Forgent Power Solutions, Inc. Class A

Greetings and welcome to the Forgent Power Solutions third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Kay Africk, Head of Investor Relations. Thank you. You may begin.

Thank you, Operator, and thank you, everyone, for joining us today for Forgent Power Solutions' third fiscal quarter 2026 earnings call. With me today are Gary Niederperum, our Chief Executive Officer, and Ryan Fiedler, our Chief Financial Officer. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of various factors, including those discussed in today's earnings release and during this conference call and in our latest filings with the Securities and Exchange Commission, each of which can be found on our website. Today's presentation also includes references to non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, and adjusted net income. You should refer to the information contained in the company's earnings release and presentation for definitional information and reconciliation of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Gary.

Thank you, Kate, and good morning, everyone. We appreciate the continued interest and engagement from our shareholders and the broader investment community. I'm excited to share more about what differentiates Forgent and how we are creating value both for our customers and our shareholders. As is our practice, I'll begin with a summary of our fiscal third quarter results and provide an update on the business. I'll then turn the call over to Ryan, who will review our fiscal third quarter financial results and updated fiscal 2026 guidance. Turning to slide five. We continue to deliver strong commercial and financial performance in Q3, with revenue growth accelerating both year-over-year and sequentially, even as we grew from a larger base. Revenue increased 103% to a record $379 million. Adjusted EBITDA rose 96% to a record $85 million. and adjusted net income grew 132% to a record $55 million. Importantly, adjusted EBITDA margin expanded 200 basis points sequentially to 22.4% in the quarter, driven primarily by increased leverage on SG&A, along with improved labor and overhead absorption. Our financial performance reflects our focus on the high growth end markets as well as our exceptional product breadth, manufacturing depth, and customization capabilities, which together we believe enable us to grow faster than the overall market, gain share, and generate attractive margins. Turning to slide six, there are five key takeaways we have for shareholders and investors coming out of Q3. First, demand for our products continues to exceed our expectations, and we are raising our fiscal 2026 guidance to reflect the strength of that demand. Second, the fundamentals across our core data center and grid markets remain exceptionally strong, and we see sustained strong market growth. The feedback we are getting from customers is consistent. Investment budgets are expanding, project pipelines are growing, and the need for customization speed and scaled manufacturing is only becoming more important. Third, we are taking share. Across our three primary end markets, data center, grid, and energy intensive industrials, we estimate aggregate market growth of approximately 20% annually. We have been growing at three to five times that rate, which speaks to the strength of our execution and the relevance of our value proposition. Customers are increasingly choosing Forgent because we can deliver highly customized solutions at scale with some of the shortest lead times in the industry. We believe that combination is highly differentiated and we expect it to continue to drive share gains over time. Fourth, we believe we are still in the early stages of our margin expansion opportunity. In the third quarter, we delivered 200 basis points of sequential adjusted EBITDA margin improvement and we expect to build on that progress with further sequential margin expansion in the fourth quarter. And lastly, we are beginning to transition from cash consumption towards cash generation. Operating cash flow improved meaningfully in the quarter, and as our current capacity expansion program nears completion and capital intensity begins to step down, we expect cash flow dynamics to continue improving with increasing cash generation potential as we move into fiscal 2027. Moving to slide seven, I'll provide more context on the strength of demand we're seeing in the business. In the third quarter, we delivered record bookings of $867 million, up 308% year over year and 14% sequentially, building on what was an already record level of bookings in the second quarter. Order growth was led by our data center and grid customers, reflecting continued strength in our core end markets. Importantly, our year-over-year bookings growth accelerated in the third quarter, even as we grew from a larger base. That underscores both the magnitude and durability of the demand we are seeing. Our book-to-bill ratio was 2.3 times in the quarter despite delivering record revenue. This highlights not only the strength of current demand, but also the increasing visibility we have in the future periods. As of March 31st, 2026, backlog was at a record of nearly $2 billion, up 157% year over year and 33% sequentially. This is the highest backlog level in Forgent's history and provides strong visibility into future revenue. as customers increasingly move to secure production capacity well into fiscal 2027 and beyond. Turning to slide eight, given the strength of the demand environment in our continued execution, we are raising our guidance for fiscal 2026. Importantly, the low end of our updated guidance ranges for revenue and adjusted EBITDA is now above the high end of our prior ranges which reflects the momentum we are seeing across the business. We now expect 1.35 to 1.39 billion in revenue, 70 million higher than prior guidance, 310 to 320 million of adjusted EBITDA, 10 million higher than prior guidance, and 197 to 207 million of adjusted net income, $7 million higher than prior guidance. At the midpoint, our updated guidance implies stronger year-over-year growth across all key metrics, including 82% revenue growth, 86% adjusted EBITDA growth, and 128% adjusted net income growth. We are operating in a very strong demand environment, but our objective is to always grow faster than the market by taking share. Slide 9 highlights two of the metrics we use to measure that progress. Starting on the left-hand side of the page, powertrain solutions are integrated combinations of custom products designed to work together as a system. When we deliver a powertrain solution, we are addressing a broader set of the customer's needs and capturing a larger share of their overall project spend. In the third quarter, powertrain solutions revenue increased 248% year over year to almost a hundred million dollars and more than doubled sequentially. That growth reflects our ability to expand our role with customers by delivering more comprehensive, higher value solutions across the powertrain. While we are seeing strong growth across our product portfolio, powertrain solutions remains the fastest growing part of the business. It is also contributing to higher average customer spend, which increased 109% year over year and 20% sequentially. Average customer spend is an important metric for us for two reasons. First, it tells us we are broadening customer engagement and unlocking the full potential of our product portfolio. Second, it indicates that we are capturing a greater share of project spend increasing our relevance to customers and expanding our presence across more of the powertrain. The strategy behind these results is very deliberate. We are engaging with customers early in their planning process and leading with our engineering capabilities. When we work hand in hand with customers to design their powertrain, it naturally creates opportunity to deliver multiple product categories and integrated solutions. We are also leveraging our strength in medium voltage switchgear and transformers to create pull through demand across the rest of our portfolio. This remains a significant opportunity for Forgent, and we believe we are still in the early stages of realizing its full potential. Slide 10 provides an example of how our strategies are translating into customer wins. During the quarter, we secured a greater than $100 million powertrain solution order from a new NeoCloud customer for the first building of what is planned to be a multi-gigawatt plus data center campus. Our scope includes medium voltage switchgear, medium voltage transformers, low voltage switchboards, and service representing a fully integrated powertrain solution. What differentiated Fortune to this win? First, We engaged early with our engineering team, which allowed us to solve design challenges upfront and build credibility with the customer. Second, our broad portfolio enabled us to deliver a fully integrated solution rather than a collective of individual products, making it easier and more efficient for the customer to work with us. Third, we tailored our solutions to the customer specific requirements. And finally, Our speed from concept to uptime was best in class, reinforcing the value of our execution model with delivery starting just six months after the PO. Slide 11 highlights a different large and strategic order, this time from a repeat customer, where we are providing over $100 million of low voltage equipment across multiple data center campuses throughout the United States. While this order does not meet our definition of a powertrain solution order, given it involves just a single product category, the strategic importance of the win is just as compelling. To provide some context, Fortune had previously supplied medium voltage transformers to the customer, establishing a strong track record of understanding their unique technical requirements and delivering to specifications and timeline. That performance laid the groundwork for a broader opportunity as the customer rapidly scaled development across multiple sites with timeline certainty as a top priority. Our ability to offer dedicated capacity and start deliveries within just five months of PO with minimal execution risk enabled by our vertically integrated manufacturing model and supply chain control gave us a clear advantage. The relationship expanded from an initial transformer order to low voltage gear as well with additional opportunities in the pipeline, illustrating how strong execution can drive increased scope, increased wallet share, and longer-term enterprise-level relationships. Taken together, these orders reinforce that our strategy is working across both new and existing customers and across different product mixes. We are increasing our relevance with customers, capturing more of their spend and positioning Forgent for continued growth as we scale. Moving to slide 12. Earlier I mentioned that we believe we are still in the early innings of our margin expansion opportunity. This page helps explain why. From the second quarter to the third quarter, gross margin increased 30 basis points. That improvement was driven by operating leverage on higher revenue despite the impact of growth-related costs, including underabsorbed fixed costs and one-time startup costs at our new facilities, as well as underabsorbed labor costs associated with accelerated hiring. To put that in context, absent those growth-related costs, gross margins would have been approximately 180 basis points higher. The key takeaway is, while gross margin improved in the quarter, we believe there is still meaningful opportunity ahead. As these growth-related costs moderate and as new capacity becomes more fully utilized, we expect gross margins to continue improving in the years ahead. Where we did see the full benefit of operating leverage was in SG&A. SG&A, as a percentage of sales, declined 230 basis points quarter over quarter reflecting revenue growth outpacing operating cost growth. We expect that dynamic to continue, which should contribute to further margin expansion in future periods. The key takeaway is that we expect to deliver further sequential margin expansion in the fourth quarter, and we believe there is meaningful opportunity to continue expanding margins over time. We are already seeing that leverage materialize in SG&A and we expect to see it increasingly in gross margins as our new facilities continue to ramp and move toward full production rates. Turning to slide 13, increasing operating leverage is also beginning to translate into improved cash flow. While we expect to continue making meaningful working capital investments to support our revenue growth, we are now reaching a scale where the business is starting to generate significant operating cash flow. In the third quarter, operating cash flow improved by $37 million year over year to 29 million, and we are expecting operating cash flow to continue to grow over time. Importantly, we also expect free cash flow to inflect as we complete our current capacity expansion plan toward the end of this year and capital intensity begins to step down. As free cash flow increases, it will provide us with greater flexibility to pursue strategic M&A opportunities to complement our product portfolio and augment our growth. The transition towards cash generation represents an important milestone for Forgent and a direct outcome of the strategy we have been executing. With that context on the trajectory of margins and cash flow, I'll now turn it over to Ryan to walk through our financial results in more detail.