FPS Q1 2027 earnings call transcript, November 12, 2026

and supply imbalance for electrical equipment provides a significant buffer against potential demand reduction. Demand for medium voltage switchgear, transformers, and other critical electrical equipment materially exceeds available industry capacity today. That means demand does not need to remain at today's level for our order book to remain full. Now let's put that into context. Most industry forecasts have called for more than 100 gigawatts of incremental U.S. data center capacity from 2027 through 2031. Let's stress test that a bit. Let's just assume 20% of those projects don't get delayed or relocated but disappear entirely because of regulatory constraints. That would still leave roughly 80 gigawatts of new capacity over five years in the U.S. That is more than six times the amount of data center capacity expected to be added this year before considering retrofits expansion or replacement demand. So point number two, even under a scenario with significant demand reduction, we believe there would still be more demand for our products than the industry has the capacity to supply. Third, the commitments already being made upstream give us additional confidence that this capacity ultimately gets built. The products we manufacture are among the later pieces of equipment ordered in the development of a data center. Long lead time equipment further upstream, particularly power generation, is committed to much earlier. Turbines, fuel cell, and other generation suppliers have multi-year backlogs and in many cases have already put significant

behind those orders. That's an important leading indicator for us. Unless many developers are prepared to walk away from their commitments and deposits, we believe there is a high probability that generation capacity gets deployed. And when it does, it ultimately needs transformers, switchgear, and power distribution equipment. to connect that power to the data center itself. So point number three, we can see investment occurring several years upstream of us, and those commitments give us confidence in the downstream demand that should ultimately flow to our products. Fourth, we believe our customers are well equipped to navigate a more complex regulatory environment. These are some of the largest and most sophisticated companies in the world. They have the financial resources, internal capabilities, and experience to work through difficult permitting requirements. And where one jurisdiction becomes more challenging, they have the ability to evaluate alternative locations that can accommodate their requirements. So point number four, more regulation can make development more complicated, but we believe our customers have both the capability and the resources to adapt to it. Fifth, and most importantly for our near-term outlook, we already have substantial visibility through fiscal 27. and into fiscal 28. Our backlog extends through that period, and a good portion of it is supported by non-refundable deposits. Just as importantly, our position relatively late in the data center development cycle provides additional protection. We generally do not receive a purchase order until the permitting process is complete.

And in many cases, we do not receive that PO until the project is already under construction. In other words, the projects sitting in our backlog are generally not conceptual projects at the beginning of a development process. They are substantially further along, supported by customer commitments, and in many cases already under construction. So point number five. Regardless of what ultimately happens with regulation, the quality, maturity, and contractual support behind our existing backlog gives us a high degree of confidence in our outlook through fiscal 27 and into fiscal 28. Now let me bring those five points together. We believe our customers continue to expect significant capacity growth. The electrical equipment market remains substantially supply constrained. We can see capital being committed upstream of us years in advance. We believe our customers have the resources to navigate a more challenging regulatory environment, and our own future. This backlog gives us substantial visibility. We will obviously continue to monitor the regulatory environment closely, and we recognize that policy could affect the timing and location of individual projects. But based on what we are seeing today, we believe the recent reaction to potential regulatory changes understates both the magnitude of the underlying demand and the degree of supply constraint in the markets we serve. Now turning to our results for the quarter on slide 5. We started fiscal 27 with strong first quarter

results. Revenue increased 69% to $479 million, marking the highest. Highest quarterly revenue in our company's history. Adjusted EBITDA increased 61% to $105 million, representing our second highest quarterly adjusted EBITDA, just below the record achieved last quarter. And our adjusted EPS increased 83% to $0.24. Turning to slide six, there are five key takeaways from the quarter. First, we exceeded the high end of our first quarter guidance, reflecting discipline execution of our production ramp. Our teams continued to scale production across our new facilities, increasing throughput and utilization while maintaining focus on quality, efficiently and cost control. This progress directly supported revenue and earnings above our guidance ranges and demonstrates the organization's ability to execute. Second, orders grew substantially year over year. Data center was strongest, followed by industrial and other, partially offset by moderation in grid, which underscores the value of maintaining diversified exposure across 3N markets. Third, our direct sales strategy with hyperscalers and AI labs is beginning to deliver tangible results. As we discussed last quarter, we already have exposure to these customers through intermediaries, but our goal is to deepen those relationships. And capture a greater share of their demand by working directly with them as well. In fiscal 27 to date, we secured a volume order from one AI lab and an initial order from a second. We also believe we are on track to receive direct orders from at least one and potentially another hyperscaler.

By the end of this fiscal year, providing another meaningful avenue for growth. Fourth, our plan to expand adjusted EBITDA margins sequentially through fiscal 27 is progressing as expected. We execute against the plan. We continue to identify opportunities to drive long-term margin expansion. We are laying the foundation now to capture those benefits in the coming years. Finally, we are raising our fiscal 27 guidance. This increase reflects the successful execution of a production ramp in the first quarter, which we expect to continue supporting performance in subsequent quarters, as well as the strength of our backlog. Which now fully covers our updated outlook. Turning to slide 7, I want to spend a few minutes on what we're seeing across our three primary end markets, data center, industrial, and grid. Starting with data center, demand remains very strong. Data center was the largest contributor to our year-over-year organization. And the signals we are seeing from customers remain positive. As I discussed earlier, policy may affect where and how certain data centers get built. But we don't believe it changes the underlying demand for capacity. And importantly, our backlog is well protected because customers generally don't place orders. with us until critical milestones such as financing, tenants, power, and permitting are already in place. Turning to industrial, we're seeing demand both accelerate and broaden. Over the last two years, growth was heavily influenced by large megaprojects. Those projects remain an important

driver, but we are increasingly seeing demand from smaller projects, facility expansions, and follow-on investments across many verticals. We saw that broadening in our own results this quarter with strong industrial orders and a meaningful increase in the number of customers placing orders with us. Finally, in grid, under line utility demand remains steady, while renewables and battery storage have seen some near-term softness, primarily driven by policy and project timing. There are two factors at work here. First, some wind and solar developers pulled orders forward to safe harbor projects ahead of the July deadline, creating a tougher comparison this quarter. Second, new restrictions on foreign-produced grid equipment have caused some developers, particularly in battery storage, to pause projects while they wait for greater clarity. That moderated our grid orders in the first quarter, but we view it primarily as a timing issue rather than a demand issue. As that uncertainty clears, we expect activity to improve. And longer term, policies designed to strengthen domestic grid security and encouraging U.S. manufacturing should be supportive for a domestic manufacturer like FORGEN. So stepping back, we feel very good about the health of our end markets. Data center remains very strong. Industrial is accelerating and becoming more diversified. And in GRID, we see upside as near-term policy uncertainty clears.

Turning to slide eight, last quarter, I talked about how FORGEN is moving up market in data centers from primarily selling point products through intermediaries to engineering direct solutions for some of the most technically demanding customers in the market, including hyperscalers and Frontier AI labs. At that time, we had received our first direct order from a Frontier AI lab and had signed our first master service agreement with the hyperscaler. Since then, we have continued to make meaningful progress across both customer groups, and this slide lays out where those relationships stand today. The important point is that direct selling into these customers is not transactional. It requires a rigorous qualification process that can include technical engagement, competitive bidding, factory audits, master service agreements, and specific product agreements, and that's even before an initial purchase order is issued. We think about that progression in three stages, crawl, walk, run. Crawl is the initial order, typically smaller in size, but strategically important. Because it validates the customer's confidence in our engineering, quality, and execution. Walk is when strong performance on those initial orders leads to larger volume opportunities. Run is when those relationships evolve into a program level orders or longer term supply agreements. We're now seeing that progression taking shape. Our first Frontier AI Lab customer is a great example. We executed well on the initial order and that has already led to a volume order. A second AI Lab has now placed its first direct order with Forgent, expanding our direct engagement within that customer category.

On the hyperscaler side, two customers have moved beyond the MSA stage and signed specific product agreements, which is typically the final commercial step before an initial order. A third hyperscaler has also entered the qualification process, which further expands a pipeline of potential direct end-user relationships. These are customers that purchase electrical infrastructure at very large scale. Our initial orders are only the starting point, but they are important because they established FORGEN as a qualified direct supplier and create the opportunity to expand over time as we execute. Looking ahead, we expect to do that. We expect orders from AI labs on a direct basis in the first half of fiscal 27 and from hyperscalers on a direct basis in the second half. Over time, as these relationships progress from crawl to walk to run, we believe they can become a meaningful driver of growth in fiscal 28 and beyond. Moving to slide nine. Over roughly the last 30 months, we have built the platform Forgent needs to compete and win at scale. That includes a broader product portfolio, a differentiated offer built around customization at scale and short lead times, vertically integrated manufacturing capacity, deep engineering capabilities, and experienced commercial leadership. Just as important, we have built customer credibility through consistent execution and proven delivery. That last point is critical. The capabilities we have built matter because they have been able to execute against them.

By delivering customers, we have earned trust and that trust is what's opening the door to larger, more strategic opportunities with some of the most sophisticated buyers in the market. As a result, we are now a full year ahead of our IPO plan on revenue, but we also recognize that there is still significant value to unlock. The next phase for Forgent is about shifting from platform creation to performance optimization. In practical terms, that means improving execution consistency, standardizing processes, sourcing smarter, optimizing capacity across our manufacturing footprint, and reducing cycle times while continuing. to improve quality and delivery. It also means taking what is working in one part of the business and replicating those best practices across our sites and functions. The goal is straightforward. Convert the scale we have built into greater operating leverage. This work is being driven by an increasingly important part of the business. The experience operational and finance leadership team. Juan Macias joined us in August as president of Solutions and Service, bringing more than 30 years of leadership experience at Schneider Electric, GE, and other industrial businesses. Jamie Brown joined us in September as president of Transformers with 25 years. of manufacturing and operations leadership at Legrand and Comscope. Together, they bring deep experience scaling industrial operations, improving execution, and institutionalizing the operating discipline required to drive margin expansion. This is also a natural point to turn the call over to Amy Ard.

new chief financial officer. Amy has been instrumental in building the financial infrastructure to support the platform we have created, and she is now helping leverage that infrastructure to optimize performance as we scale. She and her team are playing an important role in improving visibility, strengthening cost discipline, and converting our growth into greater operating leverage. With that, I'm pleased to turn the call over to Amy. Amy?

Thank you, Gary, and good morning, everyone. As I get to know many of you in the months ahead, you'll find my approach is straightforward. Run the business with discipline, communicate with clarity, and build credibility through execution. I'll briefly cover my background and priorities as CFO. I've spent more than 25 years in finance and accounting leadership, primarily in manufacturing and industrial businesses. I've served as CFO of several growth companies and have helped scale organizations through periods of rapid expansion. Across those experiences, one lesson has been consistent. Financial discipline and operational execution must be tightly connected. That is the operating mindset I bring to Forgent. I also know this business well. I joined as CFO of PowerQ, one of the companies that became part of Forgent, and then served as Executive Vice President. of Finance for the combined company. In that role, my focus was building the finance platform required to support a larger, faster-growing public company. That work included strengthening our reporting, controls, and governance, establishing the foundation for forecasting and investor communications, scaling our systems, and building plant-level margin analytics across the business. Those analytics are now an important part of how we manage pricing, sourcing, labor, and operational performance. As CFO, my priorities are clear. First, ensure a seamless transition and continue building trust with the market through consistent execution and clear communication.

Second, help lead the shift from platform creation to performance optimization. For finance, that means applying the infrastructure that we have built to improve decision making, drive margin expansion, and strengthen working capital and cash conversion. Turning to slide 12, every leader has an area. where they feel most at home. For me, it's operational finance and driving continuous improvement, and that's what this slide is about. Over the past several months, I've worked with our operations team to develop a detailed set of priorities across the six areas you see on the left side of the slide. Overhead in SG&A, working capital, labor productivity, material costs, manufacturing efficiency, and logistics. For each area, we've identified specific actions to improve financial performance. That means putting the right people in place, improving processes and systems, establishing clear accountability, and then measuring the results. That's the operation. We're building across Forgent. The priorities toward the top of the slide are generally the ones we can address more quickly, while the opportunities further down require more time and operational work across our manufacturing footprint. Our first near-term priority is SG&A efficiency. The objective is straightforward. Scale engineering. sales and our corporate functions more slowly than revenue. That operating leverage is an important driver of the year-over-year adjusted EBITDA margin expansion embedded in our fiscal 2027 guidance. And you can see an early example on the right. We've identified functions in supply chain, project management, and finance, where it made more

sense to build the capability internally. By bringing those roles in-house, we've reduced our reliance on outside professional services and generated more than $5 million of annualized savings while building an organization that can scale more effectively. Our second near-term priority is working capital efficiency. We took a systematic look across our supplier base and renegotiated payment terms with vendors representing more than 80% of our material spent. That has already generated more than $30 million of working capital improvement. Then as you move further down the slide, you get into some of the larger operational opportunities, labor productivity, material costs. Manufacturing efficiency and logistics. These take longer because the improvements have to be embedded into how we operate across multiple facilities, but the opportunity is significant and we're already making progress. Labor is a good example. We've identified areas where we were relying on higher cost contract labor and replace those positions with full. time employees. That has generated approximately $5 million of additional annualized savings while giving us a more consistent workforce to support the business as we grow. So when I look at this slide, the important takeaway is that we're still early. We already have tangible results across all three of the early wins highlighted here. More than. $5 million from professional services. More than $30 million of working capital improvement from supplier terms. And approximately $5 million from reducing contract labor. The initiatives towards the top of the slide are contributing to the margin improvement we expect in fiscal 27. But some of the bigger opportunities in labor productivity, materials.

Manufacturing and logistics are still ahead of us. And we believe those opportunities provide runway for margin and cash flow improvement beyond fiscal 2027. This is the kind of work I know well, and it's work I really enjoy. Building the right organization, putting better processes and systems in place, establishing accountability, and then translating those changes into measurable improvements in margins and cash flow. With that, let me walk through our first quarter results starting on slide 14. First quarter revenues were $479 million, an increase of 69% year-over-year and all organic. Revenues exceeded the high end of our guidance range. And we're approximately $24 million above the midpoint. The upside was driven by higher throughput and strong execution on our production ramp. Growth continued to reflect robust demand and our scaling capacity. Revenues increased across each of our offerings. Custom products grew 73% to 3%. 354 million. Powertrain solutions grew 62% to 106 million. Standard products grew 18% to 11 million. And services more than doubled to 8 million. The mix of revenue by offering in the quarter was as expected, reflecting delivery dates requested by our customers. Looking ahead, we... We expect growth to accelerate in the second quarter, particularly in powertrain solutions. Moving to adjusted EBITDA and adjusted EPS on slide 15. Adjusted EBITDA was 105 million, up 61% year-over-year. Gross profit increased 62% on volume growth. SG&A...

...increased in absolute dollars, reflecting continued investment across sales, operations, and engineering to support our growth. Adjusted EBITDA also exceeded the high end of our guidance, driven by higher throughput and better cost absorption. Adjusted EBITDA margin of 21.9% was ahead of our expectations. As we indicated... In September, we expect the first quarter to be our lowest margin quarter of the year. It reflects one-time costs to support our second quarter production ramp, primarily under absorbed labor, which we did not add back. Adjusted EPS was $0.24, an increase of 83% year-over-year, outpacing adjusted EBITDA growth.

Fiscal 2027 guidance, which we are raising. We now expect revenues of $2.45 billion to $2.65 billion, $50 million higher than our prior guidance, and representing 80% growth at the midpoint. We expect adjusted EBITDA of $587 million to $637 million. $12 million higher than our prior guidance, representing 90% growth and implying an adjusted EBITDA margin of 24%. And we expect adjusted EPS of $1.30 to $1.44, $0.04 higher than our prior guidance, and representing 101% growth at the midpoint. A few points on how to think about our updated guidance. First, the increase is driven by our strong production ramp execution to date, which gives us incremental confidence in the year ahead. Second, as production continues to ramp, we are unlocking additional book and ship capacity, which allows us to take more orders for delivery in the current fiscal year. Third, with the incremental orders we've received, our backlog now fully covers our updated guidance. Given that, I want to offer a few reminders about the quality of our backlog. It consists of firm purchase orders, often secured with deposits and milestone payments, that help protect against cancellation. Because of those provisions and other contractual protections, we have historically experienced minimal cancellations. Finally, we continue to expect revenue and adjusted EBITDA to increase sequentially throughout the year, with margins expanding as production ramps. Turning to slide 18 and our outlook for the second question.

The production ramp is gaining momentum, supported by the investments we made in the first quarter. For the second quarter of fiscal 2027, we expect revenues of $560 million to $590 million, representing 94% growth year-over-year and approximately 20% growth versus the first quarter at the midpoint. We expect adjusted EBITDA of $127 million to $137 million, representing 119% growth year-over-year and approximately 26% growth versus the first quarter at the midpoint. That implies an adjusted EBITDA margin of approximately 23%, up roughly 260 basis points year-over-year and roughly... ...110 basis points sequentially, as operating leverage builds with higher volumes. With that, I'll turn it back to Gary for closing remarks.

Turning to slide 19, before we open the call for questions, I want to leave you with our key takeaways for the quarter. First, we delivered. We exceeded the high... The high end of our first quarter guidance executed well against our production ramp and are raising our fiscal 27 outlook. We now expect revenue growth of 80% and adjusted EBITDA growth of 90% for the year. Second, order momentum remains strong. Demand was led by data center and industrial... ...and our customer base continues to diversify. Our strategy of serving three distinct end markets is providing multiple avenues for growth. Third, we are gaining traction with some of the most demanding customers in the market. The initial orders we're receiving from Frontier AI Labs and hyperscalers are important... milestones, but they represent only the beginning of what we believe the relationships can become. Fourth, our fiscal 27 adjusted EBITDA margin plan remains on track. With stronger operating discipline, better financial infrastructure, and seasoned leaders in place, we see runway for further margin... ...expansion in the years ahead. And fifth, our outlook is well supported. Our backlog fully covers our updated guidance, and as our production continues to progress, we are also creating additional book and ship capacity. Overall, this was a very strong start to the year commercially...

operationally and financially. I want to thank Team Forgent for their continued execution and focus, as it is truly this team working every day to make Forgent better for our customers, better for our co-workers, and better for our investors. With that, we're happy to take your questions. Operator?

Thank you. And at this time, we will be conducting a question and answer session. In order to get through as many questions as we can in the time remaining, please keep it to one question only for today's session. To ask a question, press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.