AAON's Q2 Earnings Call: Analyst Questions Reveal Operational Headwinds and ERP Disruptions

AAON's Q2 CY2025 financial results fell short of expectations due to ERP system rollout disruptions, higher costs from a new facility and national sales meeting, and a 4.1% revenue miss. Revenue was $311.6 million, adjusted EPS was $0.22, and adjusted EBITDA was $46.57 million. The company's operating margin declined to 7.6% from 21.7% in the same quarter last year, and backlog increased 71.9% YoY to $1.12 billion.

Heating and cooling solutions company AAON (NASDAQ:AAON) reported its Q2 CY2025 financial results, which fell short of market expectations. The company's revenue of $311.6 million was flat year-on-year, a 4.1% miss compared to analyst estimates of $325 million [1]. The adjusted earnings per share (EPS) of $0.22 was 32.5% below analysts' consensus estimates of $0.33, while adjusted EBITDA stood at $46.57 million, a 23.8% miss compared to analyst estimates of $61.08 million [1].

The company's operating margin declined to 7.6% from 21.7% in the same quarter last year, primarily due to operational headwinds from the rollout of a new enterprise resource planning (ERP) system [1]. The ERP system disruptions led to production slowdowns at key facilities and supply chain bottlenecks, impacting the company's ability to meet market demand.

The company's guidance for the next quarter (Q3 CY2025) was also below analyst estimates. The midpoint revenue guidance of $335.4 million was 14.3% below analyst estimates of $391.2 million [1]. Management attributed the underperformance to production inefficiencies from the ERP rollout and noted that the BasX brand's data center demand remained a key offsetting strength.

The company's backlog increased by 71.9% year-on-year to $1.12 billion, indicating strong demand for its products [1]. However, the company cited ongoing ERP implementation as a source of operational risk and acknowledged that nonresidential construction markets remain subdued.

Looking ahead, AAON expects production levels at both its Tulsa and Longview facilities to continue to improve from July levels, which should improve margins as ERP-induced inefficiencies subside and price increases begin to positively impact revenue and gross profit [1]. The company also anticipates growth in its BasX brand, particularly as its Memphis site ramps up, though ongoing ERP implementation and market conditions remain risks.

Key Insights from Management's Remarks

Management attributed the quarter's underperformance to production inefficiencies from the ERP rollout and noted that BasX data center demand remained a key offsetting strength. The implementation of a new ERP system at the Longview facility led to a prolonged production slowdown, particularly affecting AAON-branded equipment and creating supply chain ripple effects in Tulsa due to coil shortages. BasX-branded product sales, especially in the data center market, grew significantly, with data center sales up 127% in Q2. Management highlighted a strategic partnership with Applied Digital to supply advanced cooling solutions for AI-driven data centers. Orders from national accounts for AAON-branded products rose by 163% year over year, representing 35% of AAON-branded orders in the first half, up from 20%. Management credited focused internal investments for this traction. The high-performance Alpha Class lineup saw Q2 sales increase 8% and bookings surge 61%, underscoring increasing adoption in a soft nonresidential construction market. The newly acquired Memphis site incurred costs with minimal offsetting sales, but management views it as a key contributor for BasX-branded growth in the coming quarters as capacity expands [1].

Drivers of Future Performance

AAON's forward guidance is driven by expectations of production recovery, margin improvement from price actions, and continued strength in data center demand. Production ramp and margin recovery: Management expects production at Tulsa and Longview to increase throughout the remainder of the year, which should improve margins as ERP-induced inefficiencies subside and price increases begin to positively impact revenue and gross profit. Data center and BasX expansion: The BasX brand is projected to see continued robust demand, especially as the Memphis facility comes online and supports large-scale projects like the Applied Digital partnership, though ramping new capacity may create temporary cost pressures. Macro and ERP-related risks: The company cited ongoing ERP implementation as a source of operational risk and acknowledged that nonresidential construction markets remain subdued. Management believes backlog is favorably priced, but ongoing volatility in supply chains and interest rates could affect execution [1].

Catalysts in Upcoming Quarters

Our analysts will be monitoring (1) the pace of production stabilization and ERP system integration at both Tulsa and Longview, (2) the successful ramp-up and cost absorption at the Memphis facility to support BasX growth, and (3) the conversion of backlog into higher-margin sales as price increases and tariffs flow through. Additionally, we will watch for continued strength in national account orders and the execution of large data center projects [1].

AAON currently trades at $72.21, down from $80.54 just before the earnings [1].

References:
[1] https://finance.yahoo.com/news/aaon-q2-deep-dive-erp-072940538.html
[2] https://finance.yahoo.com/news/top-5-analyst-questions-aaon-053256420.html