Generac's 2025 Q3 Earnings Call: Contradictions Emerge on Data Center Demand, Clean Energy Strategy, and Market Readiness

Date of Call: October 29, 2025

Financials Results

• Revenue: $1.11B, down 5% YOY (vs $1.17B prior year)
• EPS: GAAP diluted EPS $1.12, down from $1.89 prior year; adjusted EPS $1.83, down from $2.25 prior year
• Gross Margin: 38.3%, compared to 40.2% in the prior year third quarter
• Operating Margin: Adjusted EBITDA margin 17.3% of net sales, down from 19.8% in the prior year (≈ -250 bps)

Guidance:

• Consolidated net sales for full year 2025 expected approximately flat vs prior year (includes ~1% FX/acquisition benefit).
• Residential product sales now forecast to decline mid-single-digits; C&I product sales expected to increase mid-single-digits.
• Full-year gross margin expected approximately flat to slightly down vs 2024 (≈1% lower than prior ~39.5% expectation).
• Adjusted EBITDA margin now expected to be ~17% (previously 18%–19%).
• Free cash flow conversion now expected ~80%, implying ~ $300M FCF in fiscal 2025.
• FY GAAP tax rate 20.0%–20.5% (Q4 ≈25%); interest expense $70M–$74M; CapEx ≈3.5% of sales; diluted shares 59.4M–59.5M.
• Company will invest in C&I capacity expansions and may pursue M&A; guidance excludes potential acquisitions/share repurchases.

Business Commentary:

* Residential Products and Outage Environment: - Generac Holdings Inc. reported that home standby and portable generator shipments grew sequentially but were below seasonal expectations due to a power outage environment that was significantly below long-term average levels. - The decline in shipments was attributed to a power outage environment that was 75% to 80% below normal levels for the quarter, resulting in lower demand for these products.

• Commercial & Industrial Growth:
• Global C&I product sales increased 9% during the quarter, led by growth in domestic telecom and industrial distributor channels as well as international markets.

• The growth was driven by increased production rates and the expansion of distribution partnerships, both owned and independent.

• Data Center Market Opportunity:

• The backlog for large megawatt generators for the data center market doubled in the last 90 days, exceeding $300 million.

• This growth is attributed to the high uptime requirements of data centers due to excess site electricity consumption, creating a significant market opportunity.

• Energy Technology and Margin Expansion:

• Sales of energy technology products outperformed expectations, growing at a significant rate, led by shipments of energy storage systems in Puerto Rico.
• The growth is linked to successful execution of an energy grant-related program and significant gross margin improvement due to cost discipline.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted durable long-term trends and a growing C&I/data-center opportunity: "we believe Generac is uniquely positioned at the center of these mega-trends." Backlog for large megawatt generators "doubled to over $300 million," and management plans aggressive capacity and M&A investments to capture growth, while acknowledging near-term residential and energy-tech headwinds.

Q&A:

• Question from Thomas Moll (Stephens Inc.): I want to start on the data center market opportunity, Aaron. What all have you learned thus far in terms of the competitive dynamics there, the size of the opportunity? I think last quarter, you framed it at about $5 billion, the deficit next year. And then just in terms of the types of customers where you're seeing some traction, what's the nature of the conversation with hyperscale at this point? And any orders there in the backlog number that you gave us?
  Response: Generac sees a large structural supply deficit in data center backup power, has doubled backlog to >$300M, has no hyperscaler orders yet but is progressing with approvals and will invest in capacity and M&A to scale.

• Question from George Gianarikas (Canaccord Genuity Corp.): Now I know you're not talking about 2026 just yet, but if you could just sort of help us work through all the moving parts here? Clearly, outages have been weaker. There is a pull from data center generators and there's this -- the roll-off potentially of what's happened so far in Puerto Rico. So how should we sort of think about 2026 broadly with all the moving pieces at play?
  Response: 2026 should see residential recovery if outages normalize and close rates improve; energy technology will face near-term contraction due to federal incentive roll-offs; C&I/data-center backlog (> $300M) provides significant upside with capacity expansion to $500M+ possible.

• Question from Michael Halloran (Robert W. Baird & Co.): I think you mentioned it briefly in there, Aaron, but maybe just on the new product launches on the clean energy side, I know early days, how is that tracking? And then maybe more importantly, could you just frame up what you mean or what the latest thought process is in terms of getting back to breakeven in those product categories? And what kind of that iterative process looks like as we work through the remainder of this year, early thoughts on '26 as far as how much of that loss you can reclaim?
  Response: Long-term view remains positive; new clean-energy products are launching but 2026 will be tougher, and the company still targets breakeven by 2027 while recalibrating R&D/SG&A and requiring share gains in 2026 or further adjustments.

• Question from Jeffrey Hammond (KeyBanc Capital Markets Inc.): Just back on the data center, I think you said you think you could do $500 million or maybe better next year. So one, just as you start to get orders, are all of those kind of contemplated for '26? Or are people -- are those longer-dated orders? And then just in terms of like this new capacity you're considering, like what would that look like? Is it a plant? Is it expansion? Is it -- we got to double this thing as soon as we can?
  Response: The $300M backlog largely ships in 2026; $500M is a capacity target (not fully contracted); to scale they will add facilities, equipment and pursue M&A to rapidly expand capacity for late‑2026/2027 delivery.

• Question from Brian Drab (William Blair & Company): This is sort of an easy segue to my question. You're talking about the capacity expansion and the idea that you don't manufacture the engine. I'm just wondering, Aaron, like what are the biggest challenges? What are your biggest concerns about adding this much capacity that quickly in terms of supply chain or just anything in terms of the manufacturing operation that's going to be challenging? I think people are looking for just that confidence that this capacity can come online smoothly.
  Response: Production capability is proven (Oshkosh start-up); engine partner (Baudouin) has capacity and alternator suppliers are established; primary constraint is physical space and packager capacity, which they are addressing via facility expansion and partnerships.

• Question from Mark W. Strouse (JPMorgan Chase & Co): Aaron, you mentioned earlier trying to get on the approved vendor list for some of the hyperscalers. Can you just give a bit more color on what that process really looks like? And is the time line for that kind of more measured in months or quarters? Or anything that you can share there would be great.
  Response: Approval timelines vary by hyperscaler but are measured in months; Generac is in mid-to-late stages with most hyperscalers, has no showstoppers, and is already a preferred supplier for two global co‑locators.

• Question from Christine Cho (Barclays Bank PLC): Just as a follow-up to Mark's question. I understand that your engines are actually coming from France, but are you finding that the Chinese ownership of the supplier is something that is brought up in your conversations with the bigger type of customers? And would you say that you need at least one hyperscaler contract in hand in order to feel comfortable in doubling the capacity?
  Response: Supplier ownership has been discussed but isn't a showstopper; engine manufacturing is global and mitigatable; a hyperscaler commitment would increase comfort in doubling capacity, but expanded capacity can be redeployed to traditional markets if needed.

• Question from Keith Housum (Northcoast Research Partners): I appreciate it. Staying along the lines of the data centers, Aaron, perhaps you can touch on the pricing for these data center generators and like the margin profile and kind of thinking of how that might affect the margins going forward?
  Response: ASP per large gen set is roughly $1.5M–$2.0M depending on content; domestic margin profile similar to core C&I (slightly below), international a bit lower, and incremental data center volume will be accretive to EBITDA.

• Question from Sean Milligan (Needham & Company): I was just curious about the margin progression. I know you don't want to really give guidance for next year. But in terms of the framework, the back half EBITDA margins are kind of weaker than what were expected. So just gives and takes into next year, like does core resi HSB get better? Energy tech, you have some revenue headwinds and then the data center piece. Just trying to kind of think about what that all means for margins moving forward on the EBITDA side.
  Response: 2025 adjusted EBITDA guide reduced to ~17% (from prior 18%–19%) driven ~1/3 by mix (less high‑margin home standby) and remainder OpEx deleverage; management expects margin recovery in 2026 from mix normalization, operating leverage and transitory items.

Contradiction Point 1

Data Center Market Capacity and Demand

It involves differing perspectives on the current capacity and demand in the data center market, which impacts strategic planning and investor expectations.

What have you learned about competitive dynamics in the data center market opportunity? What is the opportunity's size, and what is the nature of conversations with hyperscalers? - Thomas Moll(Stephens Inc.)

2025Q3: This data center market is a unique opportunity due to the structural deficit in backup power supply. Conversations with hyperscalers are productive, with significant demand due to constraints in electrical components. There are no orders from hyperscalers yet, but they are eager for additional supply. - Aaron P. Jagdfeld(CEO)

How soon could data center revenues become meaningful, and what lessons have been learned so far? - Thomas Allen Moll(Stephens Inc.)

2025Q2: The entry into the data center market will begin to impact revenues in the second half of this year. Shipments in the international market will begin in Q3. The conversation reveals a structural deficit of around 5,000 machines based on current capacity, which opens up a significant market opportunity. - Aaron P. Jagdfeld(CEO)

Contradiction Point 2

Clean Energy Product Launch and Breakeven Strategy

It involves different statements about the company's strategy for clean energy product launches and breakeven targets, which affects investor expectations and financial planning.

How are the new clean energy product launches progressing, and what is the breakeven analysis? - Michael Halloran(Robert W. Baird & Co. Incorporated)

2025Q3: Long-term prospects for solar and storage products are good due to energy trends. Breakeven by 2027 remains the goal, facing challenges from the DOE grant program ending. Investment in distribution and marketing capabilities is key to market growth. - Aaron P. Jagdfeld(CEO)

Has there been any change in the company's long-term commitment to invest in the inverter market following policy changes? - George Gianarikas(Canaccord Genuity Corp.)

2025Q2: The focus remains on improving the economics of the clean energy business. The market for solar is expected to contract but should grow structurally as power prices increase and component costs decline. The company plans to continue investing in the residential energy ecosystem, including solar and storage technologies, while recalibrating spending based on market size. - Aaron P. Jagdfeld(CEO)

Contradiction Point 3

Data Center Market Expectations

It involves differing expectations for the data center market opportunity and demand from hyperscalers, which are crucial for strategic planning and investor expectations.

What have you learned about the competitive dynamics, market size, and hyperscaler conversations in the data center opportunity? - Thomas Moll(Stephens Inc.)

2025Q3: There are no orders from hyperscalers yet, but they are eager for additional supply. - Aaron P. Jagdfeld(CEO)

Can you discuss new product launches in the C&I market, especially for data centers? Are you leveraging your existing service network for these products? - Tommy Moll(Stephens)

2025Q1: We're very excited about this, and the fact that we're seeing now some hyperscalers reach out and start coming to us and wanting us to provide them with product. - Aaron Jagdfeld(CEO)

Contradiction Point 4

Data Center Market Opportunity and Sales Strategy

It highlights differing perspectives on the current status and sales strategy for the data center market, which is a significant growth opportunity for the company.

What have you learned about competitive dynamics in the data center market? What is the opportunity size and the nature of hyperscaler discussions? - Thomas Moll(Stephens Inc.)

2025Q3: We're encouraged by the conversations we're having with hyperscalers. There are no orders from hyperscalers yet, but they are extremely eager for additional supply. - Aaron P. Jagdfeld(CEO)

Can you provide more details on the new C&I products, particularly for the data center market? What is your strategy to enter this market? - Thomas Moll(Stephens)

2024Q4: We'll begin shipping them to customers in the second half of 2025. We have already started taking orders for these products. - Aaron P. Jagdfeld(CEO)