Q3 2025 Earnings Call: Contradictions Emerge on Modular Construction, Backlog, Labor Constraints, and Service Revenue Growth

Date of Call: None provided

Financials Results

• Revenue: $2.5B for Q3 2025, up $639M or 35% YOY (33% same-store revenue growth; electric +71%, mechanical +26%)
• EPS: $8.25 per share, up from $4.09 per share in Q3 2024 (approximately +101% YOY); net income $292M vs $146M prior year
• Gross Margin: 24.8% in Q3 2025, compared to 21.1% in Q3 2024 (mechanical 24.3% vs 20.3%; electrical 26.2% vs 23.9%)
• Operating Margin: 15.5% in Q3 2025, up from 11.2% in Q3 2024 (operating income $379M vs $203M prior year, +~86%)

Guidance:

• Q4 2025 same-store revenue expected to grow in the high-teens YOY.
• Full-year 2026 same-store revenue likely to grow low- to mid-teens, weighted toward H1.
• 2026 profit margins expected to remain in the strong recent ranges.
• Tax rate ~23% for remainder of 2025 and into 2026.
• Modular capacity target: 3 million sq ft by early 2026; additional modular investment to be considered prudently.

Business Commentary:

• Exceptional Financial Performance and Earnings Growth:
• Comfort Systems USA reported EPS of $8.25 for Q3 2025, double what they earned in the same quarter last year.

• The growth was driven by a sharp increase in profitability in the mechanical business, strong electrical segment performance, and favorable developments in late-stage projects.

• Backlog and Bookings Expansion:

• The company's backlog reached a record $9.4 billion at the end of Q3, with a 65% year-over-year increase and $3.7 billion more in backlog compared to last year at this time.

• This was attributed to strong bookings, particularly in the technology sector, and robust project pipelines.

• Revenue and Margin Growth:

• Revenue for Q3 2025 was $2.5 billion, an increase of $639 million or 35% compared to last year.

• Gross profit percentage grew to 24.8%, up from 21.1% in Q3 2024, driven by improved margins in both mechanical and electrical segments.

• Acquisition and Dividend Strategy:

• Comfort Systems USA acquired two companies, FZ Electrical and Meisner Electric, in October, aiming to provide $200 million in annual revenue and $15 to $20 million in annual EBITDA.
• The company also increased its quarterly dividend by 20% to $0.60 per share, highlighting confidence in its financial performance.

Sentiment Analysis:

Overall Tone: Positive

• CEO: "We earned $8.25 per share... double what we earned in the same quarter last year." CFO: "Revenue... $2.5 billion, an increase of 35%... gross profit percentage grew to 24.8%... EBITDA $414 million, +74% YOY... free cash flow $519 million." Backlog: record $9.4B, +65% YOY.

Q&A:

• Question from Adam Robert Thalhimer (Thomson Davis): On the technology side, does bidding activity match the bookings and revenue growth seen in Q3?
  Response: Pipeline remains robust and abundant; current bidding activity matches Q3 bookings with no letup.

• Question from Adam Robert Thalhimer (Thomson Davis): On capital allocation given record free cash flow/net cash — thoughts on accumulating cash vs deploying?
  Response: Priority is deploying cash into acquisitions where we have conviction and opportunistic buybacks; if excess cash becomes persistent, we'll find other shareholder returns.

• Question from Sangita Jain (KeyBank Capital Markets): Q3 free cash flow was strong — were there material advance payments or extraordinary events driving it?
  Response: No single extraordinary advance; Q3 was a catch-up quarter with great payment terms — cash flow will roughly track net income over time.

• Question from Sangita Jain (KeyBank Capital Markets): Backlog growth — are bookings pushed out further and is that mainly modular or also traditional construction (data centers, life sciences)?
  Response: Bookings pushed farther out are primarily modular; non-modular bookings are expected to start within the next year (many slated to begin in 2026).

• Question from Julio Romero (Sadodian Company): Given the step-up in orders, how are you remaining prudent and managing pricing/risk for additional orders?
  Response: We remain selective—accept work we can execute with our skilled workforce, validate timing and margins, and leverage inter-company collaboration to share resources.

• Question from Julio Romero (Sadodian Company): Has the pool of customers expanded or are you doing more with existing customers/partners?
  Response: Primarily increasing work with existing customers and leveraging Comfort Systems companies to collaborate and share capacity rather than dramatically expanding the customer pool.

• Question from Brent Edward Thielman (D.A. Davidson & Company): How critical are internal recruiting/hiring efforts vs. larger job sizes to sustain growth amid labor constraints?
  Response: Recruiting, training, productivity gains (BIM, prefab, modular) and access to contract labor enable growth; recruiting remains a continuous priority.

• Question from Brent Edward Thielman (D.A. Davidson & Company): Is the 3 million sq ft of modular capacity available by early 2026 already sold out?
  Response: Yes — that near-term modular capacity is effectively sold out.

• Question from Brent Edward Thielman (D.A. Davidson & Company): The $15.5M write-up disclosed — which segment and impact on margins?
  Response: The largest discrete recognition ($16M referenced) was in electrical; both segments had favorable closeouts but the quarter would still have been a record without them.

• Question from Joshua K. Chan (UBS): Anything different in the last six months driving consecutive ~$1B backlog step-ups vs longer term?
  Response: Each quarter is lumpy; recent step-ups reflect multiple documented, committed opportunities across markets — strong demand and customers committing early.

• Question from Joshua K. Chan (UBS): If modular capacity is expanded, will you prioritize existing customers or seek new ones?
  Response: Preference is to serve long-term, proven customers first, though new customers are considered when appropriate.

• Question from Tim Mulroney (William Blair): Excluding modular, how much of backlog will start within 12 months vs truly pushed out?
  Response: Majority of reported backlog represents work already started or that will begin within a year; many projects show preliminary work before formal backlog recognition.

• Question from Tim Mulroney (William Blair): What is driving the 11% service revenue growth and its profitability?
  Response: Service growth is execution-driven via focused salesforce efforts, steady maintenance/contracts and conversion from new construction; profitability strong and reliable.

• Question from Brian Daniel Brophy (Stifel): The headcount rose to >21,000 — how sustainable is that hiring pace if demand remains healthy?
  Response: Headcount increase includes some acquisitions but organic hiring driven by apprenticeships and training is sustainable in the high single digits over time.

• Question from Brian Daniel Brophy (Stifel): Update on automation investments in modular and productivity benefits?
  Response: Ongoing automation (robots, turntables, AI-enabled welding, test beds) is being deployed enterprise-wide and is improving productivity and quality incrementally.

• Question from Brian Daniel Brophy (Stifel): Pharma/onshoring activity — are you seeing more project pipeline and timing shifts?
  Response: Pharma pipeline is strong with long lead times; notable bookings exist but technology projects currently compete more for resources.

• Question from Sangita Jain (KeyBank Capital Markets): With data centers commissioning, does shifting to DC power change your electrical/mechanical scope?
  Response: No material scope change — electricians perform the core work regardless of AC vs DC; primary impact is scale/density (more copper, switchgear, cooling).

Contradiction Point 1

Modular Construction Growth and Strategy

It involves differing perspectives on the growth and strategic focus of modular construction, which is a key component of the company's business model.

Can you discuss the backlog growth over the past six months? - Sangita Jain (KeyBank Capital Markets)

2025Q3: Modular bookings are further out. Most bookings start within the next year. - Julie Shaeff(CAO)

What's driving modular construction growth, and could it expand the business? - Sam Snyder (Northcoast Research)

2025Q2: Modular is a different way to build, not just a product line. It has unique advantages in speed and flexibility. It's more about project characteristics than the percentage it takes. - William George(CFO)

Contradiction Point 2

Backlog Growth and Start Times

It involves expectations regarding backlog growth and the timeline for project commencement, which are critical for understanding the company's future revenue and operational capabilities.

Can you discuss the backlog growth over the last six months? - Sangita Jain (KeyBank Capital Markets)

2025Q3: Most bookings start within the next year. - Julie Shaeff(CFO)

How much of the non-modular backlog will begin within the next 12 months? - Tim Mulroney (William Blair)

2024Q4: The majority of backlog is numerically jobs already started. New bookings are projected to start within the next year. - Bill George(CFO)

Contradiction Point 3

Labor Constraints and Workload Management

It highlights differing views on the company's approach to managing labor constraints and workload, which is crucial for operational efficiency and profitability.

What's your strategy for securing more orders despite labor constraints? - Julio Romero (Sadodian Company)

2025Q3: We only take on work we can handle with our skilled workforce and good margins. We are currently comfortable with our workload. - Brian Lane(CEO)

How do you sustain workforce engagement and recruitment amid labor constraints? - Joshua Chan (UBS)

2025Q2: We make it the best place to work for craft professionals. Our internal staffing company helps manage workforce needs. - Trent T. McKenna(COO)

Contradiction Point 4

Modular Capacity and Utilization

It highlights potential changes in the company's strategy regarding modular capacity expansion and utilization, which impacts operational and financial planning.

Is the 3 million sq ft of modular space fully utilized? - Brent Edward Thielman (D.A. Davidson & Company)

2025Q3: Yes, the space is already effectively sold out. - Julie Shaeff(CFO)

Can you provide more details on the 3 million square feet of modular space expected to be online by year-end? - M. Tju (Wells Fargo)

2025Q1: We expect 3 million square feet coming online this year. - Julie Shaeff(CFO)

Contradiction Point 5

Service Revenue Growth Drivers

It involves the explanation of the drivers behind the growth in service revenue, which affects operational strategy and investor expectations.

What is driving the strength in service revenue? - Tim Mulroney (William Blair)

2025Q3: The service business is strong due to broad strength and execution. It's supported by good teams, technology investments, and conversions from new construction. - Julie Shaeff(CFO)

Can you provide an update on service growth across the business and by segment? - Julie Romero (Sadodian Company)

2025Q1: We are also seeing strong demand for service revenue across all our companies, which was up 12% year-over-year. - Julie Shaeff(CFO)