Transcat's Q2 2026 Earnings Call: Contradictions Emerge on Rental Strategy, Service Growth, and Macroeconomic Uncertainty

Date of Call: November 3, 2025

Financials Results

• Revenue: $82.3M, up 21% year-over-year (consolidated; company also cited ~$83M in prepared remarks)
• EPS: Diluted EPS $0.14; adjusted diluted EPS $0.44 (adjusts for acquisition and CEO succession costs); net income $1.3M, down $2.0M vs prior year
• Gross Margin: Consolidated gross profit $26.8M, up 26% YOY; consolidated gross margin expanded 120 basis points year-over-year
• Operating Margin: Adjusted EBITDA $12.1M, up 37% YOY; adjusted EBITDA margin expanded 160 basis points year-over-year

Guidance:

• Return to high single-digit organic service growth in the second half of FY2026.
• Expect margin expansion as organic service growth returns to historical rates.
• Distribution rental strength to continue but growth will moderate; expect ~250–300 bps of margin expansion (CFO commentary).
• Continued M&A pipeline and technology/AI investments to support growth; CapEx to prioritize service capabilities, rental pool assets and technology.

Business Commentary:

* Strong Revenue and Gross Profit Growth: - Transcat, Inc. reported consolidated revenue of $83 million for the second quarter of fiscal 2026, which was up 21% from the previous year. - Gross profit increased by 26%, with gross margins expanding by 120 basis points. - This growth was driven by stable calibration revenue, strong performance from recent acquisitions, and significant growth in the rental channel.

• Service Segment Performance:
• Service revenue increased by 20%, marking the 66th consecutive quarter of year-over-year growth.
• The integration of recent acquisitions, such as Essco Calibration, contributed to this growth, as they fit well with Transcat's strategic objectives.

• The company's service segment benefited from retaining customers and expanding its geographic footprint through strategic acquisitions.

• Rental Channel Expansion:

• Distribution revenue grew by 24%, largely due to a 24% increase in rental revenue.
• This growth was attributed to better execution post-integration of the Axiom Test Equipment acquisition and increased demand for rental options due to macroeconomic challenges.

• Transcat's rental business expansion has significantly impacted overall revenue growth.

• Earnings Impact and Executive Transition:

• Net income decreased by $2 million from the previous year, primarily due to higher interest expenses and a higher effective income tax rate associated with CEO succession costs.
• The company expects additional succession costs in the second half of fiscal 2026 to continue impacting earnings and effective tax rates.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly characterized results as "strong" (Q2 consolidated revenue +21%) and highlighted acquisitions (Martin, Essco) and rental growth as drivers. CEO: "Transcat delivered strong performance..." CFO: adjusted EBITDA +37% with 160 bps margin expansion. Guidance expects return to high single‑digit organic service growth and further margin expansion, signaling continued confidence.

Q&A:

• Question from Greg Palm (Craig-Hallum Capital Group LLC): What's driving the rentals acceleration — market vs company execution — and can you give rentals as a percent of distribution?
  Response: Management: Growth driven primarily by company execution and integration (Axiom, Becnel) plus some rent‑vs‑buy demand; no specific rentals percentage disclosed.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): What visibility do you have for the second half in the rental business after the strong first half?
  Response: CFO: Expect growth to moderate vs the first half but continued margin expansion (roughly 250–300 bps vs prior year); not forecasting continued first‑half growth rates.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): Service showed low single‑digit organic decline — why are you confident you can return to high single‑digit organic growth in H2?
  Response: CEO: Core service (ex‑solutions) is roughly flat+; longer sales cycles delayed new starts but recent account wins give clear visibility that revenue will materialize in Q3–Q4, supporting high‑single‑digit H2 growth.

• Question from Maxwell Michaelis (Lake Street Capital Markets, LLC): After ~90 days since acquiring Essco, any unexpected positives or negatives?
  Response: CEO: Integration has been very smooth, management retained, and Essco (and Martin) are delivering double‑digit growth since acquisition; no material negatives reported.

• Question from Maxwell Michaelis (Lake Street Capital Markets, LLC): What aspects of economic uncertainty could stall your service growth in H2 — what should we model?
  Response: CFO: Key risks are tariff uncertainty and interest‑rate environment causing customers to delay decisions and lengthen purchase cycles; improvements possible but environment remains variable.

• Question from Maxwell Michaelis (Lake Street Capital Markets, LLC): Have customer sales cycles shortened in recent months?
  Response: CEO: No — sales cycles have lengthened with customers repeatedly delaying vendor changes, contributing to slower new‑business starts.

• Question from Edward Jackson (Northland Capital Markets): Rental is buried in distribution — what would prompt you to break it out and how material is rental CapEx?
  Response: CFO: Rental and distribution share operations/vendors/staff making separation difficult today; roughly one‑third of CapEx (net) is allocated to rentals; may disclose more when operational separation warrants it.

• Question from Edward Jackson (Northland Capital Markets): What is rental recorded as within PP&E (can you quantify)?
  Response: CFO: No figure provided on the call; management offered to follow up with the specific PP&E breakdown.

• Question from Edward Jackson (Northland Capital Markets): How is the solutions business performing vs expectations — sequentially and YOY?
  Response: CEO: Solutions stabilized sequentially (as guided); still down YOY but within expected ranges and expected to move from drag to growth over the next 1–2 quarters.

• Question from Edward Jackson (Northland Capital Markets): If solutions were flat sequentially, when would it stop being a drag on top‑line growth?
  Response: CEO: Management expects it to stop being a drag in the back half of the fiscal year — within the next quarter or two.

• Question from Edward Jackson (Northland Capital Markets): Are transition/CEO succession expenses and related tax effects removed from pro forma adjusted metrics?
  Response: CFO: Yes — those one‑time costs are excluded from adjusted EBITDA and adjusted EPS reconciliations; adjusted diluted EPS was $0.44.

• Question from Martin Yang (Oppenheimer & Co. Inc.): Why are Essco and Martin delivering double‑digit growth while your other service businesses are only low single‑digit?
  Response: CEO: The acquired businesses serve strong regional pockets (life sciences/med device) with healthier customer trajectories identified in diligence; their customer mix explains higher growth.

• Question from Martin Yang (Oppenheimer & Co. Inc.): Will part of Martin's performance be characterized as organic growth next quarter?
  Response: CEO/CFO: Yes — Martin's revenue will be reported as organic/recurring contribution beginning next quarter (end of the quarter treatment).

• Question from Martin Yang (Oppenheimer & Co. Inc.): How much can Martin contribute to your organic growth target quantitatively?
  Response: CFO: Martin is roughly $25M on a ~$225–230M service revenue base (~10% of service), so it will lift organic growth but is modest relative to the total base.

• Question from Martin Yang (Oppenheimer & Co. Inc.): Do you expect Martin and Essco to sustain double‑digit growth?
  Response: CFO: Expect continued strong performance but not committing to sustained double‑digit growth indefinitely as bases increase; performance should remain solid.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): From a seasonality standpoint, does distribution remain on track for H2 or any reason for higher‑than‑normal H1 revenue?
  Response: CEO/CFO: Distribution's 'Pulse' and activity remain strong into Q3; historically Q3 is strong — expect continued strength though growth likely moderates vs H1.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): How do you view the competitive landscape in services relative to your expectations for accelerated organic growth?
  Response: CEO: Transcat believes it's advantaged — greater investment in people, assets and integration vs legacy and some PE‑backed competitors, positioning it to better withstand headwinds and sustain growth.

Contradiction Point 1

Rental Business Growth and Strategic Focus

It highlights a shift in the company's strategic focus and growth expectations for the rental business, which could impact investor perceptions of the company's growth strategy.

What's driving the rental growth—market factors or company-specific initiatives—and how is it impacting distribution sales? - Greg Palm(Craig-Hallum Capital Group LLC)

2026Q2: The growth in rentals is driven by execution improvements post-integration of Axiom Test Equipment and some rent versus buy impact due to macroeconomic challenges. The business is performing well with consistent demand from the Becnel rental business. - Thomas Barbato(CFO)

Is the rental distribution's outperformance sustainable, and will we see similar growth in the future? - Edward Jackson(Northland Securities)

2026Q1: Our strategy is to focus on services and rentals, not core distribution, which we view as important but not getting capital investment. We expect consistent demand in both segments. - Lee Rudow(CEO)

Contradiction Point 2

Service Segment Growth Expectations

It involves differing expectations for the growth of the service segment, impacting investor expectations for the company's revenue and market positioning.

How confident are you in returning to high single-digit organic growth in H2? - Greg Palm(Craig-Hallum Capital Group LLC)

2026Q2: We expect revenue from these opportunities in Q3 and Q4. - Lee Rudow(CEO)

What do the high single-digit growth expectations imply for Transcat Solutions? - Maxwell Michaelis(Lake Street Capital Markets, LLC)

2026Q1: We are confident that we'll see as much as high single-digit growth in the second half. - Lee Rudow(CEO)

Contradiction Point 3

Rental Growth and Performance

The responses indicate different expectations and growth rates for the rental business, which impacts financial projections and investor expectations.

What visibility do you have for the second half of the rental business? - Greg Palm (Craig-Hallum Capital Group LLC)

2026Q2: We don't expect the growth rates of the first half to continue but anticipate margin expansion of about 250-300 basis points. There will be some continued good performance in the rental channel. - Thomas Barbato(CFO)

Is the high-single-digit service growth just conservative guidance, or is there underlying market shifts? - Ted Jackson (Northland Securities)

2025Q4: There is still some uncertainty in the near-term demand across our customer base, but we do expect sequential improvement in our service bookings in Q2, and sequential improvement in Q3, and sequential improvement in Q4. And again I think that addresses one of your questions about the ramp of sales and the booking and revenue flow. - Tom Barbato(CFO)

Contradiction Point 4

Impact of Macroeconomic Uncertainties on Service Business

It highlights differing views on how macroeconomic challenges are affecting the service business, which could influence strategic decision-making and investor confidence.

What economic uncertainties could slow service growth in the second half? - Maxwell Michaelis (Lake Street Capital Markets, LLC)

2026Q2: Uncertainty around tariff levels and interest rates has resulted in slower customer reactions and decision-making. - Thomas Barbato(CFO)

How are tariffs affecting the distribution business, and what is customer reaction to these changes? - Greg Palm (Craig-Hallum Capital Group)

2025Q4: We do believe that the macroeconomic environment has impacted somewhat the decision-making process by certain customers, particularly in the industrial sector. - Lee Rudow(CEO)

Contradiction Point 5

Rental Business Recovery and Growth Expectations

It involves differing expectations and insights into the rental business's performance and recovery, which are key aspects of the company's growth strategy.

What visibility do you have for H2 in the rental business? - Greg Palm(Craig-Hallum Capital Group LLC)

2026Q2: We don't expect the growth rates of the first half to continue but anticipate margin expansion of about 250-300 basis points. There will be some continued good performance in the rental channel. - Thomas Barbato(CFO)

Can you update us on the Becnel rental business recovery and expectations for 2025 and 2026? - Ted Jackson(Northland Securities)

2025Q3: The rental business was impacted by the December slowdown but is expected to recover sequentially in Q4. We anticipate achieving the 30% margin threshold for distribution and grow from there as the rental mix increases. - Thomas Barbato(CFO)