Transcat's Q2 2026 Earnings Call: Contradictions in Rental Growth Drivers, Service Growth Outlook, Macroeconomic Impact, and Competitive Landscape

Date of Call: November 3, 2025

Financials Results

• Revenue: $82.3M, up 21% versus prior year
• EPS: GAAP diluted EPS $0.14; adjusted diluted EPS $0.44 (normalized for acquisition and CEO succession-related costs); net income decreased $2.0M versus prior year
• Gross Margin: Consolidated gross profit $26.8M, up 26% YOY; gross margins expanded 120 basis points versus prior year
• Operating Margin: Adjusted EBITDA $12.1M, up 37% YOY; adjusted EBITDA margin expanded 160 basis points versus prior year

Guidance:

• Return to high single-digit organic service growth in the second half of fiscal 2026.
• Expect margin expansion as organic service growth returns to historical rates.
• Strong acquisition pipeline to expand geographic footprint, capabilities and market share.
• Approximately one-third of net CapEx allocated to rental assets; investing in automation and new AI programs.
• New syndicated credit facility nearly doubles resources to fund acquisitions and growth.

Business Commentary:

* Revenue and Segment Growth: - Transcat, Inc. reported consolidated revenue of $83 million for Q2 Fiscal 2026, up 21% year-over-year. - This growth was driven by a 20% increase in service revenue and a 24% increase in distribution revenue, specifically due to strong performance in the rental channel.

• Gross Margin and Profitability Expansion:
• Gross profit increased by 26% to $26.8 million, with a gross margin expansion of 120 basis points.

• Distribution gross margin expanded by 530 basis points, primarily due to an increase in the mix of higher-margin rental revenue.

• Acquisition Integration and Growth:

• Recent acquisitions, including Martin Calibration and Essco Calibration, have shown strong early results, with significant growth since acquisition.

• The integration and synergy capture of these acquisitions have made Transcat a difficult company to compete with and contributed to overall revenue growth.

• Interest and Tax Expense Impact:

• Q2 net income decreased by $2 million compared to the prior year, driven by higher interest expense and an increased income tax rate, particularly due to one-time CEO succession plan expenses.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted 21% consolidated revenue growth to $82.3M, consolidated gross profit up 26% and gross margins +120 bps, and adjusted EBITDA +37% with +160 bps margin expansion; commentary emphasized smooth acquisitions, strong rental momentum and expectation of H2 organic service acceleration.

Q&A:

• Question from Greg Palm (Craig-Hallum Capital Group LLC): What's driving the rentals acceleration and can you give rental mix as a percent of distribution?
  Response: Management: Rentals growth is driven primarily by execution/integration of Axiom and strong Becnel performance plus some rent‑vs‑buy demand.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): What visibility do you have for the second half in rentals after strong H1 growth?
  Response: Management: Expect growth to moderate in H2 versus H1 but still see continued margin expansion (roughly 250–300 bps) from the rental performance.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): Service appears to be low single-digit organic decline — why confident you'll return to high single-digit organic in H2?
  Response: Management: There is a pipeline of recently won accounts and sight lines of conversions that should drive high‑single‑digit organic service growth in H2.

• Question from Maxwell Michaelis (Lake Street Capital Markets, LLC): After ~90 days since acquiring Essco, any unexpected positives or negatives?
  Response: Management: Essco integrated smoothly with strong management and has delivered double‑digit growth post‑acquisition; no meaningful obstacles.

• Question from Maxwell Michaelis (Lake Street Capital Markets, LLC): What macro factors could stall the expected service growth in H2 and what should we model?
  Response: Management: Tariff uncertainty and interest‑rate dynamics have slowed customer decision‑timing; improvement is expected but environment remains subject to change.

• Question from Maxwell Michaelis (Lake Street Capital Markets, LLC): Have customer sales cycles shortened in recent months?
  Response: Management: No — sales cycles haven't shortened; many customer decisions have been repeatedly delayed.

• Question from Edward Jackson (Northland Capital Markets): Rental is buried in distribution — when will you break it out and why not show more metrics?
  Response: Management: Rentals and distribution share people and vendors so are operationally integrated; roughly one‑third of net CapEx is allocated to rentals, and standalone reporting may come later.

• Question from Edward Jackson (Northland Capital Markets): What is the rental portion of PP&E?
  Response: Management: Did not provide a PP&E split on the call and offered to follow up offline.

• Question from Edward Jackson (Northland Capital Markets): How is the solutions business performing versus expectations (sequentially and YoY)?
  Response: Management: Solutions has stabilized sequentially and is within prior expectations, though still down year‑over‑year.

• Question from Edward Jackson (Northland Capital Markets): If solutions trends flat sequentially, when does it stop being a drag on top‑line growth?
  Response: Management: Expect the solutions business to stop being a drag within the next 1–2 quarters (back half of fiscal year).

• Question from Edward Jackson (Northland Capital Markets): Are transition and succession expenses removed from your pro forma/adjusted earnings?
  Response: Management: Yes — CEO succession and related costs are excluded from adjusted EBITDA and adjusted EPS reconciliations.

• Question from Martin Yang (Oppenheimer & Co. Inc.): Why are Essco and Martin growing double‑digit while other service businesses are low single‑digit?
  Response: Management: Those acquisitions have higher‑growth customer mixes (life sciences/med‑device in strong geographies) identified in diligence, explaining stronger growth profiles.

• Question from Martin Yang (Oppenheimer & Co. Inc.): Will part of Martin's performance be characterized as organic growth next quarter?
  Response: Management: Yes — Martin's results will begin to flow into organic service results starting at quarter end.

• Question from Martin Yang (Oppenheimer & Co. Inc.): How much can Martin contribute to your organic growth target?
  Response: Management: Martin is roughly $25M on a ~$225–230M service base — about a 10% share of service revenue on a full‑year basis.

• Question from Martin Yang (Oppenheimer & Co. Inc.): Do you expect Martin and Essco to sustain double‑digit growth?
  Response: Management: Expect continued strong performance but are cautious about guaranteeing sustained double‑digit growth as bases enlarge.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): From a seasonality standpoint, should we expect distribution to play out differently in H2?
  Response: Management: Distribution momentum and daily activity ('Pulse') remain strong into Q3; growth should continue but moderate versus H1; no expected drop‑off.

• Question from Greg Palm (Craig-Hallum Capital Group LLC): How do you view the competitive landscape in services amid these headwinds?
  Response: Management: Transcat believes it's better positioned than traditional and many PE‑backed competitors due to consistent investment, successful integrations and diversification.

Contradiction Point 1

Rental Business Growth Drivers

It involves differing explanations for the growth of the rental business, which is a significant part of Transcat's operations and has implications for revenue and customer behavior.

What is driving the rental acceleration in distribution? Is it market-related or company-specific? What was the rental mix as a percentage of distribution in the quarter? - Greg Palm (Craig-Hallum Capital Group LLC)

2026Q2: Tom indicated that the rental growth is primarily due to the integration efforts of Axiom Test Equipment last year, leading to better execution and performance. - Thomas Barbato(CFO)

How is the rental market performing currently, and how might it respond to a more challenging macroeconomic environment? - Ted Jackson (Northland Securities)

2025Q4: Rentals are expected to grow in line with service business trends, driven by high-single-digit targets and investments in assets and personnel. - Tom Barbato(CFO)

Contradiction Point 2

Service Business Growth Expectations

It involves differing expectations for the growth of the service business, which is crucial for Transcat's overall performance and investor expectations.

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

2026Q2: Tom expects continued margin expansion, though not as high as the first half, around 250 to 300 basis points. Growth rates are expected to moderate, adjusting for the strong first-half performance. - Thomas Barbato(CFO)

Given the current macroeconomic environment, is the high-single-digit service growth expectation a conservative estimate? - Ted Jackson (Northland Securities)

2025Q4: Our focus is on improving sales processes and leveraging our strong value proposition, despite short-term volatility. We expect the business to perform well once the volatility subsides, driven by consistent execution and a strong leadership team. - Lee Rudow(CEO)

Contradiction Point 3

Impact of Macroeconomic Uncertainty on Service Growth

It involves differing views on how macroeconomic uncertainty affects service growth, which is important for understanding Transcat's resilience and strategy in a challenging environment.

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

2026Q2: Tom suggests that economic uncertainties like tariff levels and interest rate environments are causing some customers to delay decision-making. - Thomas Barbato(CFO)

How are recent tariff announcements affecting procurement and customer behavior in the distribution segment, particularly the shift between rentals and purchases? - Greg Palm (Craig-Hallum)

2025Q4: Despite this short-term volatility, we are continuing to work to execute on our plans to grow our service business in the range of high single-digit growth for the year. - Lee Rudow(CEO)

Contradiction Point 4

Competitive Landscape in the Service Segment

It concerns the competitive dynamics within the service segment, which impacts growth expectations and market positioning.

How does the competitive landscape in the service segment affect your expectations for accelerated organic service growth? - Greg Palm(Craig-Hallum Capital Group LLC)

2026Q2: Lee believes that traditional competitors like CIMCO and Tektronix are struggling due to lack of investment and strategic acquisitions. Transcat's investments and acquisitions have better positioned it to withstand headwinds. New competition includes private equity firms consolidating smaller companies, but Transcat's strategy remains strong. - Lee Rudow(CEO)

What is ESCO's growth rate compared to Transcat's service segment growth? - Maxwell Michaelis(Lake Street Markets)

2026Q1: The traditional competitors, CIMCO, and Tektronix have certainly been a big part of what we compete with and will continue to as we move forward. - Lee Rudow(CEO)