Shoals Technologies Group, Inc. Q2 FY2026 earnings call

Overall Financial Performance:

• Total Q2 2026 revenue was $163.4 million, up 47% year-over-year, within the company's guided range.
• Adjusted gross margin was 30.6% (GAAP gross margin 30.3%), within expectations; adjusted EBITDA was $31.6 million, up 27.9% year-over-year, also within guided ranges.
• SG&A expense was $28.5 million (17% of revenue), a 400 basis point decline from 21% of revenue in the prior year period.
• New orders totaled $207 million in the quarter, for a book-to-bill ratio of 1.3. Total record BLAO reached $801.4 million, up 19% year-over-year and 19% sequentially, with ~$700 million of backlog scheduled for delivery over the next four quarters through Q2 2027.
• The company generated $6.8 million in operating cash flow during the quarter, ending with $15.7 million in cash and equivalents and a net debt-to-adjusted EBITDA ratio of 1.6x. The revolving credit facility was temporarily expanded by $50 million to support growth.

Operational Progress:

• The company is consolidating three existing facilities into one new 14-acre mega-facility, and has made steady progress implementing new lean manufacturing processes, though additional work remains to fully achieve productivity targets.
• The company prevailed in its 2025 ITC intellectual property case against Voltage, with a district court damages trial scheduled for Q3 2026.

Strategic Highlights:

• Announced a new memorandum of understanding (MOU) partnership with TerraFlow, a leading grid-scale long-duration energy storage developer, to supply PowerHub recombiner solutions for up to 5 gigawatts of annual TerraFlow deployments across utility-scale and data center applications.

1. Core U.S. Utility-Scale Solar: Revenue from this segment drove the majority of total Q2 2026 revenue growth, with $425.1 million included in the total record Backlog and Awarded Orders (BLAO). Quote volume exceeded $1 billion for unique projects in the quarter, maintaining a strong pipeline. This segment represents the company's core revenue contributor and has higher margins than smaller newer segments.
2. International: International BLAO totals $102 million as of Q2 end, with roughly two-thirds of this backlog consisting of exported products shipped from the U.S. Growth is accelerating in key markets like Australia, with rising quote activity and customer engagement.
3. Community, Commercial, & Industrial (CC&I): This segment remains a small share of overall revenue mix but continues to deliver strong operational performance.
4. OEM: The OEM segment delivered 51% year-over-year revenue growth, providing a stable, predictable revenue stream for the company.
5. BEST (Battery Energy Storage Solutions): Q2 2026 revenue from BEST was ~$20 million, with $10 million in new orders secured during the quarter. BEST BLAO now stands at $65 million. Orders are episodic and dependent on customer construction schedules.

• Q3 2026 (ending September 30, 2026) guidance: Revenue is projected between $150 million and $170 million, representing 18% year-over-year growth at the midpoint. Adjusted EBITDA is projected between $32 million and $37 million, representing 8% year-over-year growth at the midpoint.
• Full year 2026 guidance is unchanged from prior estimates (reaffirmed after a full-year guidance raise in Q1 2026): Revenue is projected between $600 million and $640 million, representing 30% year-over-year growth at the midpoint. Adjusted EBITDA is projected between $118 million and $132 million, representing 26% year-over-year growth at the midpoint.
• Full year 2026 additional guidance remains unchanged: Operating cash flow is projected between $65 million and $85 million; capital expenditures between $20 million and $30 million; interest expense between $8 million and $12 million.
• Management expects gross margins to sequentially improve through the second half of 2026, targeting a low-to-mid 30% gross margin range for the full year. No 2027 guidance has been issued yet.

• Consolidating three manufacturing facilities into one new large facility is operationally complex, and full productivity and efficiency gains have not yet been realized, creating near-term uncertainty around margin expansion timing.
• The outcome of the upcoming district court trial for damages against Voltage is uncertain, and all litigation costs for the case will be fully recognized in Q3 2026, creating a near-term drag on EBITDA.
• International expansion carries variable margin outcomes based on market, origin of production, and project structure, creating mixed margin expectations for this growing segment.
• Potential policy changes including Section 232 tariffs could create longer-term modest speed bumps for business operations, though management sees no near-term impact from these changes.

Q: What is the expected timeline for revenue from the new TerraFlow partnership, and how does this partnership differ from the existing relationship with On Energy?

A: The engineering development cycle for the custom TerraFlow solution is just beginning, so no revenue from this partnership will be recognized in 2026; first meaningful revenue is expected to start in 2027. TerraFlow uses a vanadium-based long/short duration battery solution for renewable and data center projects, different from On Energy's approach, and the partnership diversifies Shoals' customer base in the growing energy storage market.

Q: Why did management reaffirm rather than raise full-year guidance despite record backlog and strong demand, and what factors could lead to a future upward revision?

A: Management raised full-year guidance in Q1 2026, and prioritizes providing reasonable, achievable guidance ranges. The company is currently focused on maximizing production efficiency at the new consolidated facility. After quarter-end, the company booked additional BEST projects, and if execution goes well in the second half of the year, management will gain more confidence for potential upward adjustments.

Q: What is the expected margin trend for Q4 2026, given that the midpoint guidance implies a lower Q4 revenue than Q3?

A: A slight sequential gross margin reduction is implied for Q4, driven by fewer annual production days and variable timing of BEST deliveries, which impacts fixed cost absorption. However, the Q3 district court damages litigation expense (which fully hits Q3 EBITDA) will no longer impact Q4, supporting EBITDA in the period. If additional short-term BEST orders are secured, it could offset the expected slight margin softness.

Q: What has customer reception been like for the new Airlink product, and what is the expected margin profile for Airlink relative to existing products?

A: Customer reception has been very strong, but there is an expected educational and learning curve for designers, installers, and code inspectors, since Airlink is a disruptive new product for power delivery to data center racks. The company is on track to have test installations completed in 2026, and Airlink is expected to command a price premium and higher margins than traditional solutions, contributing to overall margin accretion as it scales.