管理層發言
Hello, and thank you for being here. Welcome to Generac Holdings Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. I will now turn the conference over to Kris Rosemann. You may begin.
Good morning, and welcome to our fourth quarter and full year 2025 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or our SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron.
Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our fourth quarter results reflect a 10% increase in global C&I product sales year-over-year, led by higher revenue from products sold to data center customers. However, this was more than offset by continued soft power outage environment, that impacted home standby and portable generator shipments during the quarter. As a result, fourth quarter overall net sales decreased 12% versus the prior year to $1.1 billion. Fourth quarter adjusted EBITDA margins of 17% were in line, however, with our expectations despite the weaker outage environment and unfavorable mix shift. We made significant progress with our efforts in the data center market as momentum accelerated during the fourth quarter and into early 2026. We further developed partnerships in the quarter with multiple hyperscalers, including progressing to the pilot phases of our relationships with 2 specific customers as we prepare for potential significant volumes in 2027 and 2028. These developments provide incremental visibility and support for our continued investments in ramping our manufacturing capacity for large megawatt generators as we position ourselves to be a key supplier for this rapidly growing end market. Additionally, we are making progress with other data center co-locators and developers as our existing backlog has increased to approximately $400 million as a result of additional orders from these customers. We expect our order intake will accelerate over the next several quarters as we continue to progress through the qualification and contract stages with various data center customers, providing a path to doubling our C&I product sales in the years ahead. To ensure that we can serve this accelerating growth in demand, we have made significant investments that further improve our positioning as an important supplier to the data center market, including the purchase of an additional manufacturing facility in Wisconsin in December, as well as ongoing investments in our existing C&I facilities globally. As a result of these investments, we expect that our domestic manufacturing capacity for large megawatt generators will surpass $1 billion by the fourth quarter of this year. Furthermore, we will continue to evaluate additional capacity across our entire global C&I production footprint. 2025 was an important year of innovation for Generac as we introduced a number of significant new products across our portfolio. In addition to launching our new large megawatt generators, our next-generation home standby generators began shipping in the second half of the year, including the market's first 28-kilowatt air-cooled unit and other important feature upgrades. We also introduced our updated energy storage system, PWRcell 2, as well as our first Generac-branded microinverter PowerMicro that allows us to better serve the residential solar market. We also continue to develop our enhanced home energy management capabilities through our ecobee Smart Thermostat platform, helping to strengthen our home energy ecosystem through deep integrations with all of our residential products. These solutions are specifically designed to help our end customers solve the energy challenges presented by the mega trends of lower power quality and higher power prices. In addition to the well-established impact on power quality from severe and volatile weather, significant load growth is expected to further drive grid instability and raise power prices well into the future as power demand accelerates as a result of massive CapEx investments being made for the build-out of data centers. According to the North American Electric Reliability Corporation's 2025 long-term reliability assessment, nearly half of the U.S. population lives in a region that is at a high risk of seeing its power supplies fall short of established reliability criteria in the next 5 years. NERC contributes this expected instability to the combination of escalating demand growth with the peak demand growth rate nearly doubling as compared to the prior year's projection, an increase in intermittent generation sources, which carry lower reliability factors, and the uncertain pace of grid infrastructure development. Most regions within NERC's high-risk category are expected to see a substantial increase in data center investment in the coming years. Significant load growth is contributing to power demand shortfalls with third-party estimates suggesting that supply and transmission capacity investment growth rates would need to increase sixfold as compared to the rates seen over the last 5 years to match the anticipated higher demand. The investments required are likely to further increase the prices for electricity, adding to the affordability challenges that U.S. residential electricity customers already are experiencing as average power prices have increased nearly 40% over the last 5 years. Expectations for power prices are to double again in the next decade, and these continued increases underpin the need for energy technology solutions as home and business owners look for ways to reduce their increasingly higher energy costs. At the same time, the continuing trends around lower power quality highlight the long runway of growth that we anticipate will exist for our core backup power products and solutions, given that the home standby category is only 6.75% penetrated at the end of 2025, with each incremental 1% of penetration representing an approximately $4.5 billion market opportunity. As a result of our continued innovation and investments in product development, we believe Generac is uniquely positioned to help our customers solve the energy challenges they are facing with increasing power outages and rising energy costs. At the same time, we believe we are well-positioned to capitalize on the massive growth opportunity presented by the supply shortage of mission-critical backup power generators for the data center market. Now discussing our fourth quarter results in more detail. Global C&I product sales grew 10% year-over-year in the quarter, primarily due to revenue from products sold to data center customers, including continued shipments internationally and our initial large megawatt generator sales in the domestic market, as well as an increase in global shipments for our controls products and solutions. Project quoting activity and orders in our domestic industrial distributor channel continued to grow during the quarter as end-market activity remained robust. However, as expected, shipments to this channel declined in the quarter from a strong prior year comparison resulting from the reduction of lead times in the prior year fourth quarter. Throughout 2025, as we further increased production rates across our existing facilities and with our new plant in Wisconsin coming online in the second quarter of 2025, we continue to bring down lead times for products sold to this channel down to more historically normal levels. Shipments to our national telecom customers improved dramatically for the full year 2025, increasing approximately 27%. However, shipments declined modestly in the current quarter from the prior year as increased production rates also allowed us to bring lead times for these products down to more historically normal levels. We expect sales growth to this important end market to continue in 2026 as our customers further invest in hardening their networks. The growing dependence on wireless communication and increasing global tower and network hub count continues to provide a solid backdrop for future growth in sales of C&I products to our telecom customers. Shipments to our national and independent rental customers grew in the fourth quarter compared to the prior year, which we view as the start of a cyclical recovery in this market. As a result, we anticipate further organic growth throughout 2026 and believe that we are well-positioned for long-term success given the secular need for global infrastructure-related investments that require the use of our broad portfolio of mobile products and solutions. In addition, on January 5, we further strengthened our position in the market for mobile products with the acquisition of a market-leading mobile power equipment manufacturer located in Nebraska. In addition to broadening our customer base and increasing our exposure to the growing market for these products, this acquisition provides additional capacity and flexibility within our domestic manufacturing footprint as we continue to invest in doubling our C&I product sales in the years ahead. International core total sales, which excludes the benefit from foreign currency, increased 5% during the fourth quarter, primarily due to revenue from products sold to data center customers and higher global shipments of our controls products and solutions. Favorable sales mix and improved price-cost realization resulted in significant adjusted EBITDA margin expansion to 16.1% of total sales, an all-time record level for our International segment adjusted EBITDA margin. As previously discussed, we have made important investments that further strengthen our position as a key global supplier of backup power for the data center market. Our current backlog for these products has now grown to $400 million, giving us improved visibility for the current year as the majority of this backlog is expected to ship in 2026. We expect 2026 will be an inflection point for Generac in this end market as we anticipate the addition of significant volumes to our backlog over the next several quarters from a number of hyperscaler and co-locator customers. We believe that our strong reputation as an engineering-driven organization, with a unique focus on backup power, a customer-centric approach, and global production capabilities will allow us to become an important supplier to the data center market. Additionally, these large megawatt solutions will help expand our reach into our traditional end markets as they have significantly expanded our served addressable market to include applications that have higher backup power requirements. Now I want to switch gears and discuss our residential product category in more detail. Fourth quarter home standby shipments decreased 25% compared to a strong prior year period, which benefited from multiple major hurricanes. Home consultations also declined year-over-year as power outages in the second half of 2025 marked the lowest level of total outage hours in a decade. Activations or installations during the quarter also decreased from the elevated prior year period. While key market indicators such as home consultations, activations, and installations remained resilient despite the continued softness in outage activity, channel partner sentiment was negatively impacted by the weak second-half activity and the transition to our next-generation home standby platform, which resulted in lower-than-expected shipments during the quarter. However, we believe the home standby category is well positioned for healthy growth in 2026 as outages return to more normal levels and as the market fully transitions to our next-generation product line. Our residential dealer network grew modestly during the fourth quarter and now includes over 9,400 dealers, an increase of nearly 300 dealers from the prior year. Our aligned contractor program, which leverages our strong positioning with wholesale distributors to provide tighter relationships with contractors that purchase our products through this channel, has continued to grow as well, providing important additional capacity and territorial coverage for sales, installation, and service of home standby generators. In January, although not a major event for the industry, the impact of Winter Storm Fern resulted in elevated and extended power outage activity across a number of regions in the U.S. As a result, we saw increased demand for portable generators and we experienced year-over-year growth in home consultations across every region except the West. Importantly, the storm afforded us our first opportunity to assess our new lead distribution system in an elevated demand environment and generated promising results, as a wider base of dealers were able to more quickly connect with a greater number of potential customers than in previous periods of increased category awareness. As a reminder, this new approach allows for a broader base of dealers and aligned contractors with higher close rates to select the sales leads from a pool of home consultations they believe they have the capacity to address. The remaining leads are then distributed to other dealers to ensure customers are contacted more quickly after requesting a home consultation. We believe data-driven process enhancements such as this will continue to support improvements in dealer close rates and customer acquisition costs over time. Given the improved home consultation performance in January, and the assumed return to more normal outage levels for the second half of the year, together with higher price realization for the category year-over-year, we expect full year 2026 home standby generator sales to increase at a mid-teens rate over 2025. Helping to offset the softness in the fourth quarter for our home standby and portable generator products, we saw strong sales of our energy storage products year-over-year alongside continued robust shipments of our ecobee products and solutions in the quarter. Net sales for ecobee grew at a mid-teens rate and hit a new all-time record for the full year with significant gross margin expansion driving continued improvement in profitability as we finished 2025 with positive EBITDA contribution from ecobee's products and solutions. We expect profitability of these solutions to further improve in the future alongside continued strong sales growth. Ecobee's connected home count grew to approximately 5 million residences in the quarter, with increased energy services and subscription sales supporting a growing high-margin recurring revenue stream. Ecobee solutions remain central to our developing residential energy ecosystem with our PWRcell 2, PowerMicro, and next-generation home standby products all deeply integrated into the ecobee platform, thereby creating a differentiated feature set and user experience focused on resiliency and the improved efficiency of power use in the home. Additionally, our teams continue to execute extremely well alongside our partners in Puerto Rico to drive shipments of energy storage systems over the last several quarters as part of the Department of Energy program that supported this strong performance throughout 2025. As the DOE program winds down in early 2026, we expect shipments of energy storage systems to decrease for the year while strong growth in ecobee and the initial sales ramp of PowerMicro are expected to contribute to overall residential product sales growth for the full year. As we've previously discussed, we remain focused on continuing to improve profitability for our Residential Energy Technology Products and Solutions as we continue to recalibrate the level of investment in this part of our business, given the expected challenging near-term market conditions resulting from reduced federal incentives for the residential solar and energy storage market. In closing this morning, as we look to the full year 2026, we believe that a return to more normalized power outage levels and higher price realization will present strong growth opportunities for our residential products, particularly in the back half of the year. Additionally, we are growing ever more confident in the progress we've made in the data center market, and we expect 2026 to be an important inflection point on our path to doubling our C&I product sales in the coming years as we work to capitalize on the generational growth opportunity presented by the massive data center CapEx investment cycle. I'll now turn the call over to York to provide further details on the fourth quarter as well as full year 2025 results and our outlook for 2026.
Thanks, Aaron. Looking at fourth quarter 2025 results in more detail. Net sales during the quarter decreased 12% to $1.1 billion as compared to $1.2 billion in the prior year fourth quarter. The net effect of acquisitions and foreign currency had an approximate 1% favorable impact on revenue growth during the quarter. Briefly looking at consolidated net sales for the fourth quarter by product class, residential product sales decreased 23% to $572 million as compared to $743 million in the prior year. As previously discussed, continued weakness in power outage activity resulted in lower shipments of home standby and portable generators as compared to a much stronger outage environment in the prior year period. Residential energy technology sales increased year-over-year, driven by shipments of energy storage systems to Puerto Rico as we completed the Department of Energy resiliency program during the quarter. Commercial and industrial product sales for the fourth quarter increased 10% to $400 million as compared to $363 million in the prior year. The combination of contributions from acquisitions and the impact of foreign currency had a 3% favorable impact on sales growth during the quarter. The core sales growth was primarily due to revenue from products sold to data center customers, both domestically and internationally. Net sales for the other products and services category decreased approximately 6% to $120 million as compared to $128 million in the fourth quarter of 2024. The core sales decline of 7% was primarily driven by a decline in aftermarket service parts related to the residential products due to a strong prior year comparison that included multiple major power outages, partially offset by continued growth in ecobee Services. Gross profit margin was 36.3% compared to 40.6% in the prior year fourth quarter. This decrease was primarily due to unfavorable sales mix, together with a $15.6 million net inventory provision recorded in the current year quarter related to the settlement of a contract dispute with a supplier for a discontinued product, as disclosed in the accompanying reconciliation schedules to the earnings release. In addition, higher input costs and lower manufacturing absorption were mostly offset by increased price realization. Operating expenses increased to $405 million or up 34% compared to the fourth quarter of 2024. The increase was primarily driven by a $104.5 million provision recorded in the current year quarter for the settlement of a portable generator product liability matter as disclosed in the accompanying reconciliation schedules to the earnings release. Additionally, lower incentive compensation was offset by higher marketing spend to drive incremental awareness for our products. Adjusted EBITDA, before deducting for noncontrolling interest, as defined in our earnings release, was $185 million or 17% of net sales in the fourth quarter as compared to $265 million or 21.5% of net sales in the prior year. For the full year 2025, adjusted EBITDA before deducting for noncontrolling interest was $716 million or 17% of net sales as compared to $789 million or 18.4% in the prior year. I will now briefly discuss financial results for our 2 reporting segments. Domestic segment total sales, including intersegment sales, decreased 17% to $889 million in the quarter as compared to $1.07 billion in the prior year, which included a slight favorable impact from acquisitions. Adjusted EBITDA for the segment was $151 million or 17% of total sales, as compared to $243 million in the prior year or 22.7%. For the full year 2025, domestic segment total sales decreased 4% over the prior year to $3.49 billion, which included a slight favorable impact from acquisitions. Adjusted EBITDA margins for the segment for the full year 2025 were 17.1% compared to 19.1% in the prior year. International segment total sales, including intersegment sales, increased 12% to $209 million in the quarter as compared to $187 million in the prior year quarter, including an approximate 6% sales growth contribution from foreign currency. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $33.7 million or 16.1% of total sales as compared to $22.5 million or 12% in the prior year. For the full year 2025, International segment total sales increased 7% over the prior year to $777 million, including an approximate 1% sales growth contribution from foreign currency. Adjusted EBITDA margins for the segment for the full year 2025 and before deducting for noncontrolling interests were 15.1% of total sales during 2025 as compared to 13.2% in the prior year. Now switching back to our financial performance for the fourth quarter of 2025 on a consolidated basis. As disclosed in our earnings release, the GAAP net loss for the company in the quarter was $24 million as compared to net income of $117 million for the fourth quarter of 2024. As previously discussed, the current year quarter includes the impact of the aforementioned product liability and supplier contract settlements, which drove our net loss for the quarter. GAAP income taxes during the current year fourth quarter were a benefit of $3.7 million or an effective tax rate of 13.4% as compared to an expense of $27.3 million or an effective tax rate of 18.9% for the prior year. The lower effective tax rate was driven primarily by the impact of certain favorable discrete tax items and their impact on a lower pretax income in the current year. The net loss per share for the company on a GAAP basis was $0.42 in the fourth quarter of 2025 compared to net income per share of $2.15 in the prior year. Adjusted net income for the company, as defined in our earnings release was $95 million in the current year quarter or $1.61 per share. This compares to adjusted net income of $168 million in the prior year or $2.80 per share. Cash flow from operations was $189 million in the current year quarter as compared to $339 million in the prior year fourth quarter. Free cash flow, as defined in our earnings release, was $130 million as compared to $286 million in the same quarter last year. The change in free cash flow was primarily driven by a significant reduction in net working capital in the prior year, which did not repeat, and lower operating income in the current year, partially offset by lower cash payments for taxes. Total debt outstanding at the end of the quarter was $1.33 billion resulting in a gross debt leverage ratio at the end of the fourth quarter of 1.9x on an as-reported basis, which is within our target gross debt leverage range of 1 to 2x adjusted EBITDA. For the full year, Cash flow from operations was $438 million as compared to $741 million in the prior year. Free cash flow, again, as defined in our earnings release, was $268 million, as compared to $605 million in full year 2024. Capital expenditures during the full year totaled $170 million or 4% of net sales as we invested in additional production capacity and other capabilities to support future C&I growth. In addition, we opportunistically repurchased approximately 1.11 million shares of our common stock during the full year for $148 million at an average price of $133 per share. Additionally, on February 9, Generac's Board of Directors approved a new share repurchase authorization that allows for the repurchase of up to $500 million of the company's shares over the next 24 months, replacing the remaining balance of the previous program. We will continue to operate within our disciplined and balanced capital allocation framework as we evaluate future shareholder value-enhancing opportunities. With that, I will now provide further comments on our new outlook for 2026. As disclosed in our press release this morning, we are initiating 2026 net sales guidance that projects strong year-over-year growth for the full year period. We expect consolidated net sales for the full year to increase at a mid-teens rate as compared to the prior year, which includes a favorable impact of approximately 1% from the net combination of foreign currency and completed acquisitions and divestitures. Consistent with our historical approach, our guidance assumes a level of power outage activity in line with the longer-term baseline average for the remainder of the year and does not assume the benefit of a major power outage event during the year. Breaking this down by product class, we expect overall residential net sales to increase in the plus 10% range as compared to 2025, primarily driven by growth in shipments of home standby and portable generators, given the assumption of a return to a baseline average power outage environment in 2026 as compared to an easier comp in the second half of 2025. In addition, we expect higher price realization for home standby generators, the launch of PowerMicro, and continued growth at ecobee to contribute to the strong residential product sales growth. The residential growth will be partially offset by lower energy storage sales due to the end of the Department of Energy Program in Puerto Rico. As Aaron discussed, we expect robust C&I product sales growth in the plus 30% range during 2026, primarily driven by products sold to data center customers. In addition, the acquisition of Allmand is expected to contribute approximately 1/4 of this year-over-year growth, with the remainder coming from modest organic growth in our traditional C&I products and channels. Additionally, in January, we completed the divestiture of certain noncore assets that will impact sales for our other products and services category, resulting in an approximate 10% year-over-year decline for this product class in 2026. From a seasonality perspective, we expect 2026 consolidated net sales to be approximately in line with normal seasonality, resulting in overall net sales in the first half being approximately 46% weighted and sales in the second half being approximately 54% weighted. Specifically for the first quarter, we expect overall net sales to increase in the plus 11% to 13% range compared to the prior year, primarily driven by strong growth in portable generator shipments related to winter storm fern and significantly higher revenue from products sold to data center customers. Looking at our gross margin expectations for the full year 2026, we expect the full year realization of price increases to be fully offset by higher input costs and unfavorable mix, resulting in approximately flat gross margins compared to the prior year in the 38% to 39% range. From a seasonality perspective, we expect first quarter gross margins to mark the low point for the year, with a slight sequential decline from the fourth quarter of 2025 in the 36% range. In line with normal seasonality, gross margins are expected to improve sequentially into the second half of the year given the increasing mix of higher margin home standby product sales, resulting in second half gross margins in the 39% range. Looking at our adjusted EBITDA margin expectations for full year 2026, adjusted EBITDA margins before deducting for noncontrolling interests are expected to be approximately 18% to 19% for the full year 2026 compared to 17% in 2025. At the midpoint of the sales growth and margin ranges, this would result in an approximate 25% increase in EBITDA dollars in 2026 compared to 2025. We also expect adjusted EBITDA margins to follow normal seasonality and improve significantly as we move throughout the year. Specifically, regarding the first quarter, adjusted EBITDA margins are expected to land in the 15% range and then improve sequentially throughout the year, reaching approximately 20% for the second half of the year. This sequential improvement is expected to be driven by the previously discussed gross margin mix improvements, together with significant operating expense leverage on the seasonally higher sales volumes. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2026. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items should be reflected net of tax using our expected effective tax rate. For 2026, our GAAP effective tax rate is expected to be between 24% to 25% as compared to the 18.9% full year GAAP tax rate for 2025. We expect interest expense to be approximately $65 million to $69 million for the full year 2026, assuming no additional term loan principal prepayments during the year. This is a decline from 2025 levels of $71 million due to the full year impact of lower sulfur interest rates. Our capital expenditures are projected to be approximately 3.5% of our forecasted net sales for the year as we continue to invest in incremental capacity and execute other projects to support future growth expectations, particularly for C&I products. Depreciation expense is forecast to be approximately $104 million to $108 million in 2026, given our assumed CapEx guidance. We have intangible amortization expense in 2026 expected to be approximately $18 million, and stock compensation expense is expected to be between $54 million to $58 million for the year. Operating and free cash flow generation is expected to be weighted towards the second half of the year in 2026, resulting in projected free cash flow generation of approximately $350 million for the full year 2026. Our full year weighted average diluted share count is expected to increase modestly and be between 59.5 million to 60 million shares compared to 59.3 million shares in 2025. Finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures, or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.
分析師問答
Our first question comes from Tommy Moll with Stephens.
Aaron, I wanted to ask about your progress with the hyperscalers. Just to level set, I think what I hear you saying is no orders in backlog yet, but the advance to the pilot phase is new versus last quarter. So maybe if you could just confirm if that's correct. And just give us a little more insight about what you're expecting in the go forward. You talked about orders to come? Just walk us through what the phases of that might look like.
Yes. Thanks, Tommy. So yes, that's largely correct. The backlog, there's a couple of units in there for the pilot program, but that's it. So the $400 million. And remember, the $400 million is after we began shipping product in Q4 and here also started Q1. So good order flow again over the last 90 days to get the backlog to 400, and that's without any material hyperscale business at this point. So that's the answer to that question. And the second part of the question in terms of the progression there. The pilot programs are in flight. We are in deep negotiations with the two hyperscale customers in particular, and that's what the pilot programs are related to. We would anticipate with successful completion of those pilot programs here in the call it, the end of the first quarter, beginning of the second quarter, we would be in a position then with each of those customers to sign a longer-term supply agreement, a master supply agreement. That would then be when we would start to see purchase order flow, and that would then feed into the backlog. They've been holding off on that, although I will say all of our conversations with those two hyperscalers have been about how much can we supply for 2027 and 2028, what's our capacity, and do we have the potential to supply product in 2026. That is not in our guide at all, obviously. So that could be upside. Again, as I said on the call, with the purchase of the new facility here in Sussex, Wisconsin, we'll have that facility online in the second half of the year, and we could respond to the potential for additional orders from those hyperscale customers in '26 should we be able to work through the successful completion of the contract negotiations in the pilot phases. But we feel very good about where we're at. They need additional supply desperately, and we believe we're going to be in a really good position certainly for '27 and '28, but also potentially here for 2026. The addition of that facility and some of the tweaks we've made, just to our domestic capacity, we believe we're now over $1 billion here domestically for capacity. We're looking at ways we could go higher because the volumes we're talking about in '27 and '28 could take us easily above those numbers.
Our next question comes from the line of George Gianarikas with Canaccord.
So as it relates to the data center opportunity, can you just maybe talk a little bit about the competitive environment, how that may be changing or if it's the same, and whether or not this enormous opportunity is inviting any new entrants into it?
Yes. Thanks, George. So as it relates specifically to diesel generators, large megawatt diesel generator backup, the market has not changed in terms of participants at this point other than our entry into it. The reason for that largely is the limitation around the number of diesel engine manufacturers in those high horsepower diesel engine ranges. That's a pretty static number because of the investment required, not only in R&D but also the production investment needed for tooling and the manufacture of those types of products. We think we have a great partner there that has invested very heavily in capacity. So we don't believe we're going to see capacity limitations in the near term or in building out the rest of our supply chain. Obviously, it's not just the engine; there are alternators, cooling packages, structural elements of the generator in terms of the steel base frames, and the diesel tanks themselves. Obviously, the packaging structures that go around these machines that typically are handled by third-party companies. We are evaluating and deepening our relationships in the supply chain. It's not just the investments we're making in our own production environment, right? We can go out and buy a plant, we can buy the equipment, and hire the people, but we need to make sure the supply chain is ready for those higher volumes. Fortunately, this is something we do really well. We're taking a page out of our residential side of our business where we've been very agile over the years and reacting to surges in demand and the ability to get our supply chain at the levels that we need them to be successful and to handle increased demand. So we're kind of built that way. It's part of our DNA, and I think it's going to serve us quite well in this new market.
Our next question comes from the line of Mike Halloran with Baird.
Could you share your thoughts on the direction of the total addressable market and growth profile for the data center markets over the next three to five years? It would be helpful to understand this in the context of industry growth. Additionally, what share do you believe is realistic within that overall market opportunity?
Yes. Thanks, Mike. It's a great question. The numbers around the size of the market keep changing because a lot of that is obviously tied to the amount of construction. We think that the market could be as much as $15 billion a year alone. For us, when we look at what's reasonable for our share position, we look at our share here in North America, depending on the segments of the markets you look at; we're a 10% to 15% share player in the C&I market. So we think that is a reasonable target for us. Maybe on the low end of that, it's 10%. We believe that the opportunity here is great enough that we can take what effectively was a $1.5 billion business last year in C&I, and we can double that in the next 3 to 5 years. That would be the addition of another $1.5 billion. So just a 10% share. If the market is bigger, maybe that number grows. If the number is smaller because of the cyclical nature of all markets, there are cycles and we're going to be measured about that. I will say this: in addition to just obviously, the discussion this morning is heavily focused and weighted on data centers. But we basically are starting from zero with our traditional market, which already existed. That traditional market, obviously not a $15 billion a year market in that range, but it's half the dollars in our traditional market. So it's another, call it, $3 billion to $4 billion. Just getting a portion of that, we believe, is going to be supportive of the growth that we're seeing. For the record, the $400 million backlog that we keep talking about, we don't have any of our traditional large megawatt products in that backlog at this point. So that's a recent product launch. We launched with the data center-focused sets first, and we started quoting now in the traditional market. So that's an opportunity for us on a go-forward basis that we will be able to talk more about as we go throughout 2026 here.
Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.
Maybe shifting gears to residential. I wanted to just better understand what you think the hole is for the Puerto Rico wrap and then how you're thinking about PowerMicro demand and feedback. And then within the home standby, I think you said mid-teens growth, how much of that is price mix and volumes. And then just an update on kind of the cost structure in energy technology in '26 versus '25 bringing that loss down towards your target?
Thank you for your questions, Jeff. I appreciate the focus on the residential market. As you know, the second half of last year was significantly weaker due to outages. Looking ahead, we anticipate a mid-teens growth rate in the residential sector next year. However, there are challenges to consider, particularly with the DOE headwind as that program concludes in early '26, which presents a $100 million gap in energy storage that we need to address. We have launched next-generation power cell products, including the PowerMicro microinverter, which is well-positioned in the residential solar market. Although federal incentives for residential solar and storage may have diminished for homeowners, opportunities could still be available for third-party operators. While we expect a temporary compression in this market over the next year or two, projections indicate a continued demand for these products as energy costs increase, particularly at the residential and light commercial levels. We recognize the existing gap that will be partially filled by PowerMicro, along with growth in ecobee products. Overall, we anticipate a decline in storage, microinverters, and ecobee products, but we expect strong growth from our core residential offerings like home standby and portable generators. For next year's growth in the home standby category, we estimate that about half will come from price realization, reflecting the introduction of a new product line with a higher average selling price and the full-year impact of tariff increases from last year. The other half of the growth is expected to come from increased unit volume, assuming a return to more normal outage levels in the second half of the year. Despite the challenges last year, we were pleased to see metrics in the category remain stable, with positive trends in home consultations, activations, and dealer counts. The early part of this year started well with the impact of Winter Storm Fern, which helped boost volume on portable generators. Overall, we feel optimistic about the position of our residential products as we begin the year.
Our next question comes from the line of Brian Drab with William Blair.
I'm curious if you can provide an update on the expected margins from the data center products. I understand you may not disclose specifics regarding home standby. Additionally, how does that margin evolve over time? You're currently in a phase of significantly increasing capacity, along with the associated costs and inefficiencies often seen with new product launches. What do you anticipate for this year's margin and in the long term?
Yes, Brian, this is York. That's a good question. Regarding these projects, as we increase our capacity, we will incur some start-up costs. We are expecting around mid-teens EBITDA margins or contribution margins for these projects in 2026. As we scale up further, we anticipate achieving higher margins in the range of 27% to 28% in the data center sector, which aligns closely with our corporate average EBITDA margins.
I would say the upside there potential, Brian, would be as we look to bring in-house more elements, more vertical integration in the entire package, there's an opportunity there for us should we find the right way to do that either through M&A or organic investment to do more of the content. Obviously, we're not going to do diesel engines, but we have the opportunity to add to the content, which then would have the potential to improve the margin profile even further. So yes.
Our next question comes from the line of Stephen Gengaro with Stifel.
Just I was wondering about the home standby generator business. Just as you sort of observed the trends in that business over the last couple of years, how do you think about just the penetration rates you're seeing and kind of just sort of the growth rate you would expect over kind of a multiyear period in kind of a sort of smooth outage normalized outage activity market?
Yes, Stephen, great question. I think the challenge in answering the question, of course, we haven't really had much of a "normal" outage environment. We talked about that on the averages, of course, and that helps smooth things out. And I guess to answer your question, today, we're only 6.75% penetrated. Every 1% of penetration is a $4.5 billion market opportunity. Our share is outsized in that market because we created it, we own it, we drive it. There isn't a single other player in the home standby category that puts the kind of muscle we put behind. We do that because it's only 6.75% penetrated, and we think that there's huge upside there. When you look at where could penetration go, which maybe is your question, in terms of terminal penetration rate for the category. We have states where we're in the 20% range. In states like West Virginia, may not be huge states, right? But you look at other states like Michigan, which for us is a 17% penetration rate. So can we get to a 17% penetration across the U.S.? I mean, there are opportunities there. California is low. Texas, which is a massive market, is only really right at the median now. Florida is really kind of right at the median. So I think the opportunity here, if you look historically, the growth rate in the category over the last 25 years has been roughly 15%. It's been pretty consistent over that period. We're saying residential products in total are going to grow in the mid-teens. Home standby is a component of that obviously a major driver of that. So in terms of where we think we can go with this category, we just believe there's a lot of runway here. You look at just all the data around outages and the trends over the last 20 to 30 years are all up and to the right. As Americans, we deal with outages more than any other kind of developed nation in the world. The state of our grid and the reality of it is, and it's complex. There are a lot of reasons for it. Mother Nature has always been kind of driving 70% of those outages. We are seeing a change in the basic kind of math around supply and demand and shortfalls in supply. You may have heard in my comments, the National Electric Reliability Corporation calling out that half of all Americans are at risk for significant outages over the next 5 years because of energy shortfalls, not because of Mother Nature. We think the opportunity for home standby backup power and then, of course, in our C&I business, our core business, backup power, the requirements there are going to be significant in the years ahead.
Our next question comes from the line of an analyst with Bank of America.
Just to clarify here, when you say you've progressed to the pilot phase with hyperscalers. What does the pilot mean in practice? Is that based on performance validation? And then the second question I had here, we're talking about potential significant volumes in '27 and '28, right? Is that based on customer provided demand forecasts that are tied to specific cycles or more to a general capacity reservation for future expansion? I'm trying to confirm here what we can anticipate in just in the C&I profile. I think last quarter you may have spoken about C&I doubling in the next few years. Was that kind of based on just one hyperscaler award here because now we're talking about two. So trying to get more clarity around this in general.
Those are great questions. First, on the pilot programs, they vary based on the different hyperscalers and have different requirements. However, effectively, there are test scripts that we run the products through, in some of those in our laboratories or as part of actual real sites so to speak. Those are underway today. Some of those are observed directly here again, and some of those are in the wild. We are progressing well there, and we don't see any problems with meeting those requirements. We know these products quite well. As far as your question about the capacity that we've been talking about in the future here, '27 and '28 with these hyperscalers, it's a mix of both. We have a hyperscale customer that is providing us with specific site build-outs for their sites. In that instance, it's more pointed around the specifics of what is needed by site and what we could potentially provide. Of course, logistics costs are a part of the overall bill here, not only in cost but also in time. So we're trying to match the builds of these data center construction activity with our manufacturing production capacity by region. With another hyperscaler, it's all about how many slots can we reserve for them; we're talking about a lot of product, in fact, it's quite difficult for me to get my head around in terms of the actual size of what we're talking about here, and the $1 billion of capacity that I've mentioned would not be enough to handle the potential capacity that would be required if we are able to successfully land purchase orders for these hyperscale customers. We also have co-locators; we're a preferred supplier to 2 co-locators already in our backlog, and that continues to grow. The requirements here are enormous. To answer the last part of your question about our completion of doubling the C&I business over the next 3 to 5 years, if we had to be very honest, that was really a landing on a hyperscaler. If we landed one hyperscaler, that would get us to a point of doubling. Is there an opportunity to go higher than that? Of course, that would be somewhat obviously gated by our ability to expand capacity and then, of course, supply chain as well. Those are things that we've got to work on yet, so we're not ready to commit higher than that. However, I do believe that if we can get success with our own capacity and continue to work with our supply chain partners, there is the possibility that we could go higher than that in the future.
Our next question comes from the line of Christopher Glynn with Oppenheimer.
A couple on residential. Just curious about how you're thinking about ASP in the short term related to burn. And I didn't hear any comments on that. And then with the ecobee's new grid resiliency service where you had a nice contribution to the grid operating capacity. How do we think about the revenue and monetization implications for that?
Yes. Thanks, Chris. Good questions. In grid services, we obviously have invested in that. It's a small piece, but it is interesting. We want to keep a toe in that because it's recurring revenue, but also due to the pressure on utilities and grid operators, they will have to turn to nonconventional solutions like virtual power plants and other grid service types of programs. So we definitely want to stay close to it. That's something that we want to keep tracking as it's just small, but it's recurring and a nice piece of growth there. We're going to continue to stay involved. Your question had to do with Home Standby; it gave us a nice bump on portables also, gave us a nice bump in our in-home consultations, and we saw those basically double from where we were expecting them to be for the month.
Our next question comes from the line of Praneeth Satish with Wells Fargo.
The decision to expand to $1 billion per year of diesel genset capacity was made before securing contracts with hyperscalers. However, this move is justified considering the significant demand and the constraints in industry capacity. My question is about what happens next. First, is it feasible to increase capacity beyond $1 billion at this stage? Second, how do you view the expansion for the next phase in relation to peers who are also increasing their capacity for the '27 and '28 timeframe? Would you wait for contracts before proceeding with further expansion, or would you be willing to move forward if there are strong demand indicators?
You're spot on. We felt good enough about where we were headed here with our discussions with the customers that I mentioned here that we took a better risk there by going out and buying an existing facility. We bought an existing facility so we could get it up and running quickly. Building something greenfield takes more time and more capital. This was a much more efficient way to accelerate our capacity adds. That $1 billion that I mentioned is just the domestic capacity. We actually have greater than that globally. We may have a couple of hundred million of additional capacity outside the U.S., and we're looking at ways to expand that as well. Where does that put us? I think we'll give a more fulsome update. We do have an Investor Day coming up on March 25, where we will be able to provide a lot more context around where we're going from a capacity standpoint. However, if we saw opportunities, let's say we wanted to go to $2 billion, right? Like we saw handwriting on the wall; it would depend on how strong those buy signals are. Obviously, we undertook this first step without having orders in hand. I would tell you it will be easier to take confidence in trying to double it again if we had hard orders in hand. So it's not that we wouldn't do it for the right circumstances or if we saw and had the right kind of conversations at the right levels of these customers. But we did take an initial flyer here. We feel very good about it. I think that's going to pay off well, positioning us significantly well. We think that our lead times are going to remain shorter than the rest of the market, at least for the near term and probably all of 2027. Our competitors today are out kind of 2 years on deliveries. Of course, they are investing in capacity adds as well, but the constraints largely for our competitors are in the engines, and our engine partner can allow us to keep shorter lead times because of their overall investment in their capacity, which gives us access to what's arguably the most critical component in the genset in terms of long lead time.
Our next question comes from the line of Joseph Osha with Guggenheim Partners.
Just two quick ones. First, we've talked a lot about hyperscalers. I'm wondering if you could help us perhaps size the colo opportunity; Aaron, you mentioned it briefly because there’s a lot there. And then the second question, we've talked a lot about diesel today, but we also heard a lot about some of the smaller spark natural gas machines being used as a time to power solution in some cases. I’m wondering if you could comment on whether you're seeing any of that demand.
Yes. Thanks, Joe. Great question. From a diesel perspective, that market continues to grow. The co-locator portion of that today is our focus because we haven't gotten to final contract signings with the hyperscalers, and at $400 million of backlog, you could argue that's 30% of the market. There's a longer tail in terms of just the number of customers to talk to there and the number of parties involved; we've made good progress in those areas. We are listed as the preferred supplier with 2 co-locators; we are one of the primary suppliers that they look to for backup power across the sites around the world. So those are great opportunities for us and will help us to balance our reliance on any one customer. However, the hyperscalers have an outsized impact due to the capital they're deploying for data center construction. As for the spark-ignited engines, we are seeing certain spark-ignited engines being used in applications behind the meter to power data centers where grid interconnect is not available and where the lead times to wait for a traditional gas turbine or different solutions is just not possible. These engines are operated in a lean combustion cycle mode, producing power continuously, of course. They're not great pure backup assets; you may have to infill them with batteries to cover any downtime during power loss. However, we're still seeing a market and opportunity there that doesn't shrink the TAM at all for backup diesel generators; that you still need both is my point.
Our next question comes from the line of Vikram Bagri with Citi.
It's Ted on for Vik. I wanted to talk about energy technology. Are you able to share whether revenues where they shook out relative to the $300 million to $400 million range that you previously talked about? And then for this year, is it fair to assume that those revenues would be below the end of that range, if you include the Puerto Rico impact? And then just lastly, could you just confirm whether the focus is still on achieving breakeven EBITDA margins within that business in 2027?
Thanks. I appreciate the question. Last year, 2025, those products ended at the high end of the range, closer to 400, at about 375. Going forward, they're going to pull back a little bit because of the loss of the DOE program, but they are going to be in between that 300 to 400 range again with PowerMicro launching and ecobee continuing strong results. We have great products and support, and they are becoming much more deeply integrated into this ecosystem we've been building. In terms of getting to breakeven profitability by 2027, we're focused on that as we go forward.
Next question comes from the line of Keith Housum with Northcoast Research.
Going back to the residential part again here. Aaron, perhaps any thoughts you have in terms of the battery storage market, understanding there's been a lot of products coming out over the past year and potentially the cannibalization of the home standby business. How do you kind of guarantee that does not happen going forward?
Yes. Thanks, Keith. It's a great question. It's one of the reasons why we're investing so heavily in battery technology because battery performance has continued to improve, and costs are coming down. However, we are still a long way off from where a battery could stand in for long-duration outage coverage. You can buy 5 PWRcell 2s if you want, but in terms of cost per kilowatt hour of coverage, it's really expensive. So it's just not equitable today. We see batteries in the residential market for short duration outage protection, of course, but really as part of an overall strategy for homeowners who want to self-generate and have the ability to store power for later use. All indications suggest that the market for solar plus storage is going to contract in the short term, but all forecasts are that as energy costs continue to rise, the need for these types of products is going to be there. There is a market for resiliency, and we believe home standby is going to lead that market for a long time just on a raw cost basis.
Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Kris Rosemann for closing remarks.
We want to thank everyone for joining us this morning. We look forward to providing a longer-term strategic update at our upcoming Investor Day on March 25 and discussing our first quarter earnings results in late April. Thank you again, and goodbye.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.