AAON Q3 2024: Data Center Backlog Drives $500M 2025 Revenue Outlook
- Robust Data Center Demand: The transcript highlights a $174.5 million liquid cooling order (with an additional $34 million in subsequent orders) and a strong data center backlog, indicating high confidence in its data center cooling solutions and long‐term growth potential for this segment.
- Expanding Production Capacity: AAON is investing significantly in capacity with projects at the Longview facility and a new 787,000 sq ft Memphis facility, both of which are expected to boost production capabilities and support the conversion of its growing backlog into revenue.
- Strategic Market Positioning: Through its transformation efforts—including enhanced engineering competencies and transitioning to advanced refrigerants—AAON is positioning itself as a leader in both its traditional HVAC and emerging data center markets, which supports sustainable margin expansion and competitive pricing.
- Continued Weakness in the Traditional Rooftop Business: Questions highlighted that the Oklahoma segment, already down 7% in Q3, may experience further softening in Q4 and Q1 due to seasonality, the refrigerant transition, and broader macroeconomic pressures ( ).
- Execution Risks in Order Conversion and Capacity Ramp‐Up: Reliance on large data center orders—with significant revenue concentrated in a few sequential quarters—poses risk if the new production facilities (e.g., Longview, Memphis) do not ramp up as smoothly or quickly as anticipated ( ).
- Margin Pressure During the Ramp-Up Period: The margin profile on new liquid cooling orders is expected to reflect historical BASX margins, which have been under pressure, potentially meaning that high-volume orders may not deliver the anticipated margin expansion in the initial ramp-up phase ( ).
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Data Center Backlog
Q: Is backlog enough for $500M next year?
A: Management stated that using about 51% of the backlog plus the $174.5M order points to roughly $500M in data center revenue for 2025, though not all will convert within that year. -
Capacity Expansion
Q: How is capacity set for growth?
A: The company is increasing capacity in phases at Longview and Memphis, ensuring new production lines ramp up sequentially into 2025 to support growing data center demand. -
Revenue Outlook (Oklahoma)
Q: Will Oklahoma revenue drop further?
A: Management expects a slight further softening in Q4 and Q1 due to a reduced backlog, although a strong pipeline offers promise for recovery. -
Earnings Guidance
Q: Is Q1’25 EPS expected to decline?
A: While earnings may be modestly down quarter-over-quarter from Q4, year-over-year growth is anticipated as data center production ramps up. -
Big Order Size
Q: Why was the $175M order so large?
A: The $174.5M liquid cooling order, from an existing customer’s first exposure to this technology, underscores large-scale AI capacity build-outs driving the order’s size. -
Order Pipeline
Q: Are more large orders visible?
A: Management noted strong pipeline visibility with numerous orders above $20M, indicating robust demand beyond the standout order. -
Liquid Cooling Mix
Q: What’s the future liquid vs. air cooling mix?
A: Initially, air cooling will dominate; however, as investments in AI/ML progress, liquid cooling could account for roughly 40–50% of cooling demand in the long term. -
Order Sequencing
Q: How will backlog convert sequentially?
A: Revenue from backlog is expected to accelerate quarter-over-quarter, with Q2 showing notably stronger conversion driven by data center demand and seasonal trends. -
BASX Sequencing
Q: How will BASX revenue sequence post-expansion?
A: BASX revenue will transition as geographic diversification and capacity investments take effect, ultimately driving improved efficiency and margins over time. -
Rooftop Business
Q: What drives the rooftop slowdown?
A: The downturn in rooftop sales is primarily due to the refrigerant transition, coupled with subdued nonresidential construction and broader macro headwinds, though long-term prospects remain positive. -
Pricing Strategy
Q: Why price lower than competitors now?
A: The company is maintaining a competitive pricing strategy to preserve margin integrity and recapture market momentum, especially as competitors build inventory. -
Margin Profile
Q: What is the margin profile for the liquid cooling order?
A: Margins for the order are expected to align with historical BASX performance, offering modest expansion potential as operational efficiencies improve. -
Order Timing
Q: Will bulk order revenue mostly hit in Q2?
A: Management expects a sequential ramp-up where initial contributions appear in Q4 and Q1, with a bulk of the revenue density coming in Q2. -
New Facility Contribution
Q: How will the Tennessee facility impact revenue?
A: Although not quantitatively detailed, the new 787,000 sq ft facility should roughly double data center production capacity, significantly boosting revenue by late 2025. -
Tax Guidance
Q: Does a 24.9% tax rate imply high Q4 tax?
A: The effective tax rate is expected to remain around 24%, with discrete benefits likely keeping Q4 rates moderated rather than elevated.
Research analysts covering AAON.