TECOGEN Q2 FY26 earnings call TGEN

Tecogen is evolving its data center strategy, shifting from initially targeting smaller data centers to directly pursuing hyperscale and big brand developers. This change is driven by the company's resource constraints as a small entity and the belief that securing larger names will maximize company value and accelerate technology adoption across the industry. While smaller projects are still in the pipeline, the focus is now on the more influential players.

The company has gained significant traction with large data center players, hosting 12 product demonstrations (6 in-person, 6 virtual) over the past two months. These included 4 hyperscale data centers and chip manufacturers. Attendees collectively represent 15% to 20% of the present data center capacity in the U.S., operating over 8-gigawatts today and with multiple gigawatts in construction. Management views the commitment shown by these busy executives as a strong indicator of serious interest.

Tecogen's products are highlighted as solutions to critical challenges faced by large data centers, including opposition to on-site water use, noise, and air pollution. The dual-power source chiller is closed-loop, eliminating water evaporation. Products operate in noise-sensitive environments, making them quieter than diesel generators. They also offer near-zero NOx and carbon monoxide emissions, providing a cleaner alternative to diesel generators used during grid strain.

The company's base business (non-data center projects) shows strength, with a backlog exceeding $8 million and an additional $2 million to $3 million in projects expected to close soon. This growth is attributed to increasing power constraints across various markets, long lead times for electrical equipment, and rising utility rates, driving demand for cogeneration and standard power generation solutions in sectors like multifamily buildings.

The Service segment implemented cost reductions mid-quarter, with the full financial impact anticipated in Q3. These reductions, along with contract pricing adjustments and collaborations with customers on larger sites, are expected to improve run hours, increase revenue, and significantly boost gross profit dollars. Despite one-time^📎 costs of $300,000 in Q2, which reduced service margin by 7 percentage points, the underlying margin is recovering.

To address potential capacity limitations and compress lead times for data center orders, Tecogen has begun building inventory of its dual-power source chiller and power gen modules. This strategic move aims to enable quick response to purchase orders and facilitate rapid scaling once initial units are shipped, balancing cash flow management with the need to capitalize on the interest from large data center clients.

Total revenues for Q2 FY26 decreased 21% year-over-year to $5.8 million, primarily due to a 64% decline in Product segment revenue to $1.1 million. Despite this, the overall gross profit margin improved by 4% to 37.8%. Operating expenses increased 11.6% to $4.3 million, contributing to an increased net loss of $2.2 million and an adjusted EBITDA loss of $1.7 million. Energy Production revenue grew 35% to $0.24 million, but its gross margin declined due to a $100,000 shortfall.