Heating and cooling solutions company AAON (NASDAQ: AAON) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 17.4% year on year to $384.2 million. Its non-GAAP profit of $0.37 per share was 14.9% above analysts’ consensus estimates.

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StockStory’s Take

AAON’s third quarter results were met with a positive market reaction, reflecting strong execution despite ongoing operational headwinds. Management attributed sales momentum to improved production throughput at both Tulsa and Longview facilities and robust demand for its BASX brand, which specializes in data center cooling solutions. CEO Matthew Tobolski noted, "BASX-branded backlog grew to $896.8 million, up 119.5% from a year ago," highlighting this segment’s outperformance. The company continued to face margin pressures due to inefficiencies at its Longview plant and the early ramp-up at the new Memphis facility, but sequential improvement in gross margin signaled progress in operational recovery.

Looking ahead, AAON’s outlook is anchored by expectations for continued double-digit revenue growth and further margin improvement as new manufacturing capacity ramps up and operational issues subside. Management emphasized that the BASX segment will remain a key growth driver, supported by robust demand for data center cooling products and a strong pipeline of orders scheduled for production at the Memphis facility in 2026. Tobolski stated, “With a strong backlog and significant increase in capacity, we expect the BASX brand to deliver meaningful growth in 2026.” The company also intends to address lingering ERP implementation challenges and optimize manufacturing processes across all sites to support long-term profitability.

Key Insights from Management’s Remarks

Management cited strong data center demand, successful capacity expansion, and improved production throughput as primary factors behind the quarter’s revenue growth, while margin challenges stemmed from operational inefficiencies and facility ramp-up costs.

• BASX brand outperformance: The BASX segment saw exceptional growth, driven by heightened demand for custom cooling solutions in the data center market. Management reported a substantial increase in BASX-branded backlog and highlighted a robust pipeline of liquid and air-side cooling orders.

• Production improvements in Tulsa and Longview: Sequential production gains at the Tulsa and Longview facilities enabled higher sales, with AAON-branded production returning to prior-year levels in Tulsa and showing strong recovery in Longview. These improvements were facilitated by better ERP system utilization and coil supply management.

• Operational inefficiencies impact margins: Gross margin contraction was attributed to continued inefficiencies at Longview and unabsorbed fixed costs at the ramping Memphis facility. CFO Rebecca Thompson explained that these challenges are expected to abate as production stabilizes and ERP optimization progresses.

• National account and product momentum: AAON’s national account strategy delivered a 96% increase in bookings for the quarter, while its Alpha Class air-source heat pump line sustained momentum with quarter-over-quarter booking growth, reflecting effective product differentiation.

• ERP implementation lessons: The company applied insights from the Longview ERP rollout to streamline the Memphis facility’s transition, emphasizing enhanced automation and hands-on training to minimize future disruptions and position other sites for smoother system adoption.

Drivers of Future Performance

AAON anticipates sustained growth driven by data center demand, new capacity, and operational efficiencies, though margin recovery depends on addressing production challenges and market conditions.

• Data center-driven BASX growth: Management expects BASX to remain the primary growth engine, fueled by strong demand from data center developers and a diverse customer base. The ramp-up of the Memphis facility is central to delivering on a record backlog and capturing further market share in this segment.

• Margin improvement efforts: Sequential gains in gross margin are projected as operational inefficiencies at Longview subside and Memphis reaches higher utilization. Management targets further ERP optimization and best-practice manufacturing, with the hiring of a new COO to oversee consistency and efficiency across facilities.

• Commercial HVAC market softness: While the core commercial HVAC market remains soft, AAON plans to leverage its national accounts and differentiated products like the Alpha Class heat pump to outperform bookings trends, but overall order conversion could remain subdued until broader market activity picks up in mid-2026.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the successful ramp-up and order conversion at the Memphis facility, (2) evidence of sequential margin improvement as operational inefficiencies are resolved, and (3) continued strength in BASX data center demand and backlog growth. Ongoing progress with ERP implementation across remaining sites and the commercial HVAC market’s recovery will also be critical to AAON’s performance trajectory.

AAON currently trades at $100.68, up from $93.41 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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