Shoals (SHLS) Q3 2025: Backlog Jumps $50M as Battery Storage and Data Center Wins Accelerate Diversification
Shoals delivered a record $721 million backlog this quarter, fueled by early traction in battery energy storage and a sharp rebound in its core utility-scale solar business. Gross margin stability and operating cash flow improvements stand out despite tariff-driven headwinds and ongoing remediation costs. Management’s commentary and Q&A reveal a company advancing beyond its legacy solar roots into grid, data center, and OEM adjacencies—pointing to a more diversified, resilient growth profile into 2026.
Summary
- Backlog Expansion: Battery storage and international channels are driving a step-change in Shoals’ opportunity set.
- Margin Levers in Flux: Tariffs and product mix shifts are muting margin upside, but core profitability remains resilient.
- 2026 Visibility Builds: Data center, grid, and OEM demand signal Shoals’ evolution beyond utility solar.
Performance Analysis
Shoals posted a 32.9% year-over-year revenue increase to $135.8 million, with growth underpinned by robust domestic project volumes and accelerating contributions from international, community commercial and industrial (CC&I), and original equipment manufacturer (OEM) channels. The company’s gross profit margin landed at 37.0%, in line with management’s target range, but was held back by tariff volatility and a higher mix of lower-margin “Long Tail BLA” products—a trade-off that expands wallet share but dilutes margin percentage.
Operating profit and adjusted EBITDA saw healthy expansion, but free cash flow was constrained by $11.9 million in wire insulation remediation and elevated capex tied to facility consolidation. The record $721 million backlog (up $50 million sequentially) and $575 million scheduled for delivery within the next four quarters provide strong revenue visibility. Notably, data center and battery storage bookings contributed $18 million to backlog and awarded orders, and management expects these new verticals to become more meaningful in 2026.
- Cash Flow Resilience: Operating cash flow improved to $19.4 million, despite remediation and capex outlays.
- Warranty Overhang: Shrink-back remediation remains a drag, with $7.2 million in remaining warranty liability.
- Book-to-Bill Strength: Book-to-bill ratio of 1.4x signals sustained demand and commercial momentum.
Overall, Shoals is balancing near-term cost and margin pressures with a visible, expanding pipeline that increasingly spans new markets and technologies.
Executive Commentary
"The transformation from a company with a narrow customer mix, product offering, and geographic footprint to a diversified, multinational energy solutions provider is beginning to take shape. These changes do not occur overnight, but through the deployment of repeatable processes that improve productivity, visibility, and scale."
Brandon, Chief Executive Officer
"Gross profit percentage was 37.0% compared to 24.8% in the prior year period within our expected percentage range of mid to upper 30s. Months of work to test new raw materials, negotiate terms, and onboard new suppliers can be undone in a moment as trade policies change without notice. Unfortunately, like many others, Shoals has been impacted by these policy shifts this year, and as a result, some margin-enhancing savings could not be realized as expected."
Dominic, Chief Financial Officer
Strategic Positioning
1. Battery Storage and Data Center Adjacency
Shoals is actively pursuing battery energy storage systems (BESS), targeting both grid firming (utility-scale batteries that stabilize supply) and data center applications (providing backup and load balancing for AI-driven workloads). The company has signed two master service agreements (MSAs) in these emerging verticals, with $18 million in backlog and awarded orders—management expects revenue to begin materializing in Q2 2026. This marks a critical step in diversifying beyond solar and capturing growth in energy infrastructure modernization.
2. Core Utility Solar Reacceleration
The domestic utility-scale solar market remains Shoals’ anchor, with record backlog and a robust book-to-bill ratio. Management emphasized that core market share is not only protected but growing, with commercial execution enabling both new and repeat business. This foundation underpins the company’s cash generation and provides a platform for new product launches and channel expansion.
3. International and Channel Diversification
International shipments and CC&I channels are ramping, with three international projects shipped in the quarter (two in Latin America, one in Australia) and CC&I revenue up 36% year-over-year. Shoals is building out regional teams, particularly in Australia and New Zealand, to deepen its global reach and reduce reliance on U.S. policy cycles.
4. OEM and Product Innovation
OEM partnerships, especially with the largest domestic module provider, are exceeding expectations and offer a recurring revenue stream tied to partner demand. New product launches, such as the Long Tail BLA, expand Shoals’ share of wallet, even if at lower margin percentages—this trade-off is strategic, broadening customer stickiness and solution scope.
5. Operational Scaling and Facility Consolidation
The company is consolidating three facilities into a new site in Portland, Tennessee, aiming for efficiency, culture, and process improvements. This operational upgrade is expected to be complete by mid-2026 and is already supporting record production despite the transition, reflecting improved execution and scalability.
Key Considerations
Shoals’ Q3 marks a visible inflection in both strategic breadth and operational discipline, but also highlights the complexity of scaling into new markets while managing legacy cost headwinds.
Key Considerations:
- Tariff and Trade Volatility: Sudden policy changes (such as Section 232 aluminum tariffs) erased expected margin gains and highlight the need for ongoing supply chain agility.
- Warranty and Litigation Drag: Wire insulation shrink-back remediation and legal expenses continue to consume capital and management attention, though the liability is declining.
- Backlog Quality and Visibility: Record backlog is diversified across core, international, and new verticals, improving forward revenue visibility and reducing cyclicality risk.
- Facility Consolidation Execution: The transition to a single, modern site is a key operational lever—successful migration without production disruption is critical to margin and cash flow improvement.
- Data Center and Grid Storage Ramp: Early wins in these segments are promising, but bookings will likely remain “lumpy” as projects scale and customer adoption matures.
Risks
Margin stability remains sensitive to tariff swings and product mix dilution, while warranty remediation and litigation persist as capital drains. The company’s expansion into BESS and data centers introduces execution risk, as these markets are nascent and project-based revenue can be volatile. Supply chain disruptions, policy changes, and permitting delays across global markets also pose ongoing threats to forecast accuracy and delivery schedules.
Forward Outlook
For Q4 2025, Shoals guided to:
- Revenue of $140 to $150 million (36% YoY growth at midpoint)
- Adjusted EBITDA of $35 to $40 million
For full-year 2025, management maintained guidance:
- Revenue of $467 to $477 million
- Adjusted EBITDA of $105 to $110 million
- Operating cash flow of $15 to $25 million
- Capex of $30 to $40 million
- Interest expense of $8 to $12 million
Management emphasized:
- “Quarterly pacing within the year has continued to follow the strong back half we’ve been communicating since February.”
- “Revenue should be somewhat stable as customers take deliveries on new BESS and data center projects beginning in Q2 2026.”
Takeaways
Shoals is executing a deliberate transformation, leveraging its core solar franchise to springboard into battery, grid, and data center adjacencies. Investors should focus on backlog conversion, margin management amid tariff volatility, and the pace of adoption in new verticals.
- Diversification Momentum: Early traction in BESS and data center markets signals Shoals’ evolution, though revenue recognition will lag bookings.
- Margin and Cash Flow Watch: Tariff and remediation headwinds are muting margin upside, but operational discipline is supporting core profitability and backlog quality.
- 2026 Growth Levers: Facility consolidation, international expansion, and OEM partnerships are set to drive incremental growth and resilience as Shoals moves beyond legacy solar dependence.
Conclusion
Shoals’ Q3 shows a company in transition: core solar execution remains robust, while new verticals like battery storage and data centers are beginning to move the needle. Margin and cash flow discipline will be critical as the company absorbs the costs of growth and operational transformation. The record backlog and diversified pipeline provide a strong foundation for 2026 and beyond.
Industry Read-Through
Shoals’ results reinforce two sector-wide themes: First, energy infrastructure suppliers are seeing a surge in demand for grid stability and data center resilience, driven by renewables integration and AI workloads. Second, margin headwinds from tariffs and mix shifts are a persistent challenge, requiring nimble supply chain and pricing strategies. For peers in solar, storage, and electrical balance of system (eBOS) markets, Shoals’ pivot into adjacencies and international channels underscores the need to diversify revenue streams and invest in operational scale. The lumpy nature of large project bookings in BESS and data centers is likely to characterize the sector as these end markets mature.