Wesco (WCC) Q2 2025: Data Center Sales Surge 65% as Backlog Hits Record Highs
Wesco’s Q2 delivered standout acceleration in data center sales, up 65%, driving record backlog and prompting a guidance raise for organic growth. The company’s multi-segment model is benefiting from secular trends in AI-driven infrastructure and electrification, while utility headwinds are beginning to abate. Investors should focus on the sustainability of data center momentum and the company’s ability to navigate tariff volatility in the back half of the year.
Summary
- Data Center Growth Redefines Mix: Wesco’s data center sales now represent nearly one-fifth of total revenue, reshaping the business profile.
- Utility Recovery in Sight: Investor-owned utility sales returned to growth, supporting a broader segment rebound in H2.
- Tariff Dynamics Add Complexity: Volatile supplier pricing and tariff notifications could impact margin cadence and demand.
Performance Analysis
Wesco’s Q2 results underscore a decisive pivot toward high-growth verticals, with organic sales up 7% year-over-year, led by Communications and Security Solutions (CSS) surging 17% and Electrical & Electronic Solutions (EES) up 6%. Data center revenue eclipsed $1 billion for the quarter, now comprising 18% of total company sales, a marked rise from 10% a year ago. This shift signals a business increasingly levered to secular demand for AI and digital infrastructure.
Utility and Broadband Solutions (UBS), while still down 4% YoY, showed sequential improvement, with investor-owned utilities (IOUs) returning to growth and July tracking positive. EBITDA margin expanded 90 basis points sequentially, reflecting operating cost leverage despite YoY gross margin compression from mix and pricing pressure. Free cash flow conversion remained robust, with disciplined working capital management supporting $87 million of free cash flow in the quarter.
- Segment Divergence: Data center and security outperformed, while utility lagged but is positioned for a second-half inflection.
- Gross Margin Pressure: Mix shift toward large, lower-margin projects and competitive pricing weighed on margins year-over-year.
- Capital Structure Optimization: Redemption of $540 million in preferred stock and refinancing pushed significant debt maturities out to 2028, lowering annual financing costs.
Momentum entering Q3 is clear, with July sales per workday up approximately 10% YoY and backlog at all-time highs across all business units. However, margin trajectory remains sensitive to product mix and evolving tariff impacts.
Executive Commentary
"Our second quarter performance was led by 17% organic growth in CSS and 6% organic growth in EES. Setting a new record and a new mark, our total data center sales eclipsed $1 billion, and that's for the entire Wesco enterprise, in the second quarter. And they were up 65% versus the prior year. This is a clear indication of our leading value proposition and the enduring secular growth trends of AI-driven data centers."
John Engel, Chairman, President, and Chief Executive Officer
"We redeemed our $540 million Series A preferred stock in June... This refinancing action reduced our total financing costs and created a substantial benefit to our net income, EPS, and cash flow run rates. The estimated annualized benefit from this transaction is approximately $32 million, or $0.65 per diluted share."
Dave Schultz, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Data Center as Core Growth Engine
Wesco’s data center solutions business has become a primary growth vector, now accounting for 18% of total sales and driving a 40% growth outlook for the year. The company’s direct relationships with hyperscalers, multi-tenant data center (MTDC) operators, and enterprise clients provide visibility and embeddedness across the data center lifecycle—from power infrastructure (“gray space,” electrical backbone) to IT and security (“white space,” server and network layers). Notably, gray space sales grew 90% YoY, outpacing even white space, as customers increasingly seek integrated solutions.
2. Utility Segment Recovery Path
UBS is showing early signs of recovery, with IOUs returning to growth and public power customers expected to follow in H2. The segment’s business model, characterized by low SG&A intensity and high EBITDA margins, positions it for strong operating leverage as volumes rebound. Backlog growth and new contract wins further support the outlook for grid modernization and electrification tailwinds.
3. Tariff and Supply Chain Management
Wesco is actively navigating tariff-driven supplier cost inflation, with price increase notifications up 300% in Q2. The company’s direct tariff exposure is limited to less than 4% of cost of goods sold, but broader supplier price hikes are flowing through, especially in stock and flow channels. Management is leveraging global sourcing, enforcing lead times, and passing through cost increases where possible, but gross margin benefits from inventory gains are expected to be temporary and not included in guidance.
4. Capital Allocation and Balance Sheet Strength
Recent redemption of high-cost preferred stock and refinancing efforts have improved cash flow and extended debt maturities, enhancing financial flexibility for future M&A, share repurchases, and organic investment. Over 75% of free cash flow, after dividends and dilution offset, is targeted for debt reduction, buybacks, and acquisitions, supporting long-term shareholder value creation.
5. Secular Tailwinds and Portfolio Transformation
Wesco’s portfolio is increasingly aligned with enduring trends: AI-driven infrastructure, electrification, automation, and reshoring. The company’s cross-sell initiatives and technology-driven business transformation are designed to leverage these tailwinds for sustained outperformance relative to end markets.
Key Considerations
This quarter marks a structural shift in Wesco’s revenue mix and growth drivers, as the company capitalizes on secular demand for AI data centers and grid modernization, while legacy segments begin to recover. The following considerations are central to the investment case:
Key Considerations:
- Data Center Visibility: Direct end-user relationships and a growing backlog provide multi-quarter visibility, but sustainability of 65%+ growth rates remains a key watchpoint.
- Utility Inflection: Recovery in IOU and anticipated public power growth could drive margin expansion in H2, given the high operating leverage of UBS.
- Margin Sensitivity: Gross margin remains pressured by mix shift and competitive pricing, with tariff-driven price increases adding near-term volatility.
- Capital Allocation Discipline: Improved balance sheet flexibility supports opportunistic M&A and buybacks, but management remains focused on organic reinvestment and deleveraging.
- Supply Chain Adaptability: Proven playbook for managing supplier volatility and tariffs, but ongoing execution is critical as global trade dynamics evolve.
Risks
Tariff escalation and supplier price volatility could pressure margins and disrupt demand, especially if customers resist pass-throughs. The sustainability of data center growth is exposed to potential shifts in hyperscaler and MTDC capex cycles. Utility recovery remains contingent on public power destocking and broader macro conditions, while competitive intensity and project mix could further compress margins. Investors should monitor for signs of demand destruction or delays in large project pipelines.
Forward Outlook
For Q3, Wesco guided to:
- Reported and organic sales up mid to high single digits year-over-year
- Adjusted EBITDA margin approximately 40 basis points lower YoY, but up 20 basis points sequentially
For full-year 2025, management raised and narrowed guidance:
- Organic sales growth of 5% to 7% (prior 2.5% to 6.5%)
- Data center solutions sales now expected up ~40% (prior up ~20%)
- Free cash flow guidance of $600 million to $800 million, with midpoint implying 100% conversion of adjusted net income
Management highlighted:
- Record backlog growth across all segments as a leading indicator for sustained demand
- No benefit from future tariff-related price increases or inventory gains included in outlook, maintaining a conservative posture
Takeaways
Wesco’s Q2 results reinforce its transformation into a high-growth, infrastructure-focused distributor, with secular tailwinds in data centers and electrification driving the business forward.
- Data Center Outperformance: Exceptional 65% growth and expanding scope in both white and gray space validate Wesco’s unique positioning with hyperscalers and enterprise clients.
- Utility and Industrial Recovery: Sequential improvement and backlog strength in UBS and EES set the stage for operating leverage in the second half.
- Tariff and Margin Dynamics: Management’s proactive approach to supplier pricing and inventory gains introduces near-term volatility, but long-term value creation hinges on maintaining margin discipline and supply chain agility.
Conclusion
Wesco’s accelerating data center momentum and record backlog signal a business in transition, with secular growth drivers now outweighing legacy headwinds. Execution on margin management and tariff mitigation will be critical to sustaining outperformance as the business mix continues to evolve.
Industry Read-Through
Wesco’s results provide a clear read-through for the broader electrical and industrial distribution sector: Demand for AI-driven data center infrastructure is driving outsized growth and reshaping end-market exposure for distributors with deep customer integration and technical capabilities. Utility destocking cycles are nearing an inflection, with grid modernization and electrification set to accelerate. Tariff volatility is creating margin uncertainty across the supply chain, underscoring the need for agile sourcing, pricing, and inventory strategies. Peers exposed to project-based business and secular infrastructure upgrades should see similar tailwinds, but must remain vigilant on margin protection and capital allocation discipline as global trade dynamics evolve.