Investors usually view GE Vernova's (GEV) backlog as a precursor to future revenue growth, and that approach is entirely valid. However, there's more to this accumulation of unfulfilled customer orders that exceed the company's immediate production capacity than meets the eye.
There's also an underlying story of a significant improvement in the company's potential to generate long-term recurring revenue, notably from long-term service agreements (LTSA) attached to gas turbines and aftermarket parts/repair and software subscriptions in electrical equipment. In addition, there's a margin expansion and cash flow improvement story too.
GE Vernova's backlog
Here's a breakout of the company's remaining performance obligation (RPO), or backlog, over the last few years. A few points are from the data in the chart below:
- The chart shows a remarkable increase in backlog from $116 billion in 2023 to $176 billion at the end of the second quarter.
- The power and electrification segments contributed 111% of the increase in the backlog, offset by a decrease in the loss-making wind segment.
GE Vernova's backlog improvement is better than it looks
The backlog improvement isn't done yet, at least according to CEO Scott Strazik and Wall Street. For example, Strazik spoke at a Morgan Stanley conference in September and told investors that the $200 billion backlog he had guided toward in 2027 "should hit very early in 2027," based on the third-quarter orders. He also said, "$200 billion is a very humble milestone on the trajectory we see toward growing to a much larger and more profitable business."
Wall Street sees it the same way, with the consensus view, according to S&P Global Market Intelligence, calling for a backlog of $303 billion in 2030 even as its revenue improves at a mid-teens percentage rate as the company converts the backlog.
Moreover, the improvement in the power and electrification segment implies more recurring revenue down the line, as heavy-duty gas turbines are typically sold with LTSAs that generate higher-margin service sales over many years. Similarly, its electrification segment equipment (grid, substation, switchgear, transmission equipment, etc.) also generates long-term revenue from equipment maintenance and software and digital services.
Improving margins
Strazik also noted that margins were improving across all three segments' backlogs, which means "margin expansion in our business is simply going to continue" in the years when most of the backlog is executed, in 2029 and 2030.
All three segments have good long-term growth prospects. The power segment's gas turbines and nuclear solutions help supply electricity to artificial intelligence (AI) data centers. Moreover, demand in its electrification segment is partly driven by the need to build out and maintain the grid to support AI data centers.
The improvement in the wind segment is more nuanced: The company is currently working through loss-making offshore wind contracts while prioritizing margin expansion in its onshore wind business and not chasing offshore contracts. These actions should lead to margin improvement in the future.
Improving cash flow
Finally, GE Vernova's cash flow profile is being significantly enhanced by the growth in slot reservation agreements (SRAs), in which customers pay cash up front to secure equipment manufacturing slots in the future. Focusing purely on power, management said at the end of the second quarter that it had 116 gigawatts (GW) under contract, including 63 GW in SRAs (note that SRAs are not included in the RPO or backlog figures).
Moreover, Strazik emphasized in September that "We also see our customers continue to really accelerate their slot reservation agreements into orders, which drove my earlier comment on us continuing to expect a very strong third quarter orders performance."
GE Vernova's backlog will drive growth
All told, a combination of improving up-front cash flow, margin expansion in the backlog, backlog growth, and improved long-term recurring revenue prospects is strengthening GE Vernova's prospects. Moreover, investors can expect to see immediate signs of these improvements in the upcoming earnings presentation due on Oct. 28.
