Badger Meter's AI Buildout Paradox: A Small Customer and a Bigger Bill

A margin beat, a mangled full-year guide, and a component-cost squeeze that comes from the same data center wave its flow meters feed

BMI · Earnings Call · 2026-10-22

The margin nobody expected — and a guide nobody could parse

Badger Meter's third quarter was, on the surface, a holding pattern: total sales of $235.9 million, essentially flat year over year, with base sales excluding the UDlive acquisition down 2% — but up 5% sequentially as previously awarded utility projects began to ramp. Then the profitability line did the talking. Gross margin came in at 41.9%, up 120 basis points; base gross margin of 42.1% sat at the very top of the company's normalized range; operating margin rose 60 basis points to 20.2% and base operating margin jumped 130 basis points to 20.9%. Diluted EPS of $1.24 was up 4%. Nathan Jones of Stifel said it plainly: gross margins were “much better than I expected them to be in the quarter” — Nathan Jones, Analyst · 2026-10-22. The reason is the company's oldest refrain and its best structural asset: structural mix — more ultrasonic meters, more software attaching to every radio sold. Dan Weltzien credited the two usual suspects, “ultrasonic meter mix, generally across the residential space, and then continued software growth” — Dan Weltzien, Chief Financial Officer and Treasurer · 2026-10-22, both of which more than absorbed the dilutive inventory step-up from UDlive. Then came the moment that will get quoted for a while. Asked to pin down the full-year revenue shape, Ken Bockhorst walked into his own sentence:

First thing I want to clarify, I'm sure you understood what I meant, but I didn't say the word down. We expect to be down year-over-year low single digits, just to be clear.
Ken Bockhorst, Chairman, President, and Chief Executive Officer · 2026-10-22

After several rounds of back-and-forth the arithmetic landed: full-year organic revenue down low single digits, fourth quarter modestly up, despite 5% fewer working days. Set against a full-year flat-ish promise made in January — and against the first-half-down, second-half-up inversion Bockhorst explicitly forecast back then — the destination is the one he sketched. The delivery, though, was a reminder that this is a company that has spent three quarters managing an air pocket in short-cycle orders, and that its CEO is more comfortable talking about five-year funnels than about ninety-day digits.

The data center buildout cuts both ways

Here is the genuine tension in this report, and it is not a small one. Badger Meter sells flow instrumentation into data centers — clamp-on meters, mag meters for cooling towers. It is real but tiny. A quarter ago Bockhorst cautioned analysts to “stick with the with the GDP like low single digits growth. On average” — Kenneth C. Bockhorst, Chairman, President, and Chief Executive Officer · 2026-07-22, noting data centers are “not a big percentage of Badger Meter revenue” — Kenneth C. Bockhorst, Chairman, President, and Chief Executive Officer · 2026-07-22. This quarter that same revenue stream reappeared as demand in data center applications, growing off a “relatively small revenue base” — Dan Weltzien, Chief Financial Officer and Treasurer · 2026-10-22. Against that modest tailwind sits an outsized headwind: the AI build-out is inflating the cost and crimping the availability of the electronics Badger Meter buys — capacitors, bare boards, memory. Weltzien flagged the pressure last quarter as a byproduct of data center demand; this quarter Bockhorst confirmed it had worsened:

They have escalated. We do continue to see some price escalation. We do continue to see availability challenges.
Ken Bockhorst, Chairman, President, and Chief Executive Officer · 2026-10-22

That is the paradox in one line. Badger Meter is a marginal beneficiary of the AI data center capital cycle and a material victim of its supply chain. The market has begun voting on the same asymmetry: over the last 90 days the AI data center theme is a notable decliner across the tape, with far more constituent stocks falling than rising, and high bandwidth memory — the exact component class squeezing Badger Meter's bill of materials — down nearly 7% in that window. One reading: if the trade is cooling, the input-cost pressure should follow with a lag. The company's own framing is that price chases cost rather than moving with it, with “leading and lagging impacts” — Dan Weltzien, Chief Financial Officer and Treasurer · 2026-10-22 that vary quarter to quarter. Margins at the top of the range while that gap is open is the strongest operational argument in the whole call — but it also means the buffer is thin if component inflation outlasts the project ramp. The longer arc is a caution. Operating margin has fallen roughly 5 percentage points over three years, from a 21.0% peak in early 2025, and the latest quarter's 20.2% still sits below that high-water mark. Gross margin, at up about 5 points over fifteen years, is doing all the work.

What management stopped talking about

The quiet story is Puerto Rico. PRASA was the loudest theme of the year's first half — Bockhorst sized it memorably in January: “the PRASA award is the equivalent to 8 Orlandos” — Kenneth Bockhorst, Chairman, President and Chief Executive Officer · 2026-01-28. In July the nine-project cohort was “pretty solid at this point” — Kenneth C. Bockhorst, Chairman, President, and Chief Executive Officer · 2026-07-22. This quarter, installations are only now starting, and when asked how much PRASA contributed to the third quarter, the answer was flat: “No, we're not going to get into that.” — Ken Bockhorst, Chairman, President, and Chief Executive Officer · 2026-10-22 The keyword itself has fallen out of the company's own thematic top tier. That is not a broken thesis — the projects are shipping — but it is a deliberate de-emphasis, paired with a fresh warning that “just because the projects are ramping, they will also be inherently uneven” — Ken Bockhorst, Chairman, President, and Chief Executive Officer · 2026-10-22. The offset is product: OneNetwork, launched at WEFTEC in New Orleans, is a genuinely new company-unique keyword this quarter — a real-time network monitoring and analysis platform that stitches AMI, pressure, and water quality data into one operational view. It is the beyond-the-meter software layer that justifies the multiple, and its economics land in the mix bucket, not the hardware bucket.

A de-rated compounder with cash to spend

The stock tells its own story. Shares sit roughly 41% below the June 2025 peak of $254, and the valuation has compressed hard: price to revenue of 4.9x versus a 9.6x peak in late 2024. But the last ninety days show a base forming, with the tape up double digits off the summer lows. The balance sheet supports the patience: effective net cash of $226 million, up 159% year over year, funded $55 million of buybacks in the quarter — about 423,000 shares, with $35 million left on the authorization — alongside a 10% dividend raise marking a 34th consecutive year of increases. The cost is visible in cash conversion: free cash flow of $40.3 million was down from $48.2 million, and free cash flow has run well below last year's pace as inventory — including electronic safety stock — sits above normal at 23.6% of sales. The bottom line: Badger Meter did not break this quarter; it muddled a message and absorbed a supply chain tax imposed by the very boom it sells into the margins of. If component costs normalize as the awarded projects hit stride, the second half of 2026 becomes the springboard Bockhorst kept promising. If they do not, 42% gross margins at the top of the range stop being a showcase and start being a ceiling.