Jacobs Solutions Q3 2026 Earnings Call Transcript

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Provided by Quartr
August 4, 2026

Key Takeaways

  • Positive Sentiment: Jacobs raised its FY2026 outlook for the third consecutive time, increasing adjusted net revenue growth to 9.5%–10%, adjusted EPS to $7.20–$7.30, and adjusted free cash flow margin to 8%. Management expects approximately 14% net revenue growth and a 16% adjusted EBITDA margin in Q4.
  • Positive Sentiment: Q3 adjusted EPS rose 14% to $1.84, while adjusted net revenue grew more than 8% organically and adjusted EBITDA margin expanded 109 basis points year over year to 15.2%. Share repurchases and operating leverage also supported earnings growth.
  • Positive Sentiment: Backlog reached a record $29 billion, up 27% year over year, with trailing book-to-bill of 1.4x on gross revenue and 1.2x on net revenue. Strong awards in advanced manufacturing, environmental services, transportation, water, and AI data centers provide management with increased visibility into FY2027 growth.
  • Positive Sentiment: AI infrastructure remains a major growth engine, with direct AI build-out revenue reaching 11% of adjusted net revenue and the related pipeline expanding significantly. Jacobs cited major data-center and semiconductor opportunities, including a sole-source EPCM contract for Hut 8’s planned 1-gigawatt Texas campus.
  • Negative Sentiment: Water and environmental revenue grew only slightly, at just over 1%, because of continued environmental-sector headwinds, while PA Consulting faced temporary project-start delays following a change in U.K. government leadership. Management expects improvement in both areas, but the timing and conversion of awards remain execution considerations.
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Earnings Conference Call
Jacobs Solutions Q3 2026
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Operator

Hello, everyone. Thank you for joining us, and welcome to the Jacobs Fiscal Third Quarter 2026 Earnings Conference Call and Webcast. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Bert Subin, Senior Vice President of Investor Relations. Please go ahead.

Bert Subin
SVP of Investor Relations at Jacobs

Thank you, operator, welcome everyone. Following market close, we issued our earnings announcement, filed our Form 10-Q, and posted a slide presentation on our website, which we'll reference during the call. I would like to refer you to slide two of the presentation for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Now let's turn to the agenda on slide three. Speaking on today's call will be Jacobs Chair and CEO Bob Pragada, and CFO Venk Nathamuni. Bob will begin by providing comments on the business as well as highlights from our third quarter results and a recap of notable awards. Venk will provide a detailed review of our financial performance, including commentary on end market trends, cash flow, and balance sheet data, as well as our updated outlook. Finally, Bob will provide closing remarks, we'll open up the call for questions.

Bert Subin
SVP of Investor Relations at Jacobs

With that, I'll turn it over to our Chair and CEO, Bob Pragada.

Bob Pragada
Chair and CEO at Jacobs

Good afternoon, everyone, thank you for joining us to discuss our third quarter 2026 business performance. We delivered strong results in Q3. I'll quickly highlight a few key takeaways. First, adjusted EPS grew approximately 14% to $1.84, supported by more than 8% adjusted net revenue growth, all organic, and more than 100 basis points of year-on-year margin expansion. Second, I&AF posted nearly $2.1 billion in net revenue, a 10% increase year-over-year, and a quarterly record for the segment. Third, our backlog grew 27% to $29 billion, setting another new record with a trailing 12-month book-to-bill of 1.4x on gross revenue and 1.2x on net revenue. As we look ahead, we see continued strong underlying business momentum, as reflected by our third consecutive guidance raise for FY 2026, which Venk will walk through in more detail shortly.

Bob Pragada
Chair and CEO at Jacobs

Turning to slide four, we provide a detailed overview of the quarter. We are very pleased with our Q3 results, as strong operating performance paired with our lower share count drove the sixth straight quarter of double-digit growth in adjusted EPS. Our margin profile continues to trend higher with our business achieving an adjusted EBITDA margin above 15% in Q3, up over 100 basis points year-over-year, and up almost 200 basis points when compared to the same period in 2024. The combination of strong annual margin expansion, high single-digit organic growth, and continued share repurchases enabled by strong free cash flow generation has created a powerful earnings growth algorithm. We're seeing convergence of backlog growth and overall revenue growth, and we are positioned to deliver another strong bookings performance in Q4.

Bob Pragada
Chair and CEO at Jacobs

Turning to slide five, I'd like to highlight a few notable project awards from the third quarter. In water and environmental, Jacobs is selected to provide program management and technical environmental services to the U.S. Navy's Environmental Restoration Program, primarily across the Mid-Atlantic and Puerto Rico. The work involves restoring contaminated sites, including PFAS and munitions-related projects, with the goal of reducing health and environmental risks and returning these sites to beneficial use. It extends our 40-year partnership with the Navy and underscores our leadership in delivering complex, high-impact environmental solutions. This key win, as well as new awards with private sector clients, gives us increased confidence we will see a return to growth in the environmental sector in coming quarters.

Bob Pragada
Chair and CEO at Jacobs

Also in water and environmental, we were selected to deliver Central Utah Water Conservancy District's Strawberry High Line Improvement Project, which will modernize roughly 40 mi of aging canal infrastructure through new pipelines, a pump station, a regulating reservoir, and related facilities. By converting a historic open canal into a modern pressurized system, the project will improve long-term water reliability for agricultural and municipal users while supporting regional growth and enhanced recreation along the corridor. It's part of the district's broader Nebo Regional Water Project, an approximately $1.5 billion program designed to sustain a doubling of the area's population in the coming decades. This also includes the South Utah Valley Regional Water Treatment Plant, where Jacobs is already under contract to lead design and engineering during construction.

Bob Pragada
Chair and CEO at Jacobs

Shifting to life sciences and advanced manufacturing, Jacobs was awarded a sole-source EPCM contract by Hut 8 to deliver Beacon Point, the company's second AI data center campus in the U.S. Located in Texas, the multi-phase campus is designed to support 1 GW of total capacity. This award is a follow-on to Hut 8's River Bend campus in Louisiana, where Jacobs is also leading program delivery. We'll apply proven design elements from that project and deploy our data center digital twin to simulate critical assets, helping to de-risk commissioning and reduce time to first revenue by accelerating the deployment of AI workloads. Initial energization is targeted for 2027. Winning a repeat sole-source contract at this scale reflects the confidence clients place in Jacobs to deliver complex AI infrastructure with speed, safety, and certainty.

Bob Pragada
Chair and CEO at Jacobs

It also builds on our standing as Engineering News-Record's number one data center firm, a sector where we see substantial runway as AI investments increase. Finally, PA is supporting the U.K. Royal Air Force's Optimise initiative, enabling RAF leaders to use data-driven insights to further strengthen operational readiness and decision-making in an increasingly complex environment. The work turns data into confident, evidence-led decisions that support the RAF's readiness, it reinforces our standing as a trusted delivery partner in the defense sector, delivering high-tempo programs that have real operational impact. Now please turn to slide six. Given the growth tailwind we are seeing from AI investments, I wanted to take a moment to quickly highlight our position in the AI infrastructure build-out. We've been serving data center clients since the 1990s and have longstanding relationships with semiconductor manufacturers that span over 50 years.

Bob Pragada
Chair and CEO at Jacobs

Significant capital is being deployed to build AI data centers, we have been able to grow our addressable market by expanding our scope of services, which now range from technical advisory and design to digital twins and full program delivery. Further, the AI data center build-out is increasing capacity requirements in the semiconductor industry, where we are a leading facility designer, we are leveraging our capabilities across water, environmental, power, and digital to further expand our market share with both private sector clients and utilities. For context, as of Q3, the direct AI build-out represented 11% of our adjusted net revenue, up approximately 100 basis points from last quarter, our pipeline of future opportunities continues to grow meaningfully. Now I'll turn the call over to Venk to review our financial results in further detail.

Venk Nathamuni
CFO at Jacobs

Thank you, Bob. Good afternoon, everyone. Please turn to slide number seven, where I'll walk through our results for Q3. Gross revenue increased more than 34% year-over-year, adjusted net revenue, which excludes pass-through revenue, grew by over 8%. Q3 adjusted EBITDA was $367 million, up 17%, with our margin at 15.2%, or 109 basis points higher year-over-year. This resulted in adjusted EPS increasing 14% year-over-year. Consolidated backlog was up more than 27% year-over-year to a record $29 billion with our trailing 12-month book-to-bill at 1.4x. Book-to-bill was strong again in Q3, driven by good awards activity across our end markets, with standout performance in the advanced manufacturing, environmental, and transportation sectors. Additionally, on a year-over-year basis, net revenue and gross profit in backlog increased 11% and 14%, respectively, during Q3.

Venk Nathamuni
CFO at Jacobs

We're demonstrating faster organic growth in the business today, strong recent awards activity positions us well as we look ahead to fiscal year 2027. Regarding our performance by end market in Infrastructure & Advanced Facilities, let's turn to slide number eight. At a high level, we continue to see strong growth rates in life sciences and advanced manufacturing, as well as in critical infrastructure during Q3. Focusing on life sciences and advanced manufacturing, net revenue grew 24% in Q3, our highest growth rate since we began reporting end markets in late 2024. Strong performance in the data center and semiconductor sectors contributed to substantial year-over-year growth, we anticipate that this trend will continue in Q4. We're seeing high demand for new projects across life sciences and advanced manufacturing, setting us up well for the new fiscal year. Shifting to critical infrastructure, net revenue increased 9% year-over-year.

Venk Nathamuni
CFO at Jacobs

Critical infrastructure trends remain similar to Q2, with transportation and energy and power activity leading to strong growth versus last year. We continue to expect critical infrastructure to grow in the mid-to-high single-digit range over the medium term. Net revenue growth in our water and environmental end market was a little more than 1%. Net revenue growth for water remains strong, and as we indicated last quarter, we did continue to face year-over-year headwinds in the environmental sector. On a positive note, we're forecasting growth for the water and environmental end market to sequentially improve in Q4 based on good awards activity in the quarter. In summary, strong life sciences and advanced manufacturing performance during Q3 was complemented by good demand across the majority of our sectors. Moving now to slide number nine, I'll provide a brief overview of our segment financials.

Venk Nathamuni
CFO at Jacobs

In Q3, I&AF operating profit increased 14% year-over-year on 10% net revenue growth. PA Consulting operating profit increased 2% on flattish revenue, and operating margin again came in strong at above 22%. Both segments saw only a minor operating profit growth impact from foreign exchange during the quarter. Focusing on PA, the segment experienced some temporary disruption from the recent change in governmental leadership in the U.K., which delayed project start dates. Importantly, we are already seeing a return to normal, and our forecast indicates solid quarter-on-quarter revenue growth in Q4, supported by recent awards activity, new project commencements, as well as performance quarter to date. Moving on to slide 10, we provide an overview of cash generation and our balance sheet.

Venk Nathamuni
CFO at Jacobs

For Q3, we generated $541 million in adjusted free cash flow, which removes the impact of $110 million in payments related to proceeds for the PA transaction, as we had indicated last quarter. This brings year-to-date adjusted free cash flow to $633 million. Please note, we will not make adjustments to free cash flow in Q4 and will return to providing guidance for reported free cash flow margin in fiscal year 2027. Focusing on capital returns, we remain aggressive buyers of our shares during Q3 to take advantage of the dislocation in our share price. As a result, our total repurchases through Q3 rose to $614 million, which, combined with dividends paid, puts us on track to return more than 100% of free cash flow to our shareholders for the second consecutive year.

Venk Nathamuni
CFO at Jacobs

This brings total share repurchases since the beginning of fiscal year 2025 to $1.4 billion, we see continued runway moving forward given our strong outlook for free cash flow. Shifting now to the balance sheet, at the end of Q3, our net leverage ratio declined to 1.8x, achieving our target for net leverage to be below 2.0x a quarter early, we still plan to de-lever to approximately 1.5x by the end of fiscal year 2027. Please turn to slide 11 for our updated fiscal year 2026 outlook. We're increasing our fiscal year 2026 adjusted net revenue growth range to 9.5%-10% year-over-year, narrowing our adjusted EBITDA margin range to 14.7%-14.8%, raising our adjusted EPS range to $7.20-$7.30, raising our adjusted free cash flow margin forecast to 8%.

Venk Nathamuni
CFO at Jacobs

Notably, our outlook for fiscal year 2026 now implies nearly 19% year-on-year growth in adjusted EPS at the midpoint. As it pertains to Q4, we expect our adjusted EBITDA margin to be approximately 16%, with year-over-year net revenue growth of approximately 14%. Furthermore, we expect our tax rate to be roughly 27.5% and our quarterly free cash flow to be approximately $150 million. Overall, we're very pleased with our year-to-date performance, and our Q4 outlook highlights that we expect a strong finish to fiscal year 2026. With that, I'll turn the call back over to Bob.

Bob Pragada
Chair and CEO at Jacobs

Thank you, Venk. In closing, I'd like to express my gratitude for the trust our clients continue to place in Jacobs, and to our more than 47,000 talented employees for their continued commitment to delivering excellence. We're tracking very well heading into the final quarter of the fiscal year, with strong Q3 performance enabling us to increase the midpoint of our full-year adjusted EPS outlook for the third consecutive time. Our backlog is at a record level and our pipeline continues to expand, positioning us for profitable growth in FY 2027 and beyond. Operator, we'll now open the call for questions.

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand, and to withdraw your question, press star one again. We ask that you pick up your handset when asking a question for optimum sound quality, and if muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Andy Kaplowitz with Citigroup. Your line is open. Please go ahead.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

Good afternoon, everyone.

Bob Pragada
Chair and CEO at Jacobs

Hi, Andy.

Venk Nathamuni
CFO at Jacobs

Good afternoon.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

Bob or Venk, backlog growth has obviously been accelerating over the last several quarters. I think you mentioned 1.2x book-to-bill on net revenue, as you said. I know it's early to talk about FY 2027, but your exit rate in Q4 will be in the double digits at 14%. Does that mean it's possible to grow FY 2027 net revenue as fast or faster than FY 2026? Or at least at this point, give much higher visibility than usual toward that normal algorithm of mid to high single-digit growth that you have?

Venk Nathamuni
CFO at Jacobs

Yeah, Andy, I'll take that question. Obviously, as you pointed out, good solid growth in Q4 that we're projecting and good growth for the full year. Certainly, our backlog is in a really good position. I think we will defer specifics on the growth algorithm for fiscal 2027 on the next call, but suffice it to say that looking at our current backlog position, we feel pretty good about growth at least in line with the long-term average that we put out there.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

Okay, that's helpful. Bob, you had comments about the data center business and life sciences, advanced manufacturing in general. It does keep increasing as a percentage of NSR, how are we thinking about that sector now versus your investor day a year and a half ago, whatever it was. Can you grow that business double digits for the foreseeable future, based on what you see and maybe the share gains that you've had?

Bob Pragada
Chair and CEO at Jacobs

Yeah, Andy, we absolutely can. It's a growth engine right now that is deep and broad for us with the entire CADET ecosystem. If we look all the way from what we're doing in the high-bandwidth memory chips, the water and power requirements that are feeding the data center, the complexity that's going into the data center, our share is increasing. The clients that we're working for have got long pipelines ahead. The answer is absolutely yes.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

Very nice. Thanks, guys.

Bob Pragada
Chair and CEO at Jacobs

Thank you.

Operator

Your next question comes from the line of Sangita Jain with KeyBanc. Your line is open. Please go ahead.

Sangita Jain
Sangita Jain
Analyst at KeyBanc

Great. Thank you so much for taking my questions. One, I want to ask on water and environment. It seems like last quarter you had a lot of good wins. A couple of them, Bob, you highlighted in your prepared remarks. How should we think about the scope of some of those bookings and the period over which they're going to burn? I'm trying to figure out how we should think about water and environmental growth going forward.

Bob Pragada
Chair and CEO at Jacobs

Sangita, the wins that we had in the quarter will start to burn in Q4. That inflection point that we've always been telegraphing that would come at the end of the year, it's right in front of us. You'll see sequential growth in the quarter, then going into FY 2027, we're positioned extremely well to be on those growth rates that we highlighted during the investor day of that mid to high single-digit growth for water and environmental. The water sector continues to be high single-digit growth for us, and the pipeline as well as the forward outlook is very bright. We're excited about the sector.

Sangita Jain
Sangita Jain
Analyst at KeyBanc

Got it. Then maybe one for Venk. Your SG&A as percent of sales in 3Q was lower than it has been in a very long time. I'm wondering if there was anything one-time, or if it's just a function of what you've been saying that you're going to grow your OpEx at a slower pace than your revenue. That's starting to show maybe.

Venk Nathamuni
CFO at Jacobs

Yeah, Sangita, that's exactly right. As our revenues continued to accelerate over the last several quarters, and based on the guidance we provided, we made a commitment to spend at less than the revenue growth rate, and that's exactly what you're seeing in terms of operating leverage, and you'll see more of that coming through in Q4 as well.

Sangita Jain
Sangita Jain
Analyst at KeyBanc

Got it. Thank you so much.

Bob Pragada
Chair and CEO at Jacobs

Thank you.

Operator

Your next question comes from the line of Steven Fisher with UBS. Your line is open. Please go ahead.

Steven Fisher
Steven Fisher
Analyst at UBS

Thanks. Good afternoon. A nice uptick there in the book-to-bill in the quarter. As you guys look at your pipeline, how should we think about that book-to-bill from here? It seems like the growth is poised to accelerate. With that faster burn now, how sustainable do you think, say, 1.5x or better is as you accelerate, and how lumpy do you think it's going to be from here?

Bob Pragada
Chair and CEO at Jacobs

Yeah, Steve, I think if you look at the gross revenue book-to-bill versus the net revenue book-to-bill, let me kind of segregate those. The lumpiness in the gross revenue book-to-bill, where we would have a 1.5x, a 1.6x, you probably even remember last year we had a 1.7x for a quarter. That's going to come up and down as some of these larger full program delivery jobs are booked. The 1.1x to 1.3x-ish net revenue growth, pretty consistent.

Steven Fisher
Steven Fisher
Analyst at UBS

Okay. Sounds good. Wondering if, Bob, you could give us an update on two things. One, Middle East activity in general, how you're managing that over there and just international overall. Is the pace of that business picking up? Clearly, you've had some good wins, just kind of curious of how those two things are developing.

Bob Pragada
Chair and CEO at Jacobs

Yeah. Steve, maybe I'll take the second part first and then hone in on the Middle East. Internationally, we've done well. We're kind of in that 9% growth rate internationally. That is probably more skewed a little bit to Australia, New Zealand, and Asia. The Middle East is stable, and we've continued to do well there. I'd say the European areas, again, stable, mid-single digits. Overall, internationally we see some continued pipeline growth as well as stability as we look forward to the Q4 as well as into going into next year.

Steven Fisher
Steven Fisher
Analyst at UBS

Thank you.

Operator

Your next question comes from the line of Jamie Cook with Truist. Your line is open. Please go ahead.

Jamie Cook
Jamie Cook
Analyst at Truist

Hi. Congrats on a nice quarter. I guess just two questions. One, Venk, one quarter left, there still implies a significant ramp Q3 to Q4, which makes sense given the top-line growth of 14% you are talking about. I guess why so much variability to $0.10 around the fourth quarter? What would be the drivers behind the low end versus the high end of the guide? My second question, I guess what struck me about the quarter was the margin uplift, then I guess the implied 15% and then implied margins going to 16% in the fourth quarter. As I think about the trajectory for 2027, we are thinking about a world where organic growth is accelerating and margins can expand. Is it fair to say more of the margin uplift would come from I&AF versus PA Consulting? Any comments you want to make around that?

Jamie Cook
Jamie Cook
Analyst at Truist

Thank you.

Venk Nathamuni
CFO at Jacobs

First of all, thank you for your comments, Jamie. Obviously, really good quarter. I'll split the response into two halves, right? One is just focused on the net revenue growth as well as the margin expansion. On the net revenue growth, we guided to about 14% for the quarter. As you know, we have an extra week in Q4, that in and of itself accounts for about, call it, 6%-7%. When you normalize it, we are growing at 8% for the quarter. Given the fact that we grew 7.5%, 8%, or 8.3% in Q3, we see good line of sight to be able to grow the 14% for Q4. That's number one.

Venk Nathamuni
CFO at Jacobs

It is driven by the fact that the program ramps that we talked about in Q3 and in Q2, they are now coming into full fruition in Q4, which drives up utilization, and we have good visibility into that. That's from a revenue perspective. When you look at it from a margin perspective, we've done a pretty good job of increasing our margins sequentially over the last three quarters, as well as year-over-year. As you recall, I think we started the year at 13.4%, we went to 14.1%, and in this quarter, we're at 15.2%. 110 basis points of sequential growth, as well as good year-over-year growth. What we're guiding for in Q4 is 16%. Really good line of sight to be able to achieve that with the increased utilization that we talked about, as well as increased use of global delivery.

Venk Nathamuni
CFO at Jacobs

Really good visibility into achieving those targets for both revenue as well as EBITDA margin.

Bob Pragada
Chair and CEO at Jacobs

Jamie, I think on the question that you had with regards to 2027 and where we see that continued margin expansion, I'd say it's pretty balanced. That we would continue to get it from both I&AF as well as PA Consulting, because we're right in the middle of the cost synergies that we're working on with PA Consulting. Just as a reminder, PA Consulting does have the highest margins in that space. We're continuing to grow on a base that's really high.

Jamie Cook
Jamie Cook
Analyst at Truist

Thank you.

Operator

Your next question comes from the line of Andrew Wittmann with Baird. Your line is open. Please go ahead.

Andrew Wittmann
Andrew Wittmann
Analyst at Baird

Yeah, great. Thanks for taking my question. I think I heard a comment that you said in the fourth quarter, you're going to report free cash flow without any adjustments, and that's great. Is there a similar comment that you can make like that, related to your income statement? I know that obviously, over a year ago, you announced some actions for the I&AF segment. Now, Bob Pragada, you just mentioned that you're kind of integrating PA. What should the investment community expect in terms of income statement adjustments between GAAP and non-GAAP? Not just maybe for 4Q, but how long are you going to continue to recognize something there, and when can those two converge? Thanks.

Venk Nathamuni
CFO at Jacobs

Yeah, Andy, I'll take that question. I would say, obviously you've seen with this Q3 print, the gap between GAAP and non-GAAP EPS was primarily driven by just a tax item. Overall, you've seen a pretty significant convergence between our GAAP and non-GAAP numbers, except for the PA acquisition. From that standpoint, we feel pretty good about the quality of the earnings, and we will continue to make additional progress in Q4 and beyond. You'll see it from both the P&L side as well as from the free cash flow side. We've already taken M&A off the table, so you don't have to expect a lot of these variances between GAAP and non-GAAP going forward. Our view is that with Q4, as we stated on the Q3 call, the fact that there was a tax delta because of how the PA compensation expenses was treated.

Venk Nathamuni
CFO at Jacobs

That'll have an impact on Q4 because it's for the full fiscal year, but going forward, that gap will reduce substantially and will be more in line with our non-GAAP and GAAP tax rates.

Andrew Wittmann
Andrew Wittmann
Analyst at Baird

Got it. I guess just on my follow-up, I wanted to dig in on the environmental side. Obviously sounds like you had some wins here in 3Q, that are going to help that growth rate improve in 4Q. I just was hoping you'd be a little bit more specific. Is there a general context to something? Is this state and local? Is this federal money flowing better? Is this PFAS? There's lots of different things that you do in this, and just thought that since this is an area that seems to be undergoing a little bit better momentum, maybe you'd want to elaborate on that a bit more.

Bob Pragada
Chair and CEO at Jacobs

Yeah, Andy, happy to. We had two sizable wins in the private sector, and unfortunately, I can't name the two clients, but they are in the industrial space. Private sector, industrial space, long-term contracts that we won and we were successful in. The book-to-bill, ironically, as a result in the quarter was over 1.3x just for the environmental business. That balance between private and public, we're holding true to it because in the public sector, those things that you just mentioned with regards to PFAS and the DoD continuing to go back to some of those regulatory items that got paused in 2025. We're capitalizing on that work, too. Going into FY 2027, we're feeling confident that our environmental business will return back to the levels that we previously had.

Andrew Wittmann
Andrew Wittmann
Analyst at Baird

Great. Thank you.

Operator

Your next question comes from the line of Chad Dillard with Bernstein. Your line is open. Please go ahead.

Chad Dillard
Chad Dillard
Analyst at Bernstein

Hey, good evening, everyone. Question for you guys on the Infrastructure & Advanced Facilities business. Looks like on a constant currency basis, margins were up about 50 basis points. Can you talk about some of the moving parts there? How much is mix? How much is pricing? How much is leverage from technology? And then as we're thinking through our 2027 bridge, how do you think about that opportunity going forward?

Venk Nathamuni
CFO at Jacobs

Yeah. Chad, thanks for the question. I would say, as you pointed out, good expansion in margins, both sequentially as well as on a year-over-year basis. As you may recall, when we announced our margin trajectory at the February 2025 Investor Day, we laid out specific things in terms of the drivers of that margin. I'd say we've shown, as Sangita pointed out earlier, good operating leverage that continues to be a part of the core principle to drive continued margin expansion. That'll be a mainstay going forward. In addition to that, with the other three buckets, you might recall, we talked about mix, we talked about the commercial models, and then also use of global delivery.

Venk Nathamuni
CFO at Jacobs

Really good progress on global delivery, especially with our life sciences and advanced manufacturing businesses use a lot of global delivery implementation, that's driving a lot of the margin expansion. I'd say on the mix side, you'll see more of an impact coming in FY 2027 and beyond. Operating leverage and global delivery are the bigger drivers in the first public four to five quarters since we announced the targets. We're on track in terms of margin expansion. Just for everybody's benefit, you'll recall that in fiscal year 2025, we increased our margins by 110 basis points, and in fiscal year 2026, at the midpoint of the guidance that we've provided, that'll represent another 90 basis points of margin expansion. 200 basis points of margin expansion, which we think is industry-leading, and we have lots more margin expansion ahead of us as well.

Chad Dillard
Chad Dillard
Analyst at Bernstein

Great. That's helpful. Second question is on data centers. With the shift from 48 V to 800 V architecture, are you starting to see those sorts of data centers coming through your design pipeline? How does the design intensity change when you're making that shift? Any color you can give on that?

Bob Pragada
Chair and CEO at Jacobs

Yeah. There's complexities that are going on, Chad, that I'd say is increasing our scope. That 800 V DC solid-state transformer is a big deal, as has been well-publicized. I'd say I wouldn't point to that as the single source of that inflection point. The complexity in all of the utility requirements to feed the next generation of chips is increasing the complexity as well as the scale. That's where it's in the sweet spot of Jacobs. If we look at the clients that we're working for, not just the hyperscalers but also the neoclouds, we're on that journey with them, and hence you can see the results in our performance.

Chad Dillard
Chad Dillard
Analyst at Bernstein

Great. Thank you. Pass it on.

Operator

Your next question comes from the line of Michael Dudas with Vertical Research. Your line is open. Please go ahead.

Michael Dudas
Michael Dudas
Analyst at Vertical Research

Good afternoon, gentlemen.

Bob Pragada
Chair and CEO at Jacobs

Good afternoon, Mike.

Venk Nathamuni
CFO at Jacobs

Afternoon, Mike.

Michael Dudas
Michael Dudas
Analyst at Vertical Research

Bob, just maybe you could share some further thoughts on critical infrastructure and the tone of the types of business and what areas, say with highway, maybe any brief comments on what may happen out of the next IIJA bill. On PA, with the change in government should be helpful, but anything with the integration over the past several months and how that could drive some more growth and some maybe the business with your current customers in the U.S. or other parts of the world to help drive helpful on the margin and also the growth for PA itself.

Bob Pragada
Chair and CEO at Jacobs

Sounds great. A lot there, Mike. Let me take one at a time. With regards to critical infrastructure, again, really solid growth. Just as a recap, that vertical contains our transportation business, energy and power, and cities and places. Our transportation business continues to be a real growth vector for us in all geographies and growing at a high single-digit rate. I'd say the sub-sectors that are channeling that growth are around aviation, the rail business globally, as well as in the ports and maritime world. Highways and bridges was a nice element in Q3. Those three, we've got a market-leading position there, and we're seeing a lot of activity there. E&P has been really strong. Double-digit growth, predominantly in the U.S. around our T&D efforts, and I'd say outside the U.S., more on the generation side.

Bob Pragada
Chair and CEO at Jacobs

If you think SuedLink or Marinus Link, the renewables effort that's going on outside the U.S. has really been a nice growth trajectory for us. In cities and places, nice growth in the U.S. That cities and places team has some really strong building design capabilities, which we're able to not only apply to venues, but also has been with the resource needs that we have in data centers. That team has really been facilitating that growth that we're seeing in the data center business. I'd say probably the one area that we continue to monitor is a bit of a, I'd say temporarily pause in the Middle East. Still grew in the Middle East overall because of our utility work.

Bob Pragada
Chair and CEO at Jacobs

That would be the only area where I'd say a little bit of a pause. Definitely some pipeline work that would show upside next year. On IIJA, we actually feel, we've been saying this for a while, with a possible extension going into December, we feel like the funding flows coming from IIJA will continue. We've always said that there was always a two-to-three-year lag from the expiry date, just as monies are obligated and then spent. We're still at that 50% level spent. Going into the midterms and coming out of the midterms and everything that's being set up for BUILD America 250, hopefully next year, the funding levels have been pretty solid as a result of those stimulus bills and will continue on feeding all those things that I aforementioned around transportation.

Bob Pragada
Chair and CEO at Jacobs

PA, I'd say the areas where we're starting to see some real growth, again, notwithstanding my comment in Q3 on the temporary disruption that we're already starting to see come back in July. Defense and security in Europe as the U.K. MOD has taken a leadership position on what an independent Europe defense posture looks like. PA is right in the middle of that, and the synergies with the U.S., with Jacobs in the I&AF business on setting up that defense infrastructure, whether it be ports and maritime or manufacturing facilities for the defense primes, is something that we've already started to see some nice progress there. Transportation in the U.S. PA's got a strong presence in the U.K., and that's serving as a nice synergistic value as we look at the U.S. and the revenue synergies coming out of the PA relationship.

Bob Pragada
Chair and CEO at Jacobs

Hopefully that gives you a broader overview.

Michael Dudas
Michael Dudas
Analyst at Vertical Research

Excellent, Bob. Thank you.

Operator

As a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Jerry Revich with Wells Fargo. Your line is open. Please go ahead.

Andrew Azzi
Andrew Azzi
Analyst at Wells Fargo

Hi, everyone. Good afternoon. Thank you for taking my question. This is Andrew Azzi on for Jerry Revich. I just wanted to ask, last quarter you saw a significant expansion in the AI-specific data center infrastructure pipeline. Was curious if we can get an update on how that's progressing this quarter, how much of that pipeline is awarded or in backlog, and what's the conversion rate that you're embedding into your guidance, and maybe even into next year?

Bob Pragada
Chair and CEO at Jacobs

Yeah. Maybe I'll take the front part of that, and then Venk can take how much of that is in backlog. Andrew, our backlog growth just in the data center space has been significant. I'd say in the order of doubling over the period of time. The pipeline has gone up 3x. The visibility that we see before was probably six to nine months. We're getting visibility into the pipeline that extends out two to three years. This is something that we see. Again, we're being selective, because there is also a lot of speculative work that's out there. The work that we are pursuing, or let me back up, winning, executing, and continue to pursue, are those where they're established customers of ours that we've had for a while.

Bob Pragada
Chair and CEO at Jacobs

The neocloud providers that are coming in are normally backed by folks that we've known for a long time within the hyperscaler world. Overall, really strong trajectory in the data center space.

Venk Nathamuni
CFO at Jacobs

Yeah, if it extended beyond data centers into just the overall AI ecosystem, you recall last quarter we said it was roughly 10% of our business. Now it's at 11%, the growth is actually accelerating. We are doing a good job of converting that backlog into real revenue, and that's driving not only growth for us in Q4, but we expect significant growth in fiscal 2027, which we'll quantify. I also want to add to this, the previous question about revenue synergies. Obviously AI is a big part of what PA does as well in terms of implementing agentic AI for not only their clients, but it's an opportunity for us to also use it internally, both within the PA ecosystem as well as the Jacobs ecosystem.

Venk Nathamuni
CFO at Jacobs

AI is really a big driver of our growth for us, you've seen that being demonstrated in terms of our revenue growth, but also over time with margin expansion.

Andrew Azzi
Andrew Azzi
Analyst at Wells Fargo

Thank you. I appreciate that. I guess secondly, are customers still indicating that the U.S. semiconductor construction activity is accelerating, and maybe what are some of your early thoughts for FY 2027 on that front? Thank you.

Bob Pragada
Chair and CEO at Jacobs

Yeah. The short answer, Andrew, is absolutely yes. Our customers are pushing us to accelerate those designs, and we're working for the largest high bandwidth memory chip manufacturer in the U.S. today. That pipeline continues to grow. Now with the announcements that you've heard from Intel moving forward, as we've publicly stated, we've been the engineer of record for Intel for a couple of decades. In that relationship, we stayed with them during this slower time, and we're starting to see that pipeline grow going into 2027.

Andrew Azzi
Andrew Azzi
Analyst at Wells Fargo

That's great. I'll pass it on. Thank you for taking my questions.

Operator

There are no further questions at this time. I will now turn the call back to Bob Pragada for closing remarks.

Bob Pragada
Chair and CEO at Jacobs

Well, thank you everyone for joining us for our earnings call. We look forward to engaging with many of you over the coming weeks, and have a great evening.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

Analysts
    • Bert Subin
      SVP of Investor Relations at Jacobs
    • Bob Pragada
      Chair and CEO at Jacobs
    • Venk Nathamuni
      CFO at Jacobs
    • Andy Kaplowitz
      Analyst at Citigroup
    • Sangita Jain
      Analyst at KeyBanc
    • Steven Fisher
      Analyst at UBS
    • Jamie Cook
      Analyst at Truist
    • Andrew Wittmann
      Analyst at Baird
    • Chad Dillard
      Analyst at Bernstein
    • Michael Dudas
      Analyst at Vertical Research
    • Andrew Azzi
      Analyst at Wells Fargo
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