ITM Power (AIM: ITM) cuts loss forecast by 27%, but what is driving the turnaround?

ITM Power plc (AIM: ITM), the Sheffield-based manufacturer of proton exchange membrane electrolysers for industrial green hydrogen production, has reduced its expected adjusted EBITDA loss for the financial year ended April 30, 2026, to between £20 million and £21 million. The October 8 guidance revision represents an approximately 27% improvement against its previous forecast and a 38% reduction in the loss compared with the preceding financial year. However, the company has left both revenue and cash guidance unchanged, creating an important distinction between improving reported operating performance and the underlying economics of its hydrogen equipment business.

The company continues to anticipate annual revenue of £40 million to £43 million, while its most recently established year-end cash forecast remains £210 million to £215 million. That cash range incorporates a £40 million equity investment from Great British Energy announced in April, rather than reflecting operating cash generation alone. ITM has not provided a detailed reconciliation explaining the latest earnings upgrade, making its preliminary results on October 19 particularly important for understanding what changed during the second half.

The development follows several years of restructuring, manufacturing improvements and efforts to replace historically loss-making contracts with business offering better commercial terms. ITM’s January interim results showed that 71% of its contracted backlog was classified as profitable business, compared with 60% at the end of April 2025. The company also reported improved gross results, although factory underutilisation and remaining legacy projects continued to produce operating losses.

The immediate question is therefore not whether ITM’s losses have narrowed. The company has provided explicit guidance supporting that conclusion. The more consequential question is whether the improvement reflects repeatable manufacturing efficiency, a healthier contract mix and stronger cost absorption, or whether part of the benefit depends on the timing and accounting treatment of individual projects.

How much has ITM Power’s FY2026 earnings outlook actually improved?

ITM previously expected an adjusted EBITDA loss of £27 million to £29 million for FY2026, a range established in its earlier guidance and maintained when revenue expectations were upgraded in February. Its latest forecast of £20 million to £21 million represents a reduction of £6 million to £9 million in the anticipated annual loss, depending on which ends of the respective ranges are compared. Using the midpoints, the forecast loss has fallen from £28 million to £20.5 million, explaining the approximately 27% improvement highlighted by management.

The comparison with FY2025 is also meaningful. ITM reported an adjusted EBITDA loss of approximately £33 million in that financial year, despite revenue increasing to £26 million from £16.5 million in FY2024. The FY2026 midpoint implies an improvement of approximately £12.5 million against that historical loss, even as the company continues investing in technology and manufacturing capabilities.

However, adjusted EBITDA is an alternative performance measure rather than statutory profit. It excludes depreciation, amortisation and certain other items according to the company’s disclosed methodology. Its improvement does not automatically establish a corresponding reduction in the statutory loss or an equivalent increase in operating cash flow.

The October announcement also concerns a financial year that has already ended. It is an updated estimate of historical FY2026 performance, not a new forecast for the financial year ending April 2027. Distinguishing those periods is important because the October 19 preliminary results should explain the completed financial year, while any new outlook for FY2027 would represent a separate assessment.

The announcement itself does not identify a single cause for the smaller loss. ITM’s earlier disclosures provide evidence of manufacturing improvements and cost discipline, but attributing the entire October revision to those factors would go beyond what has been reported. The financial statements must show whether the benefit emerged from gross profit, operating expenditure, project provisions, other income or a combination of influences.

Is ITM Power improving factory economics or simply reducing its operating costs?

The clearest evidence of an operational improvement comes from ITM’s first-half financial results. Revenue increased to £18 million for the six months ended October 31, 2025, compared with £15.5 million a year earlier. Over the same period, the gross loss narrowed to approximately £6.5 million from £10.2 million, while the adjusted EBITDA loss improved to £11.9 million from £16.8 million.

The reduction in gross losses is important because it occurred before the October guidance announcement. ITM attributed the remaining first-half gross loss primarily to under-absorption of factory costs, meaning its manufacturing facilities were not generating enough production activity to spread their fixed operating costs efficiently. This suggests that higher manufacturing throughput could improve reported margins even without large changes in individual contract pricing.

The company’s manufacturing programme has included tighter process controls, improved equipment testing procedures and greater automation. ITM reported that it had halved electrolysis time during factory acceptance testing and installed an automated stack assembly system. These measures have the potential to reduce labour requirements, testing expenditure and production bottlenecks, although the precise financial contribution of each initiative has not been separately quantified.

The second-half figures will help establish whether that operational improvement continued. Based on reported first-half results and the latest annual guidance, second-half revenue would be approximately £22 million to £25 million, while the adjusted EBITDA loss would be approximately £8.1 million to £9.1 million, assuming consistent reporting definitions and no relevant restatements. These are calculations derived from existing disclosures, not separately announced second-half results.

That combination would indicate higher revenue and a smaller adjusted EBITDA loss than in the first half. However, confirmation of the underlying cause requires the full financial statements, particularly the relationship between cost of sales, factory overhead absorption, project provisions and administrative expenses.

Why does ITM Power’s £152 million order backlog still contain a profitability challenge?

ITM reported a contracted order backlog of £152 million in January 2026, up from £43.7 million two years earlier. More significantly, management said 71% of its contracted backlog consisted of profitable contracts, compared with 60% at April 2025. That development supports the argument that changes in pricing, customer selection and contract management are gradually improving the quality of its future work.

However, the 71% figure should not be confused with a 71% gross profit margin or a guarantee that the same proportion of revenue will generate positive cash flow. It describes the company’s classification of contracted business, while actual profitability will depend on manufacturing costs, project execution and the timing of revenue recognition. The October guidance update did not provide a refreshed backlog figure or an updated profitable-contract proportion.

ITM’s remaining legacy contracts continue to complicate its financial performance. The company has described these projects as fully provided for and not contributing to margin, with the remaining work expected to enter reported revenue over approximately 18 months from the January interim announcement. These arrangements originated before the company’s strategic reset and continue to influence the relationship between revenue growth and reported gross profitability.

The gradual completion of legacy work could improve the overall margin profile, provided newly secured projects deliver the profitability expected when they were contracted. It could also reduce the operational burden associated with earlier commercial commitments. Nevertheless, the precise timing of those benefits remains uncertain because project delivery, accounting provisions and customer milestones can affect reported results.

The most useful evidence would be an updated breakdown of profitable and legacy contracts, together with further reductions in gross losses. Growing the backlog is commercially encouraging, but demonstrating that contracted work can generate positive manufacturing margins is the more important step towards sustainable profitability.

Has percentage-of-completion accounting changed the quality of ITM Power’s reported revenue?

Revenue recognition is another important consideration when assessing ITM’s improving financial performance. Historically, the company recognised significant equipment revenue when contractual milestones were completed, including delivery, testing or commissioning. This approach could create substantial fluctuations between reporting periods even when production work progressed relatively steadily.

ITM has been expanding the use of percentage-of-completion accounting for eligible contracts as its product portfolio develops. The method allows revenue to be recognised progressively as relevant performance obligations are satisfied, rather than necessarily waiting for a single completion milestone. The company indicated that non-standard NEPTUNE, POSEIDON and ALPHA products increasingly lend themselves to this approach, while TRIDENT and standard NEPTUNE products are expected to continue under completed-contract accounting.

In February, ITM increased its FY2026 revenue guidance from £35 million to £40 million to a revised range of £40 million to £43 million. It attributed that change to strong project progress, contributions from recently announced contracts and the growing application of progressive revenue recognition. The October announcement did not increase this revised revenue guidance further.

The first-half figures demonstrate why the distinction matters. Of the £15.5 million in equipment sales revenue recognised during that period, approximately £13.9 million related to completed-contract recognition, while £1.6 million was recognised over time. The remaining reported revenue included engineering work and maintenance or upgrade activities.

Progressive accounting can provide a more representative picture of work performed on qualifying contracts, but it does not mean that all recognised revenue has already been collected in cash. Nor does changing the timing of recognition automatically improve a project’s total lifetime profitability. Contract assets, milestone payments, estimates of completion and associated costs remain important components of the overall financial assessment.

ITM’s October 19 results should clarify whether revenue growth has been accompanied by improved gross economics and cash collection. That distinction matters more than the size of the revenue increase alone, particularly while the company is completing legacy contracts and preparing for larger manufacturing volumes.

Does ITM Power’s £210 million to £215 million cash guidance indicate a stronger underlying cash flow?

ITM’s balance sheet remains an important competitive resource in a capital-intensive hydrogen industry. The company held approximately £197.8 million in cash at October 31, 2025, compared with £207 million at the end of April 2025. Its latest FY2026 cash guidance of £210 million to £215 million indicates an expected closing balance above those earlier figures, but the comparison requires consideration of a major financing transaction.

In April 2026, Great British Energy agreed to invest £40 million in ITM through a subscription for 71,994,240 new ordinary shares priced at 55.56 pence each. The transaction gave the publicly owned energy company an approximately 10.4% holding immediately following the subscription. ITM subsequently increased its year-end cash guidance from £170 million to £175 million to £210 million to £215 million, explicitly reflecting the equity proceeds.

This means the higher forecast cash balance cannot be interpreted as evidence that the operating business generated positive cash flow. The equity subscription provided new capital while increasing the number of ordinary shares. The benefit to the company’s funding position must therefore be distinguished from the performance of its underlying operations.

Cash movements are also influenced by customer advance payments, inventory purchases, receivables, capital expenditure and investment income. ITM reported a £12.7 million working-capital inflow during the first half, including movements in payables and inventories. Such timing differences can materially influence reported cash balances without demonstrating that the business has achieved sustainable positive operating cash generation.

The preliminary results will therefore need to explain how much cash was consumed or generated through operations, what was invested in capital expenditure and how customer payments affected working capital. The unchanged October cash guidance is useful evidence of financial predictability against management’s latest forecast, but it is not sufficient by itself to establish improved cash conversion.

How could the £86.5 million government support package change ITM Power’s manufacturing economics?

ITM’s longer-term financial position is also influenced by its planned investment in next-generation electrolyser manufacturing. Alongside Great British Energy’s £40 million equity investment, the company secured a £46.5 million capital grant from the Department for Energy Security and Net Zero, formally awarded in July 2026. The funding supports the establishment of manufacturing capability for ITM’s Chronos electrolyser stack technology at its Sheffield facilities.

The proposed manufacturing line is designed to provide approximately 1 gigawatt of annual production capacity, with the company targeting commercial operation in 2028. The wider investment programme could involve expenditure of up to £120 million over approximately three years. However, planned capacity should not be confused with existing production output or guaranteed customer demand.

The financing structure also requires careful interpretation. The £40 million equity subscription is distinct from the £46.5 million capital grant, which is intended to reimburse eligible expenditure through payments made in arrears. A formally awarded grant is therefore not equivalent to £46.5 million of unrestricted cash already received.

Chronos could improve ITM’s manufacturing economics if its intended reductions in equipment costs and improvements in production efficiency are achieved at commercial scale. Nevertheless, automated capacity creates fixed-cost commitments, and those investments will need sufficient future orders to generate attractive returns.

The expansion consequently introduces a second financial challenge alongside near-term loss reduction. ITM must improve profitability in its existing operations while preparing manufacturing facilities for demand that remains dependent on customers committing capital to hydrogen projects.

Why do hydrogen project delays remain a risk despite ITM Power’s commercial progress?

ITM has secured several important commercial relationships, including equipment supply work associated with RWE’s green hydrogen developments in Lingen, Germany. In August 2026, the company announced that initial hydrogen produced at RWE’s Lingen facility had reached an industrial customer through pipeline infrastructure. The achievement provided evidence of operational progress, although it did not establish that every associated plant had completed commissioning or reached full commercial production.

The wider pipeline includes a 150-megawatt NEPTUNE V capacity reservation with RWE, engineering work associated with Uniper’s Humber hydrogen project and selection for major German grid-balancing developments. However, capacity reservations, engineering agreements and preferred-supplier selections carry different commercial commitments. They should not all be treated as firm equipment orders or guaranteed future revenue.

The hydrogen sector also faces structural demand challenges. The International Energy Agency’s 2025 assessment highlighted persistent project delays, high production costs and uncertainty surrounding customer demand and investment decisions. These conditions can delay the conversion of prospective electrolyser projects into binding manufacturing contracts.

ITM’s developing Hydropulse business introduces an additional commercial model based on building, owning and operating hydrogen production assets. That approach could eventually support recurring revenue, but it also involves financing, operating and utilisation risks distinct from equipment manufacturing.

The October earnings improvement therefore provides evidence of progress within ITM’s existing operations, not confirmation that the wider hydrogen market has overcome its development constraints. Future growth remains dependent on customers moving projects through final investment decisions and into equipment procurement, installation and operation.

What must ITM Power demonstrate in its October 19 preliminary results?

The October 19 announcement will provide the first opportunity to examine the completed FY2026 results behind the upgraded guidance. Particular attention will fall on whether the gross loss continued to narrow during the second half and whether improvements arose from manufacturing efficiency, a changing contract mix or movements in operating expenses. Any changes in project provisions and the treatment of legacy contracts will also be important.

The cash-flow statement should clarify the distinction between the £40 million equity investment and underlying operating cash movements. Updated information about inventory, customer advances, capital expenditure and grant receipts would help establish how much financial flexibility remains for development and manufacturing expansion.

ITM’s updated order backlog and the proportion of profitable contracts will provide another measure of commercial progress. Evidence that legacy work is declining while newer contracts move through production at improving margins would strengthen the case for sustainable operating improvement. Conversely, continuing factory losses or significant dependence on exceptional benefits would suggest that further operational progress is necessary.

The company has already demonstrated that it can grow revenue while narrowing its adjusted EBITDA loss. Its forthcoming results must now establish whether that progress is becoming embedded in the economics of its manufacturing operations.

The central question is not whether ITM Power has produced a better FY2026 earnings forecast. It is whether the company can convert higher production volumes, improving contract quality and substantial manufacturing investment into sustainable profitability without relying on repeated external financing. The October 19 results will provide a clearer view of how far that transition has progressed.