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    Vertiv Holdings Co (VRT)

    Q1 2024 Earnings Summary

    Reported on Jan 15, 2025 (Before Market Open)
    Pre-Earnings Price$79.17Last close (Apr 23, 2024)
    Post-Earnings Price$89.79Open (Apr 24, 2024)
    Price Change
    $10.62(+13.41%)
    • Strong demand driven by AI is boosting orders significantly, with orders up 60% year-on-year in Q1 and a book-to-bill ratio of 1.5x, indicating strong growth prospects, especially since most of the AI-related orders are for new data center construction.
    • Vertiv has improved pricing power and margin protection, with strengthened pricing processes and adjusted operating margin expected to expand to 17.7% in 2024, progressing toward their long-term target of 20%+. Incremental margins are estimated to be around 40% for the full year, demonstrating strong profitability.
    • Vertiv's investments in liquid cooling technology and their complete portfolio position them well to capitalize on the increasing addressable market per megawatt due to AI and high-density data centers. They are confident in their ability to produce liquid cooling systems, leveraging their existing expertise and recently acquired capabilities.
    • Potential delays in AI adoption and growth outside the Americas, particularly in EMEA and China, could impact Vertiv's international growth prospects. China sales grew low single digits, and AI adoption in EMEA may be 9 to 12 months behind, as noted by Giordano Albertazzi.
    • Constraints in data center construction, such as obtaining permits and power, could limit Vertiv's ability to capitalize on strong demand and drive revenues higher into 2025 and 2026. As Giordano Albertazzi mentioned, the industry is growing, but there are challenges related to building data centers, getting permits, and getting power.
    • The increase in net leverage to 2.2x due to $600 million in share repurchases, including buying back shares from Platinum Advisers as they exited their position in Vertiv, could raise concerns about financial flexibility. The net leverage increased from 1.9x at year-end to 2.2x at the end of Q1.
    1. AI-Driven Order Growth
      Q: Is AI driving increased orders and revenue growth?
      A: Management reports a significant acceleration in the AI space, with the pipeline doubling in size over the last two months. Demand is strong across the board, particularly in liquid cooling, but also impacting the entire powertrain and thermal chain. They are seeing more megawatts being deployed, indicating robust demand.

    2. Margin Outlook
      Q: Can high incremental margins be sustained beyond 2024?
      A: For the full year, incremental margins are estimated around 40%. While they achieved 62% in the first quarter and guided 38% in the second quarter, management expects incrementals to ramp down as the year progresses due to more challenging comparables. They remain optimistic about reaching their long-term target of 20%+ adjusted operating profit, with incremental margins potentially in the mid-30% range.

    3. Backlog and Book-to-Bill Ratio
      Q: Will backlog continue to grow, and book-to-bill remain above 1x?
      A: Management believes that for the remainder of the year, book-to-bill will be on or above 1x. While the 1.5x book-to-bill achieved is not considered sustainable each quarter, they expect backlog to grow, though not necessarily in every single quarter due to various dynamics.

    4. Liquid Cooling Capacity and Margins
      Q: Is liquid cooling capacity expansion complex and margin-dilutive?
      A: Vertiv is confident in its expertise, having longstanding experience in designing and manufacturing thermal management products, including liquid cooling. The investment in capacity growth is progressing, and the margin profile for liquid cooling is consistent with their thermal business, aligning with the long-term trajectory towards 20%+ margins.

    5. NVIDIA Relationship
      Q: What is the nature of the NVIDIA relationship?
      A: Vertiv has a multifaceted relationship with NVIDIA, being part of their partner network, which is essential for commercial and go-to-market strategies. They are collaborating on engineering and have their liquid cooling solutions certified. The upcoming NVIDIA Blackwell technology requires liquid cooling, and Vertiv's portfolio is well-positioned to support it.

    6. Regional Growth: China and India
      Q: How are China and India contributing to growth?
      A: While the Americas remain the largest market with 55% of revenue, Vertiv sees encouraging signs in China, though it's early to say if it's a sustained recovery. India is an important location for both market potential and manufacturing capacity, and management is optimistic about AI's eventual impact in Asia.

    7. Enterprise vs. Hyperscaler Demand
      Q: Is demand shifting towards hyperscalers over enterprise customers?
      A: Acceleration is predominantly happening with hyperscalers and colocation providers, especially for high-density compute and AI applications. Management believes that AI will eventually benefit the enterprise market, but it's still premature to quantify when that will happen.

    8. Backlog Aging and Visibility
      Q: How much of the backlog extends into 2025 and beyond?
      A: While not providing specific details on backlog aging, management indicated that there has been an extension in requested lead times, moving from a 9- to 18-month window to a 12- to 18-month window. This gives Vertiv more visibility and allows for better execution and supply chain alignment.

    9. Orders Mix and Margins Protection
      Q: How is Vertiv protecting margins with longer lead times?
      A: Vertiv has strengthened its pricing mechanisms, factoring in material cost dynamics and improving contractual terms to react to unforeseen changes. Management is confident in their ability to maintain margins despite longer lead times in the backlog.

    10. On-Prem vs. Cloud Demand
      Q: What's happening with on-premise enterprise demand?
      A: Currently, the acceleration is mainly in the hyperscale and colocation segments. While AI acceleration is expected to eventually impact the enterprise market, for now, growth remains aligned with previous expectations of 3% to 5%.

    11. Supply Chain and Site Preparation Constraints
      Q: Are there constraints in supply chain or site preparation affecting growth?
      A: The situation hasn't dramatically changed; while the industry is growing, challenges such as building data centers, securing permits, and obtaining power persist. These factors can limit the absolute growth in the industry.

    12. Switchgear Capacity Expansion
      Q: What does the doubling of switchgear capacity imply?
      A: Vertiv is very happy with the capacity expansion, which underscores the importance of having a full portfolio, including the entire powertrain from medium-voltage switchgear to distribution and PDUs.

    13. Orders Pull-Forward
      Q: Was there a pull-forward of orders into Q1?
      A: Management observed statistical indications of orders being pulled in more rapidly than historically. While they are happy with the pipeline size, it's difficult to predict exact future patterns, and order timing remains subject to various factors.

    14. Price/Cost Expectations
      Q: Is the positive price/cost guidance of $60 million for the year still valid?
      A: The expectation for the full year hasn't changed significantly from prior guidance. If anything, it's trending a little more favorable, but not significantly different.