Q3 2024 Earnings Summary
- Strong Growth in Liquid Cooling Market Share: Vertiv is experiencing high growth rates in liquid cooling due to market dynamics and believes it is taking significant market share, accelerating overall growth.
- Optimistic Future Outlook with Strong Pipeline and Capacity: The company has a growing demand pipeline entering Q4 that is higher than entering Q3, indicating continued strong growth prospects. Vertiv is confident in its ability to support this growth with existing capacity and ongoing expansions.
- Favorable Pricing Environment and Operational Leverage Leading to Margin Expansion: Vertiv expects to continue operating in a price-cost favorable environment, combined with operational leverage from higher volumes, which makes them optimistic about future profit generation.
- Potential impact of elongating lead times on pricing power: Concerns were raised about whether elongating customer lead times could reduce Vertiv's pricing power in equipment sales. While management does not see a correlation between elongated lead times and reduced pricing power, this remains a potential risk as elongated lead times could impact pricing dynamics.
- Capacity constraints may limit future growth: Questions were raised about whether Vertiv has sufficient capacity to support future growth and the need for further expansion. Management acknowledged that not all product lines have the same ability to accelerate capacity, which could limit the company's ability to meet increasing demand.
- Higher capital expenditures could impact free cash flow: Net CapEx is expected to be around $200 million for the year, with approximately $80 million in Q4 alone, indicating a significant increase in capital spending. This concentration of CapEx in the fourth quarter may signal higher capital requirements to support growth, potentially impacting free cash flow.
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2025 Revenue Acceleration
Q: How do you expect backlog to trend for 2025 revenue acceleration?
A: We are operating in a favorable market and winning; we see strong pipelines and acceleration globally. While it's premature to elaborate fully, the landscape is favorable, and we are optimistic about 2025 revenue growth. -
Price-Cost Favorability in 2025
Q: Confidence in remaining price cost positive in '25?
A: We have visibility on our pipelines, backlog, and pricing elements, as well as the cost side. Combined, this gives us confidence that price-cost will continue to be favorable in 2025, even with slightly longer conversion cycles. -
Capital Allocation and M&A
Q: Thoughts on excess cash and M&A opportunities?
A: We're in a strong cash position, enabling our capital allocation strategy. We are very interested in M&A, actively involved in the process, and have strengthened our radar screen. We'll discuss more at our investor event in a few weeks, but we're definitely focused on M&A. -
Demand Pipeline Growth
Q: Is Q4 demand pipeline higher than Q3 levels?
A: Yes, the pipeline entering Q4 is higher than entering Q3—a resounding yes. This increase helps us be more ready from a supply chain standpoint. -
Orders and Trailing 12-Month Guidance
Q: Will orders stay in the 30%-35% growth range?
A: At 37% in the third quarter, we believe it's strong. It's premature to talk about future ranges, and we will not guide on orders. However, we are optimistic about the pipeline and industry dynamics. -
Capacity Expansion
Q: How do you feel about capacity and need for expansion?
A: Our ability to accelerate capacity in the short term is there. Capacity is constantly growing through expanding existing factories and continuous improvement. We believe we have the capacity to support our growth. We can accelerate if needed, sometimes faster than building new factories. -
Incremental Margins Confidence
Q: Confidence in driving 40%+ incremental margins?
A: The formula hasn't changed dramatically. Operational leverage and volume help significantly. We believe we'll continue to operate in a price-cost favorable environment, making us optimistic about the future. -
Competition with ODMs in Liquid Cooling
Q: How do you fit with ODMs in liquid cooling?
A: ODMs are important in our go-to-market strategy. We view them as partners, not competition. They integrate liquid cooling in their offerings, sometimes with our products. We synergize with them, providing technology and services they need. -
Win Rates and Content per Megawatt
Q: Are win rates and $3M-$3.5M/MW content targets on track?
A: We're happy with our win rates; they align with our market share ambitions, including in liquid cooling. Regarding content per megawatt, signals point towards the additional $0.5 million TAM per MW we indicated last year. We're still in transition but will elaborate further soon. -
Services Growth and Liquid Cooling
Q: How is service business growth, especially with liquid cooling?
A: We're happy with service orders and sales trajectory, reinforcing our value proposition. Demand for our services is increasing, particularly in liquid cooling, where we have unique capabilities. We continue to train engineers to ensure ample field service capacity. -
Lead Times Impact on Pricing Power
Q: Does longer customer lead time reduce your pricing power?
A: We don't see a correlation between lead time elongation and pricing power. Lead times elongate due to customers' project schedules, not our constraints. It actually gives us more time to prepare from a supply chain standpoint. -
Thermal vs Power Growth
Q: Will thermal growth outpace power going forward?
A: Liquid cooling will see high growth rates within our large thermal portfolio, but demand is balanced across businesses. AI and high-performance compute benefit the entire portfolio. Power management continues to grow with densification, and prefabrication becomes more important. Overall, we believe the entire portfolio will be favorable.