Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

Good morning. My name is Lucas Penner, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's Second Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note that this call is being recorded. I would now like to turn the program over to your host for today's conference call, Lynne Maxeiner, Vice President, Investor Relations.

Great. Thank you, Lucas. Good morning, and welcome to Vertiv's Second Quarter 2026 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Gio Albertazzi Chief Financial Officer, Craig Chamberlain. We have one hour for the call today. During the Q&A portion of the call, please be mindful of others in the queue and limit yourself to one question and if you have a follow-up question, please rejoin the queue. Before we begin, I'd like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of burden. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will also present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com. With that, I'll turn the call over to Executive Chairman, Dave Cote.

I am incredibly pleased by our second quarter performance and outlook for the rest of the year and beyond. We have a great position in a good industry and continue to execute very well. Gio and his team stay at the forefront of technology with organic investments and acquisitions. The industry outlook is incredibly good because the digital age has decades to go. Our outlook is incredibly good and deservedly so as we provide the picks and shovels for the digital age. The seed planning Gio and his team have been doing continues to pay off and will do so even more in the future as the benefits from our technology investments unfold over time. And with all that goodness, we still have opportunity to further improve. As Gio likes to say, we are still far from our full potential. The future is so bright, we have to wear shades. I love it. With that, I now turn it over to Gio.

Well, thank you, Dave, and welcome, everyone. Let us go to Slide 3. A strong quarter, EPS, margin, profit and cash convincingly strong, continuing on a trajectory of strong sales growth even with some timing elements. Pleased with what we see in July and full confidence in H2 execution and backlog. As a result, we have raised our full year outlook. Net sales were up 24% versus Q2 '25 driven by continued strength in the Americas, which grew 29% and APAC also up 29%. And Importantly, EMEA returned to positive net sales growth with a 2% year-on-year increase. On an organic basis, net sales grew 18% with additional 5% from acquisitions and 1% from favorable currency. Adjusted operating margin came in at 22.6%, exceeding our guidance and growing 410 basis points year-on-year. The strong margin performance translated into adjusted operating profit of $738 million, up 51% from a year ago. Adjusted diluted EPS were $1.52 or 60%, up from second quarter '25 driven primarily by high volume and continued operational productivity. Adjusted free cash flow came in at 925 million, a very strong 134% year-on-year growth. driven by higher operating profit and working capital efficiency. Free cash flow conversion exceeded 150% in the quarter. We are raising our full year guidance across all key metrics. Net sales raised to $14 billion, a $250 million increase from previous guidance, up 37% year-on-year. Adjusted diluted EPS now at $6.70, a 60% increase from '25. AOP now expected almost 60% up year-on-year, and adjusted free cash flow expected at $2.5 billion. and we achieved a net cash position at the end of Q2. Let's now move to Slide 4. And let's start with the market environment on the left. Our global pipeline momentum remains very strong, and we expect another year of robust orders growth. Demand signals are clear and broad-based. Regionally, let's start with the Americas, where market continues to be strong. Pipeline is actually accelerating, corroborating the long-term growth trajectory of our business. EMEA's momentum is further strengthening. This reinforces our confidence in the acceleration for the second half of the year. APAC showed broad-based strength, pipeline expansion and favorable market conditions. This supports continued growth across the region. Pricing continues to be favorable. We expect positive price cost in '26, including the current impact of tariffs and counter managers. Now to the right side of this slide. Q2 revenue showed strong growth year-on-year quarter-to-quarter. We are executing on further acceleration in Q3 and Q4 on strong backlog. Additional capacity is online globally. Examples are Johor in Malaysia, 5 large plants, expansions in the Americas, chiller capacity increases in EMEA MMO. During Investor Day, you saw that this expansion is rapid and broad-based at speed, but always in a very disciplined fashion. We are delivering data center infrastructure solution at an increasing scale and level of complexity. That's exactly where we want to be. We experienced a minor timing shifts in Q2 revenue primarily driven by multiphase project execution and temporary supply chain dynamics, but the demand is there and the trajectory is strong. Keep in mind, there are increasingly large projects underway, think Smart Ron and think even bigger with one core. These come with significant intends a lot of coordination, a lot of rapid learning. I like the pace of our progress, and we get stronger every day. On capital expenditures, we now expect to be at the high end of our range, 4% of '26 sales as we further expand the global capabilities and capacity going into '27. We continue to invest for the long term in a disciplined manner in future power architecture, advanced thermal systems, services and converged infrastructure. These are the building blocks that enable the next-generation AI data centers and factories, and we intend to continue to lead the industry. Let's now go to Slide 5. I am sure many of you will recall, our CTO, Scott Armul, a power architecture presentation at our Investor Day in May. I want to reiterate and build on what we shared there. multiple port architectures will coexist in the future. Virtiv supports each one of them through complete orchestrated powertrain. On the left side of the slide, you see the different architectures. Our AC foundation with, as an example, Vertiv Trinegy and energy core battery storage system and the rest of the Vertiv powertrain, of course, this architecture is broadly deployed, growing and will continue to be used by many categories of customers. The next architecture, serving a higher density has a medium voltage AC source that feeds low-voltage AC to deliver 800 volts at rack and pod level. Here, you see new Vertiv technologies like mid-voltage BaaS UPS and Vertiv volt DC site cars. This is under customer validation in 26 with deployment planned in '27. Then the 800-volt architecture at data hall Care vertical solutions will include MV DC UPS and solid state transformer to cover the multiple ways to address the end-to-end powertrain. We're active in development with planned '27 customer validation supporting '28 deployment. As stated, rather than transitioning to a single architecture, the market is expected to leverage both AC and DC solutions as power requirements continue to evolve for years to come. Now the right side of the slide. This is an example of deploying multiple power architectures as sites evolve and expand. I'm thrilled to highlight our collaboration with NVIDIA and Visionbay.ai, Foxconn's business unit focused on AI supercomputing at their site in Kaohsiung, Taiwan. For the initial phase, of this site, Vision Bay AI awarded the power, thermal and services business to Vertiv for what is Taiwan is the first AI data center featuring an DGB 300. On top of this, we are collaborating for the world's first AI data center, DP800 DC-DC architectures at the rack and pot level featuring NVIDIA Vera Rubin. This is an example of early customer validation of our road map and supports the broad power architecture evolution. This is real, this is happening. In a nutshell, as a number of viable power architectures expand and AC and DC coexist to deliver on the 800-volt DC Vertiv's content opportunity per megawatt expands and we are leading this transition. Let us now go to Page 6, and let's continue on the topic of technology. I want to spend a moment talking about Vertiv's data center colon architectures and our unique fluid management services. When the two are coupled, combined, we ensure our customers to use nearly 0 wood. As they scale, many customers have been and are adopting closed-loop cooling architectures as they optimize power and water use. A closed-loop cooling architecture is just that closed or filled with water recirculating. Typically, it does not require additional water after the fill at start-up. Vertiv Nan thermal chain technologies for both the primary and secondary cooling lube examples are Vertiv coolish to name a few, fully enable this approach. This architecture enables a data center to run on no water consumption. Now let's take the focus on water use a step further. Let's also address the initial system fill, and this is where PurgeRite's NearZero comes into the equation. As part of our unique fluid management technology and services, our PurgeRite's NearZero utilizes a closed-loop recirculation system to capture, treat and reuse water during start-up. This reduces the water normally used in the process by up to 90% during the start-up of a data center. For our customers, this means a faster and more cost-effective deployment and commissioning of liquid cooling system and chill water circuits. This means a significantly less waste and less disruption on site. More broadly, this expands vertical differentiation thermal management services, and we are managing fluid performance from start throughout decades of operational life. PurgeRite NearZero 0 is scaling through our existing serving network, a capability we believe no one else can replicate at scale. And with that, over to you, Craig.

Thanks, Gio. Turning to Slide 7, let's walk through our second quarter financial results in more detail. On adjusted diluted EPS, we delivered $1.52. That's up $0.57 or 60% versus prior year and $0.12 above guidance. The year-over-year improvement was driven by $0.58 from higher adjusted after-tax adjusted operating profit, which was driven primarily from higher sales volume and increased profitability. Looking at net sales, we delivered $3.274 billion in the quarter. That's up $636 million or 24% versus prior year. Organic sales growth was 18% and with 5% additional growth contribution from acquisitions and an additional 1% growth contribution from favorable foreign exchange. By regions, Americas grew 21% organically APAC grew 26% organically and EMEA was down 2% organically. Moving to adjusted operating profit. We delivered $738 million. That's up $249 million or 51% versus prior year and $28 million above the midpoint of our guidance. Adjusted operating margin of 22.6% expanded 410 basis points year-over-year and came in 140 basis points above guidance. The margin expansion was driven by strong operational execution, continued productivity gains and favorable price cost execution, partially offset by tariff impacts. We're also continuing investing in capacity and engineering R&D to support future business growth. To round out the quarter, adjusted free cash flow on minimum was outstanding, with the quarter ending at $925 million, up $648 million or 234% from prior year. The improvement was driven by higher adjusted operating profit, strong working capital performance, including project milestone collections, which is inclusive of initial advanced payments and lower cash interest. These items were partially offset by higher cash taxes and higher spending on CapEx investments. At our quarter end, our net leverage is at negative or 0.1x, providing even more flexibility. Just a quick note on our deferred revenue, you'll see an increase in the quarter, and that's driven by project advanced payments and ongoing milestone collections. We are very happy with our execution on project milestone development and what you're seeing in deferred revenue is a combination of payments at project initiation, order placement and ongoing project milestone execution. Flipping to Slide 8, let's look at segment performance. In Americas, net sales were $2.71 billion, up 29% with organic growth of 21%. Organic sales growth remained strong in the quarter. As Gio mentioned earlier, some minor timing shifts in 2Q revenue, these shifts were reflected in the Americas revenue numbers and were primarily driven by multiphase project execution and temporary supply chain congestion. However, we expect the associated timing delay to resolve in the second half of 2026. Adjusted operating profit was $571 million, driving 360 basis points in adjusted operating margin percentage. The margin expansion was delivered by ongoing commercial excellence and strong operational execution. Moving to APAC. The region had strong results with net sales of $720 million, up 29% with organic growth of 26%. We continue to see strong end market demand and the commercial execution across the team gives us confidence going forward. Adjusted operating margin percentage grew 270 basis points in the quarter due to strong operating leverage realized in the region. In EMEA, net sales were $484 million, up 2% with organic sales down 2%. We continue to see a strengthening market, which supports our position for the region to return to organic sales growth in the second half of 2026. EMEA also saw strong growth in adjusted operating margin percent, up 380 basis points year-on-year. The team continues to drive improved operational execution, which came through in the strong margin performance. Turning to Slide 9. Let's walk through our third quarter 2026 guidance. For 3Q, we're projecting adjusted diluted EPS of $1.80 at the midpoint, that represents 45% growth versus prior year. The year-over-year improvement is driven by continued volume growth and ongoing margin expansion. On net sales, we expect $3.75 billion at the midpoint. That's up $1.074 billion or 40% versus prior year. Organic sales growth is expected to be up approximately 35% with an additional 5% from acquisitions. By region, we expect Americas organic growth in the high 30s, APAC in the high 30s and EMEA in the mid-teens. Adjusted operating profit is expected to be $918 million at the midpoint. That's up $322 million or 54% versus prior year. Adjusted operating margin is expected to be 24.5% at the midpoint. That's up 220 basis points year-over-year and is driven by strong organic sales growth, continued operational leverage and ongoing productivity realization. Now let's turn to Slide 10 and for our updated full year 2026 guidance. We're raising our outlook across all key metrics. Starting with adjusted diluted EPS, we now expect $6.70 at the midpoint, that's up $2.50 or 60% versus 2025. The updated range is now at $6.65 to $6.75. This is an increase of $0.35 at the midpoint versus prior guidance. The year-over-year improvement is driven by continued volume growth and ongoing margin expansion. For net sales, we now expect $14 billion at the midpoint, that's up $3.77 billion or 37% versus 2025. This represents an increase of $250 million versus our prior guidance. Organic sales growth is expected to be at 31% with 5% growth from acquisitions and 1% growth from favorable currency. By region, we expect Americas organic growth in the high 30s, APAC in the low 30s and EMEA is in low single digits. Moving to adjusted operating profit. We now expect $3.325 billion at the midpoint, that's up approximately $1.235 billion or 59% versus 2025. This is an increase of $125 million versus our prior guidance. Adjusted operating margin is expected to be 23.8% at the midpoint expanding approximately 340 basis points from 2025 and up 50 basis points versus our prior guidance. The margin expansion is driven by continued operational leverage and positive price cost execution, which is offsetting some tariff headwinds. Finally, adjusted free cash flow is expected to be $2.5 billion at the midpoint. That's up $613 million or 32% versus 2025. The year-over-year improvement is driven by higher adjusted operating profit and lower cash interest which is partially offset by higher cash taxes and higher investments in capital expenditures. We're delivering strong results, raising our outlook and executing with discipline. Based on our performance and momentum, we're very confident in our ability to continue driving results throughout the balance of the year. With that, I'll send it back to you, Gio.

Well, thank you. Thank you, Craig. And let's go to Slide 11 to wrap up. Strong Q2 performance. We are delivering and the team continues to raise the bar on what's possible. We raised our full year '26 guidance across all key metrics. The momentum is strong. it's broad-based and it's accelerating. We continue to invest with discipline. Now just for the 45% growth we expect in the second half but for the years beyond, capacity, innovation services. On M&A, we closed the ThermoKey in June, strengthening our heat rejection capabilities. We closed the strategic Thermal Labs in April. We're adding the server-side liquid cooling and co-plate expertise for high-density thermal management. Together, these two acquisitions expand what we offer across the full thermal spectrum from heat rejection to directed chef cooling. Allow me two additional spotlight at the naval postgraduate school in partnership with NVIDIA, we delivered a fully engineered package rack, power and cooling system into an existing on-prem facility. This includes liquid cooling integration, commissioning and deployment and deployment support. This is a repeatable at scale reference architecture for NVIDIA DGX GB300. We call this Vertiv SmartIT solution. [indiscernible] established an advanced locally operated AI environment for education research, engineering, modeling and simulation. This also shows how an existing facility can rapidly be transformed to support next-generation accelerated computing, easy for enterprise and sovereign customers to adopt. In EMEA, Germany, our collaboration with Data 4 is a great example of the momentum we are seeing in that region. Vertiv delivers complete powertrain, including switchgear, UPS and battery systems, et cetera, and thermal chain like chilled water units, free cooling chillers and our industry-leading services, it all will enable data force new Frankfurt side. This is exactly the kind of optimized end-to-end system deployment with Vertiv Excels. To conclude, I'm more confident in our trajectory today than I've ever been. We're executing, we're investing ahead of the curve. And increasingly, our customers are asking us to help them architect their most complex infrastructures. That's the role we've earned, and it's the role we intend to further strengthen. With that, let's go to the Q&A.

[Operator Instructions]. The first question comes from the line of Scott Davis from Melius Research. Scott, go ahead.

Yes. Thanks for the reminder, operator. I haven't figured out my phone yet. Anyway, sorry, guys, and good morning. Look, I just want to address a little bit of the issue that may be hurting your stock a little bit today with the timing shifts in 2Q revenues, the supply chain congestion comment. What -- can you give us a little bit more detail on that? And more explicitly, is this something -- I mean complexity is something that I would imagine is going to just do nothing but increase over the next 5 years and perhaps forever. Is this potentially going to be an ongoing issue, not just a one-off? And if so, how do you mitigate or kind of manage through it so that it really doesn't disrupt quarters the way that perhaps it can.

Well, thanks, Scott, for the question. And you're right, complexity is increasing. Some of the projects are not only bigger but multidimensional there could be a lot of supply chain interdependencies. And this supply chain is not necessarily an external supply chain. It can be very often and internal with Vertiv supply chain. Now clearly, like everything and like we've done in so far, there is a learning curve. I'm pleased with the speed at which we are progressing in this learning curve. And this learning curve is leading execution on this complexity. So I'm pretty confident about our direction of travel. And again, these are the first very large projects with this level of complexity. And we are more and more equipped for this, not just from a technology standpoint, but from a logistics and operations in general. When it comes to the second part of your question, so what could be the -- is there an ongoing impact on the future? Well, certainly, as I said, there is a learning curve that we are progressing on at speed. But there is also the fact that we are prudent anyway in our second half guidance. This is true in general also for the future. So if you think about our H2 guidance, we're not assuming all stars at line. So we have a wiggle-room for this progress on the learning curve, not to be perfect. Though, of course, speed and perfection is our goal.

Okay. Fair point. And then just a quick one. Would -- is there a price where you would start buying back stock a little bit more aggressively, just given the pullback we're seeing in the entire complex right now?

I mean I think we always look at it opportunistically, Scott, and this is the thing that we've talked about even at Investor Day, given today, it is a good time to look at it, but I think it's always something that we evaluate and take what we consider our capital deployment, and it's 1 of the areas we look at.

The next question comes from the line of Jeff Sprague with Vertical Research.

Gio, just on the comment that the pipeline is actually accelerating. I assume that's sort of all hyperscale, but could you give a little bit more context on sort of the nature of the acceleration? Is it -- is it scope diverted? Is it kind of additional customers? Is it existing customers looking to do more quickly. And it seems to support the comment you're making about robust orders for the year, but just love a little bit more color there if you could.

Let's start from the end. Good day, Jeff. Let's start from the end. Yes, of course, this is certainly supporting our comments about orders. When I talk about pipeline, I always like to talk about magnitude of pipeline, if you will, and speed of pipeline. When I talk about speed of pipeline, we talk about acceleration, it means that the sales cycle within the pipeline can be faster or slower. So we noticed an acceleration to becoming faster sales cycle. But at the same time, just to be extremely clear, the strength is also in sheer size of the pipeline in terms of quarter-to-quarter, year-on-year growth. And this is broad-based. It's pretty much across the world. but also it's broad-based across the various customer categories. So certainly the whole range, hyperscalers, it is true for enterprise. It's certainly true for Colo, Neocloud, so pretty broad-based.

And just to add on to that, Jeff, I would also just say, again, as hyperscalers and colos, hyperscalers are sometimes deploying through colo. So to look at it that way, you might get a little bit of a mix there. So just to ensure going back to what Gio said, we're seeing it again, across regions, across products, and that's the way we really look at it, but that's the way we would view our pipelines and see it accelerating in all those spaces.

And just a quick one, if I could. Do you have a solid-state transformer solution at scale at this point? Where do you stand on that product evolution?

Just like one of the slides was describing the solid state is currently a matter of product development for us. It's in pro development phase.

Your next question comes from Amit Daryanani with Evercore. Amit, please go ahead.

I guess if you just go back to the supply chain issues and delays, can you just talk about how much revenues are actually pushed out due to these challenges you had in the quarter? I think you missed the Street numbers about $100 million, but I'm actually wondering if the supply issues were perhaps much larger than that from a dollar perspective. And maybe just on the same lines, can you just talk about was that a Vertiv-specific issue or something on the customer side that led to this impact. And then how do you see this flowing back into the model into the back half?

So first of all, is it customer or is it Vertiv? On the customer side, pretty much we see the same dynamics that we have seen historically. So no big differences. When it comes to the Vertiv side and the exact and the exact amount, well, we will not be too specific, but the majority of what we're seeing is really coming from those dynamics that I've described during while I was going through my opening remarks, but also the conversation with Scott. That is pretty much the dynamics that we see. Is it on the supply chain. The supply chain is always a matter of working the sequence of things. It's nothing different than what we have experienced historically, and we are pleased with how we are strengthening our -- the resilience of our business in general.

And Amit, I would just add that just to clarify, we're talking about the large project deployments and the learning curve around that, which has confounding effects from both the external supply chain and our own internal supply chain. So there are some, I'd say, gray areas in there when we typically can recover from a late part and our smaller supply chains, but it becomes a larger supply chain, it becomes more confounding. So again, not to define that specifically, but that's the areas where we're seeing it the most is in those large project deployments and we're learning and understanding what that takes to go forward and how to iron those out. And then also, again, as we talked about thinking of not always that being perfect in the second half as we look in the guidance.

The next question comes from the line of Deane Dray with RBC Capital Markets.

I'll keep it to one question. Really good performance on free cash flow conversion this quarter. But for Craig, I'd be interested in hearing was there any contribution from customers for deposits on orders. I know that's something you all have been looking at. And Dave Cote knows from his air and defense days, that that's pretty standard to require deposits on large orders. So any contribution there?

Yes, Deane. And again, I want to congratulate you. I know you're retiring in September. So congratulations, a great career, a fantastic career. But to your question, yes, if you look at the face of the balance sheet and you -- I mean, the face of the , you'll see that our deferred revenue did go up. And our deferred revenue is a read-through in terms of those advanced deposits on orders, but it's also ongoing deposits as we go through the milestones of delivering those larger projects. So it's a combination of both. But that is driving the working capital and the great cash performance when you look at it across the entire balance sheet. So definitely an indicator of strong commercial performance on both sides.

The next question comes from Nigel Coe with Wolfe Research.

I just want to pick up on that topic. I think this is the first time maybe I'm wrong, but the first time I've heard progress collections kind of stage payments. Maybe just touch on that. I know your assortment is changing with OneCore and SmartRun. So just maybe just talk about that, what kind of percentage of revenues are we talking about now that actually have progress collections? And then just is not a second question, by the way. So it's more kind of an add-on to the first one. the balance sheet the balance sheet numbers moved quite a lot this quarter. I mean the ThermoKey acquisition seemed quite small, but did it come with quite a big balance sheet.

ThermoKey didn't come with a large balance sheet. So I'll answer that one first, and then we can go a little bit -- I'll double-click on it as we go further into your question, Nigel. But in terms of the actual progress collections, yes, there is a portion that we get upfront and there's a portion as we deliver milestones. And a lot of that is related to delivering products to the end project. And so that's how you would start phasing it in. And sometimes you get those a couple -- like a month before you deliver projects. Sometimes you get those at the end of design. So they are all faded in different ways. So we would get a portion upfront, we get a portion at the delivery milestones that we set forth, always, in our view, staying ahead of the curve in terms of a cash position in that project. Some of it is going to be related to deliveries where you would see revenue incurred. Some of it might be delivered in terms of a design point, which would be a secondary milestone before revenue occurs. And again, they're all a little different in how we look through them, all the goal being staying ahead of the cash curve and being cash positive on that. On the other phases of the balance sheet, you mentioned lots of movement. We do have a significant ramp in the second half. So you would see some inventory come on. And as that inventory comes on, you'll see AP come on as well. And we did have a good quarter in terms of sales. So that's where our bar is going up as well. So all of this is a reflection of the volume you're seeing. ThermoKey add little impact to that.

The next question comes from Andrew Kaplowitz with Citigroup. Andrew, please go ahead.

So you updated us again regarding the evolution towards 800 BDC potentially in the start to impact Vertiv 2027. And I know you commented on an SST and product development to Jeff. But when you step back, how confident are you that versus content per megawatt could go up as 800 BDC technologies adopted. As I think you reiterated today? And would you surmise that Virtus 800 BDC offering could be toward the higher end of that $3.25 million to $3.75 million per megawatt range you gave us at the Analyst Day.

Yes, we're pretty convinced about that. And also when we look at all the elements of the powertrain in the various architectures. And when we think what happens inside the white space in the gray space, we see value there forward and an expansion of revenue per TAM per megawatt. So not differently from our conversations or what we shared at Investor Day 2 months ago, we continue to go through that math, and the math is corroborated by of course all the progress that we're doing on the product development, but also on the on the activities that we are conducting with customers. So we should and we would need to go elements per elements in that chain. But again, think about the entire powertrain, all the elements vis-a-vis what we have today, and you'll see that with that density with that complexity our content is impacted favorably.

The next question comes from Andrew Obin with Bank of America.