Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

Okay. Great. Thank you, everybody. My name is Mark Delaney, and I have the pleasure of covering Vertiv for Goldman Sachs. I'm very pleased to have with me today Gio Albertazzi, Vertiv's CEO; and David Fallon, the company's CFO. Thanks for joining us.

Thank you for having us.

I thought to start out, we could talk a little bit around the demand environment, orders in the first half of this year up roughly 60%. Maybe help us better understand what led to some of that order strength that the company hasn't seen.

Well, first of all, of course, we are very happy about the order trend that we have seen in the first half of the year and the reinforced kind of a trend that was already happened in the back half of the last year. And there are multiple factors at play. One is there certainly is a favorable market environment. Certainly, there is a majority of our revenue, majority of our sales are too data center, broadly speaking. There is an underlying, of course, a strong and ongoing strong cloud market demand that is compounded by an accelerating AI infrastructure buildup. So the market situation is favorable. If you remember back to our November Investor Conference, we said, in this favorable market environment, we are very, very -- intention to gain market share, and that is also what happened. It's a combination of things. Certainly, we've been decades in the industry. We know the industry very, very well. And it's not just about knowing the industry, it's about having the relationship that allow us to understand whether technology is going and having the technology available for the market and for the quite unprecedented evolution in terms of technical aspects of the infrastructure that is being built. So its technology, its relationship, and it's quite a strong ability to scale. The market recognized that, and we see that translated into a good successful order intake.

You mentioned data center. I think data center is about 80% of your revenue. You also have exposure though, to telecom, commercial industrial. Maybe just help us a little bit more around order rates by end market.

Yes, without being to boring you with too many details, let's put it this way. Certainly, the majority of the acceleration comes from what we call the hyperscale and colo. So the colo and cloud part of the market. That's where the acceleration is the steepest and the other parts of the market are good, okay. The telecom is not particularly strong in this moment in terms of demand. We see an opportunity in the commercial industrial, especially in the critical infrastructure for industrial applications. But by far, the biggest accelerator in that 60% that you mentioned is coming from colo cloud. Enterprise is an important part of our portfolio, an important market for us, data center for enterprise. We like the dynamics there, but it's still -- will further accelerate, thanks to AI. But in this moment, the big driver is colo hyperscale.

Maybe talk a little bit more around selling point products or full solutions. You obviously have a broad range of capabilities across all of power and thermal and I think you can be somewhat flexible by customer type. But where are you seeing the most interest from customers? And is it product solutions, some combination of both?

Well, more and more as the technology evolves, the ability, and there I say quite unique ability to have an entire range of solutions and products and technologies for the data centers across thermal, power and the entire infrastructure range gives us an advantage. And the advantage that is bigger now than in the past because the densification is changing the way data centers are designed. And our ability to sit with the NVIDIAs of the world and compare roadmaps. The ability to sit with a big hyperscalers and discuss the entire power system, the entire thermal system, how to design the white space as well, these capabilities are particularly valued by our customer base and gives us a strong advantage. So more and more the conversation that we have with our customers is at system level. The actual sale could be at point product or a system. The go-to-market is always at system. So it's a mixed bag in that respect, but the competitive advantage that we like a lot, and we are reinforcing is our ability to talk, think and sell system when needed.

I just want to talk more on the opportunity the company has been seeing around AI. At your Investor Day last November, you articulated a 20% increase in revenue per megawatt for a high-density AI build out compared to traditional compute. Maybe dig into that a little bit more, how much of that 20% increase is power, how much is cooling? What's driving the 20%?

So at Investor Day, and so what we see today is pretty much a $0.5 million per megawatt type of TAM that AI is providing us. That was moving from $2.53 million per megawatt to $3 million, $3.5 million per megawatt of TAM. Of course, the opportunity is 2 dimensional. One is the expanding the TAM per megawatt and then a net increase of megawatt being deployed. So there is a volume and there is a content effect. Certainly, liquid cooling is an element of that, that stretches the thermal chain. So everything that goes from cooling all the way to the actual server and chip to the room, to the heat rejection or heat reuse. So liquid cooling adds a piece that contributes to that delta -- favorable delta TAM. But there is a lot coming also on the power side. Power is becoming more complex, more difficult to handle with the AI spikey loads. Density at rack level becoming much larger. So is the power infrastructure that we know today going to work for the future? That is something that we are discussing with our clients and with our partners. More battery storage, because the loads are hard to manage. The other aspect is within the white space the rack itself is going to morph into something different than we have today in the industry, not us Vertiv. But the industry has today, there will be -- they are becoming bigger, heavier in terms of the loads and they have to flow through the rack liquid, high voltage probably electricity. So there are many dimensions in which the content will grow. Now that TAM expansion that I discussed is, in many respects preliminary as the industry is still evolving. I mean let's not forget that the roadmap out -- the roadmaps out there are for rack density to go all the way in not too impossible to foresee future to 1 megawatt per rack. That is enormous and enormity if you think about a 10-megawatt rack, that's probably the average existing installed base today. So, that change will drive a densification of the entire infrastructure. And we see that as a beautiful opportunity.

On the topic of liquid versus air cooling. There's been some reports recently that some of the chipsets and racks could support maybe a higher percentage of air cooling relative to liquid that had been envisioned 6 to 12 months ago. Are you seeing any change in customer interest in using liquid cooling?

It's interesting because this whole debate of liquid cooling versus air cooling is so kind of a -- is so irrational in many respects. Because about 6 or 9 months ago, people were saying, "what's going to happen of the air cooling? It's going to disappear. Now, liquid is not going to be as big as it should be. " So everyone, stay calm. So let's really think in terms of the way it is. So liquid cooling is a fact and it is coming. Air cooling will always be there, for 2 reasons. One is that no matter how many liquid cool racks, there will always be a residual air cooling. The other element is that, all the way to 30-kilowatt, 40-kilowatt, 50-kilowatt per rack, you can air cool. So every time there is a design of a data center, or today, people think in terms of liquid and air. You do not necessarily know all the time to what extent the -- your data center will be populated by racks that are liquid cooled. You may not know it upfront. And one thing is sure, over the 20 years of a life cycle of a data center, that mix will change. So you need to have a flexible environment -- flexible -- the ability to flex the 2 and to have them hybrid in parallel. But one thing is sure, Blackwell and beyond, those chips will be liquid cooled. So liquid cool will continue to happen, liquid cool will accelerate. So it's liquid, it's air, it's liquid, it's air. It's not something that has been discussed to that level when the infrastructure build-out is concerned. The industry knows that it needs to get ready for liquid. It needs to make air available and continuously available over the future. The real question is how to balance and how to mix the 2 and give flexibility during the life cycle to the infrastructure. And that's something that we do discuss and provide solutions very actively for.

Maybe tell me more, how do your solutions play into that flexibility?

For example, one product that we like a lot is a unit that generates both liquid and air, and it's able to change -- the modulate the mix air and liquid over time in a seamless manner. So you do not have to replace units just because your mix load is changing. So flexibility and flexibility within a hybrid cooling environment is absolutely the winner.

Maybe we could talk more around Vertiv's competitive differentiation as you think about the thermal opportunity. You just mentioned some flexibility of your products. I think on some of your earnings calls, your Investor Day, you also talked about reliability. Could we also speak on any other factors, technical differences like you get, you can enable a denser rack or more power efficiency. Just help us better understand that broader competitive differentiation, please?

Sure, of course. So, clearly, we are at the forefront of densification, enabling the densification of heat and load in the rack. So I give that as, let's say, that's a given for us in enabling that transition, of course, for us is efficiency, ensuring the lowest total cost of ownership to the customer. And again, total cost of ownership is extraordinarily important given the life cycle of the investments that our clients make. But it is all about efficiency and efficiency of footprint. Energy efficiency and efficiency of footprint. The other element that is fundamental is the reliability. The reliability is intrinsic to the technology that we provide. But be it liquid -- sorry, be it thermal -- of course, liquid, be it the thermal side, the power side or the white space side, but it's greatly enhanced by our services capability. We believe we have the strongest service organization and globally, so in the industry, in the data center industry, and that serves us beautifully and especially serves our customers beautifully in terms of ensuring the reliability they need. And the reliability is not just about something can go wrong, we fix it. It is increasingly telemetry and ability to understand the conditions at which something operates and intervene to make sure that the life cycle is extended. But again, think of this in a 20-year life cycle of an infrastructure, you have continuous kind of improvement expansions, continuous modification of the infrastructure, so service is absolutely vital. But another advantage, fundamental advantages is being able to sit with our customers and we do it increasingly so because of the more complex technical environment that I described at the beginning. Sit with the customer and really define with them how to design the infrastructure that will be for them, their specific needs, future proof. If you design for a hyperscaler, if you design for a colo that is going to serve edge applications or enterprise, their infrastructure will be different. So an ability to sit with them, to customize, and then scale globally, it's a fundamental advantage. So it's not just technology. We believe technology is absolutely central, is technology that gives kind of the long term, that ensures the long-term success of any company. But technology in and of itself is not sufficient.

You mentioned this close collaboration. You mentioned the density that you can help to enable by being in close collaboration with those customers, helping on the engineering. You said it leads to TCO savings. I know maybe we're still early days in these deployments. But as you're seeing the kind of TCO you can enable versus other competitors? I mean, any examples you can share to help illuminate the kinds of TCO benefits you can provide?

Well, I wouldn't compare our TCOs to our competitors. That is our customers' jobs, if you will. But we see and our TCO and our technology advantages are recognized by our customers.

I do want to talk about some emerging competition. There's been a lot of announcements, COMPUTEX, Investor Day, other companies trying to enter the cooling space. Are you seeing more competition? And is that leading to any change in the competitive landscape or pricing environment?

The data center space has always been competitive. I just want to make sure that nobody thinks that the space was not competitive before. Now the space is much more visible than it was even 2, 3 years ago, but the competition intensity has always been there. And some of the names that -- some of the HVAC players or the big electrical guys have always been present in the data center space and they are. I think when people say, hey, Competition is becoming more intense, they refer specifically to liquid cooling. That is an area in which -- there are a lot of people that are announcing something. Well, announcing something from having something that is viable, scalable that can support globally throughout the life cycle, 2 very different things. But also, we see that a lot of the liquid cooling specifically happens within the white space. So just to be clear, I use white space to talk about the pure IT part of the data center as opposed to the whole data center that has got an IT part and the facilities part, the electrical, the mechanical, big systems. In the IT part, especially in the enterprise part of the market, you would have the various system integrators that sell their products to the enterprise. When they sell their product to the enterprise, they sell it with racks, they sell it with sometimes liquid cooling. So we do not see those players necessarily as competitors. If we can see -- sometimes we see them as partners, as go-to-market partners. Often, we partner because the -- an IT refresh, a white space refresh requires then a facilities refresh. So it's not black and white. What people think is competition is not always competition. But the space is becoming more attractive. So do not be surprised if people announce that they will be big in data center. We are very convinced that our competitive advantages are strong, and we are working relentlessly to strengthen that further and that's what we're doing.

Company is bringing on more capacity to support this build-out, CoolTera was an acquisition Vertiv did specifically around liquid cooling. I think you have plan to increase your capacity by 45x. Maybe talk with CoolTera, just more broadly, how Vertiv is doing it, ramping up its own supply capabilities to support this demand.

Yes, absolutely. So, first of all, to put things in a little bit of a context in terms of the liquid cooling business size relative to everything else that we do. When we talk about liquid cooling relative to the full thermal market, full thermal market for data centers, we are thinking that at maturity in 3, 4 years, that will be pretty much a 30% TAM of the total data center thermal management business. So it's very nice. It's pretty much 1/3. For us, thermal is 30% of our revenue. So on a very successful -- on a very, very successful campaign, let's say, in liquid cooling and we think we are on that trajectory. We always think about something in the mid-teens, high teens in terms of the total Vertiv revenue in the future, specifically for liquid cooling. So that evolution is there. So, yes...

There's been reports of various ramp issues that the industry needs to be mindful of, how fast is Blackwell supply ramp up? Can the data centers get all of the power they need, talk more around what you're seeing around supply chain readiness and how you're factoring that into your outlook?

Yes. Clearly, we are -- if we go back to what we shared in terms of our market vision, we were thinking about the colo cloud part of the market, growing at 14%, 17%. When we share that with the market in November last year, people were saying, "only 14%, 17%, it's not quadrupling every year and whatever else." We said, no. First of all, because there are kind of permitting power but also because the data center industry is fundamentally a building industry. You have to build stuff. Now we accelerate the building with prefabricated solutions. But still, it is a construction business. So 14%, 17% for that part of the market is quite rapid growth. That's the type of growth when we serve that market that we are gearing ourselves for. Of course, you know that we have given, considering the total market we have indicated a growth up to, say, 11% over the long period. We're already above that for 2024. But that type of growth is certainly within our ability to accelerate. And so going back to your question earlier about our -- because I did not complete that part of the question. Going back to, for example, our liquid cooling capacity, we said, we're going to grow more than 40x our initial capacity for liquid cooling after the acquisition. Now the starting point, as I was saying, the starting point was very small. Because the liquid cooling was and is very small still in the market. But the acceleration that we are seeing is very encouraging, is consistent with that growth path that we indicated. And we see that capacity and those capacity objectives being met. As we progress through the year. But more in general, going back to the general and not just the liquid cooling, in general, the capacity and our ability to support the industry is there. For example, another area that we saw growing quite strong is in the busway and switchgear part of the market coming from the E&I acquisition soon 3 years ago. We, at the end of '23, we doubled the capacity that we acquired and we are going to -- are on a, let's say, a trajectory to double further by the end of '25. So capacity is being added. Capacity is being produced because we are obsessively optimizing our manufacturing. Our lean manufacturing programs are quite successful. A lot to do still ahead of us, but we are liberating capacity also that way. So in terms of supply chain, in terms of our internal capacity, things are happening. One important element, I'm sorry, to extend my answer here, is we think capacity as supply chain. We think capacity as manufacturing. There is another element of capacity that is absolutely fundamental. It is the service capacity because everything we do is complicated, especially for the hyperscaler and colocation world, the large data center. You need service to commission, you need service to look after in terms of life cycle. So the ability to ramp up the number of field engineers with the right training, with the right tools is absolutely fundamental.

Yes. That was going to be my next question on services. I mean, you were talking about that earlier as part of your competitive differentiation. Can you just talk a bit more on the breadth of your service offerings? I think you're in a number of locations and countries around the world. And maybe double click a little bit more on how important service is, specifically for the data centers, I mean, these are massive buildings. And I think your technicians are playing an important role, making sure these products are installed properly, maintained properly, especially as you think about the cost of these newer AI racks?

No, absolutely. The service is fundamental. This is critical infrastructure. Critical infrastructure is not sold once, it is sold and then maintained over time. This is true whether it's a small data center or a small critical infrastructure and -- or if it's a big one. Clearly, the dynamics changed relative to the size. What we see is that, if anything, the critical nature is becoming bigger of what we do. So the importance of service for our customers, but also for us in terms of positive impact for everything Vertiv is increasing. We are global in our footprint. We are global in the way we operate service. We are global in terms of the customer experience that we provide. We are very local in terms of providing that capacity where our customers need it. Clearly, service is evolving, is evolving because digitization is entering the picture. Telemetry, as I mentioned earlier, ability to understand the health of a certain piece of equipment and intervene. I think liquid cooling provides a beautiful example of how critical things would be. When you think air cooling, there is intrinsically a resilience and redundancy in the design because it's air from the environment. Okay, if all the doors are open and one closes here, nothing really changes, air circulates. But in liquid cooling is you have a CDU or sometimes you have a redundant couple of CDUs, coolant distribution units and you serve one or more racks, and each rack is a multimillion dollar small thing. And the life of that rack is [ dynamically ] connected to that relatively small piece of kit that is a CDU. So an ability to understand what the health is of that kit and the ability to intervene is absolutely important. More and more, we see that in those big data centers, customers are interested in having our crew, let's say, embedded in their infrastructure and that embedment, if you will, enables real-time response time. So that's certainly happening there.

David, I want to ask some financial questions, if I could. The company has a target to reach a 20% or more EBIT margin in the 2026 to 2028 timeframe. Guidance for this year is 18.7%. Maybe talk us through some of the key puts and takes to get to that kind of 20% or higher EBIT margin?

Perfect. Yes. And thank you for asking operational questions. So we've been so conditioned getting questions on liquid cooling and orders that almost the operational execution is happening in the background. If you go back to 2022, our operating margin was 8%. So just to understand, this year, we're guiding close to 19% for the full year. But implicit in the guidance for the fourth quarter is 19.9%. So what has driven that? Initially, it was price cost. We've always focused on operational leverage and controlling fixed costs, while continuing to invest in the business. What we have seen recently is the positive impacts of our Vertiv operating system and productivity. So in fact, in the second quarter versus last year, most of the improvement that we saw was related to that productivity in purchasing and also manufacturing. So what we said back in November is our long-term goal was to get to 20% plus, and we define the time bound of that between 2026 and 2028. So it would be very challenging for me today to say that's still our ambition since we'll probably be close to 20% in the fourth quarter. So we'll have to address that going forward. But I think the key addendum that we had in that guidance was the plus. So we never looked at 20% as being a ceiling. We always knew our entitlement, our ambition should be north of that. If you look at our competitors, they're north of 20%. We believe, in this space, and there's no reason why we can't get there. So we're not prepared at this point to share a specific number, but we're very pleased but not satisfied with the progress that we've made so far.

Company has a record high backlog as of the end of last quarter. How do you think about pricing within that backlog and making sure that you stay price cost positive going forward with the business that you're booking?

Yes. And that was another notion when we talked about margins is that, we have confidence we'll continue to stay price/cost positive. That was an issue for us that I think going back a couple of years when we talked about that 8% margin. We certainly have early indicator signals as it relates to inflation. And we've certainly matured with our commercial contract construction. So we have provisions in the contract, if inflation increases that we have escalator clauses. So backlog has lengthened a little bit with some of these larger projects. But we price into that based on that timing an expectation for inflation. So we expect inflation is going to continue. It's a reality. And we should be able to realize reasonable margins, if there is a continuation of inflation. But if there is a repeat of what we saw in '21 and '22, we do have price escalator clauses.

Your orders in the first half of the year were up almost 60% and that contributed to that backlog strength. In the third quarter, the company you guided for orders to grow by 10% to 15% year-on-year. Maybe talk about what's influencing orders as you're looking into the third quarter that led to that guidance?

Yes. I can take that. Of course. I mean nothing changes in terms of the underlying market. We always -- we increasingly see -- you will increasingly see us talking about trailing 12 months and less in terms of their actual quarterly orders. The size of the average order is growing. Actually, the market is going towards more and more -- sorry, larger and larger data centers. That will make the individual order larger in and of itself. So timing all those orders can swing a quota and makes the actual forecast very, very -- can be inaccurate on a short period. So there is a kind of -- that element of where do some large project fall? They fall in the next quarter or in the current quarter? They make a difference that is not indicative of the direction in which the business is going. So trailing 12 is the best way to look at it. So what we shared with you is certainly a prudent view of things. A prudent view of things also taking into account that some things that, that we expected to happen in the third quarter happened in the second quarter, but who knows what happens in the future. What matters is that we see pipelines continue to grow. We have experienced acceleration in the pipeline. It means a faster time between an opportunity open and closes, and they are all good things, and we are very confident in the trajectory long term. And that 10%, 15% is anyway very consistent with our long-term plan.

Well, we are out of time. I think we'll have to leave it there. Thank you both so much for joining.

Thanks a lot.

Thanks, Mark.

Thanks a lot.