Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to Oppenheimer's 20th Annual Industrial Growth Conference. Noah Kaye, Managing Director at Oppenheimer Research. And we are very pleased to welcome in the management team of Vertiv: CEO, Gio Albertazzi; CFO, David Fallon; Lynne Maxeiner. Thank you very much for being here today.

Well, thank you for having us.

So we're going to, as a sort of point of procedure, go through a number of questions that we prepared. For those listening on the webcast, you can submit questions via the Q&A function, or you can e-mail me at [email protected]. But we've got a lot to get through. So let's start, I think, with a 10,000-foot view of the industry. I think back November's investor event and the company had referenced a 9% to 12% CAGR through 2029 for critical digital infrastructure, with mid-teens growth in cloud and colo. You reiterated that during 1Q earnings. And as we've talked with investors, I think a fundamental question they're grappling with is when you consider the AI training breakthroughs, the proliferation of models, why do the growth assumptions from Investor Day still hold? And how might the nature of demand be shifting versus what we previously thought?

The question is -- can be interpreted in 2 ways, is that given all the investment, given all the shift to inference and hence to the real reason for the existence of AI, the existence of AI not to have kind of self-referential models, but is to have a stuff that can be sold and market. That is happening fast. So it's a strange times in which people say, hey, your growth model through '29 is optimistic or is too pessimistic, both ways. You can it see both ways after the nervousness of the swings in the early part of this year or even July last year. For us, it's clear that demand is there. The demand is strong. This is a secular trend. And many people have compared this to electricity or the steam engine or whatever else. It's going to continue. It's going to be strong. We always say that it could theoretically be even stronger than this were it not for some moderating factors like permitting and power availability all being addressed, of course. But all already factored in our demand plan that we have shared with all of you. And by the way, that 9%, 12% range really becomes if we focus on the colo and cloud that more for risk at this stage part of the demand would be at 15%, 17%. So if anything, as we look out, one could be more optimistic than that. But we have always been measured in our view of things. The various inputs, the various analysis, the various opinions in the market certainly corroborated also by our pipeline pointed the direction of the model we shared with you is very sound. It's going to be better. We will all be happy. And certainly, we have the capacity, the means and the innovation to be a winner in an even stronger scenario. One thing I want to reflect in a second. We came out of a February and March period where everyone was nervous in the market about demand, et cetera. We were very early in the earnings cycle this time around. Now we came out saying, hey, guys, the demand is there. It's going in the direction we told you it would be going. The market is good. Stay calm. We're focused on the long term. We are here to deliver our long-term promise as we explained that in November. And one after the others, the hyperscalers, the competitors, et cetera, confirmed that. So look at Vertiv with confidence when we tell you where the market is going.

Well, I guess, to put some meat on the bone here. I'm not sure everyone realizes. I mean you just had effectively a record quarter for orders or close to it at least. And you still had sequential growth in the pipeline. Maybe you can start by reminding us how you build up your pipeline, how you define it and what you're seeing on conversion times from pipeline into revenue.

So sure. I will start saying that, as we always say, orders in this industry are lumpy. So let's keep that in mind. So one should not read the long-term trajectory from just 1 quarter. Having said that, of course, Q1, 13% up year-on-year on 60% up last year. So it's very difficult comp, something that we are very happy and very proud of, just like the strong book-to-bill. Pipeline. For us, pipeline is everything where we are a commercially engaged factory, not just we have, I don't know, a capacity agreement that goes out into future year long term. That typically we do not call pipeline. Pipeline would be -- in my example of a given capacity agreement, would be, okay, the next 2, 3 projects that we have visibility for, that we know are being built, that we are quoting specifically or working on from an engineering standpoint, specifically, that would be pipeline. But more generically, pipeline is everything from the identification of an opportunity from a commercial standpoint to the moment we close. So it's a pipeline that has been growing, as we said, and sequentially growing as well. And where we see conversion rates that are encouraging that we see a good stability there. So the pipeline is, we believe, as it has been historically for us, including the last quarter, a very strong leading indicators of future performance.

You mentioned, Gio, that there's the shift happening, right, from training to inference. Maybe you can help us try to understand how to think about the share of demand you're seeing from training versus inference, and I don't know if that might involve smaller, more distributed projects in the pipeline, or perhaps you can push back against that. Maybe something that you saw in your order patterns. Just help us understand the mix today and how you see it trending.

Two things. One, I think we should not be too binary in the definition what is training and what inference from an infrastructure standpoint. Very often, we are here talking about people building an infrastructure or a data center that has to last about 15, 20, 25 years. So defining today what type of loads you will have in the 10th year, great -- or even in fifth year. So what we see is more and more people, I think, in a dual-use type of infrastructure. So that -- the mix will be what it is. There will be a period in which it is model training. It will be kind of a specific application training. It will be inference. We see, inference, of course, growing faster as time goes by because that's where the use case is. That's where the monetization is, and that's where AI becomes -- it's AI at work, not AI training. So -- but when it comes to the mix of -- type of data center, we continue to see large data centers being built, designed or planned. So that has not abated. Size matters for a data center. But also, we see a number of more distributed, more edge data centers, data center ideas. When we were talking about iGenius, the project that we shared publicly, that is typically a combination of all the [ southern ] and edge application in many respects. So it's a combination. We see in the medium but also long term really a combination of very large and edge. The other side -- the other aspect that is interesting that we always talk about enterprise, enterprise in and of itself on-prem is a smaller data center model. So it will not be one way or another. It is a large industry and growing, and that will have multiple ways about itself.

Yes. I mean, Gio, as you alluded to earlier, I mean, I think that there was some concern from investors in months past around these headlines of specific hyperscalers may be pulling back in areas on lease negotiations. And I think when we listen to industry experts, for example, in the data center world, I mean they were characterizing this more as really a reallocation of demand to account for scarcity of resources, like water and fiber and tower, right, and land. So I think the question for us is, are there areas of any significance where you are seeing some pause around long-term planning for some of the larger AI factories right now? And if so, how much of that speaks to these resource challenges? What are the implications for the company?

Well, we do not see anything meaningful long-term change of market dynamics in terms of -- there is a long-term need for data center capacity, be it for cloud or AI or proprietary application in the enterprise, government and whatnot. So that is not changing. Now as you say, there could be different short-term movements, adjustments of a decision on what to prioritize in terms of investment, but that's the normal course of running the business, whether the business is a cloud business or if it is an enterprise business or a government business. So that's more about the mix than the long-term trajectory. We are very optimistic about the long-term trajectory, and the optimism is grounded on these things that we see happening in our pipeline, but also in the industry more broadly speaking, longer term.

And you mentioned some of the new entrants, sovereign and neocloud and even some growth in enterprise, new colos. Maybe talk a little bit about how you approach those new entrants versus perhaps more established blue-chip, if you will, hyperscaler customers. How do you see kind of counterparty credit risk? How far out would you be willing to book orders for customers like that?

Well, I would say, certainly, the industry is expanding, but it's not so much the IT infrastructure or digital critical infrastructure. That has been always extremely broad. That has been extremely broad for the last 20, 30 years. And if you think about pre-AI, let's go back 4 years. I mean AI has been there for quite some time. But prior -- let's say, before ChatGPT in November -- when it was? November 2022, the industry was very broad from government, sovereign, AI, et cetera -- sorry, sovereign, IT, enterprise. So always very broad. Indeed, yes, we're very strong in terms of our go to market and reach, also the [indiscernible]. Then overlap on that, the AI acceleration. And certainly, the AI acceleration at the beginning has been and still is strongly and kind of a large cloud player activity. But now we see that, that is a broadening, and it's broadening because the market is very attractive, because there is space for, for example, neoclouds, but then it's almost an inevitable that other IT players, the enterprise and again, historically that to stop their game to AI. And this is really what is happening. So this expansion of the market should not be viewed as, ooh, it's an expansion of the risk base. Now because those actors have always been in the -- in play, maybe not the neoclouds, but the other actions have always been in play. They're now upping their game to AI. But when it comes to the credit risk, of course, we're very thorough. We're very thorough. We make sure that not only do the -- all the checks necessary but also more often than not, we work with advanced payments. So make sure that there's little to no fluff in the type of commercial contracts that we engage ourselves in. The last part of your question, if I remember correctly, was far out into the future, how are we committing from a backlog standpoint? Not differently than what happened a year ago, say, time or historical. So we do not see kind of runaway people that just talk the big talk and transform orders into 20, whatever. We're just very rigorous. It's creditworthy? Yes. Is this a real project? Yes. Do we have a purchase order against which there is a construction side that is alive and there? So I think that -- I'm pretty sure, actually, I am sure, the risk profile of our business has not changed materially.

In a bit, and I'm looking forward to it. I want to take it into the area of technology differentiation and portfolio evolution, which is quite exciting. We would, of course, be remiss not to address tariffs. Perhaps you could talk to the impact, if any, that you see tariffs having on the demand environment. Has there been or could there be any pull forward in demand to address reciprocal tariffs? Any change in pipeline or order conversion you've seen thus far in the Americas versus EMEA and APAC?

When it comes to the impact on general demand, we have not seen it in any material fashion. Again, the demand is there. The demand is there for our customers. The opportunity is there. So nothing material to report in that respect. When it comes to the aspect of demand pull-ins, it's really not possible in our space, a, because what we built is majority of case. But the majority of cases is destined to a -- it's destined to a location. So people are not just ordering and having stuff delivered ahead of a certain set of tariff rates that are coming into play, nor from an order standpoint, we see big movements there tariff related. So I would say no real meaningful material impact, so...

Can I just follow up on that and ask conceptually why that's the case? Because I think we had, for example, one hyperscaler increase their CapEx estimate for the year and really say this was because of tariffs. Of course, they go ahead with their plan. But for critical digital infrastructure, how should we think or should we think differently about elasticity of demand if we have tariffs increasing the cost to build? And I recognize that you are a relatively small percentage of that build versus the actual IT, the chips that will ultimately go in, particularly to these large IT factories. But help us understand why that's the case.

Well, I wouldn't have kind of an exact answer, if you will. But what we heard also from the -- from many of the hyperscalers in their recent earnings releases and calls is they have a lot of demand for AI. And more often than not, they have insufficient capacity to satisfy that demand. And they believe that this is going to continue over the years. Now you're right, the -- of the total cost of a data center, let's say, the long-term CapEx as someone has characterized that -- one of the hyperscalers has characterized that is a relatively small portion. But make no mistake. These hyperscalers are very savvy from a commercial and cost management standpoint. So the fact that there isn't a stock price elasticity such that an increase that is driven by inflation or is driven by tariffs directly impacts demand is that the demand -- their demand, not the demand for us, their demand is stronger than that. And the equation still works very well. But again, I should be truly in their shoes to give you the answer, but I think this is probably very close to what's in their head.

Yes. That makes sense. And then you commented in the past that your lead times are very competitive, perhaps even running ahead of some peers in terms of your own ability to deliver. What could that mean, if anything, in terms of opportunistic share gains? It sounds like there has been no pull forward of demand, but perhaps your agility to provide amidst all this tariff uncertainty is helping you win business that you wouldn't have previously gotten.

Yes. I would decouple tariff uncertainty from the lead time. Tariff uncertainty, if you will, is a very temporary situation. Then everything, the equilibria rebalance under the new trade rules. So I wouldn't look at it as something that [ ends ] or explains dynamics. We believe that short lead times are a competitive advantage. Now clearly, not everyone will need a short lead time. Very often, we've been vocal about that, that very often, the requested lead time for our customers is between 9, 15 months or sometimes 18 months. So we're talking about lead times well below that. But there are areas in the market, typically, the enterprise -- or sometimes, we talked about the rapid shift of priority for some of the big players, that shift of priority may require a course correction also in what you build and what you not -- don't build. And maybe you have a construction side that is -- that has initiated, and you accelerate. So the short lead time is more opportunistic than everything else. So it's additional market share, while the bulk will choose to stay in that 9, 15 months, if it makes sense.

It does. It does. I appreciate that. I think just on managing the cost side of this picture with tariffs, you led the company, Gio, out of a very challenging supply chain environment as CEO. I'm sure and perhaps you can comment on you've adjusted your approach and taken some lessons during this new period of uncertainty. But I think more concretely, the company quantified net tariff cost impacts for the year, stated expectations to exit the year at tariff neutrality, roughly 50-50, I think, between price and supply chain mitigating that. Maybe just help us get a little more clarity on how much of the backlog actually has contractual repricing or protection for tariffs versus more ad hoc discussions and how you're kind of framing any incremental pricing here. Is it truly incremental price? Or is it more of a surcharge for tariffs?

Okay. Let's say, clearly, very different conditions than 3 years ago and very different in that respect, also different company, Vertiv. But certainly in terms of execution capabilities that have been the obsessive center of focus on -- for everyone. And it continues to be as it used to be forever. So certainly, a level of supply chain resilience -- and as I said, build the resilience for China Plus One, for nearshoring and region for region, but you build tools, muscle, competencies, ability to work our people and supplier network that can adjust relatively quickly to change the perimeter that is -- or partially change the perimeter. We'll see what the longer term will be with tariffs that we are facing now. Hence, the company's fit, the company can react and is reacting quickly to this change in the environment. The other is we built a price muscle that we do not -- did not have before, and we've demonstrated. When it comes to what is the structure of our contracts, we do not go in those details. But certainly, we are in a much stronger position than we were 3 years ago in terms of an ability to act on inflation increase, tariff increases. But we'll not go into the details whether it is a price increase for inflation, if it is pricing increase for tariff on a case-by-case basis. I think that is -- one thing that I want to be sure, I send a strong message about is we do this cooperatively with our customers on a customer-by-customer basis. And so there's no way that we would just harness a contractual agreement and just go and steam roll because in the end, it is about our reputation with the customer. It's about our partnership with customers, about designing a common future with the customers. And this is a short-term, temporary thing as we -- as the entire industry reconfigures. It's the long term that matters. When it comes to a price increase that is more general, not backlog related, then it's more. You can have a price increase if the conditions change. If there is inflationary -- let's say, inflationary dynamics in the market regardless of what causing that inflationary demand. As we said already in our call, we have taken price actions in that respect.

I think just to put a last piece of this together for listeners, I think at the beginning of the year, you guided to a substantial increase in CapEx, which we know that you typically try to maintain 25%, 30% capacity headroom versus demand. We took that as a very clear signal of your expectations for demand growth. Maybe you can help us understand the primary uses of CapEx. And I will ask on a related point, if it did in any way, the tariffs that were announced perhaps change your view on CapEx, where you were going to spend it? Did it impact your strategy?

Well, let's start from the end. It's clear that we operate, let's say, in a -- in the geopolitical environment at hand and what we believe the future is going to be. There is -- only a fool would not do that, if you will. So clearly, the current situation has implications on how we allocate CapEx. Then I say this is not totally very surprising. So we've been moving in certain directions, as I said, kind of a region for region that for quite some time already. So if anything, what we see happening corroborates a certain direction. But by all means, in general, we operate in a market environment or in the trade environment in which we are finding ourselves now and believe we will be in the future. So the answer is yes, but there has no -- there has been no kind of a dramatic shift because I believe the direction in which we are heading is certainly supporting the situation. Now CapEx increase. Correctly, so you read into that optimism in growth, as we said, as we said explicitly, if you will. This connects also the CapEx dot with the narrative -- the high-level narrative and model that were shared with you. That 25%, 30% wiggle room is something that we like to retain at all times in general. It cannot be always for all product lines, et cetera, because, again, we know that no matter how well we know in the future, the future will surprise us. So we want to make sure that we are there to capture opportunities. So yes, growth in CapEx, it's not a growth that is dramatically different in terms of CapEx-to-revenue ratio, but certainly is headed in the right direction. And again, it's not just CapEx that defines our capacity. We do a lot of lean optimization. Our output per square foot is constantly increasing and will continue to increase. We talk often about operational leverage. This is an element. That's an important element. So CapEx is one of the, let's say, levers for capacity expansion, not the sole.

I want to shift to the portfolio. There was -- the company had a blitz of new product announcements, the week of GTC, new chillers, modular solutions, rack UPS software. Like to understand how those connect to the growth in the market share opportunities you're trying to unlock.

I think there are 2 aspects. One is -- the screen went black for a second. I was...

We're still hearing you.

Good, good, good. So you mentioned chillers. That's a very important one. So in the sense that it's a space that we participate, probably not -- let's say, we're punching below our weight in that space. And that is clearly something that we are strongly intentioned to change. But in general, clearly, we use innovation and new product launches to not only create market share, but bring to market things that the others are not bringing, and we do that cooperating with our customers and other partners with the silicon providers. And we do that very, very intentioned. You talked about the slew of GTC announcement. If we go back to SuperCompute 24, there are 2. One product that I like extremely is our SmartRun to accelerate -- dramatically accelerate the white space build-out times, and it's a space that is new for us. It's new for everyone, simply because we are creating opportunities and creating solutions. So yes, this is so central to what we do. We believe that in -- and I know in this space so well, we have an opportunity not just to have the product that suits the need today, but also to see what the future needs are and how we can innovate in ways that challenge the way things are done in our own very industry. So very pleased with the progress. And you rest assured that we'll continue to progress in that growth of R&D spend and our top line growth.

Well, Gio, I think I'll ask one more before we have to close here, and it's related to this. You already have leading share in thermal management in the industry. But with an expanded portfolio of chillers and now liquid cooling, how should we think about your growth opportunity? And maybe within that, you can also update us on the ramp for the liquid cooling business.

Okay. And again, certainly, we have a good market share in cooling and thermal management. We can have a better market share in cooling and thermal management quite honestly. So it's not that I would say, hey, whatever the number -- 2 more points and we're happy. There's no such thing as being happy at Vertiv. We're not happy. I mean, we are a nice bunch of people, but truly, we're never satisfied. So that applies absolutely to the cooling market share. Just like the same is true for thermal, for everything, for power, that's true for everything. We are particularly happy with the acceleration that we see in everything liquid cooling. At the beginning of the year last year, we said 43x the initial capacity by the time we are out of the year on an annualized base, and that's exactly where we landed at the end of 2024. So we certainly enter 2025 with a lot of liquid cooling capacity. We'll continue and continue to expand capacity because what we hear is that everything is going liquid. Now that liquid air makes 70-20, 30-30 or sometimes 70-50. It's not because I can't do with the math, but because there is provisioning. That will continue, but liquid is becoming ubiquitous. So we'll continue to expand that capacity. Probably not at the break-neck speed that we had last year, but that was kind of a totally new technology for us for the market, and we needed a lot of capacity to command the market share that, I think, we are entitled to.

All right. Well, we continue to look forward to your journey down that path, and we thank you all for the time and the thoughtful discussion, Gio, David, Lynne. Hoping everyone has a great day at the conference. And with that, we will speak with you all soon.