Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

Okay. Great. Thank you, everybody, for joining us. 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 Craig Chamberlain, Vertiv's CFO. Thanks for joining us.

Thank you for having us.

Maybe we could start with 1 on the top line environment. At your Investor Day in May, the company raised its organic revenue CAGR target 20% to 22% for 2025 through 2030, and that's up from the previous 5-year forecast of 12% to 14% that have been given at the 2024 investor event. Maybe start with helping investors better understand what's driving that acceleration?

Well, certainly a combination of things. First of all, with the market, it continues to be strong. If anything has been strengthening. And -- even in our July earnings call, we reiterated the message of a strong market, if anything, strengthening pipelines, more visibility, elements of sales cycle acceleration. So that's going in the right direction. And then our position in the market continues to be strengthening. So stronger and stronger. Certainly, that was very true when we had our May investor conference, 1.5 years pretty much after our previous one. And again, we continue to strengthen our portfolio. our role in the industry has thought leaders and innovators, but innovators at scale is very important. And also, the evolution of the portfolio is conducive to capturing more of that market. I'm sure we will have opportunities to go through elements of that too during the course of the conversation today. So all things pointing in the right direction in a market that is strong and if anything, is showing signs of further strengthening. .

And 1 of the key things we've discussed previously is it's not just about the revenue CAGR, but also what you're seeing with the pipeline -- the company has seen that pipeline expanding. And you also talked about an expanding pipeline on the 2Q earnings call. Can you elaborate on what's driving that increase in the pipeline?

Well there is a combination of factors. The underlying market is strengthening. We have seen that in many ways, multiple coverage public declaration of hyperscalers, various type of players, the in the frontier labs that are gradually becoming IFRS scales themselves. The industry is becoming broader and more active across the board. -- what used to be predominantly an American type of market acceleration. We have seen geographically way more widespread than it was in the past. . And again, something we've been vocal about quite constantly in the last 3 to 6 months. That acceleration is happening globally pretty much everywhere in the world. And again, the fact that we are expanding portfolio. And as we have explained several times, adding layers of value to a foundation of product component technologies, the UPSs, the chillers, the CDUs, the switchgear, you name them. the sidecars, adding to that system level layer, products, converged products like 1 core and smart run all the way to strengthening and expanding our services portfolio, all elements that contribute to that expansion.

Very helpful. There's been a lot of discussion recently in the industry around the potential for volatility and what data center build-outs may look like in terms of maybe policy restrictions on where data centers can be built or capital needs of some of these projects? And can they be financed? And as you observe some of these things, I'm curious if you're seeing that have any implications for the pipeline.

Well, again, we not only look at the pipeline, we talk a lot with our customers in the industry in general. Then, of course, the pipeline is also the result of that all. And we and we see no sign of weakening of anything we're seeing strength, the pipeline getting stronger and stronger, and our customers resolve and building plans continue to evolve in the right direction. It is clearly true that the environment has complexities as you were explaining, the industry has demonstrated over the years to be able to look at what we believe are pacing items and address them with solutions to continue the expansion. And the expansion will continue as the demand compute capacity will continue to expand. And we have no doubt about the fact that demand for compute power, especially AI compute power, but not only will continue to expand. And that's what we say. The other aspect is very important to look at those challenges as opportunities. So Vertiv is providing solutions to address some of the concerns, if you will, that are behind some postures in the general discos. From closed loop cooling to elements of increasing efficiency in the way we operate the powertrain, we were vocal at our earnings call in July, talking about per right, so everything that is fluid management and a product called near 0 that basically not only, of course, the data center not only will recirculate water so no consumption, no use of water doing running the data center, but also minimize the near 0, the consumption of water during commissioning. So all elements of a portfolio that is more and more addressing the concerns. And again, an example of hard industry is moving towards addressing the challenges that are thrown at it.

Well, speaking of solutions, you announced the proposed acquisition just very recently, utility Innovation Group. Craig, maybe you can take this one. But talk about what that brings in terms of the breadth of solutions that vertical will be offering and any financial commentary you can share?

Yes. I mean I think when we think of UIG and kind of that functional change it will do for us. It's another 1 of these assets when we look at what we're doing inorganically of what do we need in the portfolio to continue moving this forward and put us in a position to capitalize on the growth, where UIG comes into the forward and what we see it being able to help us look for is the opportunity to influence the way the powertrain will be constructed. As you think of the way it goes into the actual data center the UI is putting us in a position where when they design and develop an architecture, the way that behind the media power will go, it's strictly in that conversation from the standpoint of influencing that. So we thought it was a great spot to go and act on that. It's an acquisition where, again, a spot where we think what is not in the portfolio that can help us continue to grow and continue to help us influence the way that the data center market moves. It's again one of these ones where if we went back a year ago, it's something like Perritt where we saw it come up and we were like, "Hey, it's an advantageous thing for us to get today, and we can grow it going forward, and it gives us in a different position and a different, I would say, light in the way that we think about the way the data center architecture is being constructed. So I think when you look at the way that we structured the deal, again, we like the way we structured the deal. If the earn-out happens, we'd be really happy to pay the earnout. For us, it's a home run of an acquisition.

And on the topic of solutions, can you give us a sense of how much of or revenue comes from solutions currently and how that might evolve over the next, say, 3 to 5 years?

I don't think we ever define it in terms of solutions. I mean we always look at services and products, but products in and of themselves can be different ways in the way they're deployed. And when we say solutions, again, it's looking at the total architecture of of the product basis. So you can either do a point product delivery, you can do what I could say, a construction around an architecture of either thermal chain or the powertrain and you can even do all the way up to a smart run deployment or then you could go all the way to a 1 core deployment. And all of those are levels of solutions. And so we don't really break it out into the terms of the way of, hey, we're defining or we're developing solutions. What we like to be able to have is a portfolio of solutions that can be delivered and, I'd say, executed at a point product level, at a system level and at what we would say, an architecture level. So for us, it is ensuring that we can deliver the customer multiple layers of outcomes that will help them address what they're facing. So it's whether that is, hey, we want this level of a UPS that does this. We want to be able to do that. We want a powertrain that does this. We want to be able to do that. we want to be able to think of it in terms of what our customers want and need and a portfolio that can address all of that. So when we think of internal development and external development, that's the forethought of the strategy is how do you ensure your portfolio is going to be able to address, one, what I call the intense development and design of a point product that can deliver efficiency and effectiveness, all the way to a data center that can do all the things that need to be orchestrated together to create efficiency and effectiveness for your customers. So I wouldn't go in and say, hey, we're always going to go deliver a solution. It's the level of which that solution would come out.

That makes sense. Well, given the demand that the company has been seeing as well as some of the solutions that you're providing to customers that led to quite a bit of conversation around supply chain on the last earnings call. Maybe talk a little bit more around some of the supply chain congestion that Vertiv spoke about on the 2Q earnings call and what's leading to that?

Yes. I would say that we've got a very, very -- that was not a generic situation it was specifically referred to our converged infrastructure solution products, OneCore and SmartRun. So products that have intrinsically a high level of complexity, but that complexity is exactly the value proposition we -- with products like SmartRun and especially on core, we are removing complexity from the construction side. we are industrializing something that is a field project. That creates a lot of value for the customer. That is a phenomenal in terms of, we call it, economics in terms of a product that is designed or let's say, a data center that is optimized from an engineering standpoint as a product and then it's delivered in ways that minimize that time to token. So certainly creating a lot of value for the customer, removing the complexity on the site. Clearly, that means that, that complexity is with Vertiv, and we are industrializing something that industrial was not. So we're driving this data center product. And the way the execution of that works is 2 aspects. One is more multidimensional require much more coordination across factories. And that's a muscle that we've been reinforcing a lot Second is it can have some variability in terms of, okay, is revenue recognized this day, maybe 4 days later because some of the components are converging in the integration factory. So those dynamics are always there in the nature. But -- so I go back, it's not about supply chain. It's about coordination and maturity in this kind of in-sourcing and the complexity and returning to our customer extraordinary value for that. And we believe that is very potent. And the return we see from the market is certainly corroborating that. And we feel good about 2 things. One is the trajectory on which we are in terms of honing in that, managing that additional level of complexity, i.e., industrial, fully industrialized, something that nobody has industrialized yet. And the other end of forward-looking in the fact that the type of outlook that we have given full incorporate elements of -- well, let's say, the weaker room against possible hiccups. So we feel very good about the trajectory, but we are extraordinarily excited about the role of that offering in the market.

You spoke about building some of the muscle to deliver these full solutions that are bringing a lot of value to your customers. Are there other elements you need to do to also alleviate these kinds of challenges going forward, like having more integration capability at Vertiv and investments like that?

Oh, yes. Well, I would say that, clearly, in this type of converged product offering and a top product when -- when we really mean what the world looks at an entire system, but we use product very deliberately, Clearly, integration is a capability. It's a fundamental capability. But we are not talking about the integration like we've done for 25, 30 years, the power modules that this is a different scale. And that scales required capacity. And that capacity is being deployed. And that's a constant deployment of capacity to follow a demand that is certainly very, very encouraging. .

That's helpful. Given everything you're seeing around demand and some of these timing challenges you speak a bit on lead times and to what extent Vertiv's lead times have changed?

Well, it's really specific to the individual technology type of product market, but also size of deployment. So we do not feel we are -- we believe we are very competitive and meeting the market expectation in general with our lead times. And again, when we talk about large projects, BAM delivered as a modular or like a lot of our business is about just products being shipped on a kind of a point product basis to our customers, we feel we are in a good place.

Okay. Maybe you can talk about some of those specific products and a lot of different opportunities. I think we're underpinning the a 20% to 22% 5-year forward CAGR you gave at the Investor Day. One of those was around 800 volt. And I think you guys on your other tech part of the Investor Day spoke a bit about that, but speak more on the opportunities you see any challenges that are coming with 800 volt.

Well, I want to go back to a conversation to Investor Day and reiterated certainly in our earnings call in July. We do not see a univocal solution or the industry going in one direction. We firmly believe in May. And if anything, we are even more convinced that the future is multi-architecture and different type of use cases different type of customer groups will have different type of power infrastructure. So everything around 800 volts, it happening at individual part with a side car or all the way to the entire data hole, so a native end-to-end is something we feel very, very good about. In terms of our road maps and how we are moving along those road maps, I would say that we are pretty nicely delivering all the time lines that we shared with you in May, and we reiterated in July with customers' validations ongoing. Some of the products already in the offering cycle. And yes, we feel pretty good about that. And again, underlying all this is the fact that the complexity of the powertrain is increasing simply because that the performance required are increasing. And that's always a, let's say, favorable environment for us in terms of content, in terms of differentiating with our know-how and breadth of portfolio. And by the way, further expanded now with the recent and announced acquisition that will, again, help us to start the orchestration as Craig was saying, very early in the process, but also physically very early just behind the meter.

So very exciting. Lots of different types of 800-volt products and innovation happening. Maybe remind investors when Vertiv expects to begin shipping 800-volt products?

It really varies because we will see -- and it's less about but it is more about what we see happening on the demand side, we'll start to see an acceleration in everything sidecar happening in 2027 -- for the second half of 2027, when it comes to fully native end-to-end powertrain 800-volt powertrain, that would probably be commercially back end of '27, volumes '28. .