Vertiv offered a mixed report this quarter with stronger commentary about Q4 as opposed to Q3, along with a slight miss on adjusted operating margin. Considering the margins are already thin for many AI hardware stocks, any miss tends to be amplified. With that said, the stock has been on a tear off the Apri lows – up 130% since early April. Given the report was not a blowout, a cooling off may be in order regardless of the earnings numbers.
Notably, Vertiv will not win any hypergrowth stock awards, especially as management has previously offered CAGR guidance of 15% to 17% through 2029. Rather, it’s where Vertiv is positioned as an AI infrastructure partner especially as the trend turns toward modular infrastructure that makes this a stock to watch.
Essentially, all roads point toward Vertiv’s power and thermal solutions becoming increasingly important for future generations of rack scale solutions. Personally, I’d like to see material evidence the current CAGR guidance through 2029 will end up 2-3X higher before we add VRT to our portfolio. This is AI, so anything is possible. I've outlined important information on how Vertiv can achieve this under the Q&A section below.
Specifically for this earnings report, the following are a few key items:
- Vertiv reported a large beat this quarter with 35% revenue growth in Q2 due to the America geo reporting very strong YoY growth while EMEA lagged.
- Vertiv missed on adjusted operating margin, largely due to impact of tariffs and operational inefficiencies. The company lowered their adjusted operating margin for the year despite QoQ adjusted operating margin increases through Q4.
- However, if management meets their margin guidance for Q4, it will represent the strongest margins since the company has been on the public markets with adjusted operating margin of 23.6%
- EPS growth surpassed top line growth at 42%
- Modular AI infrastructure remains Vertiv’s top catalyst and makes this stock one to watch
We’ve covered Vertiv in the past here “AI Data Center Direct Liquid Cooling Stock” and “Vertiv Q1: Inflection Point Muted, AI Factories Catalyst for 2026”
Revenue Rises 35% in Q2, FY25 Hiked to $10B
Vertiv reported 35.4% YoY growth in revenue in Q2 to $2.64 billion, with organic growth of 34% on continued strength in the Americas and APAC, noting that demand remains strong with its order pipeline expanding in all regions.
Supported by these demand signals and favorable pricing, Vertiv hiked its full year revenue guidance to $9.925 to $10.075 billion ($10 billion at midpoint), up $550 million from its prior view for $9.325 to $9.575 billion. This points to YoY growth of 24.8% YoY, more than 7 points higher than its prior guidance. Organic growth was raised to 23% to 25%, up 6 points from its prior guidance at midpoint.
Despite the FY25 raise, Vertiv is still guiding for a rather swift topline deceleration through Q4.
- Q3 revenue was guided between $2.51 to $2.59 billion, or 23% YoY growth at the $2.55 billion midpoint. Organic growth was guided to be 20% to 24%. This sequential decline goes against typical seasonality for VRT.
- Q4 revenue was guided at $2.735 to $2.815 billion, or 18.3% YoY at the $2.775 billion midpoint. Organic growth was guided at 16% at midpoint. This would represent a ~17 point deceleration in growth in the second half of the year.
If we zoom out, then Q2 represents the largest beat Vertiv has seen in recent years. As we look forward, the guide for Q4 represents a $200M increase between Q3-Q4.
Source: Seeking AlphaSeeking Alpha
America Region Reports Strong Growth of 43%
As noted previously, the Americas and APAC drove Q2’s outperformance, with Americas growth accelerating more than 14 points sequentially. This is the strongest growth in the Americas region we’ve recorded since covering the stock for 2.5 years.
- Americas revenue increased 42.9% YoY and 43.2% organic to $1.60 billion. Growth was driven by hyperscale and colocation markets with strength in switchgear, busway, liquid cooling, and infrastructure solutions.
- APAC revenue accelerated slightly to 36.9% YoY and 36.8% organic to $560.2 million. Growth was primarily driven by hyperscale and colocation markets in China.
- EMEA revenue accelerated back into the double digit range after a soft Q1, up 12.5% YoY and 7% organic to $475.6 million. Vertiv said its EMEA pipeline remains strong with continued sequential growth.
For Q3:
- Americas growth is expected to be in the mid-30% range.
- APAC growth is expected to be in the low 20% range.
- EMEA growth is expected to be down high single digits.
Backlog, Orders Growth Slows
Though Vertiv’s backlog increased to $8.5 billion, growth is decelerating, now at 21% YoY versus 25% in Q1 and 30% in Q4. This is also the slowest growth for Vertiv’s backlog since Q4 2023.
TTM organic orders growth also decelerated more than 9 points sequentially, from 20% in Q1 to 11% in Q2.
Margins to Expand Through Q4, Yet FY25 Operating Margin Lowered Slightly
Margins expanded sequentially in Q2, with net margin moving into the double-digit range. Vertiv forecast Q3 and Q4 adjusted operating margin to expand sequentially, yet lowered its full-year guidance to account for tariff countermeasures and other factors.
Vertiv expects to be back to normal on adjusted operating margin by Q4, stating they will expect to see a margin of 23%+:
“Full year adjusted operating margin is projected to be approximately 20% at the midpoint, 60 basis points higher than last year despite tariff headwinds, and 50 basis points lower than prior guidance. We continue to drive margin improvement, including positive price/ cost and productivity. And implied in our guidance is fourth quarter adjusted operating margin in excess of 23%, once again, keeping us on track to attain our long-term target by 2029.”
- Gross margin was 34%, down 4 points YoY but up 0.3 points QoQ.
- GAAP operating margin was 16.8%, down 0.4 points YoY but up 2.5 points QoQ.
- Adjusted operating margin was 18.5%, down 1.1 points YoY but up 2 points QoQ. Vertiv said the YoY decline stemmed from accelerated R&D investments, high supply chain and manufacturing transition costs stemming from tariff mitigation efforts, and operational inefficiencies from stronger than anticipated growth. Vertiv said it expects these factors to resolve by year-end.
- GAAP net margin was 12.3%, up 3.2 points YoY and 4.2 points QoQ. Adjusted net margin was 14.1%, up 0.9 points YoY and 1.8 points QoQ.
For Q3 to see slight margin inflection from disappointing Q2 margins:
- GAAP operating margin was guided to be 18.2% at midpoint, up 0.3 points YoY and 1.4 points QoQ.
- Adjusted operating margin was guided to be 19.75% to 20.25%, or approximately flat YoY and up 1.5 points QoQ at the 20% midpoint. Vertiv said the QoQ improvement will stem from moderating operational inefficiencies.
- GAAP net margin was guided to be 13.1%, up 4.6 points YoY and 0.8 points QoQ. Adjusted net margin was guided to be 14.9% at midpoint, up less than 1 point YoY and QoQ.
Q4 to see a return to higher margins:
- GAAP operating margin was guided to be 22%, up 2.5 points YoY and 3.8 points QoQ.
- Adjusted operating margin was guided to be 23.6% at midpoint, up 3 points YoY and 3.6 points QoQ.
- GAAP net margin was guided to be 15.8% at midpoint, up 9.5 points YoY and 2.5 points QoQ. Adjusted net margin was guided to be 17.4%, up 1 point YoY and 2.5 points QoQ.
Should Q4 margin guidance materialize …
It’s important to note that if the Q4 margin guidance materializes, then Vertiv will be reporting the best margins since going public in 2020. This is visible in the adjusted operating margin chart listed above.
The proverbial “seeing the forest through the trees” is that Q2 was weaker than expected yet Vertiv’s management is guiding quite strong as we exit the year.
FY25 Margins to see impact from tariffs and operational inefficiencies:
- GAAP operating margin was guided to be 18.1% at midpoint, up 1 point YoY.
- Adjusted operating margin was lowered slightly to 19.7% to 20.3%, or 20% at midpoint, down half a point from its Q1 guidance for 19.75%-21.25%, or 20.5% at midpoint. This reflects the operational inefficiencies from tariff mitigation, accelerated R&D investments and capacity expansion efforts.
- GAAP net margin was guided to be 12.6%, up 6.4 points YoY. Adjusted net margin was 14.8%, up 1 point YoY.
EPS growth exceeded revenue growth at 42%
While adjusted EPS growth was rather robust in Q2, growth is expected to the mid 20% level by Q4, mirroring revenue growth.
- Q2 adjusted EPS of $0.95 beat estimates for $0.84, increasing 41.8% YoY. GAAP EPS of $0.83 beat estimates for $0.71.
- Q3 adjusted EPS was guided at $0.94 to $1.00, or up 28% YoY at the $0.97 midpoint. This was marginally ahead of estimates for $0.96.
- Q4 adjusted EPS was guided at $1.23 at midpoint, up 24.2% YoY and ahead of estimates for $1.14.
For FY25, Vertiv boosted its adjusted EPS outlook from $3.55 to $3.80 at midpoint, pointing to YoY growth of 33%. Heading into Q2’s report, FY26 growth was projected at 23%, though this may be revised higher given the improvement in net margin through year-end.
Cash Flows and Balance Sheet
Cash flow margins dipped slightly sequentially, and remain lower than last year. However, Vertiv also boosted its FY25 adjusted free cash flow guidance by $100 million this quarter.
The company offered the following commentary regarding cash flows being lumpy but directionally positive:
“And finally, on this page, adjusted free cash flow was down $60 million from last year's second quarter, primarily due to favorable trade working capital timing last year. But year-to-date adjusted free cash flow is up 24%. And as you will see in a few slides, we are raising our full year guidance by $100 million to $1.4 billion. In short, you can likely check the box on free cash flow.”
- Operating cash flow was $322.9 million in Q2 for a 12.2% margin, down more than 7 points YoY and nearly 3 points QoQ.
- Adjusted free cash flow was $277 million in Q2 for a 10.5% margin, down more than 6.5 points YoY and 2.5 points QoQ. For FY25, Vertiv guided for $1.375 to $1.40 billion in adjusted FCF, up from its prior view for $1.25 to $1.35 billion. This implies that Vertiv is expecting ~$859 million in adjusted FCF in 2H to reach the midpoint of its guide.
- Cash and equivalents rose to $1.74 billion, while debt remained steady at $2.9 billion. Net leverage was 0.6x in Q2, versus 0.8x in Q1.
Earnings Q&A:
Weak Q2 margins set to significantly rebound by Q4
Vertiv’s margins fall into the “fair” category when compared with other AI hardware peers. Across the sector, we see a wide spectrum — Nvidia and Broadcom deliver “excellent” margins, while Dell and Supermicro are at the “weak” end. Vertiv consistently sits in the middle: not low enough to be concerning, but not high enough to command a premium valuation.
For AI hardware investors, it’s important to recognize that earnings reactions are often driven more by margins than by top-line growth—a sharp contrast to hypergrowth and software stocks, where revenue acceleration tends to be the primary catalyst.
Starting in 2023, Vertiv began a period of critical margin expansion, as the company had a negative GAAP operating margin in 2022 prior to the AI boom. The GAAP operating margin was 17% in the last quarter, up from 14.5% last quarter – yet the margins were flat from the year ago quarter and down from 19.5% in Q4.
The CEO offered more color regarding margins, stating the executional challenges were primarily in the EMEA region: “The temporary costs of the supply chain and manufacturing transition to tariff-optimized footprint are higher than we initially estimated. We're also experiencing some temporary costs to deliver a steeper growth than expected and some executional challenges in EMEA. We expect all these factors will significantly moderate during the year, and we believe they will be materially resolved by year-end.”
He also concluded the call stating: “We are vigorously addressing the temporary margin challenges. This has my and my team's full attention. I'm confident we will see constant improvement.”
Quite a few analysts asked about margins during the Q&A, showing how nervous analysts can get about this line item even when management guides for healthy margins by year-end. Of the many questions on margins, the following Q&A exchange stood out as it discusses why management has confidence margins can expand into H2.
Nicole Sheree DeBlase, Deutsche Bank
I just had a question on margin. So the guidance implies like a 10 basis points year-on-year decline in margins in the third quarter, and then a pretty big step-up to like over 200 basis points of expansion in the fourth quarter. So probably a question for David. But can we kind of walk through some of the puts and takes that give you guys confidence in that step-up?
David J. Fallon, CFO:
Yes. I think it's 2 things, Nicole. Number one is the benefit of operational leverage. And you can get our exact Q4 numbers in the appendix, but there's over $200 million increase in sales expected in Q4 versus Q3. So that definitely provides the benefits of operational leverage.
And the other bucket is simply addressing the operational inefficiencies and execution challenges that we've seen in Q2 into Q3. Once again, we believe all of these should be resolved in Q4. So it may be oversimplifying things, but I think those are the 2 buckets that drive the improvement from Q3 to Q4.”
New Reporting Metric Starting in Q4
Vertiv will no longer report on quarterly orders and backlog information, and instead will report a new metric “projected full year orders.”
The following was stated on the call: “Beginning on our Q4 and full year 2025 earnings call, we will provide projected full year orders rather than quarterly orders and backlog information. We believe this better aligns with how we run our business. We will provide updates on the full year projections quarterly as we progress through the year and as we deem necessary.”
This could create a boost to Vertiv’s stock to remove the lumpiness from quarterly reports and to also be more forward looking in terms of visibility offered to investors.
AWS announcement sent shares tumbling in early July
Recently, an announcement that AWS is pursuing their own thermal management solutions caused weak price actionin the stock.
Management used the words “co-engineering” when asked about the announcement, implying they stand to profit regardless of how each hyperscaler uniquely approaches cooling solutions.
“So I don't think there should be any scare. This is not an anomaly in the way the market works. And we are here to scale with our hyperscale customers. We are here to co-engineer with them.”
Great Lakes Acquisition
Vertiv’s is acquiring Great Lakes Data Racks & Cabinetsfor $200 million for its portfolio of high-end rack solutions, including custom racks, integrated cabinets, heavy-duty designs, and advanced cable-management systems. The acquisition will help Vertiv to deliver AI-ready solutions to hyperscalers and neoclouds. According to Vertiv, they are paying 11.5X projected 2026 EBITDA.
Perhaps most importantly, the deal will be able to increase Vertiv’s capacity quite quickly:
“With manufacturing and assembly facilities in the U.S. and Europe, we anticipate Great Lakes will enhance our ability to serve customers with speed and scale.”
The deal is expected to close in Q3. Vertiv has $1.7B in cash on its balance sheet and $2.9B in debt.
DCD Modular AI Infrastructure
In a previous analysis we pointed toward AI factories as a catalyst for Vertiv:
“Prefabricated infrastructure where the thermal management and power specialists assemble the infrastructure could become a path to faster, more successful deployments.
Per Vertiv’s comments: “Now let me share some exciting news about our projects with iGenius. Here, NVIDIA and Vertiv are delivering a fully prefabricated AI factory. This is a very important sovereign AI supercomputer and we provide everything infrastructure from liquid cooling to heat rejection, grid to chip power in a very rapidly deployable modular infrastructure. All leveraging our NVIDIA codeveloped AI reference designs. What makes this truly special is how it brings together all our core Vertiv strengths. Our ability to deliver complex solutions at scale, our deep technical expertise and our commitment to innovation. We're not just providing infrastructure, we are enabling iGenius to deploy advanced AI models in a highly regulated industry.”
Often times, CEOs use earnings calls as a marketing tactic and it can be difficult to sort through dozens of product releases to identify which ones are important catalysts. I believe the iGenius deployment will (in time) prove to be an important deployment for Vertiv – perhaps the largest catalyst ever for the company – as it transitions Vertiv from being a solutions supplier to building end-to-end modular infrastructure with substantial cross-sell opportunities. These modular AI factories also serve the massive market of sovereign AI by reducing the dependency on cloud providers such as Amazon, Google or Microsoft.”
DCD stands for data center dynamics and refers to modular infrastructure that is desirable for its rapid and efficient data center buildouts. The pre-engineered and factory-built modules offer power, cooling and IT equipment that can be deployed much faster than traditional data centers.
In this earnings report, the CEO discussed DCD modular AI infrastructure, stating: “That is certainly a trend that we see. We know that the industry needs speed, and speed in construction is paramount, full success for our customers. But also, as I said several times, this is a construction industry. And if you have to build very, very complex systems like data centers, on site, at speed, then there certainly are challenges, shortages, manpower, skilled labor shortages, and surely things can be done better in a prefabrication setup and mode.”
For AI, where compute density and thermal loads are significantly higher, modular solutions are particularly ideal as they offer optimized power distribution, advanced liquid cooling integration, and scalable “white space” that can be expanded in phases without disrupting existing operations.
Ultimately, this reduces deployment from years to months and positions Vertiv as a choice partner for the physical layer (power and cooling) for those that specialize in the logic layer (compute and networking).
Conclusion:
Given the margin improvement expected in Q4, Vertiv will likely see a second wind come H2 – especially if the top line holds a surprise or two as it did this past quarter with an 11% top line beat.
Modular AI infrastructure continues to be a primary catalyst for Vertiv, and a viable path for the company to exceed the stated CAGR of 15% to 17% through 2029 (and potentially make its way into the I/O Fund’s portfolio).
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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