Vertiv offers power management and thermal management to data centers and telecom companies, such as Alibaba, AT&T, China Mobile, Tencent and Verizon. The company was formed in 2016 after spinning off from Emerson, and reported $6.8 billion in revenue last year. Vertiv is considered one of the larger players in data center technologies in terms of power management and thermal management, with 24,000 employees and 30 manufacturing facilities.
Vertiv offers many thermal management solutions. Among them is the Liebert XDU, which is a compact unit that sits in the row near the rack or on the perimeter. The liquid-to-liquid cooling distribution unit (CDU) functions as a heat exchanger between the data center and IT equipment, and is used in all forms of liquid cooling: direct-to-chip, rear door heat exchange and immersion. The Liebert XDU offers a secondary fluid cooling loop so that alternative cooling fluids can be used alongside water.
In 2023, Vertiv acquired a company called CoolTera, after partnering with the company for three years, to add advanced cooling technologies to its thermal management portfolio. One of the main areas of need for data centers and colocation sites is to convert air-cooled equipment to liquid cooled equipment. Retrofitting existing air-cooled infrastructure is an area where Vertiv specializes, as opposed to only providing thermal solutions for new servers and racks.
The benefits of retrofitting was touched on in the most recent earnings call: “A great example of enabling the industry to be future-ready is our truly unique Vertiv CoolPhase CDU, which makes it simple to deploy high density liquid cooling where needed without having to reengineer the entire data center environment, even in the absence of a chilled water loop.”
In 2024, Vertiv joined the Nvidia Partner Network with a statement that Vertiv is “collaborating to build state-of-the-art liquid cooling solutions for next-gen NVIDIA accelerated data centers powered by GB200 NVL72 systems.” Now that we are close to the roll-out for Blackwell, Vertiv has officially announced a co-developed GB200 NVL72 system with up to 40% less power management space and up to 20% lower cooling costs. Vertiv is also partnered with Intel to supply air-cooled and liquid-cooled servers for the Gaudi3 AI accelerators.
Notably, Vertiv is a vendor that supplies original design manufacturers (ODMs) such as Dell with thermal management. Here is how the mutually beneficial relationship was described (as opposed to being direct competitors):
“ODMs play certainly an important role in the go-to-market for the likes of us. ODMs in a play that for liquid cooling sometimes is a white space play. They have a role with their servers, with their racks, with their integration. So it’s natural that they integrate liquid cooling technology in what they do. […] When we think about those ODMs, we think of them as a go-to-market for us. And those ODMs very often also rely on our ability not only to deliver and provide technology, but also to provide the service and the liquid cooling know-how at rack, row and system level that they might need kind of being complemented with. So we do not look at that part of the market as competition. We look at a part of the market that we have opportunity to synergize with.”
The data center accounts for 80% of Vertiv’s business, up from 75% when we initially covered Vertiv back in June. The communications networks and commercial/industrial facilities is at 20% of revenue.
A few quarters back, the management team stated that AI-related projects were doubling in a two-month time frame:
“The ramp-up of production of liquid cooling globally continues as planned, and I'm happy to report we have production underway already at two of the three plants we shared with you we were planning to activate in 2024. We are on track with the capacity ramp-up as shared in February. We continue to see strong momentum with AI-related orders. While we are not disclosing specific detail on our liquid cooling orders, or more broadly AI-related orders, we did see the pipeline for AI projects more than double in the last two months.”
More recently, in Q3, management highlighted its belief that liquid cooling will grow rapidly over the next three years. Per the earnings call: “We believe from a market value standpoint that air and heat rejection combined will be 70% of the market and liquid 30% over the next few years. Air and heat rejection will grow at a 10% CAGR and liquid at a 30% CAGR, all growing very nicely."
At the recent Investor’s Event, Vertiv raised its long-term projections with an updated horizon from 2028 to 2029:
Source: Vertiv’s Investor Event PresentationVertiv’s Investor Event Presentation
Q3 Financials and 2024 Investor Event Financial Forecast Updates:
Q3 revenue grew by 19% YoY to $2.1 billion, beating estimates by 4.8%. Adjusted EPS rose by 46.2% YoY to $0.76, beating consensus estimates by 10.2%. Management also revised financial metrics during the recent 2024 Investor Event, which is discussed below.
Revenue
The company is witnessing an inflection in revenue due to strong AI data center growth (data center accounts for 80% of revenue). During the 2024 Investor Event held on Nov 18, the company's financial objectives were rolled forward one year through 2029 and guided for higher organic revenue growth for the forecasted period. The long-term organic revenue growth guidance has been raised from 8% to 11% (2023-2028F CAGR) to 12% to 14% (2024-2029F CAGR).
- Q3 revenue grew by 19% YoY to $2.1 billion. Organic sales (adjusted to exclude foreign currency exchange rate impact) growth was 19.2%, which was helped by double-digit growth in all three regions.
- The company’s CEO, Giordano Albertazzi said in the Q3 earnings call, “Pipelines continue to grow. We saw pipeline increase sequentially from Q3 – from Q2 to Q3 across all regions. We also are seeing more convincing signals that AI is indeed accelerating in EMEA.”
- Organic sales in the Americas region grew by 20.5% YoY to $1.2 billion. Demand in the colocation and hyperscale markets drove organic sales growth in the Americas, with strong contributions from switchgear, busway, and liquid cooling and services.
- The APAC region showed a 470-basis sequential improvement to 10.4% YoY growth to $432.4 million, helped by strong growth in China and the Rest of Asia.
- The EMEA region witnessed the fastest growth, with 25.2% YoY to $442.5 million, driven by robust demand from colocation and hyperscale markets.
- Management has guided Q4 revenue between $2.115 billion to $2.165 billion, representing YoY growth of 14.8% at the midpoint. The organic sales growth guide for Q4 is 11% to 15%.
- Analysts expect Q4 revenue to grow 15.5%, followed by 17.5% and 16.8% in the subsequent two quarters.
- Management has guided FY2024 revenue in the range of $7.78 billion to $7.83 billion, representing YoY growth of 13.7% at the midpoint. The organic sales growth guide for FY2024 is 14% at the midpoint. Analyst consensus for FY2025 indicates an acceleration to growth of 18.4% on revenue.
- During the Q3 earnings call, the CEO said, “The orders trends and our robust backlog indicate that growth in 2025 will accelerate relative to 2024’s 14%.” During the recent Investor Event, management provided organic sales growth guidance of 16% to 18% for FY2025, representing a solid 3-point acceleration at the midpoint.
Expanding Margins Helps Vertiv Stand Apart
Vertiv’s margins are improving helped by strong operating leverage. During the 2024 Investor Event, management provided adjusted operating margin guidance of 25% for FY2029, representing an expansion of 600 bps from the 19% guide for FY2024 over a five-year period. This helps illustrate Vertiv’s ability to stand apart as a hardware company with already-strong margins that are expected to only expand further over time.
The company plans to achieve about 4% improvement through operating leverage by deepening Vertiv Operating System (VOS) adoption, functional optimization, and digitalization, including AI utilization. About 1% will come from productivity gains and another 1% from commercial execution by delivering positive price-cost through customer value creation.
During the 2023 Investor Event, management had guided the adjusted operating margin to be above 20% during the 2026-2028 timeframe. The company is expecting to reach the previous goal two years earlier, as management has provided an adjusted operating margin guide of 21% at the midpoint for FY2025.
- Q3 gross margin was 36.5% compared to 36% in the same period last year.
- This compares to 28.4% for FY2022 and 35% for FY2023.
- Q3 operating margin improved 350 bps YoY to 17.9%. Adjusted operating margin improved 310 bps YoY to 20.1%. Management’s adjusted operating margin guide for Q4 2024 is 20.4%.
- Q3 net income was $176.6 million or 8.5% of revenue compared to $94.1 million or 5.4% of revenue in the same period last year. Adjusted net income was $290.5 million or 14% of revenue compared to $201.2 million or 11.5% of revenue in the same period last year.
EPS
The company’s Q3 adjusted EPS grew by 46.2% YoY to $0.76. It beat analyst estimates by 10.2%, which was helped by strong operating leverage. Analysts expect strong EPS growth in the coming quarters.
- Management Q4 adjusted EPS guide is $0.80 to $0.84, representing YoY growth of 46.4% at the midpoint.
- Analysts expect adjusted EPS to grow 51.2% and 32.8% in Q1 and Q2, respectively.
- Analysts expect adjusted EPS to grow 32.3% YoY to $3.56 for FY2025 and 25.8% in FY2026.
Cash Flow and Balance Sheet: $1B in FCF This Year
Vertiv announced the annual dividend increase from $0.10 to $0.15, to be paid quarterly. Management expects the 2029 dividend to be about 2x the 2025 annual dividend. In addition to achieving a net leverage ratio of 1.4x, Vertiv has repurchased $600 million worth of shares in 2024 and still has $2.4 billion authorized to repurchase by 2027.
- Q3 operating cash flow was $375.1 million or 18.1% of revenue compared to 14.3% in the same period last year. It is also a significant improvement from the 13.1% for the FY2023.
- Q3 adjusted free cash flow was $335.9 million or 16.2% of revenue compared to 12.7% in the same period last year.
- Management raised the full-year adjusted free cash flow guide to $1.0 billion, up $125 million from the prior guidance. Management expects strong free cash flow generation to continue in 2025.
- Cash was $908.7 million and debt of $2.931 billion compared to $579.7 million and $2.935 billion in Q2. Net leverage ratio has come down to 1.4x from 2.4x in the same period last year.
Key Metrics
Backlog
The backlog at the end of Q3 was $7.4 billion, up 47% year over year and 5% quarter over quarter. Expansion in all three regions helped drive the strong growth in backlog. As seen below, the 47% rate for the backlog is particularly high and is more than double the rate of revenue growth.
TTM Orders Grow 37% YoY
Management introduced a trailing twelve-month metric last quarter. The CEO said in the Q2 earnings call, “This quarter, we have introduced a trailing 12-month orders metric. As we have previously highlighted, there can be a natural variation to the timing of large orders in any quarter. Trailing 12-month is a good metric to assess order activity, smoothing some of the quarter-to-quarter push and pulls.”
The trailing twelve-month orders grew by 37% YoY and were consistent with 37% TTM growth at the end of the second quarter. Q3 orders grew by 17% and were lower than 57% growth in Q2. Management has tried to temper expectations of such high order growth as previously seen this year: “We've enjoyed extremely strong orders in the first half of 2024 and we would agree that continued approximately 60% order increases are unlikely as we tried to say last quarter.” This also helps illustrate why the company is moving to TTM reporting metric.
Earnings Call:
Backlog Elongation:
Given the backlog is growing at more than double the rate of revenue, there were quite a few questions about the backlog and pipeline on the earnings call. Most of them were too forward-looking for management to answer to, however, one question in particular was insightful in terms of Vertiv continuing to have pricing power. It’s also insightful as the analyst is implying the strong backlog may be coming from deals that are elongating from 9-15 months to 12-18 months; this makes sense if we generally apply what we know about Blackwell coming in H1 2025 and these systems being more complex, perhaps requiring a longer sales cycle.
“Noah Kaye
All right. Thank you. And just to piggyback on this, Gio, for the last few quarters you talked about the elongation in order to revenue conversion cycle times for cloud and colo. And that's supporting some of the strength and visibility you have going into 2025. But just what drives your confidence in remaining price cost positive in 2025 given that longer conversion cycle?
Giordano Albertazzi
When we were talking, first of all, thanks for the question, Noah. When we think in terms of the elongation, we were talking about the elongation happening de facto and specifically for the cola and large cola and hyperscale. And that elongation was at 12, was, let's say from the 9, 15 months to the 12, 18 months. So it's not a dramatic elongation. We're talking about a three-month elongation. So we have good visibility on our pipelines. We have of course, very good visibility on our backlog. We have visibility on the price elements of that backlog and pipeline. We have good visibility on the cost side of the equation. And the cost side of the equation, of course, is very, very important. So combine the two, enhance our continued reiterated statement that we believe price cost to continue to be favorable.”
“Resounding Yes” to Higher Q4 Pipeline:
Although pipeline is not an official key metric offered, an analyst dug around for information on how Q4 is shaping up to which the CEO was quite emphatic is better than Q3. The analyst also asked more about lead elongation but the CEO is clearly referring to Blackwell’s arrival being the impetus.
“Michael Elias
Great. Thanks for taking the question. Two quick ones, if I may. First, I want to be absolutely clear. Are you saying that your demand pipeline entering 4Q is higher than the levels you saw entering 3Q? That's my first question.
And then second, I just want to revisit a prior question related to like elongating lead times. One of the things that we're seeing in the data center market is that as the preleasing window elongates and we go further out, the lower pricing that, that data center capacity is commanding. So as I think through the equipment side, does it stand to reason that as the customer lead time elongates, Vertiv actually has less pricing power in the conversation? Any color there would be helpful. Thank you.
Giordano Albertazzi
Well, thank you, Mike. The answer to the first question is if – the answer is yes. I was just trying to think about the formulation. But yes, that pipeline entering Q4 is higher than the pipeline entering Q3, no doubt. So that is a resounding, yes.
When it comes to the elongated lead times, we do not necessarily see a correlation between lead time elongation. And again, I want to remind everyone it's not a lead time elongation because of Vertiv's need to elongate lead time. So we can, most of the time deliver on shorter lead time on their request. But simply because of lead time gets elongated because that is consistent with our customers, project plans and schedules.”
Production Capacity:
It’s important to make a quick note here that capacity is something Vertiv remains confident on, which is where rival Super Micro may become weak due to cash constraints. According to the Investor Event: “But sometimes, if we go back to some of the earnings call, we talked about, yes, do you have capacity? How much capacity are you making available? Oh, I said, "Hey, we always have this 20%, 25%, 30% wiggle room. That's the way we think about capacity being made available […] And a year from now, we will have a similar probably bigger and more impressive list of all improvements of all the capacity that has been — that will be created. But it is about new factories. New factories in India, new factories in the U.S. opened this year. It's about operating and starting production. Example, for liquid cooling, virtually — actually, not virtually in every continent in which we operate.”
Conclusion:
AI power demand is forecast to rise at a rapid rate. GPU demand is showing no signs of slowing as Big Tech continues to spend billions on AI infrastructure, and each new GPU generation is seeing higher peak power consumption. The industry is quickly taking steps to address this, and power consumption, or more specifically, power efficiency per chip, looks to be emerging as the third realm of competition.
As we’ve made abundantly clear, the arrival of Nvidia’s Blackwell is the moment when things like thermal management and power distribution become mission critical. It will not only be Nvidia’s Blackwell systems, for example, we recently published on Amazon’s Trn2 systems that will have hundreds of thousands of custom chips (i.e., not GPUs). Yet, Blackwell signals the arrival of a moment when key suppliers will have their turn in the spotlight. Vertiv remains on our list as a top contender and supplier of choice in what will become a marathon for key AI beneficiaries at the hardware level.
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