Vertiv’s operating leverage is becoming more evident as AI infrastructure demand grows. Margins stood out this quarter as Vertiv beat its own guidance and raised FY margin metrics across the board.
Revenue growth was in line with expectations, yet next quarter was soft. All-in, the company raised full year guidance to make up for next quarter’s miss, which helped to absorb the impact.
Under the hood, Vertiv’s sequential inventory growth of 26% QoQ and deferred revenue growth of 35.6% QoQ point toward Vertiv building ahead of a stronger 2H and 2027. On that note, there were many discussions in the Q&A about an incoming strong 2H, although to be balanced, there was additional commentary that deals are “elongated” to 12-18 months.
There is a lot to keep track of with this company. Below, I surface the most important points with the understanding this space is evolving quickly.
Prefabrication and Bring Your Own Power (BYOP)
Management discussed on the call the significant prefabrication opportunity for Vertiv, which means combining power and thermal techologies into pre-built systems called OneCore and SmartRun. This will allow Vertiv to capture more total system revenue as opposed to only supplying parts. It’s also worth keeping in mind that as on-site energy generation increases in complexity, that Vertiv stands to benefit by adding more content on both the power side and thermal side.
Here is what was stated on the prefabrication opportunity:
“So there are multiple reasons why this is being adopted. And there are multiple reasons why we believe we are ahead of the pack here because we are not just an integrator. We provide technology. You were also asking about the TAM for us. Clearly, that is a concentrator of opportunity for us because the prefabrication is for us and whole Vertiv technology solution. So that helps us to capture more of the TAM.”
Something similar was echoed about bring-your-own-power, which is that it increases the content opportunity for Vertiv:
“So in various shapes and form, bring your own power is a very important part of the data center equation, especially in the U.S. Certainly, we play a role in everything, microgrids, battery energy storage systems, interfacing and making sure that the entire powertrain, be it direct or alternate are consistent and designed for a bring your own power solution. But as we multiple times and we keep saying the data center needs to be looked at as one system.
So you're right when you say, hey, this is the implication, might have implications also on the thermal side of things, so exactly absorption is one of the things that naturally people and we think about. So we will have more details in May but rest assured that we see bring your own power being an integral part of how we design and think a data center. So it is an opportunity for us ultimately because it makes the system more complex and with more — possibly with more content for us.”
PurgeRite Acquisition to Strengthen Liquid Cooling Portfolio
Vertiv closed the PurgeRite acquisition in December for $1 billion to acquire technology related to cooling loops, which we’ve covered recently here. Specifically, Vertiv stated it improves their thermal-management services capabilities and will be margin accretive. Expanding more into services will allow Vertiv to see recurring service and maintenance beyond lower-margin hardware sales.
Management stated PurgeRite solves for “one of the most technically demanding and financially consequential aspects of modern data center operations.
Overall, Vertiv is expanding very rapidly with additional acquisitions such as ThermoKey, which improves the company’s heat-rejection portfolio, BMarko helps to improve Vertiv’s prefabrication positioning and CPower helps Vertiv enter into the bring-your-own-power market.
Europe a “Coiled Spring” and APAC to Improve for 2H
Vertiv is a bit rare in that its demand is driven globally rather than by the United States buildout alone. This quarter, EMEA was a weak spot as the region was down (29%). However, management is stating a combination of Europe and APAC will help drive a rebound into the back-half of the year as growth in the Americas moderates. For the year, EMEA is expected to end flat and APAC to accelerate from 12% to mid-20s. The Americas grew 44.3% yet will moderate to high 30s by year-end.
Here is what was stated: “That's why we were talking about a coiled spring because there is a shortage of data center capacity, significant shortage of data center capacity and even more profound shortage of AI capable data centers in EMEA and in Europe, in particular. So hence, the dynamics that you see. And of course, we are very well positioned in Europe because of historically a strong presence, but also because a lot of the players are players here and are players in Europe. So there is a very encouraging opportunity there.”
Management Reiterates Margin Improvement into Year End
Operating margin expanded 430 bps with management acknowledging that margins may dip between Q1 to Q2 as capacity comes online and some tariff uncertainty. However, most importantly, management discussed a 30% to 35% sequential margin, which will translate to adjusted operating margin expansion as the company exits the year.
“But if you look across the full year, we're still guiding to that between that 30% to 35% for the overall sequential margin. So I'd say it's a bit of a bump from 1Q to 2Q in terms of when we're bringing on capacity and working through all the different various actions that we have to do, offsetting all the tariffs and working through that, the 232s have now changed. So maybe there's a little bit of a dip there. But I'd say, overall, still feel very strong about the year being in the 30% to 35% range that we've given.”
Financials
Revenue up 30% YoY, Meets Consensus
Vertiv reported $2.65 billion in revenue in Q1, up 29.9% YoY and 23% organic, coming in line with consensus estimates for the quarter and at the upper end of guidance for $2.5-2.7 billion. Sequential growth was (8%), reflecting typical Q1 seasonality though a notable improvement from Q1 2025’s (13.2%) QoQ decline.
Looking ahead to Q2, Vertiv guided for revenue between $3.25 and $3.45 billion, or $3.35 billion at midpoint, below estimates for $3.4 billion. This guidance also points to a slight deceleration for both YoY and organic growth next quarter, implying 27% YoY and 22% organic at midpoint, and QoQ growth of 26.4%.
However, for the full year, Vertiv raised its revenue outlook by $250 million at midpoint, now projecting revenue of $13.5 to $14 billion. This represents 34.4% YoY and 30% organic growth at midpoint, up from its prior outlook for 32% YoY and 28% organic; it also would point to a nearly 7 point acceleration from FY25’s 27.7% YoY growth.
Considering the softness of Q2’s guide and Q1’s revenue, the FY raise suggests management is increasingly confident in a strong 2H, with revenue growth having to average ~40% YoY to meet the $13.75 billion midpoint. This is also supported by inventories surging 26% sequentially in Q1, likely to start fulfilling the strong uptick in orders in Q4 (no longer reported this quarter).
Regional Breakdown
Q1’s growth was driven entirely by the Americas, with APAC growth impacted some by timing and EMEA growth decelerating further, though Vertiv expects the region to see growth in 2H.
Americas revenue rose 53.1% YoY and 44.3% organic to $1.81 billion, a slight ~3 point acceleration from 50.2% growth in Q4. Vertiv said growth was driven by robust and diversified growth across all product lines.
APAC growth rebounded from Q4, up 14.9% YoY and 12% organic to $513.7 million. Management said quarterly organic growth was below guidance due to timing, but the full year outlook remains strong.
EMEA growth decelerated further in Q1, declining (20.3%) YoY and (29.4%) organic to $321.4 million. Vertiv said that the full year outlook for the region is improving with “increasing conviction as spring uncoils with a return to organic sales growth in H2.”
For the full year, Vertiv did not change its guidance much, maintaining Americas and APAC growth in the high-30s and mid-20s, respectively, while EMEA growth is now projected to be flat, versus its prior guide for flat to down mid single-digits.
Margins
While revenue was soft, Vertiv outperformed on margins in Q1, delivering a nearly 2 point beat to adjusted operating margin guidance and forecasting more growth next quarter. Additionally, management already raised FY26 margin metrics across the board, and similar raises each quarter this year suggests margins could end 2-3 points higher than originally forecast.
Gross margin was 37.7% in Q1, up 4 points YoY; sequential comparisons do not shed much light here as Q1 is the seasonally softest quarter, meaning margins are expected to be softer relative to Q4.
GAAP operating margin was 16.6%, slightly ahead of guidance for 16.3% and up 2.3 points YoY. Adjusted operating margin was 20.8%, solidly above guidance for 19% and up 3.7 points YoY; this was driven by the Americas with adjusted operating margin of 27%, up 5.1 points YoY.
For Q2, Vertiv forecast operating margins to strengthen, with GAAP operating margin guided to be 19.1%, up 2.3 points YoY and 2.5 points QoQ. Adjusted operating margin was guided to be 21.2% at midpoint, up 2.7 points YoY and marginally higher QoQ.
GAAP net margin was 14.7% in Q1, well above guidance for 12% and expanding 6.6 points YoY. Adjusted net margin was 17.3%, also well ahead of the 14.7% guide and up 5 points YoY.
For Q2, GAAP net margin was guided to be 14.2%, a slight sequential contraction but up 1.9 points YoY. Adjusted net margin was guided to be 16.3%, down 1 points sequentially but up 2.2 points YoY.
For the full year, Vertiv has begun to inch its margin targets higher. GAAP operating margin was raised half a point to 21%, while adjusted operating margin was raised 0.8 points to 23.3%. GAAP net margin was lifted 0.7 points to 16.1%, and adjusted net margin was raised 0.6 points to 18.1%.
While these may not be the most noteworthy raises, successive raises to this degree each quarter could see margins end 2 to 3 points higher exiting FY26, such as towards 22-23% for GAAP operating margin, which would reflect 4-5 points of expansion YoY. Additionally, a stronger 2H with growth around 40%, as is currently implied, could open the door for further margin expansion driven by operating leverage from higher growth.
EPS Shows Strong Beat
Driven by the strong margin performance, Vertiv reported strong EPS beats in Q1, with both GAAP and adjusted EPS beating estimates by 19% and 16% respectively.
Adjusted EPS was $1.17 in Q1, beating estimates for $1.01 and up 82.8% YoY. GAAP EPS was $0.99, up 135.7% YoY and beating estimates for $0.83.
For Q2, Vertiv guided for adjusted EPS to be $1.37 to $1.43, up 47.4% at midpoint and slightly below estimates for $1.43, likely reflecting the softer growth and margin guide given. GAAP EPS is guided to be $1.22, below estimates for $1.28 and representing growth of 47% YoY.
Looking ahead to Q3 and Q4, adjusted EPS growth is expected to decelerate to the high to mid-30s, with current estimates pegged at $1.73 for Q3 and $1.97 for Q4.
For the full year, Vertiv raised its adjusted EPS forecast from $6.02 at midpoint to $6.35 at midpoint, up 51% YoY, largely aided by strong growth in 1H.
Cash and Balance Sheet
Cash flows were strong in Q1, with adjusted free cash flow up 147% YoY and free cash flow conversion of >140%, putting the company on track to hit its 90% conversion target for the year. Both inventories and deferred revenue showed strong sequential growth, a key signal that the orders and book-to-bill strength seen in Q4 should convert to strong revenue growth over the coming quarters.
Operating cash flow was $766.8 million in Q1, up nearly 153% YoY and representing a margin of 28.9%, a strong 14 point expansion YoY.
Adjusted free cash flow was $652.8 million for a 24.6% margin, up 11.6 points YoY, driven by higher operating profit and working capital. Management maintained guidance for adjusted FCF to be $2.2 billion at midpoint for the year, reflecting a 16% margin.
This strong FCF generation in Q1 and for the year is allowing Vertiv to put more towards capex to fuel growth, with management saying capex will be “significantly higher” this year. Guidance points to ~ $255 million this year, or 1.8% to 1.9% of revenue.
Cash and equivalents totaled $2.5 billion and debt $2.9 billion, with net leverage improving from 0.5X in Q4 to 0.2X in Q1.
Inventories surged 26% QoQ to $1.83 billion, and deferred revenue jumped 35.6% QoQ, both serving as key signals that Q4’s orders will soon begin translating into revenue, likely as early as 2H and extending into 2027.
Conclusion:
Vertiv is converting its infrastructure demand into a strong bottom-line growth story, better cash profile, plus a more diversified role for the data center buildout. Prefabrication and bring-your-own-energy are two additional catalysts, although the inevitable move to cooling technologies for future generations of GPUs is the most obvious catalyst.
Regarding valuation, Vertiv along with many AI stocks are trading above their 3-year median. Rather than assume a stock does not deserve a premium (Vertiv certainly does), we use technicals as our primary risk management tool. You can expect to hear more in the I/O Fund’s weekly webinar held on Thursdays at 4:30 pm Eastern.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund do not own shares in VRT at the time of writing and may own stocks pictured in the charts.
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