Vertiv posted a double-beat in Q1 with organic revenue up 25% YoY. The primary key metric of backlog was up $1.6 billion YoY and up 10% since Q4. Perhaps most importantly, backlog of $7.9 billion up from $7.2 billion last quarter hints toward Vertiv reaching an inflection point as Q4 backlog had declined QoQ. The trailing twelve month (TTM) organic orders growth was up 20% YoY and up 21% sequentially from Q4. This is down from 30% YoY growth last quarter, yet the QoQ growth seems to also hint Vertiv could be ramping from here on supplying thermal management for AI systems. Book-to-bill ratio of 1.4X is another key metric that hints Vertiv is resuming AI orders as it indicates the company’s backlog is growing with more orders coming in.
As a reminder, Vertiv reported a muted earnings report last quarter with nearly all of these key metrics declining QoQ. For example, book-to-bill ratio was 1X whereas it had been 1.4X during the busier AI quarters in early 2024. Therefore, it’s encouraging to see these key metrics come in stronger this past quarter.
Vertiv’s importance as a supplier is expected to increase with each new generation of GPUs and AI accelerators. The company provides thermal management solutions, such as cold plate cooling and immersion cooling to lower the power requirements to AI systems. They also offer high density solutions such as rear door heat exchangers and coolant distribution units (CDUs). Direct liquid cooling systems, including hybrid versions that combine air and DLC, can result in 40% less power management space and 20% lower cooling costs. When you’re spending nearly $100 billion per year on capex like many Big Tech companies, this matters quite a bit. In addition to thermal management, Vertiv's power solutions include uninterruptable power systems and lithium-ion battery cabinets that supply up to 1500KW and 263KW in a single cabinet.
Vertiv is closely watched as a lead supplier to Nvidia with management stating they have a 3-6 month lead time before systems are delivered. The current quarter was encouraging especially as management raised FY25 revenue forecast by $250M at the midpoint. However, it’s also odd that analysts expect Vertiv’s growth to decelerate as we go into the second half of the year. Despite raising full year guidance with next quarter expected to report 20.6%, the company is expected to exit the year with growth of 13.8%. Given what we’ve described in terms of the increasing importance of Vertiv’s solutions, there’s a disconnect in terms of H2 weakness.
As of this report, EPS growth is expected to outpace revenue growth although adjusted operating margins are quite slim at 16.5% this quarter and are expected to be 18.5% at the midpoint next quarter. Vertiv also provided a few alternative operating margin scenarios based on tariff policy changes, with two scenarios pointing to margin headwinds ahead. However, the bright spot is that Vertiv stated they could maintain
Looking for an Inflection in Revenue
Despite a solid revenue beat in Q1, management’s Q2 guide and updated FY25 guide still point to pockets of weakness in the back half of the year on a year-over-year basis due to tough comps.
However, looking beyond Q1, Vertiv will be accelerating QoQ through the rest of the year, which points to an important inflection. Although Q2’s guidance points to a 4 point deceleration in organic growth from 25% in Q1 to 21% at midpoint, revenue will grow QoQ by 15%. Similarly, FY25 is currently guided at 18% at midpoint, well below growth rates for the first half of the year yet Vertiv is expected to grow QoQ through the rest of the year.
The sequential growth is to be watched closely as further acceleration is needed to solidify the 2025 growth story (as opposed to the 2026 growth story).
- Q1 revenue rose 24.2% YoY to $2.036 billion, easily beating the guided range of $1.90 to $1.95 billion, or 17.4% YoY at midpoint.
- Organic revenue increased 25.3% in Q1, marking a slight deceleration from 27.1% organic growth in Q4. Growth was driven by colocation and hyperscale markets in the Americas and APAC, with “strong contribution from switchgear, power solutions, liquid cooling and services.”
- For Q2, Vertiv guided for revenue between $2.325 billion and $2.375 billion, or 19% to 23% organic growth. At midpoint, this points to 21% organic growth to $2.35 billion in revenue.
Vertiv Raises Guidance by $250M with $150M Organic Growth
The company raised its FY25 outlook by $250 million to a wide range of $9.325 billion to $9.575 billion, or $9.45 billion at midpoint. However, of this $150M is organic growth with $100M being from FX tailwinds: “First, we are increasing full year sales guidance by $250 million, including approximately $150 million organically and approximately $100 million from favorable foreign exchange. The $150 million increase in organic sales is driven by both the first quarter and higher expectations in the second quarter versus what was implied in our prior guidance.”
Management expects full-year revenue growth to be sub-20%. The new outlook points to 16.5% to 19.5% organic growth, or 18% at midpoint, up from its prior view for 16% growth at midpoint. Given that revenue growth is expected to decelerate further in the back half of the year, at less than 17% in Q3 and less than 14% in Q4, this suggests there may be less room for upside in the FY guide.
Backlog Increases on Strong Order Growth
Vertiv’s backlog rebounded in Q1, up 10% QoQ and 25% YoY to a new high at $7.9 billion. However, this was the slowest quarterly growth in the past five quarters.
Orders growth was strong, with TTM orders up 20% in Q1, while Q1’s orders increased 13% YoY and 21% QoQ. Vertiv believes that TTM orders is the best key metric to focus on, although typically growth investors prefer indication sales are improving on more of a forward basis – which is why backlog is the better one for our purposes. Regarding TTM orders, management stated the lower growth was due to strong comps: “Yes, I want to underline that Q1 orders were up 21% sequentially and a healthy 13% year-over-year against very challenging comps. The strength of these numbers reflects not just market growth but our ability to expand our market position.” Even with strong comps, one has to wonder why a bigger ramp that requires thermal and power management is not showing up in an acceleration of the key metrics.
As stated in the introduction, perhaps Q1 is the inflection point and we see a stronger beat/raise as we move along given Vertiv’s book-to-bill ratio returned to a healthy 1.4x, up from 1.0x in Q4 and 1.1x in Q3, indicating demand remains healthy despite fears of AI spending slowing down. Inventories also jumped more than 11% QoQ to over $1.38 billion, accelerating from a (1%) QoQ decline last quarter.
Americas and APAC Drive Growth (incl China):
The Americas and APAC drove Q1 growth, with both regions showing strong growth in the quarter. On the other hand, EMEA growth slowed more than expected, missing an already-lowered forecast due to project timing.
Americas has a significantly higher margin at 25.6% compared to APAC with 12.6% margin in the current quarter.
- Americas revenue increased to 28.8% organic to $1.185 billion, accelerating from 24.7% organic growth in Q4.
- APAC revenue increased to 36.4% organic to $447.2 million, accelerating sharply from 27.1% organic growth in Q4 on colocation and hyperscale growth in China.
- EMEA growth slowed sharply, with revenue growing just mid-single digits versus expectations for high-single digits, on lagging AI infrastructure buildouts. EMEA increased 7.2% organic to $403.5 million, slowing from >30% growth in Q4.
For Q2, Vertiv forecast Americas to grow mid-20%, APAC low-20%, and EMEA low single-digit, pointing to sequential decelerations for both Americas and APAC as it stands.
Margins to be Resilient in Face of Tariffs
Vertiv’s margins are guided to be resilient in the face of tariffs, with management guiding very minimal impact despite the earnings call being held at the height of the effective tariff rate.
Adjusted operating margin came in at 16.5% in Q1, down 5 points sequentially and below management’s guidance for 16.7% to 17.1%. However, adjusted operating profit was $336.7 million, slightly above the upper end of the guided $315 to $335 million range.
Management said the below-guide margin print was primarily due to the impact of Q1 tariffs, though the sizable revenue beat was also a factor.
Management is expecting an impact on a YoY basis to their Q2 adjusted operating margin, stating: “If tariff rates in effect today remain in effect for the entire second quarter, we expect adjusted operating margin to be 18.5%, about 110 basis points lower than last year's second quarter. However, excluding the estimated net tariff impact, adjusted operating margin would show good expansion, which implies that tariffs more than explain the year-over-year reduction and underlying margin expansion drivers, including operational leverage, productivity and commercial execution remains strong, and we believe we continue to be on track for our long-term margin targets.”
The guide for next quarter of adjusted operating margin of 18.5% marks a 2-point expansion QoQ. However, management also lowered fiscal year guidance, stating: “We are reducing our full year guidance for adjusted operating margin to 20.5% at the midpoint, approximately 50 basis points lower than prior guidance, of course, primarily driven by the estimated net impact of tariffs offset by favorable operating leverage on higher expected sales. This all translates into maintaining our adjusted diluted EPS at $3.55 at the midpoint, which is consistent with prior guidance and 25% higher than prior year despite the impact of tariffs.” This translates to adjusted operating profit of $1.935 billion at the midpoint.
Vertiv reported at the height of the tariff impacts when the effective tariff rate was 27%, largely due to China’s tariffs of 145%. As it stands today, the effective tariff rate is 17.8% which would imply a better outcome for Vertiv’s bottom line than stated on the earnings call on April 22nd.
Despite the 50 bp reduction, this guidance suggests margins are expected to strengthen through the back half of the year to the low-20% range given Q1 and Q2 are both sub-20%.
Vertiv also provided more color on adjusted operating margin, with upside and downside scenarios based on how the tariff situation evolves over the next quarter. Vertiv’s upside scenario assumes tariff rates on April 22 remain the same, while the company recognizes tailwinds from incremental sales growth, projecting $2.015 billion in adjusted operating income for a ~21.3% margin.
Vertiv also provided two downside scenarios:
- The first scenario assumes supply chain hiccups or other risks to customer spending, projecting adjusted operating income at $1.85 billion, or a margin of ~19.6% for the year.
- The second scenario assumes that the reciprocal tariff rates announced on April 2, that were subsequently paused for 90 days on April 9, are reinstated in July. Under this scenario, Vertiv expects a larger hit, projecting adjusted operating margin of $1.80 billion, or ~19.0%, effectively eliminating much of the margin upside guided this quarter.
Commentary on China:
According to Vertiv, they have low exposure to China: “In the U.S., we have strong local capacity and we continue expanding it. We have capacity in Mexico. Most of our Mexico capacity and production is already USMCA qualified, and we are driving towards 100% of qualification goal. Single digits portion of our demand is sourced from China, and we are deploying or have already deployed lower tariff or no tariff alternatives.”
Although sourcing may be limited from China, there’s indication that China is a major customer per the geographic breakdown above where we stated: “APAC revenue increased to 36.4% organic to $447.2 million, accelerating sharply from 27.1% organic growth in Q4 on colocation and hyperscale growth in China.”
Quarterly EPS Growth Lumpy Through FY25
Similar to its margin outlook, Vertiv maintained its FY25 EPS outlook but widened its range to account for tariff uncertainties. EPS growth is expected to be quite lumpy through the rest of the year as Q1 saw some one-time benefits from a better interest rate on the nearly $3B in debt Vertiv has on the balance sheet: “The increase in EPS was primarily driven by higher adjusted operating profit, but also positively influenced by lower interest expense, in part due to the term loan repricing last year.” Q2 is expected to grow 20.9% and Q3 is also expected to outpace revenue growth at 26%.
- Q1 adjusted EPS of $0.64 beat by $0.02, representing YoY growth of 48.8%. The strong growth was notable although lower than the 76.8% growth seen in the prior quarter.
- For Q2, Vertiv guided for adjusted EPS of $0.77 to $0.85, or $0.81 midpoint. This corresponds to YoY growth of 20.9%.
- Growth is expected to rebound slightly in Q3 to 26% YoY with 15.6% growth expected toward year end.
Management was quite clear the impact of tariffs would be primarily felt in Q2 before normalizing by Q4: “Tariff costs will certainly accelerate in the second quarter from the first quarter. And with limited time to mitigate with either supply chain or commercial countermeasures, our adjusted operating margin will be negatively influenced.”
For the full year, Vertiv still expects $3.55 in adjusted EPS, up 24.6% YoY, though it has widened its forecast range, now seeing $3.45 to $3.65 versus its prior view for $3.50 to $3.60.
Cash Flow Margins Dip, Net Leverage Improves Sequentially
Cash flows dipped sequentially with operating cash flow of $303.3 million in Q1, for a 14.9% margin. This is down from $425.2 million in Q4 with OCF margin of 15.4% but more than double the $137.5 million a year ago with OCF margin of 8.4%.
Adjusted free cash flow was $264.5 million for a 13% margin, down from $361.8 million in Q4 but up more than 161% YoY. Management said that they “experienced strong collections at the end of the quarter with a good portion of that accelerated a few weeks from Q2, which does create a potential headwind for next quarter.”
Based on comments for 1H ’25 free cash flow to be roughly consistent YoY, Q2 adjusted FCF could be near $170 million. This would correlate to a 7.2% margin. Inventories are increasing from $1.25B last quarter to $1.38B this quarter, and this implies inventories will increase again next quarter.
Vertiv also maintained its outlook for $1.3 billion in adjusted FCF for the full year, though it widened its range by $25 million on each end to $1.25 billion to $1.35 billion.
Cash and equivalents increased more than $200 million to $1.47 billion, while debt remained steady at $2.93 billion. Net leverage improved sequentially to 0.8x, down from 1x in Q4 and 2.2x at the start of FY24.
Earnings Call Q&A:
Modular AI Infrastructure (AI Factories) – Catalyst for Vertiv
By now, the Blackwell delays have been fully discussed. However, investors should look deeply at what caused those delays and what solutions providers and component suppliers are solving the issues. When there is this much demand, a delay like this provides a critical opportunity for suppliers to step up and take market share if their products help to resolve the issue.
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.
Timing for the Next AI Splash
Vertiv’s report can provide hints as to when the next AI splash may occur. Analysts certainly did not miss the opportunity to try and identify timing from Vertiv. We’ve covered in the past our takeawayswhere Vertiv hinted toward Blackwell delays. What’s being described is the Q2 QoQ inflection should translate in about 3-6 months for Nvidia’s deliveries. Notably, there are many proxies to track and thus isn’t not a perfect signal, yet we are quite clear Q1 is not going to be a blowout quarter for Nvidia and it’s likely not going to be Q2 either if you assume 3-6 months out. We’ve stated this many timesmany times in the past – for Nvidia investors to look for H2 as the bigger splash (and next leg up) in AI.
Here is the current update from Vertiv (as far as they can disclose):
Chris Snyder:
Maybe just a high-level one here. What do you guys think is the best way for all of us to track liquid cooling demand in the market? Is it Blackwell shipments? And if that is what we should be looking at? My understanding is you guys do would lead the chip shipments by some period of time. But just any color on that relationship?
Giordano Albertazzi:
Well, certainly Blackwell is a good — Blackwell shipments is a good proxy. But as you were saying, we proceed that deployment or anyway, the demand for liquid cooling proceeds the deployment, especially when it's liquid cooling that is not in rack with the cool and distribution units that are not in back, in which case pretty much the CDU demand and the Blackwell demand coincide.
But it's not just Blackwell shipments. There are other chips, some prior chip ASIC silicon that is more and more requiring liquid cooling or able to work with liquid cooling. So it's a little bit multifaceted. But certainly, Blackwell is a good place. Blackwell shipments are a good place to start and think in terms of probably 6 to 3 months before that happens is when we see our demand turn into deliveries. Yes, I think we are pretty happy about the trajectory of this technology and this product line. I'm actually very happy the way it's unfolding right now.”
Reiterating 2029 Goals
Five year goals are irrelevant to a growth investor as quite a bit can change in that time period. However, management brought up their 2024 goals a few times to assure analysts on the call that their working toward margin expansion. Specifically, the following was stated in the November 2024 Investor’s Day:
- Top line growth of 14.4% from $7.8B in 2024 to $14.4B in 2029
- Adjusted operating margin of 25% up from 19% in 2024 — you can see where the company took a step back this last quarter with adjusted operating margin of 16.5%
Conclusion:
Vertiv’s report was not a blowout, yet it hints toward the next AI splash occurring in the coming quarters. While many are focused on the effective tariff rate, what we know is that if you count China as a major customer or major sourcing partner, then sales will be lower and margins will be lower compared to last year. Vertiv echoed this in their commentary. Plus, analyst consensus does not point to Vertiv growing meaningfully in the second half (right now).
Our take is a bit different than analyst consensus. According to what we parsed from Q1, Vertiv saw outsized growth in APAC and this growth from APAC is likely to wane given global tensions. Perhaps Vertiv even saw a pull forward ahead of tariffs in Q1 given APAC sharply accelerated and China was named as the region contributing to APAC’s growth. However, my take is that by the time we exit the year, Vertiv’s AI story will have driven a surprise or two as there is a dislocation between what the management team is describing and analyst consensus (in our favor).
With that said, it’s unlikely we buy Nvidia suppliers ahead of Nvidia’s report given the weakness in Super Micro’s report, the lackluster inflection for Vertiv and more muted commentary we’ve been tracking thus far for Q1 from other suppliers. We think August/November will be the bigger AI splash in terms of Nvidia’s earnings call and will align any Vertiv entries accordingly.
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Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
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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