Vertiv Holdings Co (VRT) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A reveal strong financial performance, strategic market positioning, and optimistic guidance. Despite some uncertainties in Europe and challenges with tariffs, the company is on track to achieve its long-term margin targets. The raised guidance, strategic partnerships, and growth in service and equipment orders indicate a positive outlook. The market's response is expected to be positive, with potential for stock price appreciation in the 2% to 8% range over the next two weeks.

Key Financial Performance

Adjusted Diluted EPS $1.24, up approximately 63% year-over-year, driven by higher adjusted operating profit and a lower effective tax rate, primarily from progress with tax planning and timing of some discrete items in the quarter.

Organic Sales Growth 28% overall, with Americas up 43%, APAC up 21%, and EMEA down 4%. Growth in Americas and APAC was driven by accelerated AI demand and top-line expansion, while EMEA faced challenges due to power availability and regulatory issues.

Adjusted Operating Profit $596 million, up 43% year-over-year, with a 22.3% margin. Growth was driven by operational leverage on higher sales, positive price/cost, and productivity, partially offset by tariff impacts and supply chain inefficiencies.

Adjusted Free Cash Flow $462 million, up 38% year-over-year, reflecting strong operating performance and translating to approximately 95% free cash flow conversion.

Net Leverage 0.5x at quarter end, expected to exit the year at 0.2x, providing significant flexibility for future capital deployment.

Backlog $9.5 billion, up about 30% year-over-year and 12% sequentially, providing strong visibility into 2026.

Segment Results - Americas Organic top-line growth of 43%, driven by accelerated AI demand across product lines and customer segments, with margin expansion of 400 basis points despite tariff headwinds.

Segment Results - APAC 21% organic growth, driven by AI infrastructure demand, with operating leverage critical for margin expansion.

Segment Results - EMEA Organic sales down 4% due to industry challenges, with sales higher than expectations heading into the quarter. Adjusted operating margin significantly below prior year due to deleverage on lower sales and higher fixed costs.

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Operating Highlights

800-volt DC portfolio: Planned for release in the second half of 2026, aligning with NVIDIA's 2027 rollout of Rubin Ultra platforms. Collaboration with NVIDIA to advance platform designs.

SmartRun prefabricated white space system: Innovative prefabricated system enabling faster deployment, shorter time to revenue, and alleviating skilled labor constraints on-site.

Americas market growth: Organic sales grew 43% in Q3, driven by accelerated AI demand across product lines and customer segments.

APAC market growth: Organic sales grew 21% in Q3, driven by AI infrastructure demand.

EMEA market challenges: Sales declined 4% in Q3 due to power availability and regulatory challenges. Expected rebound in the second half of 2026.

Adjusted operating profit: Reached $596 million in Q3, up 43% year-on-year with a 22.3% margin, exceeding guidance.

Adjusted free cash flow: $462 million in Q3, up 38% year-on-year, with a 95% free cash flow conversion.

Backlog: Total backlog stands at $9.5 billion, up 30% year-on-year and 12% sequentially, providing strong visibility into 2026.

Tariff mitigation: Comprehensive actions and pricing programs expected to offset tariff impacts by Q1 2026.

R&D and engineering investment: Spending to grow 20%+ in 2026, focusing on staying ahead in GPU generations and system layer advancements.

M&A strategy: Focus on both opportunistic bolt-ons and larger strategic acquisitions to expand technology leadership and global reach.

Regional restructuring: Programs in EMEA to address market challenges and prepare for future growth, with expected annualized benefits of $20 million starting in 2026.

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Risk or Challenges

EMEA Sales and Market Challenges: EMEA sales declined 4% due to power availability and regulatory challenges. Regional restructuring programs are being implemented, but growth acceleration may not occur until the second half of 2026.

Tariff Impacts: Tariffs are creating additional input costs, and while mitigation actions are in place, the situation remains fluid. Current tariffs are expected to be materially offset by Q1 2026.

Supply Chain and Operational Challenges: Operational and supply chain challenges from Q2 are being addressed, but inefficiencies have impacted margins. Investments in manufacturing and service capacity are being accelerated to mitigate these issues.

Geopolitical and Regulatory Risks: Geopolitical shifts and regulatory hurdles, particularly in EMEA, are adding complexity to operations and market performance.

EMEA Profitability: EMEA's adjusted operating margin is significantly below prior year due to lower sales and higher fixed costs. Restructuring programs are expected to yield benefits starting in 2026.

Tariff-Driven Operational Inefficiencies: Operational inefficiencies driven by supply chain actions to mitigate tariffs have negatively impacted margins, though progress is being made to address these issues.

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Guidance & Outlook

Revenue and Sales Growth: The company raised its full-year guidance for net sales to $10.2 billion, translating into 27% organic growth for the full year. For Q4, net sales are projected at $2.85 billion, with organic growth of approximately 20%. Significant organic sales growth is anticipated in 2026, supported by a substantial backlog and clear visibility of the pipeline.

Regional Performance: Americas is expected to continue its strong momentum with high 30% growth in Q4. APAC is projected to grow mid-single digits in Q4, while EMEA is expected to decline high single digits but improve mid-teens sequentially. EMEA is anticipated to rebound in the second half of 2026, driven by AI infrastructure demand.

Profitability and Margins: Adjusted operating profit for Q4 is expected to be $639 million, up 27% year-over-year, with an adjusted operating margin of 22.4%. Full-year adjusted operating profit is projected at $2.06 billion, up 33% from last year, with a full-year adjusted operating margin of 20.2%. The company remains committed to achieving its 2029 margin target of 25%.

Capital Expenditures and Investments: The company plans to accelerate investments in supply chain and service capabilities to stay ahead of customer demand. Engineering and R&D spending will grow by 20% or more in 2026, with flexibility for further acceleration. Investments in capacity expansion, particularly in the Americas, are being prioritized to maintain technology leadership and operational efficiency.

Tariff Mitigation: The company expects to materially offset the impact of tariffs by the end of Q1 2026 through comprehensive mitigation actions and pricing programs.

Market Trends and AI Adoption: The data center market is expected to show remarkable strength, driven by accelerating AI adoption globally. The company is collaborating with NVIDIA on the 800-volt DC portfolio, planned for release in the second half of 2026, aligning with NVIDIA's 2027 rollout of their Rubin Ultra platforms.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What is driving the 60% order uptick for Vertiv, and when will big announcements like Oracle's RPO number and OpenAI's deal with NVIDIA flow into orders and revenues?

A:The drivers include a strong market, technology evolution, Vertiv's competitive advantages (service, technology, reliable execution), and industry trust in Vertiv's scalability. For big announcements like Oracle's RPO and OpenAI's deal, the dynamics of orders to Vertiv differ from the backlog of customers, as these projects are built gradually and orders flow in phases.

Q:Can you provide more color on the margin structure and growth rate of services versus equipment?

A:Services are accretive to the business, generating recurring revenue and linked to lifecycle services optimization. While the product systems side is growing rapidly, the service business typically lags but is accelerating. The density of technology in new data centers is conducive to more service penetration.

Q:What is the outlook for incremental margins and the impact of tariffs on long-term margin targets?

A:The path to the 25% long-term margin target by 2029 remains intact. Incremental margins are expected to be in the 30%-35% range. Tariffs have been a headwind, but countermeasures are being enacted to offset them. Low 30s incrementals can achieve the target by 2029, and higher incrementals could achieve it sooner.

Q:Have price negotiations with customers changed over the past year?

A:Price negotiations remain challenging as customers are professional and savvy. The price achieved depends on the value delivered, including innovation, service level, and quality. Customers are business-sensitive, and Vertiv focuses on delivering value to enable favorable pricing.

Q:What is the confidence level in Europe's market recovery and the restructuring efforts to prepare for growth?

A:Confidence in Europe's recovery is cautious, with expectations for improvement by the second half of 2026. Data sovereignty and low vacancy rates drive the need for AI capacity in the region. Restructuring efforts aim to tailor the organization for AI infrastructure build-out and ensure agility for reacceleration.

Q:How is Vertiv scaling its services to support strong equipment orders?

A:Vertiv has over 4,400 field engineers globally and continues to invest in scaling services. Service capacity planning is aligned with product demand and geographic needs. Productivity in the service environment is rigorously measured to ensure high performance and contractual commitments.

Q:What are the capacity investments in North America, and how does Vertiv plan to keep up with backlog growth?

A:Capacity expansion is focused on existing sites for speed and scalability, with some new locations possible. Expansion timelines range from a few months to 9-15 months. Vertiv builds capacity 6-12 months ahead of need, leveraging backlog and pipeline visibility.

Q:What is the status of plant reconfiguration and the impact on Q4 margins?

A:Plant reconfiguration is progressing, addressing operational inefficiencies. Q4 margins are expected to be flat sequentially, with headwinds from tariffs and accelerated fixed cost investments. Tariff mitigation measures are expected to offset headwinds by Q1 2026.

Q:What is the path to mid-20s margins in EMEA, and does it require volume growth?

A:The path to mid-20s margins in EMEA involves both volume growth and restructuring efforts. Sales acceleration in Q4 and addressing operational inefficiencies are expected to improve margins significantly from Q3 levels.

Q:How does Vertiv's backlog phasing relate to recent large data center announcements?

A:The backlog phasing is consistent with typical levels, reflecting the speed of deployments. Large data center announcements are deployed in phases, and orders flow in as projects mature. The healthy pipeline supports future backlog growth.

Q:What is the timeline for expanding production capacity to meet growing data center demand?

A:Capacity expansion timelines vary from a few months for line reconfiguration to 9-15 months for larger expansions. Vertiv expands capacity based on backlog and pipeline visibility, ensuring readiness for demand.

Q:How does Vertiv address competitive dynamics and innovation in the market?

A:Vertiv embraces innovation as a driver of value and competitive advantage. Examples like microfluidics and 800-volt DC align with Vertiv's expertise. The TAM per megawatt is narrowing to $3-$3.5 million, reflecting technology advancements and a more rational competitive landscape.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on Oracle's RPO and OpenAI's deal, restructuring efforts in Europe, and exact CapEx growth for 2026. They also did not provide specific incremental margin numbers for 2026 or detailed timelines for capacity expansion.

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Earnings Word Cloud

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