Q3 2024 Vertiv Holdings Co Earnings Call
Good morning, My name is not yet and it will be a conference operator today.
At this time I would like to welcome everyone to batch to batch courtyard 'twenty 'twenty four earnings conference call.
All lines placed on mute to prevent any background noise.
Please note this call is being recorded.
Speaker Change: I would now like to time the program over to your host for today's conference Cool and Mac sign up Vice President of Investor.
Speaker Change: Thank you Maria good morning, and welcome to Virtu third quarter 2024 earnings Conference call. Joining me today are verdict executive Chairman, Dave Cody Chief Executive Officer of Giordano, All the top three and Chief Financial Officer, David filing today, we have a few of them.
Speaker Change: Thank portion of the call go an additional 10 minutes if needed up until 12 10 P. M. Eastern time, what kind of request to please limit yourself to one question and if you have a follow up question. Please rejoin the queue.
Speaker Change: Before we begin I would like to point out.
Speaker Change: Putting the future financial and operating performance converted these forward looking statements are subject to material.
Speaker Change: Certainties that could cause actual results to differ materially from those in the forward looking statements.
Speaker Change: We refer you to the cautionary language included in today's earnings release and you can.
Speaker Change: It was made with the SEC.
Speaker Change: Any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date, we undertake no obligation to update these statements as a result of new information or future events.
Speaker Change: During this call we will also present, both GAAP and non-GAAP financial measures.
Speaker Change: He found in our earnings press release and in the Investor Slide deck found on our website and investors that Burton dot com with that I'll turn the call over to executive Chairman Dave Cody.
Speaker Change: Yeah.
Dave Cody: Good morning, Q3 was another very strong quarter.
Dave Cody: Oh in the orders.
Dave Cody: Fourth quarter guidance is strong and sales were 2025 looks stronger still based on Wicked. Good orders performance and importantly, there was more goodness ahead as our portfolio expands new product he went through.
Dave Cody: Alrighty.
Dave Cody: It's too early.
Dave Cody: Typically when investors seem to oscillate between here and it's like.
Dave Cody: The first is they are a reality and the second is liquid cooling.
Speaker Change: We have the agricultural revolution than the industrial.
Speaker Change: AI is just the next step in that digital Revolution is real it has just begun its got a long way to go.
Speaker Change: Data centers are fundamental to all that computing there is no other alternative evening on the horizon.
Speaker Change: Even quantum computing relies on digital based data centers, we have enjoyed extremely strong orders in the first half of 'twenty four but we would agree that continued approximately 60% of all these increases are unlikely as we tried to say last quarter.
Speaker Change: Gross supporting orders continue.
Speaker Change: Cloud and AI reinforce each other and drives the need for a lot of computing.
Speaker Change: Additionally, be a ramp up in countries outside the U S is just beginning.
Speaker Change: Data <unk> data center infrastructure.
Speaker Change: As the data center infrastructure develops liquid cooling increasingly comes to the fore and we continue to rapidly gain share there.
Speaker Change: There are various parts to illiquid.
Speaker Change: So in the high IP and Knowhow areas, specifically Cpus and total system.
Speaker Change: She was several charts in his presentation to simplify understanding of a liquid cooled system our position.
Speaker Change: Our data center product portfolio is the broadest in the industry.
It's also important to note that while rapidly growing we are not just in liquid cooling everything is growing well.
Speaker Change: We have extensive coverage and thermal systems.
Speaker Change: AI and data center growth in the digital age benefit everything we do not just liquid cooling.
Speaker Change: While it is true there is competition in liquid cooling. That's also true of all our markets, we won't win 100% of all waters.
Speaker Change: Base and broad portfolio global scale deep industry expertise global service and strong customer relationships.
Speaker Change: He is a distinguishing characteristic characteristics that others in the market can't match.
Speaker Change: Closely on roadmap consistency with key technology providers can be ready for today.
Speaker Change: And seeing around the corners to what the industry needs to do next.
Great example of this is the joint announcement, we did last week with Nvidia.
Speaker Change: And future.
Speaker Change: The industry needs to be ready for the new era of compute converted is working closely with our customers. So they will be ready for what is coming.
Speaker Change: While there is intense focus right now on every aspect of AI.
Speaker Change: So it's about the AI future or Virtus role.
Speaker Change: Ted pick a longer term view of the secular growth story in front of us.
Speaker Change: It is a multi decade growth trajectory folding comps.
Speaker Change: Competition is not a new phenomenon.
Speaker Change: Bergen advantages, though are not easily replicated and we are further expanding.
Speaker Change: That is what I saw five years ago as I looked at this unique company.
Speaker Change: Market leadership global scale technology differentiation, great end market and law.
Speaker Change: The accretion with there.
Speaker Change: But it needed to be unlocked in a convincing way with strong leadership.
Speaker Change: Credit Geo and his team for doing the hard work to start unlocking the full potential of birth.
Speaker Change: We are still far from our full potential.
Speaker Change: Next year and for many years ahead, and then just certainly supported by our auditors and operational performance so with that I'll turn the call over to Jill.
Jill: Well. Thank you. Thank you, Dave and we go to slide <unk>.
Q3, organic sales were up 19% with double digit growth in all three regions orders with a 37% growth on a trailing 12 month basis.
Jill: Our expectation.
Jill: On a year on year basis, despite tougher comparisons the.
Jill: The demand we see is resilient.
Jill: 37% trailing 12 corroborate the ambition for long term growth.
Jill: Adjusted operating.
Jill: Louis beat guidance.
Jill: 21% adjusted operating margin expanded 310 basis points, our first time, surpassing the 20% Mark.
Jill: An indication for the potential ahead.
Jill: Millions of dollars in the third quarter, and we have generated $773 million year to date.
Leverage reduced to one four X.
Jill: The end of Q3.
Jill: We again raised our full year guidance across all financial metrics and expect organic growth of 14%.
Jill: Adjusted operating profit of one point full rate $5 billion and margins expanding.
Jill: Hello of $1 billion.
Jill: <unk> hundred $25 million from previous guidance.
Jill: The orders trends and a robust backlog indicate that growth in 2025, we will accelerate relative to 2024.
Jill: Cool.
Jill: X sight at 37% our trailing 12 month order growth remains very convincing pipelines continue to grow we saw pipeline increase.
Yeah.
Jill: Across all regions.
Jill: We also are seeing more convincing signals that the AI is indeed accelerating in EMEA.
Jill: We are not providing a view on Q4 orders do not read too much into this orders are hard to forecast they can be lumpy.
Jill: Timing often outside our control and it ultimately depends on when the customer's ready to issue a po with that said.
Jill: I'd also like to assure you that we feel good in fact, why it encouraged that you order trajectory will remain healthy and support the financial ambition that we are targeting.
Jill: Our backlog continues to strengthen up to seven $4 million at the end of Q3 and this supports our view that growth will accelerate from 'twenty to 'twenty four 'twenty five.
Jill: Now look at the right side of slide four.
Jill: We have sharp focus on our capacity.
Want to make sure we stay ahead of the demand signals and enable growth.
Jill: We continue to expand capacity and example is the recently announced new integrated modular solutions facility in the Americas.
Jill: This facility has started production and shipments in third quarter and it is helping us meet our customers' needs for rocket datacenter capacity deployment.
Jill: Our focus on supply chain is intense we see the demand trajectory unfolding for years ahead, and we're making sure our supply chain is resilient in terms of supplier redundancy and geographic diversity.
Jill: Inflation, we continue we cooperate that expectation in how we approach our commercial excellence programs.
Jill: <unk> operating system continues to deliver incremental capacity productivity gains reduced lead times fundamental to our ability to execute at speed and scale.
Jill: Let's go to slide five now.
Jill: We have added a few slides in the presentation to fully described by positioning thermal management and more specifically liquid cooling for data centers.
Jill: Let's start road.
Jill: <unk> has the most complete portfolio of critical digital infrastructure products solutions and services.
Jill: Sales are well balanced across the five business groups palm management's representing 32% of our business through remote management, 30% ITC systems, with 10% infrastructure solutions <unk> and services, 23%.
Jill: The impact of AI is favorable to the entire portfolio in terms of total volume and Tampa megawatt the.
Jill: The total vertical opportunity is much larger than just the opportunity thermal and we loved thermal.
Jill: Important so let's talk about it and let's focus on the right side of the chart.
Jill: We have the entire range of thermal chain technologies from outside the data Center building two new side. The rag everything as an example from a chiller to an <unk> or <unk>.
Jill: And at manifold.
Jill: Liquid and air cooling co exist for heat collection in the data center of the future in all cases liquid and air Cooley No matter the mix of the two require heat rejection or you do reuse, so chillers darted expansion condensers et cetera.
Jill: So.
Jill: Not air or liquid.
Jill: And liquid.
Jill: And heat rejection for the foreseeable future.
Jill: Now please focus on the thermal market pause on the very right.
Part of the page.
Jill: We believe from a market value standpoint that and Heath 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 added 30% CAGR all growing very nicely.
Jill: We have serious intentions to be the market leader in liquid cooling.
Jill: Vertical growth in liquid cooling exceeds the market growth and we believe we are rapidly gaining market share.
Jill: We see that in our orders, we see orders converting to revenue in a convincing way. This quarter is a strong example.
Jill: Slide six I.
Jill: I want to describe what vertical leadership and liquid cooling needs.
Jill: Focus believes on the left side of the slide.
Jill: So portfolio first and foremost vertical has a complete range of liquid and high density solutions in particular in racks views, one phase <unk> to phase III Cds, many foods, we adore heat exchanges.
Jill: <unk> cooling.
Jill: And we are co play technical stick.
Jill: And we like that approach as it enables us to be used to be validated across multiple coal plate technology Zen server brands.
Jill: We are proud of our portfolio, but there is more to our liquid cooling trend than the strength of our portfolio.
Jill: It is future ratings, we are working today on the products that enable that technology roadmap. So the most influential silicon providers.
Jill: Products must precede beds in the field.
Jill: Innovation, we are significantly increasing our investment in high density cooling engineering to continue to lead in the future comps.
Jill: Complete thermal chain.
Jill: The data center of the future will have both air and liquid in the mix that will vary during the lifecycle of the data center based on the loads and the refresh cycles, so having the ability to master or cooling technology is of the essence.
Jill: Ability to customize at scale.
Jill: Indeed global scale, we are on track to scale, our liquid cooling technology.
Jill: 45 X by the end of this year, we are not stopping there.
Jill: Service trend datacenter expertise and service footprint are vastly different between players from bucket, we have been servicing datacenters for multiple decades, we have about 4000 service engineers deployed globally and growing.
Jill: Long standing customer relationships they need a partner that has the expertise to understand the significant changes ahead and can deliver clear <unk> advantages.
Jill: Reliability and quality <unk> has a reputation earned over several decades of keeping data centers up and running.
Jill: This is what liquid cooling market leadership looks like and I am proud of our position we have seen this translating into strong orders and now sales.
Jill: Let's go to slide seven.
Jill: Zoom out a bit.
Let's look at our partnership with Nvidia you might have seen the recent announcements of op co development of complete power and cooling reference designs for Nvidia <unk> 200, NPL 72 platform.
Jill: We are helping data center operators getting ahead of the challenges and enabling the division of AI factories.
Jill: Merck is advantages on the prior slide are exactly why we are uniquely able to play an important role for the industry.
Jill: And while there is a very organic relationship between VPN button.
Jill: We make sure our technology enables nvidia roadmap today and in the future.
Jill: A great example of enabling the industry to be future ready is our truly unique birth, who face CDU, which makes it simple to deploy a high density liquid cooling where needed without having to reengineer the entire data center environment even.
Jill: In the absence of the chilled water loop.
Jill: It can seem less median.
Jill: Virtually believe sorry vertical can seamlessly embedding one solution the ability to navigate the transition between liquid and air cooled services. We can develop this unique solution because we because of our decade long expertise around these technologies. So we've had over over to.
Jill: David.
David: Perfect. Thanks, Thanks, Joe turning to page eight this.
David: This slide summarizes our third quarter financial results organic net net sales up 19%.
David: $114 million above the midpoint of guidance with that upside driven by favorable timing of shipments in both the Americas and EMEA.
David: Our backlog is strong and with available production capacity, we were able to realize these additional sales.
David: Obviously projected for the fourth quarter.
David: Double digit organic growth growth was seen.
David: Across all three regions with EMEA, leading the way at 25% and demonstrating that strengthen the data center demand is not only an American story, but it is indeed global.
David: Our adjusted operating profit of $417 million was $121 million higher than last year.
David: Primarily driven by higher volume and commercial execution.
David: Adjusted operating margin of 21% represents a significant milestone.
David: Surpassing 20% for the first time.
David: We shared last year in our Investor event, a long term ambition of 20% plus.
David: It is safe to assume that the 1% above the 20 in the third quarter does not define the upper limit of that plus.
David: We believe there is plenty of upside opportunity and a lot of work to do with margins and we plan to share a revised long term ambition in this year's November 18th Investor event.
David: Now back to third quarter margins, we did incur launch costs for our new infrastructure solutions facility in <unk> in the third quarter as well as at several existing facilities, where we are expanding internal capacity.
David: And these launch costs as well as some project mix negatively impacted third quarter growth margin.
David: Compared with the second quarter.
David: Some of these launch costs were one time in nature, but others are permanent and.
David: We expect those to be more fully absorbed in growth gross margin.
David: With higher volume going forward.
David: Finally on this page our adjusted free cash flow was $336 million or $115 million better than last year, driven by higher profitability and continued improved trade working capital, which declined to 16% of annualized third quarter sales now.
David: Now that figure had been consistently above 20% in recent prior years. So some good progress there, but once again similar to margins still a ton of opportunity.
David: Our adjusted free cash flow conversion was 116% in the third quarter.
David: Consecutive quarter over 100%.
David: Now turning to slide nine.
This slide summarizes our third quarter segment results as mentioned.
David: We saw double digit sales growth across all three regions.
David: Americas had another strong quarter organic sales up 21% with broad strength across multiple market verticals and product lines, including a material contribution from liquid cooling in the third quarter.
David: Adjusted operating margin expanded 470 basis points largely.
David: Driven by operational leverage and strong commercial execution.
David: APAC sales increased 10% organically with China growing.
David: Double digits.
David: Though we are pleased with this growth in China, which represents about 10% of our overall business. We are not projecting that same double digit growth in the fourth quarter, maybe out of prudence or conservatism is China still operates in a challenging macro environment.
David: APAC adjusted operating margin declined 260 basis points from third quarter at 23%, primarily due to unfavorable mix and a favorable discrete item in last years third quarter.
David: But APAC operating margins did improve sequentially from the second quarter as expected and we anticipate further sequential margin improvement in the fourth quarter.
EMEA organic sales increased 25% driven by continued strong demand from co location in hyperscale customers and.
David: And very encouragingly growth was broad across our product and services portfolios.
David: Looking forward as Joe mentioned visibility into a strong pipeline of AI related demand in EMEA is becoming clear.
David: Adjusted operating margin expanded 400 basis points to 25, 9%.
David: And in the quarterly competition with the Americas EMEA, one for the second consecutive quarter, but of course, we anticipate another close rates between those two regions as we close out the year.
Speaker Change: Moving to slide 10, this slide summarizes our fourth quarter guidance, we are expecting a strong close close to the year.
Speaker Change: With fourth quarter sales expected to be up 13% organically with the regional profile, reflecting Americas up high teens in APAC and EMEA up mid to high single digits from last year's fourth quarter.
Speaker Change: We expect fourth quarter adjusted operating.
Speaker Change: Profit of $437 million at the midpoint.
Speaker Change: And adjusted operating margin of 24% with continued expansion from the third quarter margin driven by operational leverage commercial execution and productivity gains.
Speaker Change: We anticipate year over year incremental margins of 39% in the fourth quarter.
Speaker Change: Which translates into a projected 46% incremental margin for the full year.
Speaker Change: Next turning to slide 11, our full year guidance.
Speaker Change: We are increasing guidance for sales by $140 million, a combination of volume and foreign exchange.
Speaker Change: Full year expected organic growth is now 14% with this increase primarily driven by the Americas and EMEA, both expected to post mid teens growth from 2023.
Speaker Change: We are increasing our full year adjusted operating profit guidance by $50 million of 148 $5 billion with.
Speaker Change: $32 million from the third quarter beat and $18 million from the fourth quarter raise.
Speaker Change: Full year adjusted operating margin is expected to be 19% at the midpoint.
Speaker Change: 30 basis points higher than our previous full year guidance and a 370 basis point improvement from 2023.
Speaker Change: We are certainly pleased but not satisfied with our margin performance in 2024.
Speaker Change: In November of last year, we initially guided to 16, 7% versus the 19% we are currently guiding.
Speaker Change: The consistent quarterly beaten raise with this metric demonstrates our continued progress.
Speaker Change: With operational leverage commercial execution and productivity business wide drew.
Speaker Change: Driven by the <unk> operating system and as mentioned more to come.
Speaker Change: Our projected 2024 adjusted diluted EPS of $2 68 is more than 50% higher than 2023, which translates into a a very healthy peg ratio.
Speaker Change: The higher.
Speaker Change: Earnings per share is primarily driven by higher adjusted operating profit.
Speaker Change: We continue to provide additional information on income taxes and share count in the appendix of this presentation.
Speaker Change: And we will be more than happy to discuss any details on either of these topics after the call.
Speaker Change: On the far right side of this slide we've raised our full year adjusted free cash flow guidance to $1 billion, an increase of $125 million from prior guidance. This.
Speaker Change: This implies fourth quarter adjusted free cash flow of approximately $230 million and a projected net leverage at year end of approximately one two times, providing the needed flexibility to exercise our capital deployment strategy going forward.
Speaker Change: In conclusion, we believe the strong fourth quarter exit in 2024.
Indeed positions us very well for a strong 2025.
Speaker Change: So with that said I turn it back over to Joe well. Thank you. Thank you David.
Speaker Change: Talking about 25, let's go to slide 12.
And here are some of the early thoughts.
Speaker Change: In a nutshell.
Speaker Change: We are excited about the year ahead.
Speaker Change: Market is strong and we're certainly feeling the AI.
Speaker Change: AI tailwind that should continue to strengthen next year, we have good visibility we have the sharp execution of focus and price cost is expected to be positive.
Speaker Change: This results in our expectation for growth in 2025 to be higher than our growth in 2024.
Speaker Change: With expected expansion of adjusted operating margins and strong free cash flow generation.
Let's go to slide 13.
Speaker Change: This is a quick reminder.
Speaker Change: We have an upcoming investor event in Atlanta, Georgia on Monday November the 18th.
Speaker Change: It is also an opportunity to tour our booth at <unk> 24, the following morning.
Speaker Change: So we hope we will see you there.
Speaker Change: But summarize things and go to slide 14.
Speaker Change: The data center market is strong and the market is coming towards but its we are ready for this.
Speaker Change: Not only are we delivering strong growth, but we are also demonstrating our ability to deliver on profit and cash in a convincing manner.
Speaker Change: We have raised our full year guidance again.
Speaker Change: And we continue the relentless pursuit for better there is always room for improvement and that is the mindset, we adopt everyday.
Speaker Change: We stay humble and focused the.
Speaker Change: Intensity and stepping up.
Speaker Change: This is the right time to go faster draw.
Speaker Change: Drive differentiation and deliver premium results.
Speaker Change: I am holding the vertex team and myself.
Speaker Change: Directly accountable to do just that.
Speaker Change: No.
Speaker Change: With that over to the operator.
Speaker Change: For Q&A.
Speaker Change: Okay.
Speaker Change: Thanks, Keith we will now begin the question and answer session in order to ask a question. Please press Star then the number one on your telephone keypad.
Speaker Change: And the interest of time, please limit yourself to one question.
Speaker Change: If you have a follow up question. Please rejoin the queue.
Speaker Change: Well pause for just a moment to compile the Q&A.
And this last question. Thank you Andrew <unk> of Bank of America, Andrew. Please go ahead.
Speaker Change: Hi, This is David Ridley Lane on for Andrew.
Speaker Change: As hyper scaler or starting to build out multilocation campuses, how does the order.
Timing for you work out do you receive an order for all the buildings.
Speaker Change: <unk>.
Speaker Change: A single point in time.
Speaker Change: Those get phased in over time.
Speaker Change: And how is that part of the market.
Speaker Change: Yes.
Speaker Change: First of all we definitely see this.
Speaker Change: Large large campuses and large data center deployments happen and happen.
Speaker Change: I think really large scale.
Speaker Change: Not just the scale of the all the buildings, but scale across across the market.
Speaker Change: In general we got good visibility on the entire program.
Speaker Change: But the exact way in which.
<unk>.
Speaker Change: Placed if you will it really specific to the individual high.
Speaker Change: Hyperscale rore, even speaking about very large deployment.
Speaker Change: <unk> Colo some colors have very large deployment themselves, but again they have different different models, but.
Speaker Change: But in general that the prevalent is.
Speaker Change: They place.
Speaker Change: For for the for the buildings that are.
Speaker Change: In the project of being deployed at that time, so as we said in the previous call. We get certainly a longer visibility in terms of the Po that we received from this part of the market but.
Speaker Change: The good thing is that we have the wind up is needed for them and they are actually building and the visibility on the longer program.
Speaker Change: Thank you very much.
Speaker Change: Thank you and the next question goes to Steve Tusa of Jpmorgan, Steve. Please go ahead.
Steve Tusa: Hey, guys good morning.
Speaker Change: Good morning.
Just a backward looking question on three core <unk> in the orders obviously.
Obviously in the second quarter.
Speaker Change: Beat your guidance by several hundred million dollars.
Speaker Change: You talked about a couple of things.
Speaker Change: Moving in or at least hitting in that quarter that maybe you had less visibility on at the beginning when you look at the outperformance this quarter, which was fine, but a lot more modest.
Speaker Change: Was there anything that you know.
Speaker Change: Like pushed out.
Speaker Change: On you in the quarter did you hit most of what you expected to hit from an orders perspective.
Speaker Change: And timing and then just my follow up would be there is a lot of questions around the ODM.
Who are.
Speaker Change: Talking about their market share in liquid cooling can you just maybe remind us and clarify.
Speaker Change: How you guys fit into that how much you supply them and would actually take a piece of that sure that theyre talking about and how you are competing with them as well just to kind of clarify.
Speaker Change: The relationship and interplay between you guys and the ODM done liquid cooling. Thank you.
Speaker Change: Okay.
Speaker Change: Sure so to the first of your questions.
Speaker Change: <unk>.
Speaker Change: Clearly we were talking about <unk>.
Speaker Change: Projects and an order lumpiness.
Speaker Change: The market the market that has not changed in in that respect.
Speaker Change: We have in Q.
Speaker Change: Q3.
Speaker Change: <unk> exceeded our guidance of note is our expectation so things have.
Speaker Change: They have happened nicely.
Speaker Change: But again, what is particularly important for us is that we we.
Speaker Change: We stayed at a strong trailing 12 months and that is what defines the fact that the long term trajectory. So.
Speaker Change: I wouldn't comment specifically is has this job move Daniel moved out.
Speaker Change: We explained some of those dynamics in Q2, two or two to give to give color. We are happy with the way the pipeline is unfolding.
Speaker Change: Unfolding into into orders and we have a strong pipeline going forward and indeed is what I'm, saying.
Speaker Change: Quarter on quarter.
Speaker Change: Pipeline growth and it's definitely definitely a trend this one that we have experienced over.
Speaker Change: Over the several.
Speaker Change: Quarters now.
Speaker Change: No.
Speaker Change: All good we feel very positive about about the orders that situation when it comes to the second question talking about ODM.
Speaker Change:
Speaker Change: Okay.
Speaker Change: Oems.
Speaker Change: Play such an important role in the go to market.
Speaker Change: For the likes of for the likes of Us.
Speaker Change: ODM.
Speaker Change: In a play that for liquid cooling sometimes is is a white space play.
Speaker Change: They have a role with their service with their racks with their integration so.
Speaker Change: It's natural that.
Speaker Change: They integrate.
Speaker Change: Liquid cooling technology.
And while they do sometimes they do sometimes they don't and when they do they can do that with a private labeled.
Speaker Change: <unk> products, so they can do with the.
Speaker Change: Products that are.
Speaker Change: The original vendors labeled when we think about those ODM.
Speaker Change: We think of them as a go to market for us.
Speaker Change: Those odm's very often also rely on our ability not only to deliver and provide technology, but also to provide the service and.
Speaker Change: Liquid cooling knowhow.
Speaker Change: At rack ROE and system level that they might need kind of a.
Being complemented with so we.
Speaker Change: We do not look at that part of the market as as competition. We look at parts of the market that we have the opportunity to synergize with.
Speaker Change: Great. Thank you.
Okay.
Speaker Change: Thank you. The next question goes to Amit Galliani of ethical. Please go ahead.
Speaker Change:
Speaker Change: Yep.
Amit Galliani: Good morning, Thanks for taking my question I guess do you have a clarification, which as I understand your decision to not provide auto guide going forward.
Amit Galliani: Is it fair to think that you folks will keep disclosing auto numbers on a trailing 12 month basis going forward.
Amit Galliani: If you could just clarify that that would be really helpful. And then my question really is as we think about calendar 'twenty five revenue acceleration that you're talking about.
Amit Galliani: <unk>.
Amit Galliani: Could you just talk about how do you expect backlog to trend in that framework is the exploration will be coming from backlog normalizing or you think theres enough demand that the backlog and grow and revenues can accelerated 25. Thank you.
Amit Galliani: So yes to your point in time and so the.
Amit Galliani: Your point about.
Amit Galliani: Trailing 12.
Amit Galliani: Yes, as we mentioned already last time, we move into two trailing 12, so thinking those terms.
Amit Galliani: Please when you think about what to expect from from <unk> go in going forward. We believe that trailing 12 is really the best metric as well.
Amit Galliani: We talked about Lumpiness of orders, but the Lumpiness of orders is really meaningful because it's combined with the individual order size that is becoming it can become very very big so trailing 12 as we explain it is the way forward and Sebastian indication for everyone.
Amit Galliani: When it comes to the 25 revenue acceleration.
Amit Galliani: Probably a little bit premature to elaborate too much.
Amit Galliani: On that.
Amit Galliani: <unk>.
Amit Galliani:
Amit Galliani: We probably will try to narrow the field will narrow the focus.
Amit Galliani: Further in <unk>.
Amit Galliani: In Atlanta in in.
Amit Galliani: November.
Amit Galliani: And.
Amit Galliani: By the same token elaborating.
Amit Galliani: On the backlog and how the backlog will unfold during 2025.
Amit Galliani: Is.
Amit Galliani: Seale be premature, but suffices to say that we are operating in the market that is favorable we are winning in this market and.
Amit Galliani: We.
Amit Galliani: <unk> seen strong strong pipelines and.
Amit Galliani: And and we see this acceleration so happened most of them globally done in the past.
Amit Galliani: The landscape is certainly favorable and we are optimistic about that I.
Amit Galliani: I think more and more in Atlanta.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Thank you. The next question guys you Andy Kaplowitz of Citi Great. Andy. Please go ahead.
Andy Kaplowitz: Good morning, everyone.
Good morning.
Andy Kaplowitz: Joe maybe just to clarify the competition question a little more are you still getting the same win rate or even a higher win rate as the market moves further into liquid cooling in his blackwell powered data centers being a ramp up in <unk>.
Andy Kaplowitz: Getting that three to $3 5 million per megawatt content that you told us about at your last Investor day on the <unk>.
Andy Kaplowitz: High density compute focused projects that are out there at this point.
Andy Kaplowitz: We will not go for that.
Andy Kaplowitz: Talking about our win rates and how exactly when rates.
Andy Kaplowitz: <unk>.
Speaker Change: Uh huh.
Speaker Change: If we talk about individual.
Speaker Change: Product lines that will be probably too much to too much detail to be to be really useful, but we are clearly have different expectation of win rates for different product lines.
Speaker Change: Pretty good.
Speaker Change: Can I say sophisticated in terms of how we guide and next back internally and how we expect and we drive our business.
Speaker Change: The.
Speaker Change: We are happy with the trajectory of our win rates and our win rates are consistent with our market share ambitions and this is definitely true also for for liquid cooling.
Speaker Change: When it comes to.
Speaker Change: The second part of your question.
Speaker Change: As.
Speaker Change: Is maybe the second question.
Speaker Change: How is your how is your.
Speaker Change: Can megawatts evolving scene walk the three three and half.
Speaker Change: We're still in transition within utilization, but that's what we the signal that we see.
Speaker Change: Pointing in the direction of that additional $5 million 10 megawatts that we that we indicated in November of last year.
Speaker Change: And.
Speaker Change: That's something that also we will elaborate on.
Speaker Change: Further in in Atlanta.
Speaker Change: Thanks Jill.
Speaker Change: Okay.
Speaker Change: Thank you. The next question go to Jeff Sprague of vertical Research partners. Please go ahead.
Speaker Change: Thank you and good morning, everyone, Hey, just coming back to slide five.
Speaker Change: And just kind of thinking about the array of.
Speaker Change: Kind of a thermal solutions you have.
Speaker Change: Can you maybe speak.
Speaker Change: To what extent maybe customers historically bought this way.
Speaker Change: Kind of outdoor to the chip I would imagine it's very miniscule may be historically.
Speaker Change: Is that changing with AI and raising product.
Speaker Change: Project complexity and just the higher stakes involved in can you.
Demonstrate to customers that.
Speaker Change: Further integrating all three of these and somehow deliver.
Speaker Change: Kind of better efficiency energy savings that may be going best of breed maybe.
Maybe you guys are really good enrollment ROE, but trends got better chillers or something right can you actually demonstrate that an integrated solution from Virtus superior to try to pick best of breed.
Speaker Change: Hi, Jeff Thanks for the for the question.
Speaker Change: The first part of your question I think is if we if we see.
Speaker Change: Historically.
Speaker Change: The entire portfolio even pre.
Speaker Change: Liquid cooling sold two to a customer or if it's more.
Speaker Change: A point product I would say that it is it is very much a combination.
Speaker Change: It is all the time.
Speaker Change: Pretty much all the time, we took the entire portfolio and with many customers.
We sell the entire portfolio as a matter of fact that this is true pre and let's say post.
Speaker Change: Liquid liquid cooling, but it's indifferent indifferent.
Speaker Change: Portion indifferent.
Speaker Change: Is it geographies or or four different for different customers.
Speaker Change: In that respect and are having the entire portfolio is an advantage is an advantage for us again.
Speaker Change: Uh huh.
Speaker Change: Sales leverage.
Speaker Change: Go to market opportunities and especially now as the technology improves dramatically and ability to sit around the table and talk about the problem and the entire solution not just the individual bulks is something especially the large customers.
Speaker Change: Appreciate and north and <unk>.
And get a lot a lot of a lot of value for them.
Speaker Change: The second part of your question is can demonstrate can be demonstrated the PC the TCR or the fact that yes, we demonstrate the tcf.
Speaker Change: We believe that our products are.
Speaker Change: Deliver a lot of.
Speaker Change: Efficiency footprint in.
Speaker Change: A number of advantages, though of course are specifically to the individual product and when the products becomes a solution and this is true in general across our portfolio not just for thermal then advantages in terms of footprint the speed of deployment.
Speaker Change: Again, various aspects of total cost of ownership that.
Speaker Change: It can go from the initial cost inflation cost of.
Speaker Change: Installation and.
Speaker Change: No.
Speaker Change: Patiency in footprint.
Speaker Change: It will come to fruition, so we feel pretty good about the strength of our portfolio and even more so when that is any type of solution.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you. The next question guys, Hey, Scott Davis of Melius Research. Please go ahead.
Scott Davis: Hey, good morning, everybody.
Speaker Change: Good morning, Scotland staff.
The amount of cash you guys are generating now is.
Speaker Change: It's a big number it's a high class problem I guess, but.
Speaker Change: Yes, you did a big buyback when the stock was.
Speaker Change: It was really down.
Speaker Change: What are you guys thinking now with your excess cash or are there M&A opportunities out there that youre looking at or.
Speaker Change: I would like to take that balance sheet down a little bit more.
Speaker Change: Well, yes, it's a good problem to have if you will it's definitely a position that that is very different.
Speaker Change: Two years ago, let's put it this way so.
Speaker Change: We like where we are but also because it is enabling our cash allocation strategy.
Speaker Change: We'll talk more about our cash allocation strategy when we have our investor event in a couple of three weeks.
Speaker Change: But in general.
Speaker Change: And I'm very interested in.
Speaker Change: In M&A M&A is still part of our strategy it so.
Speaker Change: We continue and indeed, we have strengthened our.
Speaker Change: Yes.
Speaker Change: A radar screen and we are.
Speaker Change: We're actively.
Speaker Change: Involved in an M&A process. So I think we I believe was that process quite a quite a lot. So.
Speaker Change: More on our capital location strategy, when we are together, but.
Speaker Change: But definitely.
Speaker Change: Definitely focus on M&A.
Speaker Change: Okay helpful.
Speaker Change: And I don't want to get ahead of the guidance.
Speaker Change: More color next couple of weeks, but.
Speaker Change: It sounds like to me that you've gotten a lot more confident in your ability to drive incremental margins at that kind of 40% or higher level.
Speaker Change: Is that confidence based on your ability to capture price for the value that you're creating or.
Speaker Change: <unk> kind of capacity adds capacity coming on.
Speaker Change: Any hiccups.
Speaker Change: Again, I don't want to take away from what you can talk about in a couple of weeks, but if theres any color you can give us. It just feels like you guys have gotten a little bit more confident.
Speaker Change: And your ability to.
Speaker Change: Generate profits off the top that growth.
Speaker Change: Well.
Speaker Change: I will say Scott to that to the equation and the Formula has not has not changed dramatically you know nobody may change dramatically.
Speaker Change: Very well that there isn't an operational leverage element.
Speaker Change: And of course volume helps that.
Speaker Change: Significantly and we continue to operate in.
Speaker Change: We believe we will continue to operate in a price cost.
Speaker Change: Favorable environment going forward.
Speaker Change: So the two things combined.
Make us.
Speaker Change: Yes.
Speaker Change: Look optimistically to the future.
Okay.
Speaker Change: Couple of weeks. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question goes to Nick how are the place of Deutsche Bank Nicole. Please go ahead.
Speaker Change: Yeah. Thanks, good morning, guys.
Speaker Change: Good morning, Nicole.
Nicole Bank: Maybe just first a follow up on the order discussion I know last quarter. When you first discussed going to trailing 12 month orders you kind of noted that we should expect them to stay in the 30% to 35% growth. So is that still the view.
Nicole Bank: And then if you could also just talk about I mean, you guys put some more capacity into place with the new facility that you announced this quarter. How do you feel about current capacity and the need to do further expansion based on pipeline growth. Thank you.
Speaker Change: Okay. So it's the first boss orders on a trailing trailing 12.
Nicole Bank: Again, we've.
Nicole Bank: We've had two things.
We will we will go to trailing 12.
Speaker Change: Clearly we were talking about 30 to 35 for the third quarter.
Nicole Bank: 37.
Nicole Bank: In the third quarter is something that is.
Nicole Bank: We believe quite quite strong I think it's premature to talk about our future ranges, but again, we said and I said it in my in my.
When we were going through the slides that we will not.
Nicole Bank: Guide on orders aside given a TTM range would be exactly the same.
Nicole Bank: I'll stick to two.
Nicole Bank: <unk> to that.
Nicole Bank: Statement, if you will but but again.
Nicole Bank: We look at the pipeline, we will look at our.
Nicole Bank: The dynamic in the industry and we look at our strengthening the industry. So we are we are optimistic.
Nicole Bank: That translate of course in <unk>.
Nicole Bank: In growth.
Nicole Bank: And.
Nicole Bank: And capacity.
Nicole Bank: In general the situation of capacity is.
Nicole Bank: <unk>.
Nicole Bank: It's not dramatically different from what we said before but.
Nicole Bank: So that we always have that.
Nicole Bank: We go room.
Nicole Bank: To be able to accelerate in the short term if needed that might not be true.
Nicole Bank: Across all products product lines, but in general that ability to accelerate is there.
Way, we design design capacity, but also capacity should not be viewed as something static or something that moves in staff saved from one year to another.
Nicole Bank: That's something that is a constantly growing yes at new plant like peltzer will have.
Nicole Bank: A step up but in general if you think about what we're doing across the 23 factor is there is a constant expansion on the one hand.
Nicole Bank: And sometimes expanding an existing factory is foster and and generates.
Nicole Bank: Kind of a.
Nicole Bank: Expansion and revenue more rapidly than the brand new factory.
Nicole Bank: And so that's something that we do we do quite a credible correctly, but also our vertical operating system and all the lean activities that that we that we constantly implement and progress.
Nicole Bank: <unk> is a is.
Nicole Bank: As liberating capacity and that will continue we do not see that necessarily as a one off activity.
Nicole Bank: That will continue.
Nicole Bank: As new product lines are launched.
Nicole Bank: The productivity and the <unk> and the that the meaning continuous improvement labor.
Nicole Bank: Elaborates capacity, so think about our capacity if something that is constantly trending if you will our northwest on a.
Nicole Bank: On the chart.
Nicole Bank: Sometimes with.
Nicole Bank: With the steps like like in the case of.
Nicole Bank: Second because of the peso and we believe we have the capacity to support up to support our growth.
Nicole Bank: Okay.
Nicole Bank: Yeah.
Speaker Change: Thank you. The next question go to Nigel Coe of Wolfe Research Nigel. Please go ahead.
Speaker Change: Thanks, Good morning, everyone and by the way it getting off this guidance is a great thing so.
Speaker Change: So I'm fully supportive of them.
Nigel Coe: That said I'm not going to ask you about <unk> Trust me on that.
Nigel Coe: So [laughter] yeah by the way how is the backlog say about so just on the.
Nigel Coe: If you can just clarify first of all.
Nigel Coe: The comment on the contents.
Speaker Change: Opportunity in sort of the hybrid thermal management did you say that the content has gone up by half a million dollars per <unk>.
Speaker Change: Megawatt. So we're now looking at $3 4 million and if that's the case, what's driving that is it just inflation or is there some scope there.
But really I'm just curious the visibility you have with 25, clearly you've got a lot of backlogs, but I'm curious if the view on 25 up 614% or more.
Speaker Change: Driven by backlog already built or if there's some view on backlog development going forward. Thanks.
Speaker Change: So.
Speaker Change: When it comes to the content.
Speaker Change: No just just to be clear when we were talking about that half a million I was referring back in the context of the question that I that we were asked is it was reaffirming if you will the 253 million per megawatt going on our AI high density to the 33.
Speaker Change: Five so different from what from what we.
Speaker Change: Discussed.
Speaker Change: Probably now for the last 12 months and sometimes that will lead.
Speaker Change: We realized when we were together when it comes to trying to fight backlog.
Speaker Change: Clearly you asking backlog. So you ask kind of a very very forward looking but let's put it this way.
Speaker Change: We are happy with the backlog.
Speaker Change: And clearly.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: The situation of our backlog for 'twenty five is encouraging obviously, otherwise we wouldn't all be given any indication that that we have given at the same time every year.
Speaker Change: It's a combination of what's driving the backlog and what you book and ship at least ship book relative to the vantage points. So in this case of the vantage point of let's say the second of October when we when we caught a line here to these numbers. So clearly they are there.
Speaker Change: Or is there is a book and ship two two <unk> delivering in 2005, but when we analyze things we know that that's always the case so it's everything.
Speaker Change: Measure and evaluate relative to our historical dynamics and relative to to our pipeline and the potential of the pipelines.
Speaker Change: So it's a combination of the two I know hopefully I'm answering your question Nigel.
Nigel Coe: Firstly, thanks, Jim.
Speaker Change: Yeah.
Speaker Change: Thank you. The next question that she never tie of Oppenheimer. Please go ahead.
Speaker Change: Alright, Thank you and just to piggyback on this you know Joe for the last few quarters, you've talked about the elongation in order to revenue conversion cycle times for cloud and Colo.
Speaker Change: And Thats supporting some of the strength and visibility you have going into 'twenty five, but just what drives your confidence and remaining price cost positive in 'twenty five.
Speaker Change: Given that longer conversion cycle.
Speaker Change: When we were talking.
Speaker Change: First of all of our thanks for the question no.
Speaker Change: <unk>.
Speaker Change: When we think in terms of the.
Speaker Change: Elongation.
Speaker Change: We're talking about the innovation that happened in <unk> and.
Speaker Change: And specifically for the cooler and logical in Hyperscale.
And that elongation was was it 12 was let's.
Speaker Change: That's a from the 915 months to the 12 to 18 months. So it's analogy dramatic elongation, we're talking about a three month elongation.
Speaker Change: <unk>.
Speaker Change: We have good visibility on on our pipelines. We have is of course very good visibility on our on our backlog.
Speaker Change: Visibility on the on the price element of that backlog.
Speaker Change: Backlog and project pipeline.
Speaker Change: Pipeline, we have good visibility on the on the cost side of the equation on the cost side of equation of course is very very important so.
Speaker Change: Bind the combined the two enhance our.
Speaker Change: Continued.
Speaker Change: No.
Speaker Change: Continues reiterated the statement that we believe.
Speaker Change: Price cost to continue to be stable.
Speaker Change: Okay, maybe just to sneak one more in.
Speaker Change: The net Capex I think the guide is around $200 million for the year.
Speaker Change: That implies something like.
$80 million in <unk>, if I've got my math right.
Speaker Change: Driving this capex pattern and maybe help us understand.
Speaker Change: <unk> the increase in Capex.
Speaker Change: The prior quarter's run rate.
Speaker Change: Yes. Thanks this is David so.
Speaker Change: I can tell you first of all we do.
Speaker Change: Do not try to plan the year to have capex to accelerate as you go through the quarters. It just happened to happen that way almost every year. So if you could look back historically, our fourth quarter is generally the highest quarter as it relates to capex in the first quarter is the lowest.
We certainly had that $80 million plan cannot guarantee that all of it is going to happen within the three months in the fourth quarter I am not sure some could slip into into Q1.
Speaker Change: But.
Speaker Change: The one thing that is certain is that we continue to expand capacity, we have very specific identified projects and we're executing upon those right now.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you. The next question go to Michael <unk> of TD, Kevin Michael. Please go ahead.
Michael: Great. Thanks for taking the questions.
Michael: Two quick ones, if I may 1st I wanted to be absolutely clear are you, saying that your demand pipeline entering <unk> is higher than the levels. You saw entering <unk>. That's my first question and then second I just wanted to revisit a.
Michael: Prior question related to selecting the ball along in lead times, one of the things that we're seeing in the data center market is that.
Michael: The pre leasing window elongate then you 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, along gave rent or actually have less pricing power in the conversation any color there would be helpful. Thank you.
Michael: Okay.
Speaker Change: Well, thank you Mike.
Speaker Change: I think the first question is.
Speaker Change: If.
Speaker Change: If.
Speaker Change: The answer is yes, I was just trying to think about the formulation, but but yes. The pipeline entering Q4 is higher than the pipeline entering Q3 no doubt. So that's that's a is a resounding yes.
Speaker Change: When it comes to the elongated.
Speaker Change: Gated lead times.
Speaker Change: We do not necessarily see a correlation between lead time elongation and again I want to remind everyone is not a lead time in litigation because.
Speaker Change: Avert is.
Speaker Change: Need to elongate lead time. So we can we can most of the time delivering shorter lead time than the request and it was simply simply because of a lead time gets elongated because that is consistent with our customers' project plans and schedules. So if we do not see that correlation.
Our end, but.
Speaker Change: Yeah, I cant elaborate more than much on that but what we like on the elongation of lead time does that helps.
Speaker Change: It helps us it gives us time to to be more ready from a supply chain standpoint, and every spec capacity negotiation et cetera et cetera. So all good things.
Speaker Change: Great. Thanks for the color for you in Atlanta.
Speaker Change: Thanks, Thanks, a lot.
Speaker Change: Thank you. The next question goes to Mark Delaney of Goldman Sachs. Martin. Please go ahead.
Mark Delaney: Yes, good morning, and thanks very much for taking my question can you provide more detail on how orders have grown either in the third quarter or on a TTM basis between products and services and could you share more on the services business, specifically and how the shift to liquid cooling is affecting services revenue growth and bookings potential. Thank you.
Mark Delaney: So.
Mark Delaney: Yes.
Speaker Change: We are pleased you have about the direction of travel of orders.
Speaker Change: Full service in general and we are.
Speaker Change: Quite satisfied also the how that translates into into service service service or sales or so.
Speaker Change: I'd say that.
Speaker Change: I would say that.
Speaker Change: If you think about the trajectory of our of the service business is very much reinforcing our value.
Speaker Change: Let's say equation that knowledge into value that we provide to investors as well also the certainly the value that we provide to our customers and we see moving increasing increasing.
Speaker Change: Demand for our services.
In general and certainly specifically for liquid we have capabilities in liquid cooling in terms of installation and commissioning and lifecycle services.
Speaker Change: And.
Speaker Change: Now, let's say predictive predictive maintenance.
I do.
Digitally enabled that quite a quite unique in the in the industry and thats something that is.
Speaker Change: Is very convincing a customer base and reinforces our hour.
Speaker Change: <unk> value proposition.
Speaker Change: We have trained.
Speaker Change: Okay.
Speaker Change: Oh.
Speaker Change: We have trained and we continue to train a lot of engineers, we we want to make sure that there is no shortage of a field service liquid cooling capacities to serve the industry the industry.
Speaker Change: And adjustment.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question does she Brett Linzey of Mizuho. Please go ahead.
Brett Linzey: Hello, well thanks for the question.
Brett Linzey: To come back to thermal management I. Appreciate the long term forecast you guys have always had been very very active on new investment liquid, calling becoming a bigger component should we begin to see thermal application growth outpacing the power side going forward is there any major divergence, we should be thinking about.
Brett Linzey: A couple a couple of questions right here one is.
Brett Linzey: Certainly inside the.
Brett Linzey: <unk>.
Speaker Change: Did I say large very large thermal portfolio, but it's clearly the liquid cooling itself will be characterized by by high grades.
Speaker Change: Rates because of the dynamic the dynamics of the market as we explain in.
Speaker Change: On page five but also because.
We believe we would hate them out yet so combined the two certainly.
Speaker Change: Uh huh.
Speaker Change: Accelerate accelerates things, but as we mentioned the demand is quite balanced across the various portfolios on a business unit, but not his thoughts of the business.
And.
Speaker Change: And as we've said the.
Speaker Change: And our high density and.
And any way high performance compute is beneficial to the entire portfolio.
Speaker Change: So we.
Speaker Change: We will we will elaborate more on this aspect when we are together.
<unk>.
Speaker Change: In Atlanta.
Another aspect is very very interesting is that power management power power is going to.
Speaker Change: The Densification continues.
Speaker Change: Power will continue power will continue to grow so we're very encouraged by what we see in power and the dynamics that their densification will drive the other element that we talked about service with close I can I can only we reaffirm that the other aspect is.
Speaker Change: Infrastructure and prefabrication with constrains in the industry in terms of speed of Bill.
Speaker Change: Building new data centers.
Speaker Change: Prefabrication, some kind of more and more important.
Speaker Change: Yes, we will certainly see it positive acceleration coming from from liquid cooling, but thats, a and we believe.
Speaker Change: The entire portfolio will be will be favorable impact.
Speaker Change: Okay I appreciate the detail I'll leave it at one.
Thanks, a lot.
Speaker Change: Thank you. This concludes our question and answer session I would like to turn the conference call back over to Jeff Albers Harvey for any closing comments.
Well, thank you very much and thank you for the extra 10 minutes.
Speaker Change: With us I think.
Speaker Change: It was important to do a little bit more time for Q&A.
Speaker Change: I really like to thank the <unk> team for another strong quarter, another strong quarter of <unk>. So a big thank you for joining us today and again. Thank you for your questions really appreciate the support and see you in Atlanta.
Speaker Change: Yeah.
Speaker Change: Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Yeah.
Speaker Change: It has now concluded thank you for attending today's presentation.