See you sweat when I ask you, you know, that's good. Oh, we got to start. All right. Welcome back. We are very excited to have Vertiv Corporation with us. We've got Gio Albertazzi, who is the CEO, and we've got Dave Fallon, who is the CFO. And Gio, as I walk over to you, you know, maybe just start with, there's obviously a lot of noise out there, you know, after reported earnings, which were very good, by the way. But if we can start off with, why do you still seem so confident that you're well positioned to take advantage of the AI-driven CapEx cycle? Maybe to sum it up, you've talked about being a one-stop shop. So sort of what does that mean, you know, between your experience in thermal and power service infrastructure solution? What does that mean, being a one-stop shop?
Yeah. Thanks, Anand, for the question. As I said, Q4 was a very strong quarter. Very, very proud, very proud of our Q4, very proud of all the progress and acceleration in the fourth quarter. AI clearly is making the entire infrastructure more dynamic and more challenging in every possible sense in terms of the loads that are being serviced today, but even more importantly for the long term in terms of the intrinsic dynamics of the industry. We know that the type of IT loads and infrastructure today, the GPUs, the servers, the clusters will only become denser and more challenging, more performant, if you will, more efficient over time, but more challenging from an infrastructural standpoint.
Our ability that comes from decades in the industry, that come from the most complete portfolio in the industry, our technical prowess makes us uniquely strong in being the privileged interlocutor for many of the hyperscalers and large colos, but as well as a lot of the silicon providers these days. Why is that very important? Because we know as those loads, as the infrastructure, as the IT infrastructure evolves, everyone wants to make sure that today their decision, their capital is allocated in something that is future-proof. And you can have that conversation with them if you know what the future will look like. And you know that only if you have a very strong relationship with the silicon providers. We have a very strong relationship with NVIDIA, and we work the technology roadmaps together, but the same we do with many of the hyperscalers.
So this forward-looking and ability to think the entire system is something that positions us uniquely strongly in the market.
Gio, it's safe to say that with all the changes out there, you think you're at least holding or gaining share? Is that the right way to think about it?
Yes. Yes. Not only we believe, but we gave an indication of the market, the space in which we operate, kind of a blending of all the various components, something that grows 9%-12% over the next few years. If you look at our trailing 12 orders at 30% at the end of December, or if you think about our 18% growth in 2024, well, that shows market share gain.
So you got about six questions on orders on the call, maybe about half the call. So I'm going to try and sum it in.
It felt like 24, but.
Yeah, I understand. So I'm going to try and sum it in the one question, right? So you said your orders were up about 30% year- over- year, trailing 12 months, right? But much of the investor angst that we've seen, lately, has revolved around the recent flattening in the actual level of quarterly orders and backlog. However, to hit, you know, you got a $14.7 billion revenue target out there for 2029. It's 12%-14% organic revenue growth. Backlog in actual quarterly orders would have to trend up again to hit those numbers, I think. So would you ascribe the Q4 European order delays, you said, just lumpiness? Are you seeing any significant delays with hyperscaler orders in the U.S.? And is it fair to say that your confidence level is still high, that your order backlog up cycle is in the early innings?
I tried to do it all on one question.
Yeah, exactly. So that's 24 questions in one. Well, I think when we look out in the future, we have to absolutely think in terms of two things. One is the backlog creation that we have delivered in 2024. With 1.2 book-to-bill, certainly there is a backlog creation that goes in the right direction. The trailing 12 is important. We always say that our industry is, and especially as the individual projects become larger and larger, the lumpiness, if you will, exaggerates. And that's why we moved away from talking necessarily and obsessively about orders in the quarter. We think that kind of a 12-month representation is more interesting and more relevant to define what future looks like. So it's a combination of things. There is a pipeline that is strong and growing. There is an industry that is very convincing across the board.
Yes, there are some geographies that might be a little bit slower than others, but it's still in an overall kind of a global landscape that we see as very favorable and certainly very consistent with the model that we shared with all of you in November in Atlanta.
So I'll ask you one follow-up to that, Gio. So like you mentioned at the investor day, you were answering a question around, you said 100 GW of cumulative power added from 2023 to 2029. And you know, but you, how do I say this? You were concerned around your organic rate guidance, 12%-14%, because there could be headwinds that could slow down versus the power needed, what your growth would be. So would you say EU regulation is a headwind? And are there any other headwinds that have developed over the last few months, you know, with the understanding that the DeepSeek news came out between then and now?
So if we go back, let's go back two years. Sorry, a year and a little bit more when we were our first investor day. We said, hey, there's certainly an insatiable appetite for infrastructure build. And we cautioned everyone, hey, this insatiable appetite is moderated by factors like power availability or the fact simply that there is permitting. There could be areas where regulation is a moderating factor, but also the fact that the industry is a construction, this is a construction business in many respects. So there is a natural, let's say, limiting factor against that insatiable appetite. So when we were talking about our, when we gave our growth indications, market indications, so if we focus on hyperscale and colo, we were saying we see them growing in a 15%-17% range, that factors that in. But clearly we're talking about kind of the medium term.
We're not talking specifically one quarter or the other. So the fact that there might be, as we said, some of the projects in EMEA moved to the right, I wouldn't say is changing the assumptions of the model. It's just, you know, it's part of the lumpiness, it's part of the things. And if you look at things on a kind of a more longer period, the 12 months, well, then we see that, for example, Europe is clearly lagging the U.S. in general by 12, 18 months. We thought it could have been a little bit shorter, but it's lagging at this pace. Is that totally new? No. We believe that our model going forward in terms of the indication of growth, margin growth, et cetera, is still measured relative to the market.
So we feel good about the market relative to our indications, but also our model relative to what could be the hiccups of the market around that trajectory.
Yeah, Gio, that's very helpful. So Dave Cote on the earnings call talked about Vertiv seeing benefits from seed planting and R&D, your customer relationships and your CapEx, where I think your CapEx this year is up 50%. So can you give more color regarding what specifically you're doing in these areas and why they're helping you?
Yeah, I will let David talk about CapEx. I will gladly talk about innovation. I was mentioning about the very dynamic phase in which the industry is and will be probably for the foreseeable future. In this industry, it's not just about having the best point product. It's about having the best system and an ability to be ahead of competition for the entire power train, thermal chain, or more generally speaking, the entire infrastructure. So we continue to invest in innovation. We have given an indication of 15% CAGR spend increase in innovation. And we are probably in 2024 a little bit ahead of that. And if being ahead of that is something that we think is the right thing to do, we will do that. No hesitation.
We like that a lot, but we believe that being able to deploy technologies that enable our customers' success and business model is key, is one of the keys to pricing power and market share gain.
Great. And then, yeah, yeah.
Oh, yeah, just quickly on CapEx. So I think traditionally we've described our business as being relatively capital light. I would say in general, that is still the case, but the exception is when you see or anticipate, you know, periods of significant growth. So historically, our CapEx as a percentage of sales has been south of 2%. I think that was the case in 2023. We crept a little bit 2.5%, so a significant increase in 2024 versus 2023. But as you mentioned, there's going to be a step change, another 50% increase to $275 million in 2025, which is 3% of sales. And that's at the upper range of the directional guidance we gave in November.
The only thing I will say about that, if you're looking for breadcrumbs, if you're looking for signals, there's no more significant signal in, you know, our confidence in the growth we're seeing than with the checkbook. That's with the $275 million investment. Some of that, you know, inevitably will support demand we see in 2025, but it's more of a forward-looking investment in what we see beyond the current year.
Yeah, it's very helpful, Dave. And you know, maybe to that point, you know, it's interesting, like, you know, APAC seems to follow different sort of trends. So right now it's orders, but like last summer it was liquid cooling, right? And so to that sort of capacity additions that you have, like, you know, maybe an update on where you are in your liquid cooling build-out. I think by now you might be 40 times higher than you were when you started, or at least that's what you had talked about at the time. And how much that is contributing to your sort of full solution capability?
Yeah, about a year ago, indeed, we were indicating a 45% capacity growth, kind of analyzing the beginning of 2024 to the end of 2024. We are certainly there. We're very happy about the capacity that we have deployed and the geographical, let's say, spread of this capacity. So we are happy there. We think we have the capacity needed to serve the industry and to have a very relevant participation in this specific technology. It's absolutely, absolutely important. And I think that is a demonstration of the technical, not only technical prowess, but the ability to read the market and the technology and to combine organic innovation and inorganic innovation, because we made an acquisition at the end of 2023 that exactly fueled our strength in liquid cooling.
And nowadays, you know, you have to have the entire, speaking about the cooling, you have to have really the entire range of technologies, the liquid cooling, the air cooling, and everything, heat rejection, chillers, or other more advanced technology, like we like to talk about the CoolPhase Flex. So it's the entire system that you optimize. It's that entire system ability of value proposition that takes you to the meaningful tables and influences the design cycles of our customers.
Versus your own expectation, did anything in terms of the competitive landscape on the liquid cooling side, you ramped up, you feel good about where you are, again, a lot of flexibility?
At SC24, I've seen how certainly this is an area that is very dynamic in terms of portfolio expansion, very dynamic, relative to engineering capacity that we had in 2024 to now. We're not specific, but it's much larger, much larger, even post-acquisition, much larger now. So there's a lot of development. It's not unusual, actually, absolutely expected that in these situations, in this life cycle, the phase of the life cycle, there will be some entrants that come with some good ideas, but they may not be aware of all the service capabilities, the presence, or the ability to scale, or there will be a consolidation in the industry. Some of these will be acquired just like we acquired CoolTera back then, so I would say, are we surprised? No, we're not surprised.
I think that this part of the industry is behaving pretty much as you would behave a relatively new technology, and we're proud of the position we have.
Yeah, that's helpful, Gio. And then just one question back on Europe. Was there one particular country in the EU that, you know, was more of an issue? Like you had talked for a while, I think, about Europe being six to 12 months behind, right? So like, you know, now 12 to 18, is it like literally a few projects in one country move six months? Or like, how do we think about it versus?
Anyway, it doesn't work so well, thanks. I was complaining with Ritz-Carlton.
You guys need to be okay.
It doesn't work.
Yeah.
So now I got distracted for a second. So we're saying it's not in one specific.
Yeah.
We talk about the bulky nature, large projects, and sometimes these projects have their own cycle. But it's true that we thought that Europe is taking a lot of action than we expect. It doesn't mean that things are not happening, but not at the speed. But, you know, go back one week or two days, a lot of kind of key players, European players, were in Paris kind of looking at themselves and saying, hey, what can we do to unleash a little bit more of vigor in the AI industry and more? So I think it's blatantly obvious.
That's helpful. And then, Gio, I feel like I asked you this before, literally the same question. How concerned are you regarding next-generation chip power efficiencies, right? So let me just leave it at that, because I know how you've answered me before, but now with this news out, how do you answer me now?
Yeah, but I think two aspects. One is before I say, you know, we talked about the fact that anyway, the sheer amount of capacity increase overwhelms and is way over the efficiency gain that the silicon is providing. I think that holds absolutely, absolutely true today. And indeed, when we model the future, we always assume that there is efficiency, just like there has been efficiency in this industry for decades. So this is no, sorry, no different. The amount of volume, the amount of traffic, the amount of compute, raw compute power needed is going to increase. I mean, if one thing DeepSeek has done is clearly start to accelerate the transition from training to inference. And I always like to think about training as something that is a pure cost for those who do the training and inference being the revenue-generating part of the industry.
So in talking with many of the players, they see, you know, the transition to inference is accelerating. Inference is not less power intensity or computer power intensity. So our position that anyway, net demand is way in excess of the efficiency gain is still.
In your conversations, you don't think hyperscaler CapEx will change materially?
Absolutely. Some were saying, hey, Q4 was our peak CapEx 2024. And oh, by the way, think about the future as planned out, which means year-on-year increase. So some were blatantly out with higher numbers than historical numbers. So I think it's going in the right direction.
So I'm going to open up to the audience in a second. Let me ask you just about enterprise, because it doesn't get a lot of attention, but it used to be a big portion of the business. So maybe you can talk about enterprise customers, what they're saying, you know, is growth picking up there at all as AI starts to trickle?
Yeah, clearly it's a slower part of the market. We see an increasing number of conversations and attention, and the enterprise market is moving. And it's moving on traditional compute or AI compute. It's gradual, it's slower. Sometimes it's hard to really separate AI and traditional, but we see an improving landscape. Now, if inference moves more to the edge, still in the hands of the usual players or the new cloud people, which is certainly happening, or even enterprise, I would go to market for definitely for both.
Got it. Any questions from the audience?
Thank you. On the last call, you noted that despite the normalizing TTM orders growth number quarter over quarter, that the internal pipeline that you track grew sequentially. Can you just flesh out what the process is for that and what sort of rigor and analytics go into that number, even though you don't disclose it externally? Thank you.
Yeah, because I will be only that, let's say. I'll not be giving numbers, of course, like that's straightforward, but we're pretty rigorous in pipeline. So I'll start to be clear about what is not pipeline for us. When we sit with a customer and that customer shows us their CapEx plan for 2027, 2028, or 2029, and we know what the implications are likely to be, we know that that's in our heads. It's not in our pipeline. In our pipeline, we put the portion that is quoted, be it quoted at a, let's say, budgetary level, or it is quoted at the various stages of the sales cycle. So it's something that is quite quantitatively well defined, but also something that has a certain stability in method.
Indeed, we are very rigorous in this because we run our entire selling motion across every level of the organization, across every region of the world. We feel pretty good about our ability to compare pipeline in different pipeline evolution over time. We're rigorous in that respect. We know that there is much more out there. Sometimes you have a lot longer visibility, but we want to make sure that the rule is what is in the pipeline. What we call pipeline is something that has an actual dollar value attached to it. It doesn't mean that we sell everything. Of course, we measure and analyze pipeline statistically, win rates, pipeline velocity, what time it takes from an opportunity to be created to becoming an order, or sometimes we don't win 100%. I must admit that. Or anyway, for the opportunity to close.
So that process is quite mature and advertised.
Any other questions?
So I'm just curious if there's any metrics you look at, you know, the conversation about training LLMs versus inference. You know, how do you think about the demand for cooling for inference versus training, if there's any, you know, industry guidelines? Thanks.
So that's true for cooling and true for power. It's true across our portfolio. At the beginning, I mean, probably a year ago, and even before that, and even in New York at our November 2023 Investor Day, we were given some indication what is AI, what is not AI. And then one could say, hey, maybe we can talk about what is inference, what is training. We stopped doing all that. But even internally, if you will, of course, we know from a product technology standpoint what is certainly going to serve a GPU type of server or not, because you have liquid cooling, you have other things. But what we see, and I mentioned that last week, but what we see increasingly so is that the lines between AI and non-AI are blurring. But even, and I'll explain why, I will explain why.
But even within AI, the lines between training and inference are blurring. I think more and more our customers understand that dedicating an asset only to training, that means that you make an investment where you have, let's say, a useful life cycle of 20 years to a portion of your compute needs for the next 20 years. So more and more we see our customers, be they hypers or colo, they say, hey, I need to build an infrastructure that is capable of handling the various types of loads. So going back to non-AI to AI, they say, well, I know today that whatever the AI non-AI mix will shift over time. The medium density racks, high density, very high density will change over the life cycle of the asset.
Some over-provision cooling, for example, a 100 MW data center will have 80 MW of liquid and 60 MW of air, so 40% over-provision because you build in flexibility. By the same token, between this was non-AI, AI loads are going up. Data centers are being designed for longevity, and over time, the mix between training and the same facility will be used for both. Now, some of the players are very explicit about the fact that started to build more and more close to the central gravity of the use of the population, because we know that during the course of the life cycle of the asset, we want the asset to serve more for inference than training.
Any other questions?
So, Gio, I want to ask you, maybe getting into the margin topic, because you guys have executed quite well, and maybe this is for Dave too. So, I'll just actually start with APAC, because you have seen some sales recovery there. There is a pretty big discrepancy in margin between APAC and the other segments. So, is there anything structurally that keeps those margins lower? Is there more opportunity there? How do you think about that versus the other segments?
Thank you for asking about margins, by the way.
No worries. I got a few.
Not 24, though.
Exactly. So we posted this quarter with 21.5% operating margin, and there were zero questions on the call about it. So just to put that in reference, you go back to 2022, our operating margin was around 8%. We grew it to 15.3% in 2023, and then this past year at 19.4%. So big driver there. Certainly, we can get into the mechanics, but it's Gio's relentless nature. I think you look at our culture today versus what it was three years ago, and it's night and day difference. And you can get into that debate. Does winning drive culture? Does culture drive winning? There's probably a co-dependence there. But we talk a lot about the Vertiv Operating System. There's three pillars to that. It's a rigorous operating cadence. It's sharing best practices and lean continuous improvement.
And all of those things play a part in what we talk about the drivers of margin expansion even going forward. Of course, the operational leverage, everyone thinks that's a fixed cost focus. It's really a productivity focus driven by the Vertiv Operating System. Of course, we have operational execution and commercial excellence. But to your question, APAC margins, so we did see a pretty nice step up in margins in APAC in the fourth quarter, I think 12.5%. And we were pleased by that. Some of that, certainly driven by the 25% growth that we saw in the quarter. But all of those things that I talked about, driving margin improvement, they're pertinent across all of the regions. So we expect to see margin expansion in 2025 and going out to 2029 in all of the regions.
But to your point, there is some structural difference as it relates to the margin profile we see in China and India and Southeast Asia. So we definitely see opportunity. But when we're talking here in 2029 or 2030, talking about 2029, we're not going to be talking about an APAC at par with those other two regions.
So I definitely think that we take your margin performance for granted. You guys have done a good job there. You answered kind of my next question to some extent, Dave. So let me ask you in terms of balancing price versus cost, Gio. So over the last few years, you've come a long way on your pricing, as you know. And you've also built up your supply chain pretty significantly in terms of resilience. Those are the two things that were tougher a few years ago, right? So maybe talk about how that prepares you for the future, because there are the questions on tariffs, Mexico, what have you. So talk about how you can react pretty quickly on the price versus cost side, if need be, and the ability to price in the current market.
I think, let's start from price side, and two things. One is a pricing muscle that we have developed, have proven as well. We were reporting prices specifically and kind of exactly and sorry, specifically up until 2023, and that clearly showed some improvements, so the pricing muscle is like having the right processes, having the right decision-making, having the right delegation of authority, having an ability to really translate price or the value creation into price. That is a muscle that we didn't have or was a little bit atrophied, and certainly now it's there and it's strong, but to me, price is really, and pricing power is really about, I go back to what I was saying.
If we are not able to augment the value of our customers' business, if we are not enabling our customers to be more successful with us than they would be with someone else, then anything else is worth zero. So it is relentlessly being focused on that creates pricing power. The rest of the cost side of the equation is about relentlessness. So yes, it's resilience in the supply chain. And we know that we have learned that lesson dearly in the past, but never take anything for granted. To continue to work your supply chain from performance, cost, resilience. That activity goes on. With that is the overall efficiency of the execution machine. And the last piece is the operational leverage that we've several times explained or elaborated upon. You're talking about tariffs.
Clearly, we are in a little bit of a limbo to really understand what they will look like. We have, we believe, developed strong playbooks depending on the various scenarios that we have developed. So we need to understand exactly what will happen to deploy the right playbook that we have ready at hand.
Let me ask you two follow-ups on that. So one, these are big complex projects that you're signing, a lot of them. Do they have escalators in there? Because tariffs might get thrown at us from different angles. God knows. So they have escalators in there. And then the other is, as the projects get more complex, I think early in the AI evolution revolution, you said, I think AI could have margin than traditional projects. Is that the case?
So let's see, while the tariffs. The country, but again, very importantly in a cooperative manner. What was the other side part of it?
Pricing of the newer complex project versus the traditional.
So, as I said, the complexity in the technology, and that increasing complexity plays very well to capabilities. That typically translates into pricing power. To the extent, and it's quite an extent, that we are really creating value customers.
John, I've got one question about the impact of tariffs in China recently. It seems like you've talked about going after these kind of technology innovation acquisitions. Are there other cool targets out there, in quotes, that you could buy for reasonable valuations? And if there aren't, do you lean into things like repurchases or what's your reaction to that?
I think we have laid out our capital deployment strategy quite extensively in November. But pretty much going down the same type of architecture. We have a vision board for doing that. We told everyone we will be opportunistic, and that's our strategy. When it comes to acquisitions, let's say we like those kind of focus technology acquisitions because they reinforce our organic innovation roadmaps. But also sometimes we accelerate technology that we can then deploy globally and scale globally. We like them a lot. So do not be surprised if there will be more in the future. But clearly, the strength of the balance sheet allows us also to do things that are of a different size. So our M&A pipeline is live, is very well. But then what will happen, of course, remains to be seen.
But I think that other types of kind of guiding principles in the acquisitions, like is there kind of a technology that will be developing in the future in the industry that we might benefit from a kind of a larger acquisition for? Or are there kind of a market share or route to markets or capacity plays? If anything like that should be the right thing for us to do, we would have the means for doing that. So I wouldn't exclude either or. The thing that I always like to say is that we are not going to completely change the profile, the characteristics, and the DNA of the company in doing this.
So just quickly, last question. Just what are the top two or three innovations and structural changes that affect the company over the next five years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?
No, I think it is the fact that the technology will continue to evolve. The technology will continue to evolve. This evolution will be the driver for everything, and we see that as a favorable driver out there. There are other aspects that we like, and we will increasingly consider is the fact that our portfolio is very, very, very well suited for commercial industrial application that are critical infrastructure in that nature. So that's an area for us of further growth, another axis of growth, another avenue of growth that we might develop over time, and critical infrastructure is something that we can do very, very well. We do it very well in the data center space, and why not elsewhere?
Thank you, Gio. Thank you, Dave. Appreciate you coming.
Thanks a lot.