Significant disruptions in the data center supply chain forced Vertiv to pay much higher prices for data center equipment and components in the fourth quarter, leading to an unexpected financial setback in the fourth quarter.
Shares of Vertiv plunged nearly 40 percent in trading Wednesday morning, with shares trimming losses to trade at $11.98 around noon, down $7.59 on the session.
Vertiv executives said the supply chain and pricing disruptions are likely to continue through 2022, and said it is raising its prices to acknowledge the impact of inflation on component pricing. Although this will improve Vertiv’s results, it suggests that higher prices will ripple through to customers and be felt more broadly across the data center industry.
“Supply chain issues are real, and challenging,” said Vertiv CEO Rob Johnson. “Our biggest challenge is with electromechanical parts and fans, which are critical components of many of our Vertiv products. Internally we have launched countermeasures to address the shortages. However, we expect and have been prepared for supply chain pressures to continue for the majority of 2022.
“We consistently underestimated inflation and supply chain constraints for both timing and degree,” said Johnson. “We learned a hard lesson from our slow response in 2021, and we acted decisively late last year and early this year with aggressive price actions.”
Vertiv’s operating results were $58 million lower than the same quarter a year earlier, as higher material and freight costs accounting for a $60 million impact for the quarter.
Price Hikes Will Address Supply Chain Inflation
Johnson took responsibility to the earnings miss, saying the company had been too slow to raise prices, in some cases out of concern that it might lose sales. The issues were aggravated by a forecasting issue in the Americas related to problems with an ERP system. As it adjusted its pricing, Vertiv found that customers would accept higher prices, and it expects its price hikes to stick going forward.
“We have been extremely aggressive with pricing in the last 90 days,” said Johnson. “With this better understanding of cost and higher pricing, we are confident that we will deliver strong financial results in the second half of 2022 and beyond.”
“I apologize for putting all our investors through this,” said Dave Cote, Vertiv’s Executive Chairman, told securities analysts. “The long-term thesis is intact, especially as performance begins to improve in the second half. We know we have to prove it to you. And we will.”
Cote noted that orders and backlogs remained at record highs in the Americas. Orders in the fourth quarter were up 51% from a year earlier, driven by large buys from colocation customers, even as Vertiv began to implement price hikes.
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But the company expects the supply chain challenges to continue this year.
“Critical parts availability is spotty, and despite all the efforts to qualify second and third sources and redesign products where possible, we know parts shortages are something our industry will grapple with throughout the year,” said Johnson.