Spending but Sweating
Consumers have been displaying trade-down behavior
Summary: Consumer spending remains strong but consumer confidence is under pressure. Inflation is a drag and consumers have been displaying trade-down behavior even at higher income levels. The ECB cut interest rates thanks to a lower inflation outlook. Will the Fed follow?
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Macro
Consumers are still strong
"...on the consumer side, it's just continued more of the same. Consumer is generally strong, high spend levels continue. We can talk about credit some more, but the short answer is not a whole lot of difference in terms of the trends that we're seeing." - Wells Fargo (WFC 0.00%↑) CEO Charlie Scharf
"When you look at the spend patterns by different income segments, as you called it, the trends have been relatively unchanged for several quarters" - Visa (V 0.00%↑) CFO Chris Suh
"...the consumer is spending, the consumer is spending." - Fiserv (FI 0.00%↑) President Frank Bisignano
“...then on the consumer side, the consumer has just been resilient than any of us would have ever thought. I mean I think you can look at any quarter and say, gosh, this is the quarter, maybe it was going to be the season -- the holiday season, whatever it may be that are going to start slow spending." - Truist Financial (TFC 0.00%↑) CEO William Rogers
But confidence is pressured
"Consumer confidence is pressured despite there's some obvious positives in the economic environment, but there's other concerns and challenges that are putting pressure on consumers. And then we're seeing that show up and just then be more thoughtful and more aware of how they're making choices and spending money. And then you layer in the election environment and other dynamics going on in our cultural and society, the consumer is in a, I guess, I'd say, an uncertain place. And so that certainly influences all of consumer behavior." - Ulta Beauty (ULTA 0.00%↑) CEO David Kimbell
"...there's still a pretty cautious consumer out there on durable goods…the end consumer is still just very cautious with their dollar" - Winnebago Industries (WGO 0.00%↑) CFO Bryan Hughes
Inflation is a drag
"The quarter solidified that consumers are feeling the impact of multiple years of inflation across many key categories such as food, fuel, and rent and are, therefore, far more deliberate with their discretionary dollar…I would also call out that the slowdown we experienced was across all geographies, further suggesting there was a broader macro impact." - Five Below (FIVE 0.00%↑) CEO Joel Anderson
Higher-income households are trading down
"We’re not seeing any material impact at the moment, but I do think that in a discretionary category like ours, there does remain ample reason to take a cautious view of the US consumer. They remain under pressure. I think that is being noted as particularly true in higher-income households trading down at the moment. We have not seen any of that with our current — with our client base at the moment." - Stitch Fix (SFIX 0.00%↑) CEO Matt Baer
“What we're seeing in Q1 is pretty similar to Q4. We're continuing to see a trade down of higher income consumers, the sweet spot looks to still be the $100,000 to $150,000 household income range” - Ollie's Bargain Outlet (OLLI 0.00%↑) COO Eric van der Valk
“we achieved positive comps in our higher income cohorts, suggesting some trade down of these customers seeking value at our stores” - Five Below (FIVE 0.00%↑) CEO Joel D. Anderso
Consumers have jobs but they’re also sweating
"So net-net, I'd say the state of the consumer is still pretty strong because that consumer has a job and they've had some real wage growth, and inflation is tempering. But it's certainly more stressed than it was 2 years ago and consumers are a bit more levered than they were 2 years ago. And banks are less reluctant to make new loans, and consumers are less able to afford those loans because of higher rates. So net-net, consumer is okay, but they're sweating harder than they were certainly 2 years ago. And it's brought some reluctance to create new lending, and you see that with just a consistent decline in loan origination across most categories." - TransUnion (TRU 0.00%↑) CEO Christopher Cartwright
International
The ECB cut interest rates for first time Since 2019
"We decided to cut, and we did so because overall our confidence in the path ahead because we have to be forward-looking, has been increasing over the last months....if you look at the peak of inflation, in October 2022, we were at 10.6% – double-digit inflation on average. Now fast forward to September 2023, we were at 5.2%... If you look at Q4 2025 projections – you look at September, you look at December, you look at March, you look at June – there’s a variation between those projections of 0.10 percentage points. So it’s either 2 or 1.9 or 2 or 1.9 or 2. And it’s on the basis of this reliability and solidity and robustness of those projections that we have made that decision to actually cut" - European Central Bank President Christine Lagarde
China’s recovery has remained weak
“…we remind ourselves that China is still in recovery. We're seeing consumers understandably similar to what we saw in Europe as well as in the Americas, when restrictions were lifted and people started resuming normal activities, the priority was on seeing family. It was on travel. It was on dining and entertainment and a bit less on goods. …So it really is this last pocket of recovery, if you will, that we have with China that has just been a bit flatter in terms of the recovery than what we had anticipated." - Estée Lauder (EL 0.00%↑) CFO Tracey Travis
There are structural problems that China needs to address
"I think China, we expect to have a pretty muted recovery. There are some enormous structural things that are holding back the economy beyond the geopolitical tension that's in the headlines every day. You've got a real estate overhang in the country. Real estate and construction represent 20% to 25% of their GDP. So when the real estate market is sick or slow, it's going to have real implications for growth in China. You don't have a lot of leverage at the central government or at the household level in China, but you have a significant amount of debt, whether it's nonbank debt or shadow debt at the local government level. So they've got a balance sheet issue to clean up at that part of their economy. That's going to constrain growth, and that's where a lot of the economic activity takes place. But we think the big debate still in China is whether they pivot back to domestic consumption versus export-light growth, right? I think that's the big question mark that a lot of foreign investors have and a lot of private entrepreneurs in China have is where is the government kind of try to stimulate at this point in the cycle? But China is probably going to be 4% to 5% type-ish growth for the next 3, 4 years as they start to work through all these issues." - KKR (KKR 0.00%↑) Co-President Joseph Bae
Mexico is a hot market due to nearshoring trends but it has infrastructure challenges
"Mexico is the hottest market because everybody is using Mexico as a backdoor to the U.S. There's plenty of labor and a lot of -- and because of NAFTA 2 or whatever they call it, that's almost as good as being in the U.S. The problem with Mexico, the big bottleneck on Mexico is a lack of energy -- they just don't have enough electricity at the right price because their infrastructure is way behind. But Northern cities in Mexico along the border are literally on fire with demand from manufacturers wanting to locate there...Well, a lot of people are basically shifting China production to elsewhere in Asia. Non-China, Asia and to Latin America on specifically Mexico with some of these...The rail tracks are not the same gauge. So the railroads are not connected. There is the availability of Mexican drivers to actually drive good in America is a problem. So there are all kinds of practical issues with respect to good. But some of those supply chains are very well developed. For example, for the auto industry, a lot of parts get manufactured in Mexico along the so-called NAPOCOR I-35 basically that works just fine. No problem… the Mexican ports are not as efficient as the American Boards and a lot of them are seeing surges in volume, and the infrastructure is not quite there to handle what they're experiencing in terms of demand." - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
Customers want suppliers to be close by
"We set up our very large new factory in Malaysia, which is much closer to customers. We invested in a lab in Korea close to several of our customers. We invested in a lab in Taiwan close to customers. We continue to invest in the lab outside of Portland, near two of our very large customers." - Lam Research (LRCX 0.00%↑) CFO Douglas Bettinger
"...especially in the last couple of years, we had our customers receive guidelines from their leadership teams, from their CEOs, from their CPOs about the dependability of capacity and TI is in a unique position to provide these geopolitically dependable capacity at a very affordable, cost-competitive manner, and also with a muscle or the size of the capacity." - Texas Instruments (TXN 0.00%↑) CEO Haviv Ilan
Businesses are building contingencies to move away from Taiwan
"...there's lots of geopolitical risk and concern about concentrations in Taiwan. We are on a path to have [ diversify the ] substantial portion of our product will be available or able to manufacture outside of Taiwan..TSMC is our biggest foundry partner. About half of our business is done externally. I would say, over half of that relates to [ TSM ]. But one of the things that's going to help even in that regard is -- and we talked about this on the earnings call, is we are going to have capacity in the new fab that TSMC is building in Japan" - Analog Devices (ADI 0.00%↑) CFO Richard Puccio
It’s not always possible to move production close to the customer
"There were discussions about production diversification [because of the tensions]. However, it's not possible to move production to Arizona, or move all out of Taiwan. Our capacity is 80% to 90% here..We absolutely hope there is no war. If there is a war, it's not only semiconductors that everyone needs to worry about. There are a whole lot of other things that people need to worry about. So I think leaders of both sides and leaders around the world will have enough wisdom to prevent a war from happening...The first priority is Taiwan, the second priority is Taiwan, and the third priority is Taiwan. ...We will definitely keep all the most advanced chip production in Taiwan and run that production smoothly first here, and then consider production using those technologies overseas." - TSMC (TSM 0.00%↑) CEO & Chair C.C. Wei
There may be emerging opportunities in Japan
"...we'll talk about Asia a little bit later, but I just came back 2 weeks ago from a 10-day trip to China and to Tokyo. I would tell you what's happening in Japan is pretty exciting right now. And we've talked about this in the past, coming out of 2.5 decades of deflation, where you have now positive wage growth. You have small positive interest rates, you have a relatively low inflation, but you have this incredible country that has saved so much money in the last 30 years of deflation, right, $10 trillion in deposits in the banking system, $3 trillion in the annuity market in Japan, the biggest savings market potentially in the world in terms of those types of assets. That will slowly start rotating into risk assets over time as the economy is coming out of this deflationary period. It's an incredible backdrop actually for potential investing and growth and the asset classes that we participate in." - KKR (KKR 0.00%↑) Co-President Joseph Bae
Financials
Bank loan demand is weak
"And we've seen very, very little change, both on the consumer side as well on the wholesale side. Loan demand is not particularly strong" - Wells Fargo (WFC 0.00%↑) CEO Charlie Scharf
Customers are in a wait-and-see mode
"...there seems to be a big wait-and-see around interest rates. I mean the presumption that rates were going to go lower. I mean, we started the year with the -- would be saying there's going to be 7 cuts who was to borrow, let's wait for the 7 cuts. So I think people are trying to get in their heads, what are rates going to be through the cycle here. We have an election coming up. We have corporate margins that have been squeezed and therefore, people are unwilling to expand working capital or do CapEx. All of these things cause pent-up demand." - PNC Financial Services (PNC 0.00%↑) CEO William Demchak
Credit quality remains strong
"I would say -- so first of all, credit quality continues to remain very, very good. It is -- we know we've come from incredibly benign credit environment. The increases that we're seeing in terms of delinquencies continue to look like they are very much on top of the performance that we had seen pre-COVID, so a more return to normal…we feel very good about what we're seeing in terms of the credit card growth that we've had in the underlying credit quality." - Wells Fargo (WFC 0.00%↑) CEO Charlie Scharf
Non-investment grade issuance is rebounding
"We had a very strong first quarter, as all of you know, 29% top-line growth in the Ratings business. We've seen very robust issuance in April. May has had robust issuance in noninvestment grade as well as bank loans and some structured areas. Investment grade dropped a lot. That slowed down a lot during the quarter. When we look to the full year, we expect -- there has been pull forward into the first order in the second quarter from the second half of the year, maybe a little bit from 2025. But when we take a longer look we see a very robust refinancing schedule that's going to be coming up in '25, '26, '27, '28." - S&P Global (SPGI 0.00%↑) CEO Douglas Peterson
PE fundraising environment is improving
"...we're seeing some of the challenges in the market from a fundraising perspective soften a little bit. So it feels a little bit better today on the fundraising side than it felt maybe 12 or 18 months ago.... the thing I always look at in terms of the best leading indicator for activity is the health of the leveraged finance markets. And we've seen more sustained strength in the leveraged finance markets over the past number of months than we have at any point in the last few years. The equity markets are certainly very strong right now. Some of the equity capital markets around IPOs and secondaries, a little bit less so. But if you move on to what that means for deployment for us or for the industry, we're seeing a real pickup." - KKR (KKR 0.00%↑) CFO Robert Lewin
Fintech and consumer lending sectors are struggling with funding & liquidity
"I mean, look, fintech is hunkered down right now, and mini fintech, the space generally is struggling to get funding, to get liquidity to originate, right? If we have a decline in rates, you're going to see that flow into fintechs and origination volumes will pick up substantially there. And that's good news, right? Because it's more competition, it's more access for consumers. Again, we're not running our business or communicating growth expectations, anticipating any rate cuts, right? We're in a higher for longer and no rate cut posture, right? So I wouldn't expect that kind of recovery." - TransUnion (TRU 0.00%↑) CEO Christopher Cartwright
Consumer
Costco’s net sales were up 8.1% in May
"...net sales for May came in at $19.64 billion, an increase of 8.1% from $18.16 billion last year…..The following comparable sales results by category for the month exclude the impact of foreign exchange. Food and sundries were positive mid-single digits. Cooler, food and candy were the strongest departments. Fresh foods were up high single digits. Better performing departments included produce and meat. Nonfoods were positive mid-to-high single digits. Better-performing departments included jewelry, gift cards and toys and seasonal. Ancillary business sales were up mid-to-high single digits. Pharmacy, food court, and optical were the top performers." - CostCo (COST 0.00%↑) Assistant Vice President of Financial Planning & Investor Relations
Retailers are cautious with inventory
"...our independent dealers experienced increased retail activity during the Spring selling season; however, conversion to sales remained difficult in light of the economic pressures on retail buyers. Faced with elevated floor plan interest rates, our independent dealers remain understandably cautious with their ordering patterns; consequently, our independent dealer inventory levels remain suppressed." - Thor Industries (THO 0.00%↑) CEO Robert Martin
Consumers are spending on beauty
"Consumers, as you can see it on this slide, continue to prioritize beauty in their spending habits…In fact, beauty was the only category that grew units in calendar 2023 out of all other consumer categories, including food, apparel, toys, electronics, amongst others. This confirms that beauty is a preferred category and one that consumers are willing to pay more for, as growth in prestige beauty units outpaced growth in mass beauty units." - Coty (COTY 0.00%↑) CEO Sue Nabi
“So prestige beauty is a growth category. It is -- has been growing anywhere between high single and low double digit in most markets, most of the measured markets that we measure with the exception of China, which obviously has had more challenges as it relates to the recovery. So it's a great growth opportunity for us” - Estée Lauder (EL 0.00%↑) CFO Tracey Travis
“…beauty category is healthy and has been for a long time has been historically, it's performed very well, a very consistent growth category because of the importance it plays in consumers' lives. Beauty is emotionally connected to consumers. It's so important in how they take care of themselves, how they show up in the world, how they think about self-care and wellness and self-expression" - Ulta Beauty (ULTA 0.00%↑) CEO David Kimbell
LinkedIn’s percentage of remote jobs peaked at 21% of total, now at 8%
"Two things on remote jobs is really fascinating right now. So pre-pandemic, there's -- at any given time, there's 15 million, 20 million jobs that are posted on LinkedIn actively. And pre-pandemic, it was roughly 2% of all jobs on the platform were remote jobs. If you go back 2.5 years ago, it peaked. 20%, 21% of all jobs on LinkedIn were remote jobs, which is pretty insane to see that jump from 2% to 21%. And now that number is back to 8%, so it kind of peaked up and now it's starting to come back down again. So we pay a lot of attention to kind of how the labor market is shifting through remote work, and it seems like that trend is coming down" - Microsoft (MSFT 0.00%↑) LinkedIn CEO Ryan Roslansky
Job changes are rising after the two-year Great Resignation lull
"And the second thing I'm paying a lot of attention to right now is I watch this stat, which is the frequency with which the member base changes jobs on LinkedIn. And if you go back 2.5 years, we all remember, I think it was in the Great Reshuffle, Great Resignation, just a ton of movement, people changing jobs. That really leveled off the past 2 years. But if you look at the past maybe 4 months, it's really starting to pick up again. So I'm not saying we're going into another Great Resignation or anything like that. But for the first time in 2 years, we are starting to see people moving jobs more frequently again. I think people were sheltering in place for a while, so we're starting to pay a lot of attention to that." - Microsoft (MSFT 0.00%↑) LinkedIn CEO Ryan Roslansky
Technology
The Fed’s view on AI: There’s a lot more being used than you realize
"We are talking to firms of all different industries, and what we're hearing are two things that might surprise you. First, AI is being used a lot more than you believe, and generative AI is being used a lot more than you might imagine. … So, the second fact, though, is that businesses are using it. The second fact that we hear is, yes, we're using it, actively, but not for our most valuable prized products, the things that we're selling that have a reputation. So, I'm going to use a - we did not talk to a rocket-making company, but I'm going to use it. It's useful to understand. If you're making rockets, you're not using generative AI to build the rocket, and nobody's [inaudible] employees anymore. You're using it to do back-office operations, to look at early schematics, to [inaudible] research tells you about jet fuel or rocket fuel. You're using it to have inputs to the process, but not to do these other ones. And that's because, as repeatedly we're told, it's not ready yet." - US Federal Reserve Governor Lisa D. Cook
AI in action
"...we're all in on AI. We have multiple ways. We've been all in for decades, right? 30 years that we've had some form of AI in our product sets…We have over 140 models benefiting over 40 products and services today that range from fraud and fraud management all the way to sort of a customized shopping experience. We think that it's going to be great, and we're all in on it. We have more data than pretty much everybody, so that's for sure." - Visa (V 0.00%↑) CFO Chris Suh
"...as part of our broader approach to embed AI across our business, we continue to scale our AI inventory buying tool to inform a larger set of buying decisions. This tool sifts through our proprietary transactional and client data to predict demand at the individual style and client level, empowering our merchandising team to make buying decisions that are more effective and efficient. This enables our merchants to spend more time on the art of merchandising, including trend identification, vendor partnership, and private brand development. In Q3, the tool informed nearly half of all inventory receipts, and that merchandise outperformed the items selected without the use of the tool." - Stitch Fix (SFIX 0.00%↑) CEO Matt Baer
"So some of the things we're doing now is we make pizzas before people order them. You start your order online, at some point, our algorithm figures out, you're ready to order, and we start making it. We will bring it out to -- our delivery driver used to have to find a spot, park the car, come in, get pizza. We now -- because of GPS, we know where the pizza is and we run it out to them. And so that means we're making your pizza sooner. It means we're bringing out to the delivery driver quicker. It means more run for them, more tips. It means faster delivery for you, and that brings people back. And so that's not the most sophisticated futuristic Star Trek-like algorithm, but man, is that helping the business right now. At some point, we're going to get to the point where more just-in-time pizza making, where the computer may be smart enough to say, "Hey, you know what, we don't have enough delivery drivers now. Let's not actually make those pizzas because they'll just be cold. Let's actually call up more delivery drivers to then handle that volume." And so instead of a manager having to make those decisions, him or herself, the computer will start to -- so you won't even see the orders if you're not supposed to make the order." - Domino's Pizza (DPZ 0.00%↑) COO & President of the Americas Russell Weiner
"...we demonstrated how we have productized generative AI to automate the creation of deal and credit memos, to quickly interpret policies, to chat with, upload, locate and file documents and return PDFs into data. Our customers are so excited by this breakthrough technology that we actually got reprimanded by the Fire Marshal for overcrowding at the nSight Banking Adviser booth." - nCino (NCNO 0.00%↑) CEO Pierre Naude
"We've launched our first order type -- AI-driven order type in our markets, Dynamic M-ELO. It's increased the volumes of that particular order type by 20% since we launched it. So really excited about seeing, and the fill rates have improved quite dramatically for our clients as a result. So we have that. We're using AI to help manage our strike management program, making sure that we're optimizing strikes. We're using it inside our infrastructure to predict -- to make sure that we're using it honestly for our infrastructure to predict issues with infrastructure so that we can obviously prevent them. And then also, we have a GenAI tool that we've launched in our Anti-Financial Crime business that automates the investigative process for analysts. Like once you come up with an alert and you say this could be a bad person, a bad actor, right now, an analyst goes out and searches the Internet and tries to find anything they can about that person. We now have the ability to automate all of that, write the report, here are all the sites and generate a recommendation as to whether or not they should forward it in terms of a regulatory report, and it [cuts the time it takes] for investigation by 90%. So it is a remarkable tool for efficiency. We're launching that in our Surveillance business now." - Nasdaq (NDAQ 0.00%↑) CEO Adena Friedman
AI is pushing up prices across the whole datacenter ecosystem
"...we're seeing a tremendous demand. And some of it is related to AI, but the majority of -- the vast majority of the new business that we see in CoreSite is hybrid cloud deployments by enterprises…What AI has done is it's put pressure across the ecosystem on pricing, so prices have gone up. And so that's allowed us to also raise prices while still having years of record sales." - American Tower (AMT 0.00%↑) CEO Steven Vondran
High bandwidth memory is critically enabling for AI
"...when you think about the AI workloads and you think about the data required to do the things that we're talking about with Gen AI, it requires a lot of storage. So we expect that the NAND market will grow." - Applied Materials (AMAT 0.00%↑) CFO Bryce Sills
"If you're looking for green shoots in memory and storage, that's where you see it. High bandwidth memory is -- I think everybody in the room probably knows is critically enabling for AI compute, right? To feed the parallel GPU or accelerator compute, you need a lot of low latency DRAM." - Lam Research (LRCX 0.00%↑) CFO Douglas Bettinger
“...think in general, we think DRAM will inflect sooner. A lot of that's because of the uniqueness of HPM, driving a lot of capacity. NAND, you need more NAND capacity as well for AI servers, but HPM-DRAM is a little more inefficient to make, which is good for us to put it makers. But NAND, I think we'll catch up eventually. So a little delayed relatively” - MKS Instruments (MKSI 0.00%↑) CEO John T.C. Lee
AI systems revenue more than doubled at HPE
"Demand for HPE's AI systems is accelerating at a faster pace, and our solid execution enabled us to more than double our AI systems' revenue sequentially to over $900 million, helped by supply chain conversion through improved GPU availability. Our lead time to deliver NVIDIA H100 solutions is now between six and 12 weeks, depending on order size and complexity. We expect this will provide a lift to our revenues in the second half of the year. Enterprise customer interest in AI is rapidly growing, and our sellers are seeing a higher level of engagement." - Hewlett Packard Enterprise (HPE 0.00%↑) CEO Antonio Neri
AI processing may move more to the edge
"So getting compute and AI out into the physical edge is going to be super powerful because…This is a simple example. When you think about noise cancellation. And I don't just mean the [ Bose ] that you wear on your headphones when you're in plane, it could be hearing aids. Sound is very [ variable ]. We're shipping product today and developing products that have neural [ nets ] built into the devices that allows the algorithms to do the work to [ sort ] the sound to do the noise cancellation, super powerful, super effective. Another good example I like is you think about factory automation, which is one of the big trends, it's going to be a big driver for us on the industrial side. When you think about the robotics, the robotics that are in automated factories. Well, if you can get compute at the edge and everybody today is talking about large language models. [indiscernible] [ ChatGPT, it's all ] the large language models. I think more about it as small language models with compute at the edge. So you think about that robot arm that is sensing and actuating, that data has to go back and be computed to determine the next move to follow its algorithm. Now you can have that compute power in the device. So you think about the benefits, less latency. It's closer to the actual source of the data when you do the compute, less power consumption and more secure because you're not taking all of that data, physical data, converting it to digital, sending it to the cloud, you're doing that at the edge." - Analog Devices (ADI 0.00%↑) CFO Richard Puccio
AI may help Arm take market share in Windows
"Arm's market share in Windows - I think, truly, in the next 5 years, it could be better than 50%..it’s a pretty significant revenue opportunity. Because 200M units & our market share is [currently] approximately zero...so I think there’s only upside for us there...Again, respectfully, I think the world has kind of moved on relative to Intel, AMD, Qualcomm inside and there’s probably less of a buying decision for folks anymore...I think the AI PC is good liftoff because it’s obvious with what Microsoft’s doing with Copilot and what runs locally and what runs at the cloud. And it’s obvious that AI is creating all kinds of differentiated use cases. Let me say it this way. If there was no AI, I think it might have been a little harder for Microsoft in general to create buzz around this new category. I think AI PC gives a great kind of tailwind. And I think on top of that, that it creates the window for new machines. I think the Windows on Arm machines are going to be when people say oh, I need it" - Arm (ARM 0.00%↑) CEO Rene Haas
If Arm does win, Intel at least wants to be the foundry
"This is not the first Windows on Arm announcement, right? And the x86 market share has remained very hot, you need to have a reason to change. So, if you believe what I showed on stage today, literally the best CPU, the best graphics, the best NPU and very compelling battery life—why would you change,...That said, if Arm emerges, I want to be the foundry. We don't say that cavalierly. We mean it. The partnership that Intel has forged with Arm is dramatically more powerful and beneficial for both companies than I could have even imagined when I took this job. We're seeing a lot of momentum for Arm as a foundry partner for Intel, as well." - Intel (INTC 0.00%↑) CEO Pat Gelsinger
AI may be taking share from other IT budgets
"We did have some macro pressures, and we called that AI disruption impacting a bit of R&D, mainly services, but R&D also. And part of that was AI disruption. This idea that -- and I would say not -- there's no direct line relationship between a customer saying, hey, we're going to do some AI project. We're not going to do your project, but just more of the broader disruption and distraction and mind share that has kind of played out over the last couple of quarters. So that was a factor for us. It impacted some of the deal timings." - Veeva Systems (VEEV 0.00%↑) SVP Paul Shawah
"When you look at kind of Q1 earnings across many people highlighted somewhere around that mid-March -- mid-March time frame. It just felt like the environment got tougher, longer deal cycles, more scrutiny on deals." - UiPath (PATH 0.00%↑) CFO Ashim Gupta,
"So macro remains tough. Deals scrutiny remains high… the next hurdle is you need to convince the CFO that actually the savings can be done. They're being more scrutinizing, show me savings quarter by quarter by quarter." - Zscaler (ZS 0.00%↑) CEO Jay Chaudhry
"In Q1, we saw probably a bit more scrutiny than we've seen the last year when it comes to big transformational deals or platform deals where people are thinking about putting in a new HCM platform or people putting in a new ERP platform or financials." - Workday (WDAY 0.00%↑) President Carl Eschenbach
The semiconductor industry is in a downcycle outside of AI
"Look, the duration of the downcycle is long because of this asynchronous nature, I think you're right. And we just see a first-in first-out behavior on everything…I think now it's gained momentum." - Texas Instruments (TXN 0.00%↑) CEO Haviv Ilan
"I've seen a lot of cycles. I started in this industry in the early '90s. And we always get to the point we think, hey, the next cycle is going to be less than the ones that came before. I no longer say any of that…This one to me feels maybe a little bit more elongated because we had COVID show up, right? I think a lot of the industry players, I don't know, shame on us, we mistook the demand that was pulled forward during COVID as some aspect of secular growth, and it didn't turn out to be that. I mean it wasn't purposeful." - Lam Research (LRCX 0.00%↑) CFO Douglas Bettinger
"So we are in a cycle, a semiconductor cyclic correction-...And what we talked about in our last earnings call is that -- we expect the inventory digestion to continue into Q2 and that we expect that to dissipate into the second half of the year." - Lattice SemiConductors (LSCC 0.00%↑) CEO Esam Elashmawi
Healthcare
Sequencing costs are no longer the largest component of total costs
"...if you think about, an end-to-end workflow and you think about their total sequencing cost, both at the research level as well in a clinical environment. The cost of sequencing is getting to a point will that isn't the largest part of the cost system anymore. Right?" - Illumina (ILMN 0.00%↑) CFO Ankur Dhingra
Industrials and Transport
75% of FedEx’s deliveries are to residences now vs 25% 10 years ago
"A vast majority of growth in the parcel market is now driven by e-commerce. A little less than 10 years ago, roughly 75% of the stocks, or packages stocks were businesses…You fast forward to today, now about 75% of our stops again, our packages stops are residential." - FedEx (FDX 0.00%↑) CEO Raj Subramanian
E-commerce requires 3X more logistics space are regular brick-and-mortar
"So e-commerce takes 3x as much logistics space as regular bricks-and-mortar retail…There was a shift from about 15% of retail sales being e-commerce to about 25% during the pandemic. And that 10% increase in share resulted in a bunch of demand for warehouse space. That tightened up the market tremendously. Now when the vaccine came through and the market opened up, some of that was given back. So we went from 15% to 25% down to 23%. But we got 4 or 5 years' worth of growth during the pandemic, and it's kind of stuck at that elevated level. So I think there was a permanent shift in demand for warehouse space because of higher ratio becomes. That is not -- and we're going off of that higher percentage. In other words, before we're growing at 15%. Now, we're going off of the 23%. I think that's very much real." - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
There’s not enough labor to work in warehouses
"So labor is becoming a much more important issue for customers. There is no labor, particularly no labor to work in warehouses. So what does that mean? You have to bring in more automation into these warehouses. And automation is very capital-intensive. And today, automation is not super flexible, meaning that if you want to optimize the operation of your warehouse, you need a very bespoke investment in automation. And that really increases the cost and the CapEx associated with these projects, which is why the spike in interest rates caused a bigger pause in new commitments than it would have normally done because you have to get the automation to fill up these warehouses. So the costs are huge." - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
Chinese auto market is setting global standards for cost and technology
"So I believe that the China consumer experience digitally is far beyond the west. What Huawei and Xiaomi have done inside the vehicle is far beyond what we can see with CarPlay and Google Automotive Services. That is the natural law now, in terms of great software….what I keep coming back to is, the natural law that you have to have great cost fitness and quality fitness to even have the right to compete and that’s being defined not by here in the U.S., it’s defined by China." - Ford Motor (F 0.00%↑) CEO James Farley
A high level of competition for EVs in China is leading to differentiation inside the vehicle
"When I look at China, was there for the last 10 days, so it's very fresh in our minds -- all of our minds. The competition is so high in China for new energy vehicles that you're seeing sub, sub, sub-segments that you don't see anywhere else. And many of those competitors see the digital experience so compelling that you don't have to drive the car, that the experience inside your car is so compelling that it's your new third space. That is what you want in your digital experience. You want movies projected for the second row, you are content, you want ADAS to come to life in a way that -- you want AI systems in the car. And why do you want that? Because Level 3 is going to give us time back." - Ford Motor (F 0.00%↑) CEO James Farley
Hybrids are more profitable than non-hybrids at Ford
"...many of our hybrids in the U.S. are now more profitable than their non-hybrid equivalent. That was not the case a year ago. Customers are voting. They like these in-between solutions." - Ford Motor (F 0.00%↑) CEO James Farley
Airline traffic will tend to coalesce around routes where the industry can be profitable
"I think the industry is going to is moving towards a world where it coalesces around everyone flying places where they can be profitable. That's what's going to be a much better industry." - United Airlines UAL 0.00%↑) CEO Scott Kirby
Materials & Energy
Hyperscalers are concerned about power usage
"...if you talk to anybody in the space, one of the broader concerns for the hyperscalers and probably for everybody at this point is power. Power is going to be a constraint. And so anything that can be done to help make the hyperscalers and their data centers more power efficient is a big win. So we've got a win in with one of the hyperscalers on a vertical power solution. And that vertical power solution can reduce about 30 -- up to 35% of the power loss in running those chips in the data center. So that's a super powerful win, and we're getting traction with all of the hyperscalers." - Analog Devices (ADI 0.00%↑) CFO Richard Puccio
Oil demand is growing steadily, but US supply is going to have difficulty growing
"What we see going forward is post-COVID now, oil demand has generally lined back out with GDP slightly different slope than what it was pre-COVID, but it looks like demand is still growing and continues to grow not only in the U.S. but in emerging economies globally as well, which is exciting for us. And then on the supply side, I think everybody can see that U.S. supply is mitigated. We don't forecast necessarily that U.S. supply will flatline or start to shrink or anything, but it is going to be more and more difficult for the U.S. to grow for various numbers of reasons. The first being -- all the growth for the U.S. over the past decade, a dominant amount of growth has come from tight resources, which brings with it steep declines. The second piece of it is what we talked about just a minute ago is that there are not a lot of companies out there that are exploring. There aren't really any companies out there exploring for new resources, EOG being one of the few." - EOG Resources (EOG 0.00%↑) EVP - Exploration & Production Ezra Yacob
Real Estate
Warehouse vacancy was rising back to more normal levels but then construction of new space came to a standstill
"In a normal business cycle, vacancy rates for industrial real estate, logistics real estate. At the low side, it was about 7% at the high side was about 9%, 10% that was -- that was considered in market normal for a long period of time. During the pandemic, the vacancy rates got into the mid-3s. And in some markets like Southern California, they got to be under 1%, which basically means that you're completely sold out of the space. And that resulted in spectacular growth in rent in certain locations that were short on space because people simply have to have that space to put their goods. That vacancy rate, supply responded to that, and that vacancy rate started creeping back up to a more normal level. And today, we're in the low 5s. I think we're going to peak at 6… And then -- and this is probably the most important thing I'm going to say today, supply stopped about 6 months ago. So starts of construction of new buildings are down 80% from the peak. So we know exactly what's going to be supplied in the next year or 2 because that's how long it takes to deliver a building. And so the only question becomes what's going to be demand. And if demand is even [ 1/3 ] of normal or half of peak, we see that vacancy rate going back down to 5%." - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
Several factors are restricting the supply of warehouses
"So real estate construction and development is financed mostly by banks, construction loans. Banks are out of the business of lending to commercial real estate because they read the headlines, they hear about the office buildings, declining value and all that has nothing to do with our business. But they basically are reducing the exposure of their portfolios, the so-called commercial real estate and commercial construction. So developers that depend on that kind of financing to kick off their projects are basically stuck and can get the money to put on that supply. I think that's the primary reason. Secondly, interest rates have gone up, construction costs have gone up, and therefore, the rents that you need to justify that new construction are significantly higher than market rents today, which means that project's on pencil with new land and new financing costs, which is actually great because that means we have a great pricing umbrella under which we can operate. So very little new supply is going to come on with those high rates and those high construction costs and high land costs. Third thing is that municipalities, particularly the ones in these very popular areas like New York, New Jersey, L.A., these markets are passing left, right and center moratoria against construction or warehouses. Everybody wants their package from Amazon this afternoon, but none of them want their real estate in their backyard. So the confluence of those 3 factors has really curtailed construction" - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
Certain markets like Southern California, have experienced dramatic rent increases for warehouses
"Rents tripled in the last 5 years in Southern California. Vacancy rate was under 1%. So what would happen after the user lost the third building, he or she probably turned to the real estate procurement officer and said, you're not going to lose the next one because we're going to be out of business. So they committed to more space to get the next deal. And they probably paid more for it than they should have. That's why rents triple. That stuff is going to come on in the subleasing market, and it's going to have to get absorbed. So vacancy rates in Southern California went from 0% to 1% to maybe approaching 5% and that will take a couple of years to normalize again. But rents have tripled. I mean I will take that market over any other market if I had to do it all over again in the last 3 or 4 years." - Prologis (PLD 0.00%↑) CEO Hamid Moghadam
Nuggets of Wisdom
The last 5% is the hardest
"What I learned actually was one of the very first products that I worked on was a microprocessor with copper interconnects, and it turns out that the last 5% of what it takes to get a product out is probably the hardest, where most of the secret sauce is." - Advanced Micro Devices (AMD 0.00%↑) CEO Lisa Su
Steve Jobs: Fire ineffective leaders quickly; the right team will emerge and drive success.
“I went down there, and basically went down, and we took a walk. I just told him all my problems, everything that was going on, and he just stopped me. He said, "This is what you need to do." He looked at me and said, "You go back to Seattle, and you fire everyone on your leadership team." I thought he was joking. I said, "What do you mean, fire? What are you talking about, fire everybody?" He said, "I just told you, fire all those people." He was screaming at me in my face, "Fire all those people. That's what I would do." I said, "Steve, I can't fire all the people. Who's going to do the work?" He said, "I promise you, in six months, maybe nine, they'll all be gone." He was right. Except for one, the General Counsel, they were all gone. I talked to him since then, and we were on stage together at an event, and I told him, "They're all gone." "Well, you're six months, nine months late, man. Think about all the things you could have done."” -Starbucks (SBUX 0.00%↑) Former CEO Howard Schultz
Schultz regrets not snagging the rights to two innovations
“Can I tell you a mistake I made? I was getting ready to open the standard cup in the world. It was that terrible Styrofoam cup that is used in diners in New York City. Remember that cup? I put boiling water into that cup. Five minutes later, the cup is starting to turn a golden color because of the chemical...so we had to change the cup. This was such a smart move in retrospect, but we were just trying to figure it out. Now, no one in America that is in the paper business had any kind of cup or lid that was compatible with what I was trying to do. In fact, they didn't understand it."Why not just use the cup that exists?" No, because it doesn't taste good, and it doesn't feel right....So, we went to Chicago to the International Paper Company, and they had a cup, but the cup didn't have a compatible lid. We found a lid, that beautiful sip lid, which is now ubiquitous in the world. Howard Schultz should have said to them, "I want an exclusive on that lid," because that lid became the standard for the world. If I had just understood that. The other thing I didn't do is we introduced café latte to America. We didn't trademark it. You know, we trademarked Frappuccino later on, but we didn't trademark café latte. I just wasn't thinking..I just missed it” - Starbucks (SBUX 0.00%↑) Former CEO Howard Schultz