Erik Woodring

Erik Woodring from Morgan Stanley asked CEO George Kurian about balancing margin protection and product gross margins (mid-to-high 50s) against the risk of demand destruction or market share losses amidst anticipated multiple memory price hikes. He also asked CFO Wissam Jabre for clarification on why unfavorable mix was a headwind to Q3 product gross margins despite strong all-flash array performance.

Answer

CEO George Kurian stated that NetApp anticipates tight supply and pricing to continue, not expecting it to be a short-term issue. The strategy involves ensuring adequate supply from multiple suppliers, driving gross profit dollars, and matching supplier costs with customer pricing while allowing adjustment time. He emphasized offering value through efficient flash, hybrid flash, cloud, and Keystone solutions. CFO Wissam Jabre explained that revenue mix is influenced by a multitude of factors including geographies, customer types, and specific products, contributing to the sequential decline in product gross margin.

Erik Woodring from Morgan Stanley asked how NetApp balances protecting product gross margins (mid to high 50s) amidst anticipated memory price hikes, while limiting demand destruction or market share losses, acknowledging the unprecedented times. He also sought clarification on why unfavorable mix was a headwind to product gross margins in Q3, despite strong All-Flash Array growth.

Answer

CEO George Kurian anticipates tight supply and pricing to continue, emphasizing securing adequate supply from multiple vendors. He discussed balancing competitiveness with profitability, focusing on driving gross profit dollars, and offering various solutions (efficient flash, hybrid flash, cloud, Keystone) to customers based on their budget and business priorities. CFO Wissam Jabre explained that revenue mix is influenced by a multitude of factors including geos, customer type, and product, and declined to provide more specific details on the product gross margin headwind.

Erik Woodring with Morgan Stanley inquired about the drivers behind the product gross margin expansion, asking if it was due to all-flash mix, pricing tailwinds, or bill of materials cost reductions, and questioned the sustainability and potential for further expansion of current product gross margins.

Answer

CFO Wissam Jabre stated that product gross margins are expected to remain stable for the rest of the year, driven by a combination of mix and pricing, with costs being relatively flat year-on-year. He reiterated the long-term target of mid to high 50% for product margins, emphasizing that the growing high-margin cloud business is a significant tailwind for overall company gross margins.

Erik Woodring asked about the drivers of NetApp's product gross margin expansion, its sustainability, and whether current levels represent peak margins, seeking insight into the underlying factors.

Answer

Wissam Jabre (CFO) stated product gross margins are expected to remain stable for the rest of the year, driven by a combination of mix and pricing. He reiterated the long-term target of mid to high 50% for product margin and highlighted the positive impact of the fast-growing cloud business on overall gross margins.

Erik Woodring from Morgan Stanley asked for perspective on whether the divergent performance between strong Americas commercial and weak public sector/EMEA would continue. He also questioned the drivers behind the decision to raise the long-term gross margin target for the public cloud business.

Answer

CEO George Kurian detailed that Americas performance was broadly strong across enterprise and mid-market, while U.S. public sector weakness was due to budget deployment delays and European softness was localized to the UKI and parts of Germany. CFO Wissam Jabre explained the public cloud gross margin target was raised to 80-85% because of sustained improvement driven by depreciation rolling off initial hardware and a higher mix of software content in revenue.

Erik Woodring from Morgan Stanley questioned if the trend of strong Americas commercial demand versus weakness in public sector and EMEA would persist. He also asked for the drivers behind raising the long-term public cloud gross margin target to 80-85%.

Answer

CEO George Kurian noted strong Americas performance and localized weakness in the U.S. Public Sector and parts of Europe, expecting the public sector headwind to lessen in the second half. CFO Wissam Jabre explained the higher public cloud gross margin target is due to depreciation rolling off initial hardware and an increasing mix of software content in revenue.

Erik Woodring asked about Dell's memory price inflation assumptions for fiscal year 2027 and the specific actions taken to protect profitability in the current cycle compared to past cycles.

Answer

David Kennedy, Executive, Dell Technologies, indicated that CSG's market assessment for memory price increases is double-digit (11-12%) for the year, more acutely in the second half. He stated Dell's guidance incorporates prudent management of margin rates, with quick and decisive actions on pricing. Jeff Clarke, Vice Chairman and Chief Operating Officer, Dell Technologies, detailed actions learned from COVID, including rapid price changes (e.g., server business in days, PC business on Jan 6th), shorter quote validity, dynamic pricing, reduced promotions, and moving to discount off list price, which stabilized server margins and are expected to stabilize CSG margins.

Erik Woodring from Morgan Stanley asked about Dell's assumptions for memory price inflation in its fiscal year 2027 outlook and what specific actions Dell is taking differently this cycle compared to past cycles to protect its profitability.

Answer

David Kennedy indicated that CSG guidance assumes double-digit memory price increases, particularly in the second half, and Dell's guide reflects a commitment to manage margin rates. Jeff Clarke detailed that spot market DRAM prices are up nearly 5.5x and NAND 4x over six months, with analysts projecting further increases. Dell's actions include rapid price changes (e.g., server business in days, PC business on January 6th), shorter quote validity, dynamic pricing, reduced promotions, and a shift to discounting off list price, leveraging lessons learned from COVID-era supply disruptions.

Erik Woodring sought clarification on Dell's bullish outlook for the PC opportunity into next year, contrasting it with channel partners' views, and asked about the stage of the PC refresh cycle and factors that could extend it.

Answer

COO Jeff Clarke stated that the Windows 11 transition is far from complete, with a large installed base of older systems needing upgrades. He also highlighted AI PCs, small language models, and NPU capabilities as factors that will drive continued PC market growth, projecting the market to be roughly flat year-over-year after mid-to-high single-digit growth this year.

Erik Woodring sought clarification on Dell's bullish stance on the PC refresh cycle, asking where Dell believes the cycle currently stands, if it's primarily driven by Windows End-of-Life upgrades, or if new factors could extend it into 2026.

Answer

Jeff Clarke (COO, Dell Technologies) stated that the Windows 11 transition is not complete, with Dell being 10-12 points behind previous OS transitions. He highlighted 500 million Windows 11-capable units not yet upgraded and another 500 million four-year-old units unable to run Windows 11 as significant upgrade opportunities. He also pointed to AI PCs, small language models, and NPU capabilities as factors that will drive the PC market forward. Dell's outlook for the PC market is roughly flat year-over-year after mid-to-high single-digit growth, with plans to gain share.

Erik Woodring from Morgan Stanley questioned the change in the storage market outlook, noting Dell's full-year guidance for storage was lowered to flat growth after previously expecting over 3% growth, contrasting with some peers' more optimistic views.

Answer

Jeff Clarke, Vice Chairman and COO, explained that demand moderated in large accounts, particularly in North America. He pointed to strong double-digit growth in PowerStore and the all-flash portfolio as bright spots. Clarke attributed some of the overall softness to a headwind from HCI customers re-evaluating their private cloud strategies, while expressing confidence that Dell's own IP storage portfolio will outperform the market in the second half.

Erik Woodring from Morgan Stanley asked about the potential for storage and services attach rates alongside AI servers. He questioned when this opportunity might materialize in a meaningful way, how to size the potential impact, and what it could mean for margins as the AI server business scales with various customer types.

Answer

Jeff Clarke, Vice Chairman and COO, explained that while storage and networking attach has seen modest improvement, the attach rate for deployment and installation services has improved significantly and is a key market differentiator. He stated that the opportunity to attach storage, particularly object storage, is substantial as enterprises adopt disaggregated architectures. Clarke admitted they are 'not satisfied' with current attach rates, viewing it as 'all upside and opportunity' that the sales team is focused on.

Erik Woodring inquired about the risk of ODM encroachment in the AI server market as customers become more sophisticated, and asked how Dell refutes concerns about potential disintermediation and margin pressure.

Answer

COO and Vice Chairman Jeffrey Clarke acknowledged that ODMs are present in large deals but emphasized Dell's differentiation through significant engineering and architectural capabilities for custom solutions. He highlighted Dell's value-add in services, global support, financing, and go-to-market expertise, stating that customers value the end-to-end solutions and faster deployment times Dell provides, as evidenced by being first to market with a GB200 rack.

Erik Woodring of Morgan Stanley asked whether the anticipated pull-forward of storage and services demand from AI server sales has materialized and, if not, why.

Answer

Executive Jeffrey Clarke explained that the opportunity extends beyond the server node to full rack-scale solutions, including networking, storage, cooling, and power management. He emphasized that services like deployment, high-level support, and financing through DFS are key differentiators and margin-accretive opportunities that Dell is increasingly capitalizing on.

Erik Woodring requested more detail on the customer composition of the AI-optimized server business, specifically the changing concentration of spending between enterprise customers and Tier 2 cloud service providers (CSPs) in the backlog and pipeline.

Answer

COO Jeffrey Clarke confirmed that while large Tier 2 CSPs remain a significant part of the backlog and pipeline, the number of enterprise customers and the revenue they represent are growing each quarter. He noted this signals enterprises are moving from experimentation to piloting AI, with expansion seen in life sciences, higher education, and financial services.

Erik Woodring asked about the philosophy or approach behind setting the full-year guidance, given volatile pricing, uncertain supply, elongated lead times, and potential demand destruction, especially when looking into the second half of the year.

Answer

Tarek Robbiati, CFO, stated that guidance is determined by pipeline demand and visibility for the next couple of quarters. It incorporates the price increases (effective February 9th, benefiting the full year) and the benefits from the hyperscaler business, with the majority of hyperscaler revenue expected in Q3 and Q4 of fiscal year 2027.

Erik Woodring from Morgan Stanley asked for insight into Everpure's philosophy and approach for setting its full-year guidance, given the significant unknowns such as volatile pricing, uncertain supply, elongated lead times, and potential demand destruction risks, especially looking into the second half of the year.

Answer

Tarek Robbiati, Chief Financial Officer, explained that the guidance is based on the strength of the pipeline and demand visibility for the next couple of quarters. He noted that the guidance incorporates the February 9th price increases, which were strategically timed for full-year benefit and surgically adjusted to maintain customer value through enhanced data reduction. Additionally, the guidance factors in the hyperscaler business, with the majority of revenue expected in Q3 and Q4 due to non-linear data center build-out schedules.

Erik Woodring from Morgan Stanley asked CEO Charlie Giancarlo about potential differences in demand elasticity in Pure Storage's markets during the current memory cycle compared to 2017 or 2021, and whether the ability to pass through pricing could inhibit market demand this time.

Answer

CEO Charles Giancarlo explained that while higher memory prices might constrain demand in terms of terabytes, commodity pricing historically impacts the overall market's top line more than Pure Storage's gross margins, which are effectively managed. He added that the increasing demand for data driven by AI and the criticality of data architectures help sustain market demand despite potential budget limitations.

Erik Woodring from Morgan Stanley asked for CEO Charles Giancarlo's opinion on whether demand elasticity in Pure Storage's markets might differ in the current memory cycle compared to 2017 or 2021, and if current pricing could inhibit overall market demand.

Answer

CEO Charles Giancarlo acknowledged that while higher prices could constrain demand, past cycles showed commodity pricing primarily affecting the top line (overall market size/growth) rather than Pure Storage's gross margins, which are well-managed due to competition with cost-plus vendors. He also noted that AI is driving increased demand for data, making data architectures a top priority for customers, which helps sustain demand despite budget constraints.

Erik Woodring of Morgan Stanley sought clarification on the CFO's comment about 'possibly more' than one to two exabytes for Meta this year, asking what specifically influences that statement.

Answer

CFO Tarek Robbiati explained that the phrase 'possibly more' is meant to signal strong confidence in achieving the guided one-to-two exabyte range for fiscal year 2026. He reiterated that the revenue contribution this year is not expected to be material and that the company will provide updates on the deployment ramp as it progresses through Q3 and Q4.

Erik Woodring asked about HP's approach to full-year guidance, specifically regarding the embedded memory price appreciation, the balance between demand destruction and margin protection, and the overall impact on EPS. He also sought clarification on HP's capital allocation strategy for fiscal 2026, balancing the commitment to return 100% of free cash flow with the gross leverage target and the current low stock valuation.

Answer

Karen Parkhill, CFO, explained that the full-year outlook is shaped by stronger first-half revenue, increased memory costs partly offset by higher mitigations, and print margins expected at the high end of the long-term range. She noted current assumptions include a 100% sequential memory cost increase in Q2 and further increases, leading to an expectation of being at the lower end of the EPS guidance range. On capital allocation, Karen Parkhill reiterated the commitment to return 100% of free cash flow over time, noting that increased cash balances are earmarked for 2026 debt maturities, which enabled $600 million in shareholder returns in Q1, including over $300 million in share repurchases, despite leverage slightly above target.

Erik Woodring asked about HP's approach to full-year guidance given uncertain but likely inflating memory costs beyond the current quarter, specifically inquiring about the embedded memory price appreciation, the balance between demand destruction and margin protection, and the implications for EPS. He also sought clarification on HP's capital allocation strategy for fiscal 2026, balancing the commitment to return 100% of free cash flow (FCF) with the gross leverage target and the current low stock valuation.

Answer

Karen Parkhill, HP Inc.'s Chief Financial Officer, explained that the full-year outlook is shaped by stronger first-half revenue, increased memory costs partly offset by higher mitigations, and print margins expected at the high end of the long-term range. She noted a prudent view, assuming first-half revenue strength moderates and EPS is more first-half weighted, anticipating being at the lower end of the guidance range given current assumptions of a 100% sequential memory cost increase this quarter and further increases. Regarding capital returns, Karen Parkhill reiterated the commitment to return 100% of FCF over time, noting that earmarking cash for 2026 and 2027 debt maturities has enabled share repurchases, with $600 million returned to shareholders in Q1, including over $300 million in buybacks.

Erik Woodring inquired about the reasons for the moderated PC market outlook for the second half of 2025, questioning the impact on specific segments and the relevance of the Windows 11 refresh. He also sought details on the scale and growth rate of HP's designated "growth businesses."

Answer

CEO Enrique Lores attributed the prudent PC outlook to macroeconomic uncertainty and industry-wide price increases, while maintaining that HP aims to gain share. CFO Karen Parkhill affirmed that the Windows 11 refresh remains a catalyst. Regarding growth businesses, Mr. Lores confirmed they are growing faster and have higher margins than core businesses, citing AI PCs, Workforce Solutions, and Industrial Print as examples, but did not disclose their aggregate size.

Erik Woodring of Morgan Stanley inquired why the Print operating margin target remains 16-19% when HP has consistently performed at the high end for three years, and why the company guides to grow only "in line with the market" in FY25 after recent share gains.

Answer

CFO Karen Parkhill explained that while they expect to continue operating at the high end of the range, maintaining the lower end provides flexibility to invest in opportunities. CEO Enrique Lores added this allows them to place more positive hardware units if the opportunity arises. Regarding market share, Lores stated the guidance is conservative and the goal remains to gain profitable share, not just share for its own sake.

Erik Woodring of Morgan Stanley asked for an update on PC demand across different commercial end markets, the status of the commercial refresh cycle, and how accelerated cost savings would be balanced between profit drop-through and reinvestment.

Answer

CEO Enrique Lores confirmed the PC recovery is driven by commercial, with the major refresh cycle still ahead. CFO Karen Parkhill clarified that cost savings are already enabling HP to hit margin targets while funding strategic reinvestments, which can result in a P&L geography shift with higher gross profit offset by higher OpEx.

Erik Woodring inquired about the current status of HVAC inventory levels and the ADI ERP system upgrades, seeking clarification on what issues are fully resolved and what might still impact the 2026 outlook. He also asked about ADI's growth and margin potential, specifically how the business can reaccelerate to mid-to-high single-digit growth, and the linearity of 1Q versus full-year 2026 revenue and adjusted EBITDA growth rates.

Answer

Mike Carlet, CFO, confirmed the ADI ERP system implementation is complete and fully operational. He also stated that HVAC inventory adjustments by large distributors are largely behind them, reaching a 'new normal.' Tom Surran, President of Products and Solutions Business, added that the HVAC market is expected to improve by the end of Q1, and Resideo performed well relative to the market downturn. Rob Aarnes, President of ADI Global Distribution Business, emphasized that ADI is now stable and focused on customer service and market share. Regarding ADI's growth, Rob Aarnes noted that the video surveillance pipeline is recovering, and most commercial security categories saw year-over-year growth, indicating a return to mid-to-high single-digit growth. Mike Carlet explained the linearity of 2026 growth is influenced by the number of selling days (more in Q1, less in Q4) and the stronger Q1 2025 performance compared to the second half, which was impacted by ERP and HVAC headwinds. He expects the second half of 2026 to be stronger on a days-adjusted basis.

Erik Woodring from Morgan Stanley inquired about the current status of HVAC inventory levels and the completion of ERP system upgrades, seeking clarity on what issues are fully resolved and their impact on the 2026 outlook. He also asked about ADI's revenue growth potential versus recent declines, and the linearity of 1Q revenue/EBITDA guidance compared to the full-year forecast.

Answer

CFO Mike Carlet confirmed the ERP system implementation for ADI is complete and fully behind them. President of Products and Solutions Tom Surran noted that large distribution customers have reduced HVAC inventory below historical norms, expecting normalization by Q1 2026, and that P&S performed well relative to the market. President of ADI Global Distribution Rob Aarnes emphasized ADI's operational stability post-ERP, allowing the team to refocus on customer service and market share. Regarding ADI's growth, Rob Aarnes attributed recent declines to the video surveillance category's multi-month sales cycle, which is now recovering, and expects a return to mid-to-high single-digit growth. Mike Carlet explained the linearity of 1Q guidance versus the full year is influenced by the number of sales days and the stronger performance in Q1 2025 compared to the second half, which faced ERP and HVAC headwinds.

Erik Woodring sought a deeper explanation for why the residential HVAC market headwinds are considered transitory and whether they negatively impacted Resideo's Products and Solutions gross and operating margins. He also asked for the operating margin outlook for both P&S and ADI for Q4 and the next 1-3 years, and clarification on the positive 2026 guidance.

Answer

President of Products and Solutions Business Thomas Surran explained the HVAC market disruption stems from distributor inventory and regulatory changes, clarifying that Resideo's product margins were not directly discounted. CFO Michael Carlet attributed Q3 operating margin compression to HVAC and ERP costs, outlining long-term targets of double-digit operating margins for ADI and 300-500 basis points expansion for P&S over 3-5 years. He confirmed 2026 estimates are at the low end of internal planning.

Erik Woodring pressed for a deeper understanding of why Resideo's Products and Solutions (P&S) business is affected by HVAC market headwinds, particularly inventory gluts of competitor products, and whether P&S margins were impacted by market discounting. He also sought clarity on the operating margin trajectory for both ADI and P&S into Q4 and over the next one to three years, concluding with a request for clarification on the company's 2026 financial outlook relative to current analyst consensus.

Answer

President of Products and Solutions Thomas Surran explained that the HVAC inventory glut impacts distributor cash flow and creates market disturbance, indirectly affecting Resideo's product stocking, but affirmed no discounting on Resideo's products and reiterated the transitory nature of the headwinds. CFO Michael Carlet detailed that P&S operating margins were compressed by HVAC headwinds and ADI's by ERP implementation costs, outlining long-term targets of double-digit operating margins for ADI and 300-500 basis points of expansion for P&S over three to five years. He also confirmed that the company's initial 2026 budgeting process indicates a more positive outlook than current analyst consensus estimates.

Erik Woodring from Morgan Stanley asked about the drivers of ADI's strong 10% organic growth, the performance of the SnapOne business, the dynamics of the partnership with Google on the First Alert SC5 detector, and the future of the legacy Control4 software platform after the ADI spin-off.

Answer

Rob Aarnes, President of ADI Global Distribution, explained that 2% of ADI's growth came from tariff-related pricing, with the rest from strong demand and market share gains. He clarified that SnapOne's performance is holding flat amid a tough residential market but noted the integration is paying dividends through cross-selling. Aarnes also confirmed the Control4 platform will remain with ADI post-spin. Thomas Surran, President of Products & Solutions, described the SC5 detector as a close partnership with Google and clarified that Resideo competes with the entity that acquired Google's former security product, not Google itself.

Erik Woodring of Morgan Stanley sought clarification on management's comments about the absence of customer buy-aheads or hesitancy, asking specifically about demand linearity in April. He also asked for a high-level perspective on where Resideo stands within the broader residential and commercial spending cycles.

Answer

CEO Jay Geldmacher, P&S President Thomas Surran, and ADI President Robert Aarnes all confirmed that customer pull-ahead activity was minimal in Q1 and through April, citing proactive communication and strong underlying demand. Regarding spending cycles, Tom Surran described the residential market as having more tailwinds ahead, with low existing home sales depressing the market but healthy remodeling activity. Rob Aarnes noted that while the residential AV market is soft, ADI is mitigating this through share gains and strength in its commercial categories.

Katy, on behalf of Erik Woodring from Morgan Stanley, asked if Resideo's competitors face similar tariff exposure from production in Mexico. She followed up by asking how strong demand in ADI's exclusive brands and e-commerce could affect pricing power and whether the market remains price-competitive.

Answer

CEO Jay Geldmacher stated that the competitive landscape is mixed, with some competitors manufacturing in Mexico while others are in China and other locations. Robert Aarnes, President of ADI, confirmed that the pricing environment was highly competitive in Q4 but noted that the most margin-accretive channels, e-commerce and exclusive brands, are key strategic growth areas. He added that investments in a new ERP system are expected to improve future pricing discipline.

Erik Woodring of Morgan Stanley asked about the ideal qualities for Resideo's next CEO following Jay Geldmacher's retirement announcement. He also inquired about the drivers behind ADI's strong Q3 organic growth and why this performance wasn't translating into better margins.

Answer

CEO Jay Geldmacher stated that the company is now well-positioned for a new leader to drive future growth and profitability without the foundational challenges he faced upon joining. Robert Aarnes, President of ADI, attributed the segment's growth to sustained momentum in commercial categories, strong performance from large national accounts, and the fruition of multi-year investments in e-commerce and exclusive brands. The margin pressure was previously attributed by CFO Mike Carlet to diminished inflationary benefits and competitive pricing.

Erik Woodring asked for clarification on the Auto OEM business, specifically why the 2023 target of 40% annual growth to $800 million was not met, what lessons were learned, and the conviction behind 'doubling down' with the Mercedes-Benz partnership. He also sought details on the next evolution of this business, including potential 3-year growth rates, customer diversification, and target margins. Additionally, he inquired about the Outdoor segment's accelerating growth and new product features for 2026, questioning if this implies different timing for a fēnix launch or new models, given historical launch patterns.

Answer

Cliff Pemble, President and CEO, explained that the 2023 Auto OEM outlook was based on OEM projections that changed due to market structure and geographic results. He stated that Garmin learned to manage for scale and invest in innovation, and is now shifting R&D resources to other product lines, having reached a critical mass with automakers. Regarding the Outdoor segment, Mr. Pemble did not comment on specific product launch timing but confirmed a very active year plan for 2026, with many launches expected in the back half of the year, which should lead to stronger H2 revenue.

Erik Woodring asked for insights into the Auto OEM business, specifically what Garmin learned from not meeting its early 2023 growth target of 40% annually to $800 million, and how this influences the conviction to double down. He also sought details on the next evolution with Mercedes, including potential 3-year growth rates, customer diversification, or target margins.

Answer

CEO Cliff Pemble explained that the 2023 outlook was based on OEM projections that changed due to market structure and geographic results. He highlighted learning to manage for scale and invest in innovation, and that Garmin is now shifting R&D resources to other product lines, having reached critical mass with automakers. Woodring also questioned the outdoor segment's accelerating growth and new product features for 2026, given that Fenix is a major revenue driver and its next launch is typically in January 2027. Pemble clarified that while he wouldn't comment on specific product launch timing, Garmin has a very active year planned for outdoor, with many launches expected in the back half of the year, leading to stronger H2 revenue. Finally, Woodring inquired about the priority of growing Garmin's ratable business (subscriptions and services), which has marginally decreased to around 5% of revenue, and the margin differences between ratable and point-in-time businesses. Pemble confirmed that subscription-based business margins tend to be higher and that Garmin aims to grow these, but not as the sole growth path, noting that the subscription business has been growing strongly, but the overall business growth has kept its percentage below the 10% threshold.

Erik Woodring asked for an understanding of where Garmin stands in the product cycle for its fitness and outdoor segments, given years of strong performance. He also questioned why capital expenditure guidance has consistently been higher than actual spend over the past three years.

Answer

Cliff Pemble, President and CEO, described the fitness and outdoor opportunities as ongoing, not cyclical, highlighting Garmin's growing market share and innovation. Doug Boessen, CFO and Treasurer, clarified that CapEx estimates are made early in the year and sometimes get pushed out, emphasizing that the company has ample cash and remains committed to infrastructure for future growth.

Eric Woodring asked for an assessment of where the Fitness and Outdoor segments stand in their respective product and pricing cycles, given multiple years of strong performance. He also questioned why capital expenditure guidance has consistently exceeded actual spend over the past three years.

Answer

President and CEO Cliff Pemble characterized the Fitness and Outdoor segments as an ongoing opportunity rather than a cyclical pattern, highlighting Garmin's position as a growing market share player in wearables, driven by innovation. CFO and Treasurer Doug Boessen clarified that CapEx estimates are made early in the year and sometimes get pushed out, emphasizing that the company has ample funds and remains committed to infrastructure investments for future growth.

Erik Woodring asked for a big-picture view on Garmin's growth algorithm, questioning if the company is entering a new, higher revenue growth phase. He also inquired about the elasticity of demand and pricing power for consumer wearables, and clarified if the MyLabs acquisition was included in the updated guidance.

Answer

President and CEO Clifton Pemble attributed growth to continuous innovation and differentiation across all segments, particularly in the wearables market where Garmin is gaining share. He clarified that price increases are tied to new products with enhanced utility, not hikes on existing SKUs. CFO and Treasurer Douglas Boessen confirmed the MyLabs acquisition is fully factored into the 2025 guidance.

Erik Woodring requested a breakdown of the updated 2025 guidance, seeking to separate the impact of assumed demand weakness from the FX tailwind. He also asked about Garmin's short- and long-term tariff mitigation strategies and whether the current landscape would alter its vertical integration and manufacturing footprint.

Answer

CEO Cliff Pemble explained that while the FX impact is quantifiable, it's difficult to disaggregate demand shifts and mitigations. He noted the company is only assuming a modest potential decrease in demand and that the net impact of FX and mitigations on EPS is zero. On mitigation, Pemble stated that "everything is on the table" and actions are being evaluated on a case-by-case basis. He affirmed that Garmin's global footprint and vertical integration are currently a benefit, not a detriment, and does not expect a major shift in strategy.

Erik Woodring of Morgan Stanley questioned the lowered 2025 Auto OEM revenue outlook, seeking factors beyond general market softness, and asked about the growth trajectory leading up to a major 2027 program win. He also probed whether the 2025 guidance contains a degree of conservatism similar to the initial 2024 outlook.

Answer

CEO Clifton Pemble clarified that the reduced Auto OEM forecast is '100% due to the softening outlook of automakers,' particularly high-end brands exposed to a struggling China market. Regarding the full-year guidance, he explained that the company starts the year with a pragmatic outlook it has high confidence in, acknowledging the back-half seasonality of consumer markets, but always strives to overachieve.

Erik Woodring from Morgan Stanley questioned the sustainability of the record-high margins in the Fitness and Outdoor segments, asking about the role of pricing strategy. He also asked if the softening Auto OEM market would impact Garmin's 2025 revenue target of $800 million or affect new OEM contracts.

Answer

President and CEO Clifton Pemble emphasized that continuous cost-down efforts are a key part of their strategy and that margin sustainability is driven by creating products with unique differentiators that command premium pricing. Regarding the Auto OEM segment, Pemble acknowledged the softer market but stated it was too early to comment on 2025 targets or the impact on new programs, which will be addressed in the next outlook.

Erik Woodring inquired about the current state of the Apollo story, specifically what Kornit has learned regarding the time to onboard and ramp new customers, and if new customers are using Apollo differently than existing ones. He also asked CFO Assaf Zipori about the drivers for better profitability in 2026, including gross margins with an improved AIC mix, ink/consumables growth, and the approach to expenses.

Answer

CEO Ronen Samuel explained that initial Apollo deployments in 2024 focused on existing digital customers, while 2025 targeted net new screen printers, leading to a longer sales cycle due to workflow, training, and mindset differences. He noted efforts to build lighthouses among screen printers and focus on workflow innovation to shorten the sales cycle. CFO Assaf Zipori stated that AIC is the biggest growth driver, contributing to gross margin expansion as it scales. He indicated a disciplined approach to expenses, not expecting significant changes in OpEx or gross margins in 2026, while remaining mindful of FX impacts.

Erik Woodring sought an update on the Apollo system's status, particularly regarding onboarding new screen printer customers, sales cycle lengths, and any differences in usage compared to existing customers.

Answer

Ronen Samuel, CEO, explained that Apollo's 2024 deployment focused on existing digital customers, while 2025 targeted net new screen printers, which involved longer sales cycles due to different workflows and mindsets. He noted learnings in quality, productivity, garment types, and the need for workflow automation for screen printers, leading to 'lighthouse' customers and repeat Apollo orders. Erik Woodring also asked Assaf Zipori about the drivers of improved profitability in 2026, including gross margins and operating expenses. Assaf Zipori, CFO, stated that AIC is the primary growth driver, contributing to gross margin expansion as it scales. He anticipates reasonable gross margin levels and a disciplined approach to OpEx, with no significant changes expected in 2026.

Erik Woodring of Morgan Stanley asked for a deeper analysis of the new $14.5 million Annual Recurring Revenue (ARR) metric for the All-inclusive Click (AIC) model, seeking details on the system mix and growth potential. He also questioned the timeline for catalysts like the shift to on-demand and the de minimis loophole closure to translate into meaningful revenue and margin impact.

Answer

CEO Ronen Samuel stated the $14.5M ARR is a mix of Apollo and Atlas MAX systems and that the pipeline for AIC is strong, expecting meaningful revenue contribution in the second half of 2025. Regarding the timeline for broader market shifts, Samuel indicated that while some growth from screen printers is happening now, major brand adoption involves pilot programs and will likely take longer to scale, with more significant impact expected in H2 2025 and into 2026.

Erik Woodring of Morgan Stanley questioned the drivers behind management's increased conviction in the analog-to-digital shift and inquired about the potential for further cost discipline and operating leverage over the next year.

Answer

CEO Ronen Samuel attributed his strong confidence to a convergence of factors: market demand for speed and sustainability, superior technology like MAX and Apollo meeting quality and volume needs, and the innovative AIC business model which accelerates adoption. On costs, Ronen pointed to long-term margin expansion goals, while CFO Lauri Hanover added that the company is focused on reallocating resources to drive future growth rather than just cutting expenses.

Erik Woodring asked about the current materiality of on-premise AI, inquiring about the percentage of customers in production versus proof-of-concept stages and their investment considerations between on-premise and cloud for Generative AI.

Answer

President and CEO Steve McMillan stated that on-premise AI is a key growth driver, with next-generation hardware incorporating GPUs. He noted a doubling of POCs in 2025, with some moving to on-premise production, and emphasized Teradata's focus on expansion in both cloud and on-premise environments. CFO John Ederer clarified that the difference in free cash flow growth versus EPS for 2026 was primarily due to a one-time $0.05 tax benefit in Q4 2025, with other free cash flow drivers including working capital improvements and tax benefits.

Erik Woodring asked about the current materiality of on-premise AI, the percentage of customers in production versus proof-of-concept, and how enterprises are thinking about investing in Gen AI on-premise versus in the cloud.

Answer

Steve McMillan, President and CEO of Teradata, stated that on-premise AI is a key growth driver, with future hardware platforms incorporating GPUs. He noted a doubling of POCs in 2025, with many moving to on-premise production, driving platform usage. John Ederer, CFO of Teradata, clarified that a one-time $0.05 tax benefit in Q4 2025 impacted the year-over-year EPS comparison, while working capital improvements and better collections contributed to strong free cash flow.

Erik Woodring inquired about Teradata's strategy for achieving greater operating leverage and free cash flow through OpEx optimization, asking for details on the potential size, texture, and timing. He also asked about the company's offensive strategy for driving top-line growth and client engagement.

Answer

President and CEO Steve McMillan explained that cost optimizations are ongoing, but the key driver for leverage is returning the company to total ARR growth in FY25, which builds a foundation for durable free cash flow. CFO John Ederer added that while not providing specific FY26 numbers, the actions taken this year are setting the company up for a strong finish and future growth. McMillan also highlighted that go-to-market changes, a focus on hybrid cloud and on-prem environments, and new AI workloads are key to the company's growth strategy.

Erik Woodring of Morgan Stanley asked about the potential for further cost-cutting, particularly in SG&A, and the reasons for the significant sequential decline in the Q2 EPS guidance.

Answer

CEO Stephen McMillan stated the company is focused on profitable growth and has made the right investments to return to ARR growth in 2025. Interim CFO Charles Smotherman attributed the Q2 EPS decline to lower volume, higher claims, and lower CFC, partially offset by reduced headcount.

Erik Woodring asked if more decisive action is needed to accelerate Teradata's long-term transformation and growth, and questioned why free cash flow and EPS are guided down despite cost-cutting measures.

Answer

CEO Stephen McMillan asserted the company is in its next pivot towards AI, building on its cloud foundation with new partnerships and technologies. CFO Claire Bramley explained that while cost actions are offsetting revenue headwinds, they are not fully offsetting a ~$20 million FX impact, as the company is prioritizing reinvestment to ensure it achieves its total ARR growth target for 2025.

Erik Woodring sought assurance that recent headwinds, including staged migrations and deal elongation, are not due to competitive pressures from cloud-native platforms. He also asked about the recurring revenue gross margin profile amid the shifting business mix.

Answer

CEO Stephen McMillan expressed confidence in Teradata's competitive standing, citing a recent win-back from Snowflake and a performance win against Databricks, highlighting the platform's cost-effectiveness and unique hybrid capabilities. CFO Claire Bramley noted that recurring gross margin has been stable, as ongoing improvements in the cloud margin rate have successfully offset the negative impact from the mix shift.

Erik Woodring questioned CDW's recent market outperformance of 200-300 basis points compared to historical levels of 400-500 basis points, asking if structural market changes or competition explain this trend. He also inquired about the notable divergence in corporate versus small business performance, with SMB showing strong double-digit growth while corporate remained flat, and what this implies for 2026.

Answer

CEO Chris Leahy clarified that CDW's outperformance is at the high end of the 200-300 basis point range, noting that the increasing mix of netted-down revenue impacts the top-line differential, and expressed confidence in CDW's competitive position. He explained that larger corporate customers have been focused on cost optimization and AI experimentation, now moving into production, while small businesses are more agile, cloud-forward, and quickly adopting packaged AI solutions for rapid ROI, leading to the observed differences in spending cycles.

Erik Woodring from Morgan Stanley asked about CDW's recent outperformance relative to the U.S. IT market (200-300 basis points vs. historical 400-500 basis points), questioning if structural market changes or competition were factors. He also inquired about the divergence in corporate versus small business performance, with SMB showing strong double-digit growth while corporate was relatively flat, and what this implies for 2026.

Answer

Christine Leahy, CEO, attributed the outperformance to the high end of the 200-300 basis point range and the increasing mix of netted-down revenue, which impacts top-line compression. She expressed confidence in CDW's competitive position and ability to take market share. Regarding customer segments, she noted larger companies' focus on cost optimization and experimentation with AI, now moving into production, while small businesses are more nimble in adopting packaged AI solutions for fast ROI. She anticipates an uptick from the corporate side, despite a prudent approach to overall spend.

Erik Woodring from Morgan Stanley sought clarification on what makes the current spending environment "complex or challenging" compared to historical cycles, and how this complexity is affecting CDW's gross profit dollar growth. He also asked what level of gross profit dollar growth CDW needs to achieve to return to its historical 10%+ EPS growth algorithm.

Answer

Chris Leahy, Chair and CEO of CDW, characterized the complexity as "volatility" and "unpredictability" over the past nine months, citing rapid changes, new AI technology questions, funding shifts, geopolitical unrest, and macro uncertainty, which have caused hesitancy in larger technology commitments. He noted that institutions are now adapting to this unevenness. Al Miralles, CFO of CDW, explained that returning to high single-digit to double-digit EPS growth requires sustained gross profit growth, continued progress on gross margin, and a strong focus on profitable growth to achieve operating leverage, bringing the efficiency ratio back to the 55-56% range.

Erik Woodring sought clarification on the complexity of the current spending environment, how it differs from historical cycles, and its impact on gross profit dollar growth. He also asked what level of gross profit dollar growth CDW needs to achieve to return to its historical 10%+ EPS growth algorithm, considering variable compensation headwinds.

Answer

Chris Leahy, Chair and CEO of CDW, identified volatility and unpredictability as the primary drivers of complexity, leading to customer hesitancy in making larger technology commitments. Al Miralles, CFO of CDW, explained that returning to high single-digit or double-digit EPS growth requires sustained gross profit growth, continued gross margin progress, and a focus on operating leverage to bring the efficiency ratio back to the 55%-56% range.

Erik Woodring from Morgan Stanley questioned why CDW's consistent outperformance isn't translating to a higher market share gain forecast beyond the stated 200-300 basis points. He also asked for an update on the hardware cycle for client devices, net comm, servers, and storage.

Answer

Chris Leahy, Chair & CEO, affirmed that CDW is confident in delivering its 200-300 basis point premium over the market and that recent performance underscores this share gain. She characterized the client device refresh as being in its 'mid-cycle' and noted an uptick in infrastructure hardware. Al Miralles, CFO, added that the positive turn in solutions hardware this quarter was encouraging, though it is still early days.

Erik Woodring asked why CDW is not demonstrating its historical operating leverage, with 2025 EPS growth guided in line with revenue, and inquired about the company's current appetite for M&A.

Answer

CEO Christine Leahy explained that the current lack of leverage is due to making significant strategic investments during a low-growth environment but expects leverage to return as conditions improve. On M&A, she stated the appetite is always large, and the company is now in a strong position to be opportunistic, with a particular focus on industry-specific capabilities.

Erik Woodring sought to clarify if the cited double-digit declines in infrastructure solutions were reflective of the broader market or a result of CDW's decision to walk away from low-profit deals. He also asked for more detail on the increased market competition, questioning what is different now and why it would dissipate in a stronger market.

Answer

CEO Christine Leahy explained the decline is a combination of both factors: it reflects the broader market view but is also tempered by CDW's discipline in not "racing to the bottom" on uneconomic deals. She characterized the current competitive environment as featuring "irrational pricing" with an intensity not seen in years, driven by competitors feeling the pressure of elongated sales cycles and deferred spending.

Erik Woodring asked for an assessment of the premium home theater market's health amidst a K-shaped economy, noting Sonos' market share gains, and sought clarification on geographical performance, particularly Americas versus international. He also requested a detailed breakdown of the tailwinds and headwinds contributing to Sonos' strong Q1 gross margin performance compared to the previous December quarter.

Answer

CEO Tom Conrad confirmed Sonos' continued share growth in premium home theater in the Americas and EMEA, aligning with a K-shaped market trend of growing demand for premium experiences and diminishing demand for entry-level products. He emphasized Sonos' strategy to differentiate as a system beyond individual categories and highlighted the growing contribution of the installer channel. CFO Saori Casey attributed the robust gross margin to ongoing cost reduction efforts, favorable FX, and effective pricing adjustments for tariff mitigation. She noted that tariffs were a 300 basis point headwind, largely offset by these actions, while unfavorable product mix (strong Era 100 sales) and a difficult prior-year comparison (Arc Ultra launch) were partial offsets.

Erik Woodring asked about the overall health of the premium home theater market, including any green shoots or challenges, and specific geographical performance, particularly the Americas versus international markets. He also sought clarification on the drivers behind the strong Q1 gross margin performance, requesting a breakdown of tailwinds and headwinds compared to the prior year's December quarter.

Answer

CEO Tom Conrad confirmed continued share growth in premium home theater in the Americas and EMEA, noting a K-shaped market with growing demand for premium experiences offset by diminishing demand for entry-level products. He emphasized Sonos' strategy to differentiate the system beyond individual categories and highlighted the growing importance of the installer channel. CFO Saori Casey attributed the strong gross margin to continued cost reduction efforts, favorable FX, and pricing adjustments for tariff mitigation, which largely offset the 300 basis point tariff headwind and unfavorable product mix from strong Era 100 sales. She also mentioned a difficult comp from last year's Arc Ultra launch.

Erik Woodring from Morgan Stanley inquired about Sonos's pricing strategy amid tariff pressures, the current market backdrop, and whether the annualized non-GAAP OpEx target of $580M-$600M has changed.

Answer

CEO Tom Conrad explained that the pricing strategy aims to optimize gross profit dollars while monitoring consumer response, without providing specific product details. He described the market as 'cyclically challenged' but noted favorable long-term trends. CFO Saori Casey stated that while not guiding for FY26, cost optimization efforts are ongoing and the full impact of recent workforce reductions will materialize in FY26, with an expectation of continued profitability improvement.

Erik Woodring asked for clarification on the company's tariff exposure, a normalized growth outlook for Q3 excluding the tough Ace headphone launch comparison, the philosophy on product launch cadence versus other priorities, and the strategy for using the company's cash balance.

Answer

Interim CEO Tom Conrad clarified that the vast majority of U.S.-bound production is subject to a paused 10% tariff, not exempted. CFO Saori Casey explained that normalizing for the Ace launch is difficult due to multiple factors and declined to provide a specific figure. Conrad affirmed a cadence of two hardware launches a year is ideal but the current focus is on software to rebuild trust. Casey stated that while shareholder returns are a priority, preserving liquidity is paramount in the near term due to tariff uncertainty.

Erik Woodring of Morgan Stanley asked for clarification on the "too many layers" comment from the CEO's internal memo, questioned the rationale for changing a previously successful organizational structure, and sought color on Q3 revenue seasonality given a difficult year-over-year comparison.

Answer

Interim CEO Tom Conrad detailed that the previous business-unit structure created redundancies and inflexibility, and the new functional model enables more nimble, efficient project teams. He clarified this change was a refined "return to form," as the business-unit structure was only 18 months old. CFO Saori Casey acknowledged the difficulty in forecasting Q3 seasonality and could only point to the tough comparison from last year's ACE headphone launch, declining to provide further guidance.

Erik Woodring from Morgan Stanley sought details on long-term efficiency initiatives, their impact on the product launch cadence, recent demand linearity, and potential shifts in seasonality for the upcoming fiscal year.

Answer

CEO Patrick Spence confirmed the plan to launch at least two new products annually, with a greater focus on impact and efficiency. He described the current retail environment as challenging and promotion-driven. CFO Saori Casey explained the move to quarterly guidance is due to market uncertainty. She noted the wide Q1 guidance range reflects the holiday season, new product launches, and a proactive effort to reduce channel inventory, which creates a 5-7 point headwind to year-over-year growth.

Erik Woodring asked about the revenue upside potential from Apple's AI initiatives, given the associated costs flowing through OpEx, and sought clarity on how Apple plans to monetize AI and the timeline for realizing ROI. He also inquired about the primary and most sustainable factors driving the current strength in iPhone sales.

Answer

CEO Tim Cook stated that integrating AI across the operating system in a personal and private way creates great value, opening up a range of opportunities across products and services, and expressed satisfaction with the collaboration with Google. Regarding iPhone strength, Tim Cook attributed it to a combination of factors including the display, camera, performance, new selfie camera, and the beloved design, all contributing to a very strong product cycle.

Erik Woodring asked about the key drivers behind the iPhone 17's success, specifically whether it's due to an aging install base replacement cycle or standout features, and inquired about Apple's strategy for managing component cost inflation, particularly with increasing memory content and rising memory prices.

Answer

CEO Tim Cook attributed the iPhone 17's success to its incredibly strong product lineup, highlighting the iPhone 17 Pro's advanced features, the iPhone Air's design, and the iPhone 17's value. CFO Kevan Parekh noted Apple's world-class procurement team is effectively managing costs, seeing a slight tailwind on memory and storage prices, and successfully mitigating higher initial costs of new products.

Erik Woodring inquired about the drivers behind the iPhone 17's strong success, specifically whether it's due to an aging install base replacement cycle or standout features, and Apple's strategy for managing component cost inflation, particularly memory prices, given increased memory content in devices.

Answer

CEO Tim Cook attributed iPhone 17's success to an incredibly strong product lineup, highlighting the iPhone 17 Pro's advanced features, the iPhone Air's breakthrough design, and the iPhone 17's value. CFO Kevan Parekh noted that Apple's procurement team effectively manages costs, currently seeing a slight tailwind on memory and storage prices, and that new products' higher cost structures are managed down over time.

Erik Woodring asked about the performance of Apple's services business in light of reports of declining Safari searches, questioning the strategic value of Apple devices as search access points. He also sought clarity on performance in Greater China, asking if the strong results were due to one-time promotions or a fundamental shift in demand.

Answer

CEO Tim Cook stated that Apple devices continue to be very valuable as search access points and that the company is monitoring evolving consumer behaviors. Regarding China, he confirmed 4% growth, driven by iPhone and Mac, attributing it partly to government subsidies, but also highlighted an all-time high installed base, record iPhone upgraders in mainland China, and top-selling models for both iPhone and Mac.

Erik Woodring asked about the expected mix of iPhones sourced from India for the U.S. market and whether Apple's goal is 100% sourcing from India. He also inquired if sell-in and sell-through were aligned in the March quarter and if consumers were accelerating purchases ahead of tariffs.

Answer

CEO Tim Cook explained that for the June quarter, the majority of iPhones sold in the U.S. will originate from India, with most other products coming from Vietnam. He detailed the applicable tariff structures but declined to predict future production mixes. Cook also stated there was no obvious evidence of a demand pull-forward in the March quarter, noting that channel inventory levels were similar at the start and end of the period, though Apple did build ahead inventory, which is reflected in manufacturing purchase obligations.

Erik Woodring asked for details on how Apple Intelligence is impacting iPhone 16 demand and which features are most used, and also inquired about headwinds in China.

Answer

CEO Tim Cook confirmed that markets with Apple Intelligence showed stronger iPhone 16 performance. He noted that in China, where revenue fell 11%, over half the decline was due to channel inventory changes, and Apple Intelligence has not yet launched there.

Erik Woodring asked for an assessment of the iPhone 16 demand cycle, noting short lead times, and inquired about upgrade rates and the impact of Apple Intelligence. He also questioned the outlook for gross margins given trends in component and commodity prices.

Answer

CEO Tim Cook stated that Apple Intelligence is a compelling reason to upgrade, citing high iOS 18.1 adoption. He clarified that the goal is to balance supply and demand quickly, noting iPhone 16 Pro models were constrained in October but are expected to reach balance soon. CFO Luca Maestri added that while most commodity prices are favorable, NAND and DRAM prices are increasing. He expressed confidence in the strong gross margin guidance of 46% to 47% for the December quarter.

Erik Woodring asked about Western Digital's strategy and patience in signing long-term purchase orders extending into calendar 2027, aiming to secure better economic terms amidst a tight HDD market and rising NAND inflation. He also inquired about the monetization plans for SanDisk shares and the intended use of those proceeds.

Answer

CEO Irving Tan stated that Western Digital is sold out for calendar 2026 and has long-term agreements (LTAs) with top customers, including two through calendar 2027 and one through calendar 2028, with pricing reflecting the value delivered and a stable pricing environment. CFO Kris Sennesael confirmed the intention to monetize the remaining 7.5 million SanDisk shares before the February 21st deadline, likely via a debt-for-equity swap, with proceeds earmarked for further debt reduction.

Erik Woodring inquired about Western Digital's strategy for signing purchase orders extending into calendar 2027, particularly how the tight HDD market and NAND inflation influence the economics extracted from these agreements. He also asked about the monetization of SanDisk shares.

Answer

Irving Tan, CEO, confirmed being sold out for calendar 2026 and having long-term agreements (LTAs) with top customers through 2027 and 2028, which include both volume and price conditions. He emphasized the structural shift in value delivered to customers, leading to stable pricing. Kris Sennesael, CFO, stated the intention to monetize the remaining 7.5 million SanDisk shares before the February 21st deadline, likely through a debt-for-equity swap to reduce debt.

Erik Woodring asked for details on the Q1 fiscal 2026 gross margin guidance, questioning why sequential expansion appears to be slowing and what the potential for incremental margins is during the current upcycle.

Answer

CFO Kris Sennesael expressed satisfaction with achieving a 41.3% gross margin, well above the long-term model. He attributed the strength to stable pricing, a favorable mix shift towards higher-capacity drives, and effective cost controls. Sennesael stated he is confident the team will continue to execute well and drive further gross margin improvements over time.

Erik Woodring from Morgan Stanley inquired about Western Digital's capital allocation strategy, specifically focusing on future dividend growth and share buybacks, and asked whether the increased visibility from long-term agreements (LTAs) implies sequential growth through calendar year 2025.

Answer

CEO Irving Tan explained that the company's primary goal is to reduce net leverage to its target range, after which it intends to return 100% of excess cash to shareholders through both dividends and buybacks. He confirmed that new LTAs with two major hyperscale customers now extend into the first half of 2026, providing significant visibility and confidence in robust demand through calendar year 2025.

Erik Woodring from Morgan Stanley asked about Xerox's prioritization and management strategy amidst multiple ongoing initiatives, including reinvention, Lexmark integration, cash flow management, core business protection, and volatile macro/memory conditions, particularly concerning execution risk. He also pressed on the strategy to protect the IT services business against potential pull-forward and a challenging second half due to rising memory costs and inflation, inquiring about elasticity and margin impact.

Answer

Steven Bandrowczak, Chief Executive Officer, affirmed that the reinvention strategy and acquisitions of ITsavvy and Lexmark are working, citing examples like the Morrisons account and the launch of Xerox TriShield 360 Cyber Solution. He emphasized that reinvention and integration are managed as one project under an Enterprise Transformation Office, providing confidence in execution and 2026 guidance. Regarding memory price impacts, Mr. Bandrowczak, drawing on his CIO background, explained that clients will likely extend asset life, shift to software-as-a-service, and leverage Xerox's full portfolio to navigate increased endpoint costs. He expressed confidence in Xerox's capabilities to help clients manage these challenges, focusing on controllable factors rather than unpredictable chip pricing.

Erik Woodring asked about Xerox's prioritization strategy amidst numerous ongoing initiatives, including reinvention, Lexmark integration, cash flow management, core business protection, and volatile macro and memory market conditions, seeking insight into how execution risks are managed. He also pressed on the strategy to protect the IT services business from potential pull-forward and a challenging second half due to rising memory costs, especially given double-digit bookings and billings growth.

Answer

Steven Bandrowczak (CEO) affirmed that Q4 performance met expectations for revenue, operating profit, and cash, highlighting the success of the reinvention strategy and the ITsavvy and Lexmark acquisitions through examples like the Morrisons account, A3 product expansion, and the TriShield cyber solution. He emphasized a unified Enterprise Transformation Office (ETO) for managing all initiatives and a positive cultural integration, bolstered by an AI Center of Excellence. Addressing memory cost protection, he explained that as a former CIO, he understands budget constraints and client needs to "sweat assets," extend product life, and shift to SaaS or other platforms, expressing confidence in Xerox's portfolio to help clients navigate these challenges.

Erik Woodring questioned the decision to maintain full-year guidance given the fluid tariff situation and potential $50 million impact, and asked about the long-term gross and operating margin potential for the IT Solutions business.

Answer

CFO Mirlanda Gecaj explained that guidance was maintained because tariff policies are not yet final, and the company aims to remain accountable to its original targets. For IT Solutions margins, CEO Steven Bandrowczak stated the goal is to achieve double-digit operating profit by leveraging a lower SG&A structure. President and COO John Bruno added that the business mix, including value-added services like cloud and security, carries healthy operating margins. Bandrowczak also noted that recent growth in lower-margin entry-level equipment will drive future high-margin supplies sales.

Erik Woodring of Morgan Stanley asked about the persistent decline in gross margins despite reinvention cost savings and sought clarity on the strategy to stabilize them in 2025. He also inquired about the future of the finance receivable forward flow program and its expected cash flow contribution beyond 2025.

Answer

An executive attributed the Q4 gross margin decline to the mix of A4 equipment, lower print volumes, and the inclusion of ITsavvy. For 2025, they expect gross margins to be lower than 2024, primarily due to the full-year impact of the lower-margin ITsavvy business, which will be partially offset by pricing and productivity initiatives. CEO Steven Bandrowczak added that strong growth in lower-margin A4 hardware will yield higher-margin supplies revenue in future years. Regarding the forward flow program, an executive confirmed it's a 4-year plan with about $800 million of receivables expected to be sold over the next two years.

Erik Woodring questioned the basis for management's confidence in returning to revenue and operating income growth in 2025, given the significant number of concurrent, complex initiatives and the execution challenges faced in 2024. He also requested clarification on the math making the ITsavvy acquisition immediately accretive.

Answer

CEO Steven Bandrowczak attributed his confidence to the management team's 'pattern recognition' from past experiences and internal visibility into the progress of various reinvention workstreams, such as cost savings and strategic acquisitions. CFO Xavier Heiss detailed the ITsavvy accretion, citing its ~$440M LTM revenue, ~$30M EBITDA, and an expected $15M in cost synergies, which would yield an accretive EBITDA margin. Heiss also noted the deal advances their strategy by increasing IT and Digital Services to 15% of total revenue.

Eric Woodring questioned the conservative infrastructure guidance for 2026, which projects a decline despite strong IBM Z performance in 2025. He asked if there were pull-forward buying trends in 2025 or if the guidance is overly cautious, given Z's AI capabilities and potential for sustained growth.

Answer

CEO Arvind Krishna stated that guidance is given with high confidence to hit or beat numbers. He highlighted that z17 has been the strongest start in three quarters, driven by secular factors like demand for on-premise control, mainframe's lowest unit cost economics, and GenAI tools (Watson Code Assistant for Z) modernizing the platform. He also emphasized the new in-line AI capabilities of z17, which came to market in Q4 2025, providing potential tailwinds as clients adopt these features.

Eric Woodring questioned the strong Z performance in 2025 and the guided infrastructure decline in 2026, asking if 2025 saw a pull-forward of demand or if the 2026 guidance is conservative, particularly regarding the sustainability of the Z cycle and its role as an AI workhorse.

Answer

CEO Arvind Krishna stated that guidance is given with high confidence to hit or beat numbers. He highlighted the continuous improvement in Z adoption (z17 being the strongest start in three quarters), driven by secular factors like demand for sovereignty/on-premise control, favorable mainframe economics, Gen AI tools for modernization (Watson Code Assistant for Z), and in-line AI capabilities (Spyre cards). He acknowledged that while these provide tailwinds, the 2026 guidance remains prudent.

Erik Woodring sought clarification on whether the 2026 growth rates discussed were organic or included M&A. He also asked for IBM's perspective on the exceptional growth of cloud providers in infrastructure services and large-scale AI workloads, and if IBM Cloud sees a similar opportunity to capture long-term infrastructure-driven demand.

Answer

Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, clarified that the 2026 growth rates are largely organic, with small M&A included, and substantial M&A would further accelerate them. He explained that IBM partners deeply with hyperscalers, viewing their growth as an opportunity for IBM to deploy consulting projects and software on their infrastructures, particularly in private instances for AI models. Mr. Krishna highlighted that IBM's mainframe (z17 capable of 450 billion inferences/day) and storage portfolios are direct beneficiaries of AI infrastructure demand. Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer, reiterated the Software model's target of approaching double-digit growth, comprising 2-3 points inorganic and 6-8 points organic, with 2025 organic growth approaching 6%+.

Erik Woodring, Managing Director of Equity Research at Morgan Stanley, sought clarification on whether the 2026 growth rates discussed were organic or included M&A. He also asked how IBM views the exceptional growth of cloud providers in infrastructure services and large-scale AI workloads, and if IBM Cloud sees a similar opportunity to capture long-term infrastructure-driven demand.

Answer

Arvind Krishna, IBM's Chairman, President, and Chief Executive Officer, clarified that the mentioned growth rates for 2026 are largely organic, with any substantial M&A potentially accelerating them further. He explained that IBM deeply partners with hyperscalers, viewing their growth as an opportunity for IBM to deploy its consulting projects and software on their infrastructures for clients, especially in private instances for regulated industries. Krishna emphasized that IBM's mainframe (IBM Z17) and storage portfolios are direct beneficiaries of AI infrastructure demand, with the Z17 capable of 450 billion inferences per day and storage needed for AI training. Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer, reiterated that IBM's software model targets approaching double-digit growth, with 6-8 points organic and 2-3 points inorganic, and that 2025 is seeing higher inorganic contribution due to HashiCorp. He confirmed that the organic engine is expected to be fueled by TP monetization, Red Hat acceleration, and annuity growth into 2026.

Erik Woodring asked about the impact of the $7.5 billion cumulative AI book of business on other parts of IBM, specifically whether AI spending is incremental or if it is cannibalizing non-AI client spend.

Answer

Chairman, President & CEO Arvind Krishna explained that AI spend is largely incremental for infrastructure and enabling software layers. He stated that cannibalization occurs as clients reduce labor expenses to fund technology. In consulting, he noted that dollars are being directed toward transformative AI projects, which can cannibalize other forms of custom application development, making it crucial to be focused on high-impact areas.

Erik Woodring asked why IBM did not raise its full-year free cash flow guidance, given that a significant positive currency swing is expected to boost reported revenue and profit dollars while the underlying constant currency guidance remains unchanged.

Answer

CFO Jim Kavanaugh responded that while they feel stronger about the $13.5 billion target, it is prudent not to raise guidance this early in the year with 85% of the cash flow yet to be generated. He explained that IBM's hedging program mitigates some of the bottom-line benefit from currency moves, as they hedge cash flows but not revenue. He emphasized that the primary driver for free cash flow remains strong growth in adjusted EBITDA, which is on track.

Erik Woodring sought clarification on whether the 2025 outlook includes the pending HashiCorp acquisition and requested a more detailed breakdown of the puts and takes for the 2025 free cash flow guidance.

Answer

CFO Jim Kavanaugh confirmed the 2025 guidance is 'all in' and includes the expected impact of HashiCorp. He detailed that the $13.5 billion free cash flow forecast is primarily driven by over $1.5 billion in adjusted EBITDA growth. This will be partially offset by headwinds including a couple hundred million dollars in higher CapEx, a couple hundred million more in cash taxes, and a couple hundred million from net interest opportunity loss.

Erik Woodring asked when the long-duration AI consulting projects would materially impact revenue and under what conditions these projects would become incremental to, rather than cannibalizing, traditional consulting business.

Answer

CFO Jim Kavanaugh explained that the company will begin to 'wrap' the period of discretionary spending pullback in the first half of 2025. Based on historical technology shifts like Red Hat, he anticipates a significant revenue inflection from these AI projects in the second half of 2025. At that point, the volume of new business is expected to build a sufficient backlog to drive healthy, incremental growth for the segment.

Erik Woodring asked about Seagate's exabyte growth, referencing the mid-20% CAGR target from the previous Analyst Day. He sought clarity on where supply growth might land this calendar year and if the pace of exabyte growth would accelerate as the HAMR crossover point approaches later in the year, given demand outpacing supply.

Answer

CEO Dave Mosley stated that Seagate plans an aggressive transition to 4 TB per platter but emphasized that manufacturing is tight, leading to a prescriptive, profitable ramp rather than a rapid one. He expressed optimism for the 4 TB per platter product replacing legacy products and creating more opportunities.

Erik Woodring asked about Seagate's exabyte growth, specifically where supply growth could land this calendar year relative to the mid-20% CAGR target, and if the pace of exabyte growth would accelerate as the HAMR crossover point approaches.

Answer

CEO Dave Mosley stated that Seagate plans an aggressive transition to 4 TB per platter, but manufacturing is currently tight. He described the ramp as prescriptive and profitable, not as fast as some past ramps, and expressed optimism that the 4 TB per platter product will replace legacy products due to its strong value proposition.

Erik Woodring inquired about the sustainability of Seagate's recently reported incremental margins, which have been in the 60-70% range, questioning if this trend would continue to exceed the 50% target outlined at the analyst day.

Answer

Gianluca Romano, CFO, confirmed that Seagate is executing better than expected, primarily due to a favorable mix shift towards higher-profitability, higher-capacity HAMR drives. He noted that while short-term results are strong, variability exists, but the long-term financial model presented at the analyst day remains robust.

Erik Woodring inquired about the sustainability of Seagate's 60-70% incremental margins, questioning if they would consistently remain higher than the 50% outlined at the analyst day.

Answer

CFO Gianluca Romano attributed the higher margins to a better product mix and HAMR adoption, noting that while there is variability, short-term performance is strong and exceeding the financial model.

Erik Woodring of Morgan Stanley questioned the implied gross margin guidance for the September quarter, noting that the projected sequential expansion of approximately 20 basis points seems low compared to the average of over 200 basis points in recent quarters.

Answer

CFO Gianluca Romano clarified that the estimate was significantly lower than what the guidance implies. He stated that Seagate is guiding for a notable increase in both gross and operating margins, keeping the company on its path to achieve the financial milestones discussed at its recent Investor Day.

Erik Woodring asked for clarification on the source of the March quarter's revenue upside despite supply constraints and questioned the risk of demand pull-forward affecting the June quarter's guidance.

Answer

CEO Dave Mosley stated that the June quarter guidance would have been the same a month ago, attributing the stability to the predictability of their build-to-order model. He noted that previously discussed operational issues have been resolved and that the build-to-order process provides long-term visibility and financial predictability through product transitions.

Erik Woodring of Morgan Stanley inquired about the $200 million revenue shortfall forecasted for the March quarter, asking whether this revenue would be deferred to the June quarter or pushed further out.

Answer

CEO Dave Mosley explained that the supply issue causing the shortfall is temporary and limited to the March quarter. While not directly confirming a dollar-for-dollar recovery, he expressed confidence in continued exabyte and demand growth, emphasizing the company's focus on predictability and successful product transitions.

Erik Woodring of Morgan Stanley questioned why the guided gross margin expansion for the December quarter was only about 70 basis points, a deceleration from the 200-400 basis point sequential gains seen over the last year, despite ongoing favorable pricing and mix.

Answer

CFO Gianluca Romano explained that the September quarter's gross margin improvement included a non-recurring benefit of about 100 basis points from the elimination of underutilization charges, which will not be present in the December quarter. He emphasized that the company is still progressing on pricing and product mix, and the focus is on consistent, steady improvement rather than maximizing gains in a single quarter.

Erik Woodring sought clarification on whether Logitech's 300-500 basis points of outperformance is against PC revenue or PC units, and asked about the company's strategy to convince underpenetrated users in the existing PC installed base to purchase peripherals.

Answer

Matteo Anversa, CFO, clarified that the outperformance refers to PC *unit* sales. Hanneke Faber, CEO, explained that the strategy to penetrate the installed base relies on product superiority, addressing real user needs (e.g., productivity with MX Master 4, performance in gaming, comfort with Ergo products), and effective social-first digital marketing campaigns.

Erik Woodring sought clarification on whether Logitech's historical 300-500 basis points of outperformance was against PC revenue or PC units, noting the variability in IDC forecasts. He also asked how Logitech plans to convince underpenetrated users within the existing PC installed base to purchase mice or keyboards, detailing specific strategies like incentivization or product benefits.

Answer

CFO Matteo Anversa clarified that the outperformance refers to PC unit sales. CEO Hanneke Faber explained that convincing underpenetrated users comes down to product superiority and clear user benefits. She cited the MX Master 4 as an example, highlighting its premium features, productivity gains, and effective social-first digital marketing campaigns that drive both new trial and upgrades. Hanneke emphasized that products address specific user needs like productivity (MX), performance (gaming), or comfort (Ergo).

Erik Woodring from Morgan Stanley followed up on consumer response to higher prices, asking about observed behavior before and after price increases in the U.S., assumptions for pricing elasticity in the December quarter, and Logitech's current M&A strategy compared to the analyst day outline.

Answer

CEO Hanneke Faber stated that B2B and premium portfolio products saw very little impact from price increases, with some timing-related pull-forward in Q1 for B2B. She noted more impact on lower-end products, which improved during Q2. Regarding M&A, Faber reiterated no change from the Analyst Day, prioritizing organic investment, dividend growth, M&A for strategic targets that 'make the boat go faster,' and share buybacks as the last priority.

Erik Woodring inquired about the consumer response to higher prices in the U.S. and Logitech's M&A strategy, asking if there were any changes from the Analyst Day in March regarding capital allocation priorities.

Answer

CEO Hanneke Faber stated that there was very little impact from price increases on the B2B side and premium products, with more impact on the lower end, which improved during the quarter. Regarding M&A, she confirmed no change from the Analyst Day, reiterating that organic investment is the top priority, followed by dividend growth, M&A for strategic targets, and then share buybacks to manage the balance sheet.

Erik Woodring inquired about the operational implications of shifting U.S. production out of China, particularly for the Suzhou facility, and asked about quarter-to-date spending trends and customer demand reactions to tariff volatility.

Answer

CEO Hanneke Faber stated the Suzhou facility will remain critical for producing goods for the 70% of Logitech's business outside the U.S. The U.S. volume will shift to the company's existing 'China plus 5' manufacturing footprint. Regarding demand, she noted consumer resilience with varied behaviors, while B2B customers show more caution, though demand for Logitech for Business remains positive. She highlighted video conferencing as a natural hedge against corporate travel reductions.

Erik Woodring contrasted the strong first-half results with the weaker second-half forecast, asking for the reasons behind the expected slowdown. He also questioned the significant year-over-year increase in OpEx and whether it signaled a change in spending intensity.

Answer

CEO Hanneke Faber clarified that the flat net sales outlook for the second half is due to the normalization of the sell-in versus sell-out dynamic, while underlying demand is expected to remain strong. CFO Matteo Anversa attributed the lower operating income forecast to tougher year-over-year gross margin comparisons, freight cost pressures, and higher seasonal promotions. Faber confirmed that while Q2 OpEx was elevated for strategic investments, the full-year OpEx will remain within the 24-26% target range, reflecting a disciplined shift toward R&D and marketing.

Erik Woodring from Morgan Stanley pressed on commodity costs, specifically the significant increase in server DRAM contract pricing in Q4. He asked about the implied pricing increases needed to offset these costs and the company's assumptions regarding demand elasticity, given the projected acceleration in Cloud and AI growth.

Answer

President and CEO Antonio Neri confirmed that the analyst's estimate for pricing increases was close, possibly even conservative, and that changes reflect DRAM costs and their mix in the bill of materials. He emphasized the benefits of upgrading to newer server generations (energy savings, performance, density, fast ROI) and stated that HPE will monitor costs and demand, expecting a rebalancing between units and revenue, with revenue growth driven by average unit price (AUP) mix shift. CFO Marie Myers added that HPE employs multiple tools, including demand shaping, to navigate the environment while balancing customer relationships.

Erik Woodring of Morgan Stanley inquired about the current consumer spending environment for discretionary products and the evolution of the 360-camera market, including GoPro's historical share and future opportunities with the upcoming MAX 2.

Answer

CEO Nicholas Woodman characterized consumer demand as 'stable,' with GoPro's positioning as a 'solution' resonating with choosier buyers. CFO & COO Brian McGee added that sell-through was tracking to projections. Regarding the 360-camera market, McGee noted it has grown to nearly 2 million units annually since GoPro's last MAX launch in 2019, creating a significant opportunity for the company to regain share. Woodman also highlighted the low-light camera segment as another key growth area.

Erik Woodring of Morgan Stanley inquired about the current state of consumer spending on discretionary products and sought details on the evolution of the 360-degree camera market since GoPro's last MAX camera launch in 2019.

Answer

Nicholas Woodman, Founder, CEO & Chairman, described consumer spending as 'choosier' but noted stable demand for GoPro's products as essential tools. EVP, CFO & COO Brian McGee added that sell-through was tracking to projections. McGee also detailed that while GoPro initially held ~90% of the 360-camera market, its share eroded due to a delayed product refresh. Woodman concluded by highlighting the low-light camera market as another significant growth opportunity.

Erik Woodring inquired about the current state of consumer spending on discretionary products and the evolution of the 360-degree camera market since GoPro's last MAX camera launch in 2019.

Answer

Founder, CEO & Chairman Nicholas Woodman noted that while consumers are more selective, GoPro's stable demand is supported by its 'solutions, not things' ethos and modest price increases to offset tariffs. EVP, CFO & COO Brian McGee added that sell-through is tracking to projections. Regarding the 360 market, McGee stated GoPro initially had ~90% share, which eroded due to a delayed product refresh, but noted the market has grown significantly to 1.5-2 million units annually, presenting a large opportunity for the upcoming MAX 2. Woodman also highlighted the low-light camera market as another key growth area.

Erik Woodring from Morgan Stanley inquired about the drivers of stronger-than-expected Q1 sell-through, asking if it was pull-forward demand ahead of price hikes. He also questioned the discrepancy between U.S. sell-in and sell-through rates and sought context on the significant revenue decline in Asia.

Answer

CFO and COO Brian McGee clarified that there was no evidence of pull-forward demand, noting sales were linear and back-end loaded. He attributed the U.S. sell-in/sell-through gap to a one-time $5 million sale of older inventory to generate cash. For the Asia-Pacific region, McGee cited macroeconomic challenges and increased competition, particularly in China, Japan, and South Korea, as the primary reasons for the 54% revenue decline.

Erik Woodring from Morgan Stanley inquired about the drivers behind the forecasted 2025 subscriber decline, given strong retention rates, and requested more specific full-year revenue guidance.

Answer

CFO Brian McGee attributed the subscriber dip to lower anticipated unit sales, which is partially counterbalanced by rising ARPU from high retention rates. McGee declined to provide full-year 2025 revenue guidance due to market volatility, competition, and FX headwinds, but highlighted planned cost reductions and gross margin improvements. CEO Nicholas Woodman added that subscriber growth is expected to resume in 2026 with the launch of new products.

Erik Woodring from Morgan Stanley requested a high-level perspective on the current cycle for major product categories like servers and PCs, and asked about the drivers behind the sequential increase in operating expenses.

Answer

CEO Paul Bay characterized the cycle for servers, storage, and networking as being in the 'mid-innings,' partly driven by AI-related GPU activity, and noted early signs of recovery in the SMB market. EVP & CFO Mike Zilis explained that the OpEx increase was driven by a $32.8 million one-time charge related to divestitures, variable costs on higher revenue, annual merit increases, and some pulled-forward investments into the xVantage platform.

Erik Woodring inquired about the magnitude of the Q1 revenue pull-forward due to tariffs and how that influenced the sequential decline in the Q2 guidance. He also asked for an update on the current pricing environment and vendor price increase activity.

Answer

CEO Paul Bay stated that any Q1 pull-forward was slight, not material, and primarily concentrated in the PC refresh cycle, not other product categories. He clarified that the Q2 guidance assumes continued but more moderate PC refresh growth. Regarding pricing, Bay explained there has been minimal impact so far, with some changes in peripherals, but no significant price increases from vendors in Q1 or early Q2. He emphasized that predictability is key and the company is able to adapt.

Erik Woodring of Morgan Stanley inquired about the source of confidence for a return to top-line growth in 2025 and asked for clarification on potential one-time costs in the Q1 guide that might explain the year-over-year profit decline.

Answer

CEO Paul Bay attributed confidence in 2025 growth to momentum in client endpoint solutions, an expected rebound in the networking business, and continued strength in North America. CFO Michael Zilis stated there are no notable one-time costs in the Q1 guide; the profit pressure stems from margin factors, including product mix and heightened competition, particularly in India.

Erik Woodring asked for details on demand linearity during the quarter, specifically how demand progressed from April into May and then into June, and whether there were notable differences between Endpoint Solutions and Advanced Solutions.

Answer

CFO Marshall Witt described demand as strong in March and April with mid-teens growth, softening slightly in May but still showing good year-over-year growth. He noted that June trends reflect the Q3 guidance. CEO Patrick Zammit added color on technology trends, highlighting continued strength in software, cloud, and PCs, and a positive return to growth for the networking category.

Erik Woodring asked for commentary on the evolving macroeconomic backdrop and its impact on customer spending plans. He also sought an explanation for the decline in gross and adjusted EBITDA margins in the retail segment during the quarter.

Answer

CEO James Kelly responded that the company is not seeing a spending pullback from its B2B customer base, which has very low attrition. He noted customers are eager to upgrade to the new platform. CFO Brian Webb-Walsh explained that the Q1 retail margin decline was driven by lower hardware revenue and an unfavorable sales mix of lower-margin third-party products. He affirmed that margins are expected to recover and that the full-year retail margin guidance of 19-20% is maintained.

Erik Woodring inquired about the potential risk from tariffs due to the ODM transition delay and asked why software and services revenue growth is lagging the growth of ARR and platform sites.

Answer

CEO James Kelly noted that while tariff news is dynamic, the company's contracts generally allow for passing those costs to customers. He and executive Brian Webb-Walsh explained that the revenue growth lag is partly due to the services business model. They expect growth rates to converge as the business mix shifts to 80% recurring revenue post-ODM and as new drivers like payments are layered on.

Erik Woodring asked about the core value proposition NCR Voyix is using to attract new customers. He also requested a reiteration of the company's capital allocation strategy following recent strategic transactions.

Answer

CEO David Wilkinson explained the value proposition centers on a renewed focus on core retail and restaurant markets, deep industry expertise, and an open, flexible technology platform. CFO Brian Webb-Walsh reiterated the capital allocation plan: maintain leverage at or below 2x, execute the announced $100M buyback and $20M product investment, and then prioritize internal growth and potential tuck-in acquisitions.

Erik Woodring asked for clarification on the company's previous "overreliance on hardware," questioning if it related to focusing on deployments over SaaS or developing too many proprietary hardware products. He also inquired about customer feedback regarding the internal leadership changes and its impact on their confidence in SmartRent.

Answer

John C. Dorman, Chairman of the Board, clarified that the issue was an over-distraction on developing hardware point solutions rather than strategically using hardware to drive SaaS growth. He described customer feedback on the transition as "encouragingly positive," with primary concerns being the low stock price, which are addressed by highlighting the company's financial strength. Daryl Stemm, CFO, added that strong metrics like low churn and net revenue retention above 100% reflect positive customer experience.

Erik Woodring from Morgan Stanley asked for clarification on the divergence between declining active users and growing paid subscribers, and also sought confirmation on the full-year operating margin improvement guidance.

Answer

CEO Ashish Arora explained that engagement pressure stems from the large 2020-2021 user cohorts aging, which is not fully offset by new user acquisition. However, he pointed to positive leading indicators for new users, such as a 50% improvement in machine connection times and more projects completed in the first week, which historically correlate with better long-term engagement. CFO Kimball Shill added that the 5% subscriber growth exceeded expectations and demonstrates the company's ability to monetize its existing base. Regarding margins, Shill confirmed the outlook for a one-point year-over-year improvement for the full year remains unchanged, noting that Q4 margins are typically lower due to holiday promotions.