Erik Woodring

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 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 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 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 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 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 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 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 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 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 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 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 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.

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 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.

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 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 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 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 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 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 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, 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 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 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 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 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 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 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 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 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 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 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 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.

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.