Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Well, Big a On is a big market story as
Speaker 2: well today once again driving the trade, pushing Semi as
Speaker 2: a group semiconductors that is hired today led by Broadcom,
Speaker 2: who stock jumped after open Ai agreed to buy the
Speaker 2: company's custom chips and networking equipment in a multi year deal,
Speaker 2: part of an ambitious plan by the startup to add
Speaker 2: AI infrastructure. So we wanted to just dig a little
Speaker 2: bit deeper into it. Amy talked about it. We certainly
Speaker 2: are seeing it playing out in the market. Got a
Speaker 2: great voice though, Billy to walk us through it.
Speaker 1: One of my favorite people.
Speaker 2: I will say Bailey must have said man Deep's name
Speaker 2: about five times on the call.
Speaker 1: This more immediately was like we need to get him
Speaker 1: in the studio.
Speaker 3: So perfect timing, and that's why we're joined now by
Speaker 3: Bloomberg Intelligence Global Head of Technology Research Mandeep saying here
Speaker 3: in the studio, Mandeep.
Speaker 1: Walk us through this deal.
Speaker 3: Because it feels like every other day open Ai has
Speaker 3: a new agreement with some chip manufacturer and the terms
Speaker 3: are slightly different, whether it's a ownership stake or front
Speaker 3: buying chips.
Speaker 1: What's up with this broad compact.
Speaker 4: I mean, they are really going after you know, data
Speaker 4: center capacity right now, and the way they are doing
Speaker 4: it is by diversifying their supplier base.
Speaker 1: So it's not just relying on.
Speaker 4: Nvidia, which everyone does right now for compute, but really
Speaker 4: leveraging Broadcom, which is a custom silicon maker. So think about,
Speaker 4: you know, Nvidia giving you a generic chip where you
Speaker 4: can run your AI workloads, whether it's training or inferencing.
Speaker 4: Custom silicon is used just for you know, the specific
Speaker 4: workload that OpenAI has to run for its proprietary model.
Speaker 4: So no one else has any benefit of using a
Speaker 4: custom silicon because open ai is not looking to sell
Speaker 4: its own chips to compete with Nvidia. It's looking to
Speaker 4: use its chips for its own ChiPT app or any
Speaker 4: other custom app that it has developed in house. And
Speaker 4: Google is a prime example of what a custom silicon
Speaker 4: looks like because they have their own TPUs, which when
Speaker 4: you compare it to Nvideo GPUs, is more customized in nature,
Speaker 4: but it does a terrific job of running YouTube or
Speaker 4: any other AI workloads that Google wants to run on
Speaker 4: a chip. So that's what open eye is doing, and
Speaker 4: it has a tremendous cost advantage because it costs a
Speaker 4: lot lower than the Nvidio price tag of thirty thousand
Speaker 4: dollars on an average for a.
Speaker 2: GPU TPU tensor processing unit. So make sure I understand.
Speaker 2: What's interesting though, is I do feel like there's this
Speaker 2: move trend to get chips that maybe don't cost as much,
Speaker 2: maybe don't use as much power, but do exactly what
Speaker 2: we need.
Speaker 4: Is that fair?
Speaker 5: Yeah?
Speaker 4: I mean, look one s part one gigawart requires up
Speaker 4: to five hundred to six hundred thousand accelerator chips, so
Speaker 4: we're talking point five two point six million chips for
Speaker 4: one gigawatt data center. Imagine if you can save up
Speaker 4: to five thousand dollars how it multiplies, you know, in
Speaker 4: terms of cost savings. The real constraint right now is power.
Speaker 4: It's not as if you get a cheaper chip and
Speaker 4: you are all good. You still need the performance per what,
Speaker 4: which is why in video is so good because it
Speaker 4: gives you five to ten x more performance per what
Speaker 4: than the Snares competitor, right exactly.
Speaker 2: I want to show there's a graphic and one of
Speaker 2: our producers made it, Elizabeth Cedron, and I think you know,
Speaker 2: we've all been looking at this. It's about open AI
Speaker 2: and all of the companies that they're doing deals with.
Speaker 2: And it's not even been a month, but they have
Speaker 2: done deals with Nvidia, Oracle, core Weave, AMD, now Broadcom
Speaker 2: and again it's just late September to mid October. So
Speaker 2: is that what this is is just giving them a
Speaker 2: smarter supply chain and having access to what they need.
Speaker 2: Is it as simple as.
Speaker 4: That, Well, it's not as simple because they're going across
Speaker 4: the stacks. Think of you know how AI applications are deployed.
Speaker 4: You need the chip, you need the infrastructure, you need
Speaker 4: the cloud because that's where you're doing your fencing. So
Speaker 4: they've cut deals with different parts of the stack here,
Speaker 4: not just the chip makers, not just the power guys,
Speaker 4: also the cloud guys. So from that perspective, Coreviv exactly.
Speaker 4: And look, I mean, to my mind, they are going
Speaker 4: aggressive in terms of adding more capacity than they probably
Speaker 4: need because they think if they get market share, they
Speaker 4: get the companies or users to use their product, then
Speaker 4: they will be able to monetize and probably drive some
Speaker 4: companies out of you know, competing with them because of
Speaker 4: the scale involved here.
Speaker 3: Well, our Xai and forpics striking similar deals or is
Speaker 3: this the open Ai show?
Speaker 4: I think right now Xai must be thinking and they
Speaker 4: are doing a twenty billion dollar deal with some private financing.
Speaker 4: But look, when opening I announces a ten gigawad deal,
Speaker 4: we're talking five hundred billion, not twenty billion anymore. So
Speaker 4: it's the numbers are getting bigger and bigger.
Speaker 3: Is open Ai in this moment in time, on October
Speaker 3: thirteenth the most important company.
Speaker 1: In the world.
Speaker 4: Well, when I look at MAG seven, your broadcom is
Speaker 4: not in Max seven. It's a one point six million
Speaker 4: dollar company. You know, open Ai it's probably you know,
Speaker 4: it's what.
Speaker 1: They're up ten percent because of this.
Speaker 4: I mean.
Speaker 3: Also the whole space sold off on Friday, so don't
Speaker 3: want to downplay that too much.
Speaker 2: But like they're not even public, they're not even profitable
Speaker 2: as much as we know, right.
Speaker 4: No, No, I mean, look, so right now, their gross
Speaker 4: margins would be negative if you factor in the training costs,
Speaker 4: inferencing wise, yes, they are making some money, but clearly
Speaker 4: if you include everything, and just to compare it with Google,
Speaker 4: Google has an annual cost of revenue of around one
Speaker 4: hundred billion that powers all of their apps, you know, Google, YouTube,
Speaker 4: everything that they run. Open AI's compute costs are probably
Speaker 4: north of twenty billion right now, and if they're adding
Speaker 4: twenty six gigawt more capacity, we are talking you know,
Speaker 4: compute costs to multiply at least twenty five fold. So
Speaker 4: from that perspective, you have to ask yourself, Yeah, how
Speaker 4: much incremental revenue do you want to see from open
Speaker 4: ai to justify this? You know, one trillion, potentially one
Speaker 4: trillion dollars in compute infrastructure spend. And that's where Google's
Speaker 4: infrastructure is so efficient because just you know, less than
Speaker 4: five gig a word of compute gets you to over
Speaker 4: four hundred billion in revenue.
Speaker 6: That's pretty cool, you know, to say the least in
Speaker 6: a non financial analysis terminology Man Deep, thank you always
Speaker 6: a gem Bloomberg Intelligence Global Ahead of Technology Research Man
Speaker 6: Deep saying AI spend in the buildout is one read on.
Speaker 2: The US economy and certainly the tech economy. Now to
Speaker 2: another great read, Bailly onius economic activity. And we're talking
Speaker 2: about the industrial supplier fasten All, which reported earnings earlier
Speaker 2: this morning and shares. I think they were the worst
Speaker 2: performing the S and P five hundred at one point.
Speaker 3: Yeah, right now down about six percent. And keep in
Speaker 3: mind this is a fifty billion dollar company, so this
Speaker 3: is no small small fish in again in the industrial space.
Speaker 3: One of the first reads we get every quarterly earning
Speaker 3: season missing Wall Street views broadly speaking, So interesting, what's
Speaker 3: driving that?
Speaker 2: Well, let's ask the CEO. Daniel Flornes is with us.
Speaker 2: He is chief executive officer of fastinally joins us from Winona, Minnesota. Dan,
Speaker 2: it is great to have you back with us. Talk
Speaker 2: to us about the quarter, because it does seem like
Speaker 2: analysts were noting that the pricing during the quarter was
Speaker 2: weaker than expected and marks the second straight quarter of
Speaker 2: softare pricing and maybe that's why we're seeing the stock down.
Speaker 2: What do you want to say to investors.
Speaker 5: Well, part of the reason our stock's down is it
Speaker 5: priced perfection if you look at what it's done, you know,
Speaker 5: year to date and where the multiple is gone. But
Speaker 5: you know, we had we had a really good quarter.
Speaker 5: We had we had a double digit quarter. We hadn't
Speaker 5: seen that for a couple of years. Double digit growth. Sorry,
Speaker 5: and please with the outcome. One of the one of
Speaker 5: the challenges we had this year was there's a lot
Speaker 5: of fluidity around tariffs and what it means for pricing,
Speaker 5: and we will raise price to address costs in our
Speaker 5: customers supply chain. We really don't want to raise more
Speaker 5: than that because we believe it impairs our ability to
Speaker 5: grow as fast as we'd like. And you know, coming
Speaker 5: into the quarter, we estimated you know X for impact
Speaker 5: of pricing came in a little bit less. We lowered our
Speaker 5: number for the fourth fourth quarter. But the most important
Speaker 5: aspect is on a price cost basis, we are neutral
Speaker 5: and that's what we aspire to be. We'd rather just grow.
Speaker 3: And dan to your point, fasten all even with the
Speaker 3: pull back today returning twenty two percent year to date,
Speaker 3: so outperforming the S and P five hundred and comparable
Speaker 3: stocks in the industrial space. But just one more question
Speaker 3: on pricing in terms of expectations, would you want to
Speaker 3: raise pricing? Like, do you get the sense that consumers
Speaker 3: and customers would push back, just given how you've been
Speaker 3: shifting into bigger customers spending much more money.
Speaker 5: Yeah, Customers always pushed back on pricing.
Speaker 1: It doesn't matter the size customer.
Speaker 5: Will we are having conversations with our customer, We will
Speaker 5: be doing some price increases in the Q four. I
Speaker 5: suspect we'll be doing some price increases as we move
Speaker 5: into twenty twenty six. But again, our first discussion with
Speaker 5: the customer, they understand it, they're willing to move on price.
Speaker 5: Our first discussion is always what are alternatives to this product?
Speaker 5: That maybe doesn't mean we have to raise your prices
Speaker 5: five percent. Maybe it means it only has to be
Speaker 5: two and we'd rather go to two because that's what
Speaker 5: a supply chain partner does.
Speaker 1: Well, Dan, how do terrorists fit into this?
Speaker 3: Just given that according to analysts across the street, when
Speaker 3: we look at certain industries, now is when we're going
Speaker 3: to see tariff showing up in the third quarter in
Speaker 3: guidance as it relates to twenty twenty six. What are
Speaker 3: you seeing and how are you kind of attacking or
Speaker 3: address a any pressures from tariffs?
Speaker 5: Yeah, So for us, tariff's been in the in the
Speaker 5: equation since the early part of the second quarter, a
Speaker 5: little bit of the first quarter. I think in the
Speaker 5: individual that handles pricing, historically he will provide us an
Speaker 5: update once a month. He'd gotten the point where he
Speaker 5: was down on providing us updates. He was up to
Speaker 5: video number fourteen as of July that he was serving
Speaker 5: out to the field giving them guidance into what we
Speaker 5: were seeing in our supply chain. And so we've been
Speaker 5: adding price as we've gone through the year, and these
Speaker 5: have been discussions with customers. And I hope that answers
Speaker 5: your question.
Speaker 1: No, I think it does.
Speaker 3: But I think the big thing is are you mitigating
Speaker 3: the impact of tariffs? Are you shifting your supply chain?
Speaker 3: Is the expectation that you can have some kind of
Speaker 3: knock on effect as it relates to pricing if we
Speaker 3: do continue to see threats from the President going after
Speaker 3: countries like China or others. We are going to talk
Speaker 3: to what are the members of LEVI management team, and
Speaker 3: they called out that they had to dial up their
Speaker 3: expectations for the impact of tariffs from other countries. So
Speaker 3: how is that impacting when you look at your supply chain,
Speaker 3: when you look at the potential for pricing impacts In
Speaker 3: twenty twenty six.
Speaker 5: We've been moving supply chain around the planet in earnest
Speaker 5: since twenty seventeen twenty eighteen. Time Print, as our name
Speaker 5: would imply, we sell a lot of fasters, and most
Speaker 5: of the fasters in North America come from either mainland
Speaker 5: China or Taiwan, and the automotive industry took the production
Speaker 5: there back in the fifties and sixties, actually took it
Speaker 5: to Japan and South Korea and then migrated from there.
Speaker 5: If I look at our resources, we now have a
Speaker 5: sourcing team in Shanghai, but we have a sourcing team
Speaker 5: in Bangkok. We have a sourcing team in Northern India.
Speaker 5: And we have worked to diversify our supplier base around
Speaker 5: the planet and a little bit more in North America,
Speaker 5: but really around the planet, so to have diversity and
Speaker 5: supply so you're not caught off guard by some price
Speaker 5: change or a tariff change. In addition to that, we've
Speaker 5: taken supply chains coming into North America, which traditionally came
Speaker 5: in through the West coast the United States and then
Speaker 5: we would redistribute from there. We have moved supply chains
Speaker 5: so they're bringing product directly into the West coast of
Speaker 5: Canada or the West coast of Mexico, because those two
Speaker 5: countries represent about fourteen percent of our revenue. Now you
Speaker 5: bypass the tariff. However, it's more expensive to break shipments
Speaker 5: down over in Asia and bring them in, but it's
Speaker 5: a lot less than a tariff.
Speaker 2: One of the things I want to ask you you
Speaker 2: talked about supply chains, is the endgame Dan, we're talking
Speaker 2: about Dan Flernesi's chief executive officer Fastenal. Is it about,
Speaker 2: though largely reducing your exposure to China, which has been
Speaker 2: a pretty big one.
Speaker 5: It's it's reducing our customers exposure to any market in
Speaker 5: this case China and or Taiwan, but any market that
Speaker 5: are on the receiving end of some of the political
Speaker 5: wins and create an unstable supply base for our customer.
Speaker 5: Here it happens to be China another month, it might
Speaker 5: be a different country. Another year, it might be a
Speaker 5: different country. It's diversifying your supply chain so your inks
Speaker 5: are not all in one basket.
Speaker 2: Gotta be ready so much ever our customer, Yeah, whichever
Speaker 2: way the winds blow.
Speaker 4: Hey.
Speaker 2: One of the things I want to ask you, just
Speaker 2: big broadly the earnings up day today you talked about
Speaker 2: the industrial environment still sluggish. We've heard similar commentary on
Speaker 2: this persistent sluggishness elsewhere from manufacturers, as well as caution
Speaker 2: around project delays. At what point does this become something
Speaker 2: more worrying than just sluggishness for us.
Speaker 5: It's been sluggish since November of twenty twenty two. Okay,
Speaker 5: when we really key on what the industrial is still
Speaker 5: for supply management puts out the PMI index and that's
Speaker 5: been sub fifty, which really plays into our customer base.
Speaker 5: Other than January and February of this year, that's been
Speaker 5: sub fifty since November of twenty twenty two. So we've
Speaker 5: been in a sluggish economy for a long time from
Speaker 5: our perspective, and other than living through the first part
Speaker 5: of it, where you had customers that were downshifting, what
Speaker 5: reason our growth is shining through a different way? A.
Speaker 5: I think we're executing at a higher level. But B
Speaker 5: once you get through that downshifting, now you're just even
Speaker 5: if your customers are at a subdued level, you can
Speaker 5: grow in that kind of environment. And that's what's shining
Speaker 5: through in our numbers right now.
Speaker 4: All right.
Speaker 2: One thing I want to ask you, because as you
Speaker 2: would imagine, I don't know how much of this is
Speaker 2: pervasive in your world, but AI is like the NonStop
Speaker 2: conversation that we are having, certainly when it comes to
Speaker 2: activity and market impact, to what extent is AI maybe
Speaker 2: sucking up the oxygen in the economy? Are you seeing
Speaker 2: any signs of.
Speaker 1: That or your world?
Speaker 2: They're going to still need what you guys supply no
Speaker 2: matter what's going on with the AI spend husiasm.
Speaker 5: Well, first off, we have a lot of We have
Speaker 5: a meaningful improvement in our revenue as it relates to
Speaker 5: things like data centers because we sell into a wide
Speaker 5: range of customer needs and end market needs, whether that
Speaker 5: is the actual construction. I visited many data centers being
Speaker 5: built where we have people on site there after it's built.
Speaker 5: We're supplying into that facility with things like air handling
Speaker 5: and maintenance equipment in the case of the customers that
Speaker 5: sell into that sector. That's actually a strong business for
Speaker 5: us right now. And then as an organization, we're we're
Speaker 5: increasingly making use of AI in our own business and
Speaker 5: how we go to market and how we help our
Speaker 5: employees be more efficient in what they do.
Speaker 3: And Dan about forty five seconds here with keeping in
Speaker 3: mind data center construction, where are those products sourced from?
Speaker 3: Are those also heavily sourced from China and expose the
Speaker 3: tariffs or are they different supply chain al together?
Speaker 4: There?
Speaker 5: You know, there it mostly different supply source, but it
Speaker 5: depends on the component. If it's facility maintenance types of products,
Speaker 5: they're coming from anywhere on the globe and so they're
Speaker 5: subject to the same type of issues any product would have.
Speaker 5: But a lot of the components I know a lot
Speaker 5: of the manufacturers that we sell into. I visited one
Speaker 5: about a year ago in Michigan where they were purposely
Speaker 5: avoiding China and they're selling directly into the data centers.
Speaker 2: You've been at Fastenel for a long time. You've seen
Speaker 2: different cycles. How do you describe this one? And again,
Speaker 2: just got about twenty seconds if you could be very quickly,
Speaker 2: very quick.
Speaker 5: Ooh, odd in the fact that you know similar what
Speaker 5: we saw on eighteen, but odd with the fact of
Speaker 5: it's just some damn fluid and there's so many things
Speaker 5: that occur from week to week, month to month that
Speaker 5: are outside the norm. But the fundamentals still work all right.
Speaker 5: So serve your customer at a high level, you grow
Speaker 5: your business.
Speaker 2: Love talking with you. Dan Florina s you, CEO of
Speaker 2: fasten All