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