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WEST JORDAN, Utah, Sept. 06, 2023 (GLOBE NEWSWIRE) -- Sportsman's Warehouse Holdings, Inc. ("Sportsman's Warehouse" or the "Company") (NASDAQ:SPWH) today announced financial results for the thirteen weeks ended July 29, 2023. "We were disappointed with our second quarter results and the slow-down in store traffic, as the challenging macroeconomic conditions continue to pressure consumer discretionary spending," said Joseph Schneider, interim CEO and Chair of the Board. "Given results came in below our expectations, we are taking additional actions to reduce our overall expense structure to closer align with current sales trends. Additionally, we will be more aggressive and strategic with our promotional activity to drive foot traffic to our stores and leverage our omni-channel platform to provide consumers with an industry leading product assortment." "The Board continues to search for a permanent, long-term CEO to lead Sportsman's Warehouse," continued Schneider. "This is our number one priority. The search is progressing well and we are pleased with the quality and experience we are seeing in the candidates and expect to fill the position soon." For the thirteen weeks ended July 29, 2023: Net sales were $309.5 million, compared to $351.0 million in the second quarter of fiscal year 2022, a decrease of 11.8%. This net sales decrease was primarily due to lower demand across all product categories and a decline in store traffic resulting from the continued impact of consumer inflationary pressures on discretionary spending, partially offset by the opening of 14 new stores since July 30, 2022. Same store sales decreased 16.1% during the second quarter of fiscal year 2023, compared to the second quarter of fiscal year 2022, primarily as a result of the same factors noted above that impacted net sales. Gross profit was $100.8 million, or 32.6% of net sales, compared to $117.5 million, or 33.5% of net sales, in the corresponding period of fiscal year 2022. This decrease as a percentage of net sales was primarily driven by a greater portion of our sales from promotional activities and reduced product margins in our ammunition category. Selling, general, and administrative (SG&A) expenses were $102.3 million, or 33.1% of net sales, compared to $97.0 million, or 27.6% of net sales, in the second quarter of fiscal year 2022. The increase, as a percentage of net sales, was largely due to increases in rent, depreciation and new store pre-opening expenses, primarily related to the opening of 14 new stores since July 30, 2022. These increases were partially offset by a decrease in payroll expenses, driven by increased operational efficiencies across our retail stores.   Net loss was $(3.3) million, compared to net income of $14.6 million in the second quarter of fiscal year 2022. Adjusted net loss was $(1.6) million compared to adjusted net income of $15.1 million in the second quarter of fiscal year 2022 (see "GAAP and Non-GAAP Financial Measures"). Adjusted EBITDA was $13.1 million, compared to $30.6 million in the corresponding prior-year period (see "GAAP and Non-GAAP Financial Measures"). Diluted loss per share was $(0.09) compared to a diluted earnings per share of $0.35 in the corresponding prior-year period. Adjusted diluted loss per share was $(0.04) compared to adjusted diluted earnings per share of $0.36 in the second quarter of fiscal year 2022 (see "GAAP and Non-GAAP Financial Measures"). For the twenty-six weeks ended July 29, 2023: Net sales were $577.0 million, a decrease of 12.6%, compared to the first six months of fiscal year 2022. This net sales decrease was primarily driven by lower demand across all product categories and a decline in store traffic due to the continued consumer inflationary pressures on discretionary spending and extended winter weather conditions in the Western United States, partially offset by the opening of 14 new stores since July 30, 2022. Same store sales decreased 16.9% compared to the first six months of fiscal 2022, primarily as a result of the same factors noted above that impacted net sales. Gross profit was $180.9 million or 31.3% of net sales, compared to $216.6 million or 32.8% of net sales for the first six months of fiscal 2022. This decrease as a percentage of net sales was primarily due to a mix shift to product categories with lower margins, reduced overall product margins from increased promotional activities and a decline in ammunition margins. SG&A expenses increased to $201.3 million or 34.9% of net sales, compared with $193.1 million or 29.2% of net sales for the first six months of fiscal 2022. This increase was primarily the result of increases in rent, depreciation, new store pre-opening expenses and professional services expenses. These expenses were partially offset by increased store operating efficiencies. Net loss was $(18.9) million, compared to net income of $16.6 million in the prior year period. Adjusted net loss was $(16.4) million, compared to adjusted net income of $17.3 million in the first six months of fiscal 2022 (see "GAAP and Non-GAAP Financial Measures"). Adjusted EBITDA was $7.5 million compared to $43.6 million in the prior year period (see "GAAP and Non-GAAP Financial Measures"). Diluted loss per share was $(0.50), compared to diluted earnings per share of $0.38 in the first six months of last year. Adjusted diluted loss per share was $(0.44), compared to adjusted diluted earnings per share of $0.40 in the prior year period (see "GAAP and Non-GAAP Financial Measures"). Balance sheet and capital allocation highlights as of July 29, 2023: The Company ended the quarter with net debt of $200.2 million, comprised of $2.9 million of cash and cash equivalents and $203.1 million of borrowings outstanding under the Company's revolving credit facility. Inventory at the end of the second quarter was $457.2 million. Total liquidity was $98.6 million as of the end of the second quarter of fiscal year 2023, comprised of $95.7 million of availability on the revolving credit facility and $2.9 million of cash and cash equivalents. During the second quarter of fiscal year 2023, the Company repurchased approximately 431,000 shares of its common stock in the open market, returning $2.1 million to stockholders. As of the end of the second quarter of fiscal year 2023, the Company had approximately $7.5 million of remaining capacity under its authorized repurchase program. Third Quarter Fiscal Year 2023 Outlook: For the third quarter of fiscal year 2023, net sales are expected to be in the range of $310 million to $330 million, anticipating that same store sales will be down 19% to 14% year-over-year. Adjusted diluted earnings per share for the third quarter are expected to be in the range of negative $0.20 to negative $0.05. Jeff White, Chief Financial Officer of Sportsman's Warehouse, said, "During the second quarter we successfully executed certain cost reductions and continue to find ways to streamline our overall expense structure to be leaner and more efficient. We believe these ongoing efforts will yield up to $25 million in annualized cost savings. Given the persistent macroeconomic pressures on the consumer, we are taking a very cautious approach in the back half of this year. We plan to implement aggressive promotions and markdowns to drive store traffic to meet our customer where they are financially, putting additional pressure on our gross margins." Conference Call Information: A conference call to discuss second quarter 2023 financial results is scheduled for September 6, 2023, at 5:00PM Eastern Time. The conference call will be held via webcast and may be accessed via the Investor Relations section of the Company's website at www.sportsmans.com. Non-GAAP Financial Measures This press release includes the following financial measures defined as non-GAAP financial measures by the Securities and Exchange Commission (the "SEC") and that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP"): adjusted net (loss) income, adjusted diluted (loss) earnings per share and adjusted EBITDA. The Company defines adjusted net (loss) income as net (loss) income plus expenses incurred relating to director and officer transition costs, costs related to the implementation of our cost reduction plan and a one-time legal settlement and related fees and expenses. Net (loss) income is the most comparable GAAP financial measure to adjusted net (loss) income. The Company defines adjusted diluted (loss) earnings per share as adjusted net (loss) income divided by diluted weighted average shares outstanding. Diluted (loss) earnings per share is the most comparable GAAP financial measure to adjusted diluted (loss) earnings per share. The Company defines Adjusted EBITDA as net (loss) income plus interest expense, income tax (benefit) expense, depreciation and amortization, stock-based compensation expense, pre-opening expenses, director and officer transition costs, costs related to the implementation of our cost reduction plan and a one-time legal settlement and related fees and expenses. Net (loss) income is the most comparable GAAP financial measure to adjusted EBITDA. Adjusted EBITDA excludes pre-opening expenses because the Company does not believe these expenses are indicative of the underlying operating performance of its stores. The amount and timing of pre-opening expenses are dependent on, among other things, the size of new stores opened and the number of new stores opened during any given period. The Company has reconciled these non-GAAP financial measures to the most directly comparable GAAP financial measures under "GAAP and Non-GAAP Financial Measures" in this release. The Company believes that these non-GAAP financial measures not only provide its management with comparable financial data for internal financial analysis but also provide meaningful supplemental information to investors and are frequently used by analysts, investors and other interested parties in the evaluation of companies in the Company's industry. Specifically, these non-GAAP financial measures allow investors to better understand the performance of the Company's business and facilitate a more meaningful comparison of its diluted (loss) earnings per share and actual results on a period-over-period basis. The Company has provided this information as a means to evaluate the results of its ongoing operations, and as additional measurement tools for purposes of business decision-making, including evaluating store performance, developing budgets and managing expenditures. Other companies in the Company's industry may calculate these items differently than the Company does. Each of these measures is not a measure of performance under GAAP and should not be considered as a substitute for the most directly comparable financial measures prepared in accordance with GAAP. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results as reported under GAAP. The Company's management believes that these non-GAAP financial measures allow investors to evaluate the Company's operating performance and compare its results of operations from period to period on a consistent basis by excluding items that management does not believe are indicative of the Company's core operating performance. The presentation of such measures, which may include adjustments to exclude unusual or non-recurring items, should not be construed as an inference that the Company's future results, cash flows or leverage will be unaffected by other unusual or non-recurring items. Forward-Looking Statements This press release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this release include, but are not limited to, statements regarding: expected annual cost savings from our cost reduction initiatives; our ability to leverage our omni-channel platform to drive consumers to our stores and website; our search for a permanent, long-term CEO with the skills and drive needed to lead our company through its next evolution of growth; our guidance for net sales, same store sales and adjusted diluted earnings per share for the third quarter of fiscal year 2023; our plan to implement aggressive promotions to drive store traffic and accommodate our customers; and our anticipated $25 million of annualized expense reductions. Investors can identify these statements by the fact that they use words such as "aim," "anticipate," "assume," "believe," "can have," "could," "due," "estimate," "expect," "goal," "intend," "likely," "may," "objective," "plan," "positioned," "potential," "predict," "should," "target," "will," "would" and similar terms and phrases. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management's beliefs and assumptions. We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that predicting the impact of known factors is very difficult, and we cannot anticipate all factors that could affect our actual results. The Company cannot assure investors that future developments affecting the Company will be those that it has anticipated. Actual results may differ materially from these expectations due to many factors including, but not limited to: the Company's inability to find a new CEO on its anticipated timeline; the impact of the announcement of a successor CEO on the Company's stock and its employees, suppliers and customers; current and future government regulations relating to the sale of firearms and ammunition, which may impact the supply and demand for the Company's products and ability to conduct its business; the Company's retail-based business model, which is impacted by general economic and market conditions and economic, market and financial uncertainties that may cause a decline in consumer spending; the impact of general macroeconomic conditions, such as labor shortages, inflation, rising interest rates, economic slowdowns, recessions or market corrections, liquidity concerns at, and failures of, banks and other financial institutions, and tightening credit markets on the Company's operations; the Company's concentration of stores in the Western United States and related weather conditions; competition in the outdoor activities and specialty retail market and the potential for increased competition; changes in consumer demands; the Company's expansion into new markets and planned growth, including its plans to open additional stores in future periods, which may not be successful; and other factors that are set forth in the Company's filings with the SEC, including under the caption "Risk Factors" in the Company's Form 10-K for the fiscal year ended January 28, 2023 which was filed with the SEC on April 13, 2023, and the Company's other public filings made with the SEC and available at www.sec.gov. If one or more of these risks or uncertainties materialize, or if any of the Company's assumptions prove incorrect, the Company's actual results may vary in material respects from those projected in these forward-looking statements. Any forward-looking statement made by the Company in this release speaks only as of the date on which the Company makes it. Factors or events that could cause the Company's actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws. About Sportsman's Warehouse Holdings, Inc. Sportsman's Warehouse Holdings, Inc. is an outdoor specialty retailer focused on meeting the needs of the seasoned outdoor veteran, the first-time participant, and everyone in between. We provide outstanding gear and exceptional service to inspire outdoor memories. For press releases and certain additional information about the Company, visit the Investor Relations section of the Company's website at www.sportsmans.com. Investor Contact: Riley TimmerVice President, Investor Relations Sportsman's Warehouse(801) 304-2816investors@sportsmans.com   SPORTSMAN'S WAREHOUSE HOLDINGS, INC.Condensed Consolidated Statements of Operations (Unaudited)(amounts in thousands, except per share data)         For the Thirteen Weeks Ended                               July 29, 2023     % of net sales   July 30, 2022     % of net sales   YOY Variance   Net sales $ 309,495     100.0%   $ 351,021     100.0%   $ (41,526 ) Cost of goods sold   208,678     67.4%     233,482     66.5%     (24,804 ) Gross profit   100,817     32.6%     117,539     33.5%     (16,722 )                           Operating expenses:                         Selling, general and administrative expenses   102,334     33.1%     97,023     27.6%     5,311   (Loss) income from operations   (1,517 )   (0.5%)     20,516     5.9%     (22,033 ) Interest expense   3,527     1.1%     767     0.2%     2,760   (Loss) income before income taxes   (5,044 )   (1.6%)     19,749     5.7%     (24,793 ) Income tax (benefit) expense   (1,756 )   (0.6%)     5,135     1.5%     (6,891 ) Net (loss) income $ (3,288 )   (1.0%)   $ 14,614     4.2%   $ (17,902 )                           (Loss) earnings per share                         Basic $ (0.09 )       $ 0.35         $ (0.44 ) Diluted $ (0.09 )       $ 0.35         $ (0.44 )                           Weighted average shares outstanding                         Basic   37,498           41,962           (4,464 ) Diluted   37,498           42,194           (4,696 )                                .....»»

In this article, we will be taking a look at the 13 best cryptocurrency exchanges and apps in the US in 2023. If you are not interested in reading the detailed analysis, head straight to the 5 Best Cryptocurrency Exchanges and Apps in the US.  Welcome to the world of cryptocurrency trading in the United States […] In this article, we will be taking a look at the 13 best cryptocurrency exchanges and apps in the US in 2023. If you are not interested in reading the detailed analysis, head straight to the 5 Best Cryptocurrency Exchanges and Apps in the US.  Welcome to the world of cryptocurrency trading in the United States in 2023, where the landscape is constantly evolving, and the choices for cryptocurrency exchanges and apps have never been more diverse. As the adoption of cryptocurrencies continues to surge, the demand for secure, user-friendly, and feature-rich platforms has reached unprecedented heights. In exploring the best cryptocurrency exchanges and apps available to US residents, we will delve into the leading platforms catering to newcomers and seasoned traders like Binance KuCoin and Crypto.com, among others. Whether you’re looking for a platform to buy, sell, or trade digital assets or seeking advanced features for your cryptocurrency portfolio management, this guide will provide valuable insights into the top options available in this exciting and dynamic era of crypto.  One of the most critical decisions when investing in cryptocurrency is choosing the proper exchange and app. Not all businesses and apps are created equal, and making the wrong choice could result in lost funds or missed opportunities.  The importance of choosing the proper exchange and app  First and foremost, you’ll want to choose an exchange and app that is reputable and secure. Look for deals and apps with a proven track record of protecting users’ funds and personal information. For example, in March 2023, the exchange platform Coinbase reported holding more than $130 billion in assets, proving its commitment to security and trust. Additionally, be sure to choose an exchange and app that is user-friendly and easy to navigate, as this will make it easier for you to buy and sell cryptocurrency.  Another essential factor is the selection of cryptocurrencies available on the exchange and app. Different businesses and apps may offer other cryptocurrencies, so choose one that provides the cryptocurrencies you’re interested in investing in. The global cryptocurrency market has reached a value of over $1.13 trillion, highlighting the vast array of options available for investment.  Finally, consider the fees associated with the exchange and app. Some businesses and apps charge higher fees than others, so factoring this into your decision-making process is essential. For instance, Binance charges a trading fee of 0.1%, while Coinbase charges a higher cost of 1.49%.  By taking the time to research and choose the proper cryptocurrency exchange and app, you’ll be setting yourself up for success in the exciting world of cryptocurrency investing, where every dollar and percentage point counts.  Recent regulatory developments affecting US cryptocurrency exchanges In the United States, cryptocurrency exchanges are facing significant regulatory changes driven by increased government scrutiny over concerns related to money laundering and illicit activities within the cryptocurrency sector. These changes primarily include mandatory registration with the Financial Crimes Enforcement Network (FinCEN), an agency responsible for monitoring financial transactions to combat illegal activities. Compliance with specific guidelines and regulations is required for legality and transparency.  Additionally, there is a growing emphasis on compliance with securities laws, with notable cases of cryptocurrency exchanges being accused of offering unregistered securities to investors violating this law, which has prompted many exchanges to prioritize compliance to avoid legal consequences.  The cryptocurrency industry has experienced substantial global losses due to related crimes, surpassing $1 billion in 2021. In the United States, FinCEN has assessed civil monetary penalties exceeding $29.2 million against Bittrex in 2022. Moreover, the Securities and Exchange Commission (SEC) imposed a $10 million fine on a cryptocurrency exchange in 2021 for securities law violations. These statistics underscore the pivotal role of regulatory developments in protecting investors and preventing financial crimes, reflecting the heightened regulatory attention on the expanding cryptocurrency market.  Glimpsing into the Crystal Ball: What Lies Ahead for Cryptocurrency Markets and Platforms  Looking ahead to the future of cryptocurrency markets and platforms, we encounter both exciting developments and challenges. The growing demand for digital currencies is evident, driven by increasing awareness of their technology and potential uses.  The cryptocurrency landscape will be influenced by several factors, including regulatory shifts, technological progress, and evolving market trends. Decentralized finance (DeFi) is a notable trend expected to have a significant impact as more investors seek decentralized platforms and applications.  Stablecoins, digital currencies tied to stable assets like the US dollar, are also gaining prominence. They offer a means to mitigate the volatility often associated with cryptocurrencies, making them appealing to a broader range of investors. In 2023, the pinnacle of stablecoin market capitalization has receded, experiencing a 25% decline to $120 billion, underscoring the increasing interest in stablecoins and their potential influence on the cryptocurrency market’s future.  Pixabay/Public Domain Our Methodology   Our methodology for identifying the best cryptocurrency exchanges and apps in the US in 2023 involved conducting thorough research using sources like Coinsutra, G2, Yahoo Finance, Guru99, and Forbes. We selected the US’s top cryptocurrency exchanges and apps in 2023 based on a structured scoring system. Each exchange and app received points based on the times it appeared in the research sources. By employing this approach, we created a definitive compilation of the best cryptocurrency exchanges and apps in the US in 2023 and ranked them in ascending order of high scores.    13. Bitcoin IRA  Insider Monkey Score: 1  Investing in Bitcoin via an IRA diversifies your retirement funds. While Bitcoin offers a unique investment opportunity, it comes with volatility. Research and financial guidance are vital. Choose a trusted provider like Bitcoin IRA, a top crypto IRA platform. It’s a 24/7 self-trade platform connecting users to custodians, wallets, and exchanges for tax-free IRA growth. Features include real-time tracking, portfolio analysis, SSL security, and support for multiple cryptocurrencies. Payment options include PayPal Holdings, Inc. (NASDAQ:PYPL), bank deposits, and cards. With 60+ cryptos, dApps, margin trading, DeFi, and transparent fees (3.50% for trading, 1% for buying), Bitcoin IRA has earned the trust of over 170,000 users.  12. StormGain   Insider Monkey Score: 1   StormGain is a best cryptocurrency exchange and app known for its intuitive interface, low trading fees, and advanced tools suitable for beginners and experienced traders. It offers extensive educational resources, 24/7 customer support, and secure wallet protection. Supporting multiple languages and cryptocurrencies like Ethereum, Litecoin, Tether, and Bitcoin Cash, StormGain is accessible on Android and iOS and is available in various countries. KYC requirements include personal details, and it offers margin trading and dApps support with transparent transaction fees, typically ranging from $10 to $20. Payment options include PayPal Holdings, Inc. (NASDAQ:PYPL), Visa Inc. (NYSE:V), Mastercard Incorporated (NYSE:MA). Trusted by over 12 million users worldwide, StormGain serves both novices and industry experts.  11. SoFi  Insider Monkey Score: 1  SoFi’s crypto exchange and app have transformed finance with user-friendly transactions. SoFi must adapt by monitoring trends and feedback to stay at the forefront. Expanding altcoin support, boosting security, and ensuring compliance are critical. Known for financial services, it offers low-cost, no-minimum crypto trading and education. With 5.6 million users and 2022 revenue of $1.57 million, SoFi excels in the industry.  10. Bybit  Insider Monkey Score: 2  Bybit, a cryptocurrency derivatives exchange, allows leveraged trading of Bitcoin, Ethereum, XRP, EOS, and more (up to 100x) and stands among the 15 Biggest Cryptocurrency Exchanges in the World. Its user-friendly interface and advanced tools cater to experienced traders. Bybit offers perpetual contracts, futures, and options, ensuring diverse trading options. Security and customer support are paramount, with two-factor authentication, SSL encryption, and cold storage for asset safety. The platform excels in speed and customization, offering a range of order types. Users praise Bybit for its user-friendliness, robust features, and commitment to security.  9. Zengo   Insider Monkey Score: 2   Zengo has become a top cryptocurrency exchange and app in 2023 due to its unwavering commitment to safety and user-friendliness. It prioritizes security with multi-factor authentication, cold storage, and regular security audits, earning trust in a risky crypto landscape. Zengo enhances user experience through a friendly interface, extensive crypto support, and seamless payment integration. It eliminates private critical vulnerabilities as the most secure non-custodial wallet in Web3. Zengo facilitates the storage, buying, swapping, and sending of various cryptocurrencies, including BTC, ETH, SHIB, and DOGE, with 24/7 support. The app Pro offers added security with Multi-Factor Authentication and 24/7 Priority Support. Serving users worldwide, except in certain countries, Zengo handles numerous fiat currencies and 120+ cryptocurrencies, with fees ranging from 0.75% to 1.99%. Zengo boasts 900,000 users who appreciate its secure and user-centric crypto management approach.  8. EToro  Insider Monkey Score: 3   eToro, founded in 2007, is a social trading and investment platform with 25 million users in 140 countries and stands eighth among the best cryptocurrency exchanges and apps in the US in 2023. It offers diverse financial asset trading, including cryptocurrencies, stocks, and commodities, featuring a unique copy trading system. eToro’s crypto exchange boasts a user-friendly interface and comprehensive educational resources. Known for innovative tools and social trading, it ranked among the top cryptocurrency exchanges in May 2023. EToro’s revenue surged from $60 million in 2016 to an impressive $631 billion in 2022. However, its EBITDA declined to $35 million in 2022, down from previous highs of $193 million in 2018 and $95 million in 2020.  7. UpHold  Insider Monkey Score: 3  Uphold leads the way as one of the best cryptocurrency exchanges and apps in the US in 2023 in the ever-evolving digital landscape. Offering a user-friendly platform for a wide range of crypto activities, Uphold caters to new and experienced investors, ensuring a secure and accessible path into the future of finance. Uphold excels in transparency and customer support, delivering comprehensive cryptocurrency insights and round-the-clock assistance with paymane options like Mastercard Incorporated (NYSE:MA). Beyond traditional exchange services, Uphold pioneers innovation by introducing a suite of crypto-powered financial products, including loans, savings accounts, and debit cards. With a massive user base exceeding 30 million, Uphold’s all-encompassing cryptocurrency solution serves a vast audience.  6. Gemini   Insider Monkey Score: 4  Gemini is a leading global cryptocurrency exchange known for its security and innovation and is one of the best cryptocurrency exchanges in the US. It offers a user-friendly platform for trading cryptocurrencies, including Bitcoin, Ethereum, and Litecoin. Gemini’s commitment to innovation is evident in its plans for state-of-the-art apps in 2023, featuring real-time data and advanced charting tools. It provides trust and discounts for high-volume traders as a fully regulated exchange. Operating globally, Gemini requires KYC verification and supports various operating systems. It grants access to over 75 cryptocurrencies, including NFTs and dApps, and supports DeFi. Transaction fees vary from $0.99 to $2.99 for trading and 1.49% to 3.49% for buying crypto. In 2022, Gemini reached a peak revenue of $730.0M with 3,000 employees, emphasizing its stature in the cryptocurrency exchange market.  Click to see and continue reading the 5 Best Cryptocurrency Exchanges and Apps in the US In 2023.  Suggested Articles: 15 Best Cryptocurrency Trading Platforms in 2023. 10 Most Profitable Cryptocurrency Stocks. 15 Best Cryptocurrency Exchanges and Apps in May 2023. Disclosure. None: The 13 best Cryptocurrency Exchanges And Apps In The US In 2023 is originally published on Insider Monkey......»»

In this article, we will be analyzing the fish industry while covering the most consumed fish in the country. If you want to skip our detailed analysis, you can go directly to the 5 Most Consumed Fish in the US. The Global Fish Market According to a report by Mordor Intelligence, the global fish market […] In this article, we will be analyzing the fish industry while covering the most consumed fish in the country. If you want to skip our detailed analysis, you can go directly to the 5 Most Consumed Fish in the US. The Global Fish Market According to a report by Mordor Intelligence, the global fish market is expected to grow from $1.04 trillion in 2023 to $1.19 trillion by 2028, at a compound annual growth rate of 2.60% over the forecast period. In 2022, FAO reported that the aquatic food production in the world will increase by 15% by 2030. The rapidly growing fish consumption around the world can be attributed to several factors. People nowadays tend to consume protein diets which are rich in vitamins and fish is a prime example of such a diet. Other than the health benefits, the distribution systems have improved so much that imports and exports of fish can be noticed all around the world. Governments have also been offering support in terms of exports. Fish has also entered into a luxury food category where restaurants serve it as an exotic offering and hence people worldwide dine in restaurants to have prawns, tuna sandwiches, and sushi. AquaBounty Technologies, Inc. (NASDAQ:AQB), Pingtan Marine Enterprise (NASDAQ:PME) Ltd., and Marine Harvest ASA (NYSE:MHG) are among the renowned players in the global fish market. AquaBounty Technologies, Inc. (NASDAQ:AQB) farms shellfish, fish, and crustaceans. It is also known for producing genetically modified fish such as hybrid salmon, trout, and tilapia. Pingtan Marine Enterprise (NASDAQ:PME) Ltd. does fishing through its self-owned vessels in the Arafura Sea of Indonesia and the Indian Exclusive Economic Zone. It is one of the largest US-listed marine companies. Marine Harvest ASA (NYSE:MHG) is a Dallas-based fish company that owns patented proprietary technology to produce shrimps without any chemicals or preservatives. Hence, it contributes to eco-friendly and sustainable fishing practices. The US Fish Industry According to a report by the National Oceanic and Atmospheric Administration, there were 8.6 billion pounds of commercial fish caught by fisheries in the United States in 2021. The regional insights for the fish market in the United States reflect interesting trends. The main states where fisheries catch fish are Alaska, the Gulf, New England, Hawaii, the South Atlantic, the Pacific Coast, and the Middle Atlantic. Out of these, the three areas dominating the fish market are Alaska, the Gulf, and the Pacific Coast. Alaska contributes to 61.5% of the total fish volume in the country. The gulf comes second, bearing 13.3% of the fish caught. Moreover, 11.23% of the fish volume comes from the Pacific Coast. The fish caught in the country is used for several purposes. 78% of this fish which is more than half of the total volume is consumed as fresh or frozen. A smaller 15% is converted into oils. The remaining minor portion is used either for preparing canned human food or animal food. Recent Trends and Challenges Recreational fishing has been on the rise in the United States. Opposite to commercial fishing which is done for profit, this kind of fishing activity is more of a hobby or a pastime for leisure. The most common form of recreational fishing is angling where the fish is caught through a hook and line. This trend has increased since the pandemic hit the world. On August 23, 2021, the United States Geological Survey reported that fishers regarded angling as something that relieved stress for them during the pandemic at a low cost. Although this low cost comprises many small expenditures like buying fishing essentials or traveling to a place to fish, the fishing activities boomed during the pandemic which is also evident from the increase in the fishing license issues during that period. There has been a lot of emphasis on sustainable fishing practices. Hence, there is increasing pressure on fishing firms to produce, process, and distribute seafood in a sustainable manner. The concept of Blue Economy comes into existence here. Blue Economy basically refers to all the activity regarding oceans, seas, and shores. Also inculcated in the Sustainable Development Goals by the United Nations under the heading ‘life under water’, this concept of striking a balance between earning profits and caring about concerns such as marine life and climate risks is growing more popular in this industry. In order to pursue sustainability, inter-industry partnerships have been a norm. The Shrimp Conference is one such example. Based in the Netherlands, the Global Shrimp Forum Foundation connects all stakeholders in the shrimp industry including fishers, brands, and retailers to network and discuss their concerns. However, fishers in countries like the Philippines and Ghana operate on a small scale. On this scale, they cannot afford to invest much capital in a responsibility as big as sustainability. They also don’t have the right training and awareness regarding environmental concerns. The US fish market is also subjected to issues in the supply chain. On February 20, the National Provisioner reported that 80 to 85% of the fish demand in the US is from imports. These imports cannot be as efficient in meeting the fluctuating demand due to longer lead times for products being transported across the globe. Furthermore, companies have to pay high holding costs to store seafood at the ports once their warehouses are fully occupied. Fish Imports For the US In June 2022, the University of Florida published the economic contribution of seafood imports for the US economy. It reported that the US imports large quantities of fish, each of which serves a different purpose and proceeds through its own journey. Among different fish species, shrimp imports topped the numbers. Most of the shrimp are imported in peeled form and some as shell. The processed shrimp imports are comparatively less. Salmon serves to be the second-highest fish import in the country. The majority of salmon is imported in the form of a fillet which could be both fresh or frozen. Following salmon imports are crab and lobsters which are mainly imported in more frozen than canned forms. These imports have a significant implication on the US economy. The sectors of the US economy benefitting most from these fish imports are retail, seafood packaging, and restaurants. These imports generate a revenue of $10 billion for food and beverage stores. Full-service restaurants receive $4.7 billion from the use of this imported fish. Moreover, $3.6 billion is earned by limited-service restaurants. The seafood preparation and packaging industry generates $4 billion from these imports. Major Players The major players in the US fish market include both international and domestic companies that are involved in fish production, processing, packaging, or retail. Some of the most notable names in this market include High Liners Food Inc. (TSE:HLF), Sysco Corporation (NYSE:SYY), Trident Seafood Corporation, Admiralty Island Fisheries Inc., and Thai Union Group PCL (BKK:TU). Let’s take a look at each of them. High Liners Food Inc. (TSE:HLF), is a leading North American processor of value-added frozen seafood. It sells its retail branded products in different grocery stores and supermarkets in the United States under four labels namely High Liner, Fisher Boy, Mirabel, Sea Cuisine, and Catch of the Day. With three processing plants located in Lunenburg, Nova Scotia Portsmouth, New Hampshire and Newport News, and Virginia, it supplies frozen fish to restaurants. With the goal of ‘changing the way we see food’, the company strives to supply food that is easy to prepare and unique in taste as well. On July 1, the company reported that it earned $254.3 in revenue in the second quarter of 2023, as compared to last year’s $253.5. The limited growth was attributed to the cost of holding larger inventories to fulfill the shortages that had resulted during the pandemic. Sysco Corporation (NYSE:SYY) sells and distributes food products to different food chains, retailers, restaurants, and educational facilities through 25 production facilities in the US. The company’s subsidiaries ‘Trinity Pride’ and ‘Incredible Fish’ help it source fish products to different parts of the world including the United States. On the contrary, Buckhead and Newport are the company’s brands that supply meat. On August 1, Reuters also reported that Sysco Corporation (NYSE:SYY) has been struggling with cost pressures as consumers have begun to spend more on necessary products than on custom-cut seafood. In this regard, the company cannot even raise prices because the customers are price-sensitive and they can’t afford to lose more. Trident Seafoods is a family-owned seafood business that emerged from fishermen in Alaska catching fish to serve the US market. It currently has its facilities in 48 states of the US. Outside America, the company serves China, Germany, and Europe. On August 15, Morningstar reported that Trident Seafoods will be shifting its plant from Dakuten to Unalaska in 2025 rather than in the previously projected 2024 since they see better opportunities in Unalaska and can no longer bear the high cost of operations. Expressing the current vulnerability of Trident Seafoods to rising inflation, regulatory conditions, and low consumer demand, here’s what the CEO, Joe Bundrant, said: “I’ve been in the industry a long time and I’ve never seen markets like this. The rate and pace at which markets are collapsing across our key species is staggering. Not only are global inventories and operating costs high, but demand is low, and some are selling at or below cost just to generate cash.” Admiralty Island Fisheries Inc. is one of the top North American frozen seafood brands responsible for the processing and distribution of wild Alaskan seafood in the United States. It has also been certified by the Stewardship Council for engaging in fishing responsibly. Products offered include salmon, halibut, black cod, and crab. Selling under the trademark ‘AquaStar’, the company serves 17 countries. Another player dominating the US market, Thai Union Group PCL (BKK:TU), is a global seller of seafood. It has its facilities in countries such as the US, France, Germany, Ghana, Poland, Portugal, Norway, Scotland, Vietnam, and Thailand. The products offered include tuna, shrimp, sardines, mackerel, salmon, pet food, and prepared foods. Thai Union Group PCL (BKK:TU) has been ranked number 1 on the Dow Jones Indices for Sustainability. It has also been successful in earning the title of awarded ‘Environmental & Social Management (ESRM) Pioneer’ for being responsible in risk management practices. Now that we have reviewed the US fish industry and some global market players, let’s look at the 25 most consumed fish in the US. Methodology In order to rank the 25 most consumed fish in the US, we sourced data from the database of The National Oceanic and Atmospheric Administration (NAOO) Fisheries, a US government agency that reports on the marine situation in the country. For this purpose, we utilized the ‘Processed Foods’ on NAOO Fisheries which states that Processed Foods refer to “any fishery product or other food product which has been altered or preserved by any recognized commercial process, including, but not limited to, filleting, canning, freezing, dehydrating, drying, the addition of chemical substances, or by fermentation”. As reported by NOAA’s Seafood Inspection Program, it certifies all edible product forms ranging from whole fish to formulated products, as well as fish meal products used for animal foods. This implies that processed fish products are available for consumption. Hence, we have considered the processed weight of Processed Foods as our metric, measured in pounds, as of 2021. Finally, we have ranked the 25 most consumed fish in the US in ascending order of their processed weight as follows: 25 Most Consumed Fish in the US 25. American Lobster Processed Weight as of 2021: 11,407,093 Pounds American Lobster is one of the most consumed fish in the US, located on the Atlantic Coast of North America. It is used in dishes like New England clam chowder and lobster roll. It is mostly found on the rocky bottoms of oceans. 24. Dungeness Crab Processed Weight as of 2021: 17,897,820 Pounds Situated on the West coast of North America is another widely consumed US fish product, the Dungeness Crab. It is mostly found on the muddy and rocky bottoms of water bodies. In appearance, this species of Crab is reddish brown and shiny. 23. King crab Processed Weight as of 2021: 20,459,677 Pounds King Crabs are located in the North Pacific coastal waters. Some of its breeds include red king crab and golden king crab. They are mostly found in the depths of oceans. They are usually grilled, steamed, and baked for consumption. 22. Rockfishes Processed Weight as of 2021: 21,699,972 Pounds Rockfishes are mostly common in California and Maryland. They tend to hide behind rocks and grow really slowly. Their light and tender fillet is liked by most Americans, making it one of the most consumed fish in the country. 21. Sablefish Processed Weight as of 2021: 27,078,835 Pounds Also known as the Black Cod is this popular US fish, the Sablefish. It is commonly located in deep waters of the Northern Pacific. It also tends to consume other fish such as squid and jellyfish. Furthermore, it resides on the muddy ocean beds. 20. Eastern Oysters Processed Weight as of 2021: 28,480,457 Pounds Found along the Eastern coasts of North and South America are these Eastern Oysters. They have a greyish-white shell. They also tend to live in more shallow waters and are classified as one of the most consumed fish in the United States. 19. Rainbow Trout Processed Weight as of 2021: 31,403,078 Pounds Rainbow Trout is found along the Western coast of North America. They tend to live in moderately shallow waters. In appearance, Rainbow Trout contains a mix of colors including white, black, pink, blue, and yellow. 18. Ocean Quahog Processed Weight as of 2021: 31,403,078 Pounds Found on the Eastern coast of the United States is another famous fish choice, the Ocean Quahog, which can live up to 200 years as reported by NOAA Fisheries. It is normally used for consumption in chowders, stews, and soups. Ocean Quahogs belong to the family of Mollusks and are one of the most preferred fish in the US. Prominent players in the global fish market include AquaBounty Technologies, Inc. (NASDAQ:AQB), Pingtan Marine Enterprise (NASDAQ:PME) Ltd., and Marine Harvest ASA (NYSE:MHG). 17. Sockeye Salmon Processed Weight as of 2021: 41,794,627 Pounds Sold at a comparatively high cost in the US is this breed of anadromous fish, Sockeye Salmon. It is popular among fishermen as well as chefs. It is also called Red Salmon since it tends to be red during spawning and turns blue in water. 16. Shellfish Processed Weight as of 2021: 42,083,016 Pounds Another popular type of seafood in the US is the Shellfish. It is consumed in both fresh and frozen forms. It is located in both the Pacific and the Atlantic. The Salish Sea is known to contain the most shellfish in the country, attracting many fishers around. 15. Pacific Hake Processed Weight as of 2021: 58,976,532 Pounds Consumed as fish sticks and fish fillets in abundance is the Pacific Hake. It migrates once a day from deep waters to the ocean surface. It is greyish-white in color and found off the Western coast of the United States. 14. Sea Scallops Processed Weight as of 2021: 59,900,857 Pounds Mostly found in North West Atlantic are these sea scallops which are liked in the US fish market. They are mostly seen in deep sea waters and less shallow depths. This popular fish breed tends to live on ocean floors and is one of the most sought fish in the US. 13. Atlantic Salmon Processed Weight as of 2021: 60,443,102 Pounds Native to the Atlantic Ocean is this breed of salmon which is preferred by many Americans. Most of the Atlantic Salmon are caught by the commercial fish farms in Washington however recreational fishers tend to catch any of this salmon that escapes. They are mostly found in Maine, United States. 12. Squid Processed Weight as of 2021: 62,832,013 Pounds A known fish in the United States is the Squid which is one of the most wanted species in the country. It is preferred to be eaten as seafood salad or calamari. Squids can survive in both shallow and deep waters. They also have the ability to readily change their color to camouflage themselves in their habitat. 11. Cod Processed Weight as of 2021: 66,778,020 Pounds Cod is another popular fish in the US. It is mostly found in the Pacific or Atlantic water although the Pacific Cod is larger in numbers. Cod from the Pacific is also the second largest commercial groundfish in the US. 10. Pink Salmon Processed Weight as of 2021: 91,270,158 Pounds Pacific and Arctic waters hold this popular breed of Salmon known as the Pink or humpback Salmon. It is one of the most consumed fish in the US, typically used in salmon cakes and salmon burgers. 9. Red Hake Processed Weight as of 2021: 105,162,171 Pounds Native in the Atlantic Ocean is the Red Hake which is also known as the Squirrel Hake. Red Hakes are usually reddish brown in color. They are one of the most consumed fish in the US and are often overfished from the Atlantic. 8. Tuna Albacore Processed Weight as of 2021: 106,467,976 Pounds Mostly surviving in the tropical and temperate climates of the North Atlantic and Pacific Oceans is this breed of Tuna called Tuna Albacore which is one of the famous fish in the US. It migrates between oceans very frequently. It is baked, grilled, or seasoned with sesame seeds as a meal in the country. 7. Catfish (farmed) Processed Weight as of 2021: 118,635,010 Pounds This farmed catfish has mild flesh and half of its global population resides in the US waters. Found mostly in North America, this fish is known for its exotic taste among Americans. 6. Surf Clams Processed Weight: 130,630,716 Pounds Surf Clams are a breed of Bivalve Mollusks. Freshwater Clams live in freshwaters while Marine Clams tend to survive in salt waters. Americans enjoy Clams by adding them to their soups, pasta, and chowders. Hence, surf clams are one of the most preferred fish for consumption in the US. Investors who are looking to increase their exposure to the US fish market can look up stocks such as AquaBounty Technologies, Inc. (NASDAQ:AQB), Pingtan Marine Enterprise (NASDAQ:PME) Ltd. and Marine Harvest ASA (NYSE:MHG). Click to continue reading and see 5 Most Consumed Fish in the US. Suggested articles: Top 25 Countries with the Most Facebook Users 15 Countries That Watch the Most K-Dramas 20 Most Catholic Cities in the US Disclosure: None. 25 Most Consumed Fish in the US is originally published on Insider Monkey......»»

Ventas (VTR) teams up with expert operators to enhance the performance of 26 independent living communities. Ventas VTR, a prominent healthcare REIT, has recently announced a strategic move to enhance the performance of its senior housing portfolio. The company is set to entrust the management of 26 independent living communities to three seasoned senior housing operators to capitalize on attractive markets and bolster occupancy rates.Reflecting positive sentiments, VTR shares were up 3.2% during Wednesday’s regular session. This expansion aligns with Ventas' acclaimed "Right Market, Right Asset, Right Operator™" strategy while harnessing the expertise of Sodalis Senior Living, Priority Life Care and Discovery Senior Living.Ventas has garnered attention for its consistent track record of successful operator partnerships. Building on prior collaborations, the company has handpicked three operators that have demonstrated their ability to steer senior housing communities toward a solid performance.Sodalis Senior Living is responsible for 13 communities in Texas, and Priority Life Care will manage eight communities in Florida. Meanwhile, Discovery Senior Living will oversee five communities in California. These operators are set to leverage their local market insights to maximize results.VTR's decision to entrust these operators with a significant portion of its senior living assets stems from its proven approach to active asset management. The "Right Market, Right Asset, Right Operator™" strategy emphasizes aligning the right assets with the right operators in markets with favorable demand and supply dynamics. This calculated move capitalizes on the unique strengths of each operator and the potential of the markets they serve, ensuring a symbiotic relationship that drives both occupancy and financial performance.Central to this strategy is Ventas' proprietary data analytics and insights platform, Ventas OI. Starting in 2020, Ventas has effectively utilized its Ventas OI playbook to smoothly transfer more than 150 communities to new management, yielding significant financial outcomes.The transition to the new operators is expected to be completed in the coming months, with the majority of the communities commencing operations under their stewardship by Sep 1, 2023. The remaining assets are slated for transition in the early fourth quarter, pending final documentation and customary conditions.The communities that are part of this transition are currently managed by Holiday by Atria. The shift to the new operators is being facilitated in an orderly manner, with Atria playing a role in ensuring a smooth transition process.Going forward, Ventas is poised to benefit from its diversified portfolio of healthcare real estate assets in the key markets of the United States, Canada and the United Kingdom. The rebound in senior housing industry fundamentals and favorable demographic trends aid the company’s senior housing operating portfolio’s growth.Ventas’ life-science segment is gaining from the increasing longevity of the aging U.S. population and biopharma drug development opportunities. Also, accretive investments in driving its research and innovation business bode well. However, competition from peers and high interest rates are key concerns for Ventas.Shares of this Zacks Rank #3 (Hold) company have rallied 1.1% in the past three months, outperforming the industry’s increase of 0.8%.Image Source: Zacks Investment ResearchStocks to ConsiderSome better-ranked stocks from the REIT sector are Welltower WELL, SBA Communications SBAC and Omega Healthcare Investors OHI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.The Zacks Consensus Estimate for Welltower’s 2023 FFO per share has been raised marginally upward over the past month to $3.53.The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved 1.4% northward over the past month to $12.86.The Zacks Consensus Estimate for Omega Healthcare’s ongoing year’s FFO per share has been raised marginally upward over the past month to $2.83.Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information. Top 5 ChatGPT Stocks Revealed Zacks Senior Stock Strategist, Kevin Cook names 5 hand-picked stocks with sky-high growth potential in a brilliant sector of Artificial Intelligence. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion. Today you can invest in the wave of the future, an automation that answers follow-up questions … admits mistakes … challenges incorrect premises … rejects inappropriate requests. As one of the selected companies puts it, “Automation frees people from the mundane so they can accomplish the miraculous.”Download Free ChatGPT Stock Report Right Now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Ventas, Inc. (VTR): Free Stock Analysis Report SBA Communications Corporation (SBAC): Free Stock Analysis Report Omega Healthcare Investors, Inc. (OHI): Free Stock Analysis Report Welltower Inc. (WELL): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»

Bath & Body Works, Inc. (NYSE:BBWI) Q2 2023 Earnings Call Transcript August 23, 2023 Bath & Body Works, Inc. beats earnings expectations. Reported EPS is $0.4, expectations were $0.33. Operator: Good morning. My name is Ted, and I will be your conference operator today. At this time, I would like to welcome everyone to the […] Bath & Body Works, Inc. (NYSE:BBWI) Q2 2023 Earnings Call Transcript August 23, 2023 Bath & Body Works, Inc. beats earnings expectations. Reported EPS is $0.4, expectations were $0.33. Operator: Good morning. My name is Ted, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Second Quarter 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded. [Operator Instructions] I will now turn the call over to Ms. Heather Hollander, Vice President, Investor Relations at Bath & Body Works. Heather, you may begin. Heather Hollander: Thank you. Good morning. And welcome to Bath & Body Works’ second quarter 2023 earnings conference call. Today’s call may contain forward-looking statements related to future events and expectations. Please refer to this morning’s press release and the risk factors in Bath & Body Works’ 2022 Form 10-K for factors that could cause the actual results to differ materially from these forward-looking statements. Today’s call contains certain non-GAAP financial measures. Please refer to this morning’s press release and supplemental materials for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. Joining me on the call today are Gina Boswell, Chief Executive Officer; Julie Rosen, President, Retail; and Eva Boratto, Chief Financial Officer. I will now turn the call over to Gina. Gina Boswell: Thank you, Heather, and good morning, everyone. Thank you for joining us today. Before I discuss our performance and progress in the quarter, I’d like to thank our teams for consistently delivering terrific service to our customers, remaining agile in a dynamic environment and executing on our strategic initiatives. We are also very pleased to have welcomed Eva Boratto as Bath & Body Works new CFO at the beginning of this month. She is a seasoned executive with over three decades of financial, operational and retail experience, and she’s already hit the ground running. You will, of course, hear from Eva on today’s call. Now moving on to our second quarter results. Net sales were in line with our expectations, declining 3.6% compared to the prior year. Adjusted diluted earnings per share of $0.40 were better than planned, with the majority of the outperformance driven by the benefits of our cost optimization initiative, increased average unit retail or AUR and improved merchandise margin. In fact, year-over-year merchandise margin rate increased modestly for the first time in nine quarters. I continue to be very pleased with our team’s ability to drive efficiency in the business while building the capabilities to drive future growth. In the second quarter, we once again showcased our exceptional innovation capabilities. With the completed rollout of our new hand soaps, all of which are formulated a paraben, sulfates and dyes, continued delivery of newness through our genome fragrance collection, the addition of grooming to our men’s offering, the successful limited launch of our new fragrance haircare line in July, which has received a very positive response from our customers, and finally, the launch of hand soap refill cartons in July, providing our customers with a convenient sustainable solution. We were also pleased with our Mother’s Day results and executed well in our June semiannual sale, delivering merchandise margin rates above our expectations. From a category perspective, in the second quarter, our body care sales increased versus the prior year. Home fragrance and soaps and sanitizer sales declined as expected, driven by post-pandemic normalization. Importantly, year-to-date, we have increased unit share across these product categories. As expected, we continue to see some pressure on basket size during the quarter. To be clear, we aren’t seeing any trade down in our business, but we have observed that the customer is carefully managing their spending against the backdrop of a challenging macroeconomic environment. As we look ahead to the remainder of the year, we remain focused on delivering innovation and building capabilities to position our company for above industry growth when our categories normalize. Our revenue is approximately 40% above 2019 levels and we have diverse opportunities and multiple initiatives designed to deliver long-term topline growth and margin expansion. We are making progress on the five key areas that I outlined on our last call; first, elevating the brand through innovation and upgrades to our forms, packaging and merchandising; second, extending our reach through adjacencies and international growth; third, engaging with our customers by fully leveraging the strength of our loyalty program, enhanced technology and more personalization; fourth, enabling a seamless omnichannel experience by advancing our digital platforms and connecting them with our stores; and finally, enhancing operational excellence to drive efficiency. Julie will speak to our progress in brand elevation and extending our reach in a moment, but I’d like to dig a little deeper on the other three, returning to our work to better engage with our customer. We are deepening our connection across the customer journey, building on our history of connecting with the customer through fragrance, outstanding products and a terrific shopping experience, whether online or in-store. Our customer segmentation analysis identified the customer groups that represent our biggest growth opportunities and has given us a better understanding of their unique needs and motivations. These insights are now informing our innovation, merchandising and marketing, and enabling us to be more effective and efficient in reaching our target customer segments. We are also building our technology capabilities to implement a more personalized targeted approach the marketing and promotions rooted in data and analytics. Through this work, we plan to increase trial of new products, encourage cross-channel and cross-category shopping, build the customer’s basket and drive incremental trips. Now that we have successfully completed the vast majority of our IT separation from Victoria’s Secret, we will begin testing personalized marketing and optimize promotions this fall, that apply these capabilities more broadly and derive more value from them at the beginning of the year. Our loyalty program continues to be a key component of customer engagement. This August, we anniversaried the national launch of our loyalty program and we remain pleased with our enrollment of nearly 38 million members, with loyalty sales representing approximately three-quarters of our U.S. sales since launch. While we will continue to build on our impressive enrollment, our primary focus is on increasing engagement. For example, in the second quarter, we not only of our loyalty members to both for the featured fragrances in our laundry product, we then gave them exclusive access to a previous sample event. Next, we gave our loyalty members a sneak preview of our Halloween collection and an exclusive to early Halloween shopping event prior to the national launch. We have more benefits planned and we are excited to test new capabilities such as accelerators in the third quarter. Beyond that, we are focused on fully integrating our loyalty experience throughout our channels. We are still in the early innings of our loyalty program and we are confident in our ability to drive more sales and improved merchandise margins, while attracting more customers to the program. Moving to the next area of focus, which is enabling a seamless omnichannel experience. Although we have a strong profitable digital business, our digital assets are largely transactional. As we move to more experiential integrated platforms, we plan to drive higher sales, more discovery and larger baskets through personalized landing pages, immersive content and product recommendations. In the second quarter, we introduced personalized recommendations on our website and mobile app. This month, we will begin to deliver personalized e-mail content. Later in the third quarter, we plan to test immersive video content on our website and mobile app with a broader launch plan for the fourth quarter. As you know, we completed our national rollout of Buy Online, Pickup In Store, or BOPIS in the first quarter. BOPIS orders increased 25% in the second quarter as customers are increasingly choosing this convenient option and approximately 30% of BOPIS customers made an additional purchase in store when they picked up their order, which is a testament to the power of the outstanding in-store experience delivered by our talented associates, iconic fragrances and compelling assortments. Delivering a seamless omnichannel experience will allow us to convert more single channel customers to dual channel customers, which, on average, increase spend threefold. Finally, we are enhancing operational excellence and efficiency through $200 million of planned annual cost savings across the company. We are on track to deliver approximately $150 million of those savings in 2023 and Eva will share additional detail on plans for the second half of the year shortly. Eva will also provide an update to our fiscal 2023 guidance, which reflects our bottomline outperformance in the second quarter and sales expectations for the second half of the year. As I touched on earlier, the customer has been cautious in managing their spending amidst the softer macroeconomic backdrop. However, they are still responding to newness, innovation and our compelling seasonal events. We are taking action to deliver innovation and build the capabilities that will allow us to better serve our customers, drive above industry growth and deliver margin expansion. Bath & Body Works has a highly differentiated business model, positioned at the intersection of consumer goods and retail, and a strong fleet of profitable stores with off-mall and in-mall that position us close to the customer. We have a vertically integrated supply chain, which allows us to respond quickly to changing customer and macro trends, along with a strong balance sheet and a history of superior growth and free cash flow generation. As we navigate macroeconomic pressures, I am confident that we have a diverse set of opportunities to profitably grow the business and create value for our shareholders, built a strong foundation that exists today. With that, I will turn the call over to Julie. Julie Rosen: Thank you, Gina. We started the second quarter with a strong Mother’s Day, delivering newness with our Gingham all back of collection and a strong gifting assortment. As you know, our vertically integrated supply chain allows us to read and react to trends quickly and we have leveraged this capability as we chased winners and delivered additional inventory to meet customer demand. As Gina mentioned, we executed well in our June semiannual sale and we are pleased to deliver merchandise margin rates above our expectations. We were very intentional in structuring this year’s event to drive early interest by offering compelling price points on sale products and introducing full price new summer season product alongside the event. We then took fewer markdowns over the course of the event and delivered better-than-expected merchandise margin rate. Turning to category performance. Second quarter body care sales increased slightly versus last year, a sequential improvement from the first quarter. Body care was propelled by growth in Fine Fragrance Mist, Travel, as well as our men’s business, which posted a double-digit sales increase this quarter and remains one of our fastest growing product lines as we add new forms and merchandising ideas. At the beginning of the quarter, we launched Men’s Grooming, which performed well and exceeded our expectations. We are very excited about the growth of our men’s business as it is bringing in new customers to our brands and also garnering the attention of younger customers. The home fragrance and soaps and sanitizers categories both declined versus last year, as expected driven by continued industry-wide post-pandemic normalization trends, which we have discussed previously. Sales for the home fragrance and soap and sanitizer categories collectively represent just over half of our business. We remain market leaders in these categories and have gained unit share year-to-date even as the categories experienced pressure at the industry level. We remain focused on innovating and positioning for future growth in these categories. For example, wallflowers once again outperformed candles as customers are spending less time at home. We are leaning into the demand by increasing our assortment of in-control wallflower heaters and offering decorative innovations such as the projection wallflowers in our Halloween collection, which illuminate and project festive images. Turning to our strategic initiatives. As Gina mentioned, I will provide some detail on how we are making progress in elevating our brand and extending our reach to accelerate growth. This quarter, we continued to deliver innovation in product and merchandising. This was visible and our refreshed core hand soap offering, including the completed rollout of our new formulation made without paraben, sulfates or dyes. Additionally, we have rolled out foaming hand soap refill and recyclable paper cartons to all U.S. stores, allowing customers to conveniently refill their soap containers and minimize waste. Beyond soap, we are innovating and elevating our product and packaging while staying true to the brand heritage. For example, this month, we brought back fan-favorite purpose spraying water [ph], a new and elevated packaging and formulations. We also added a sensitive skin product with colloidal oatmeal. This ingredient-led collection is an exception of our wellness category and intended to provide the additional moisture, hydration and sensitive skin solutions that our customers are seeking. And within merchandising, we are evolving our storytelling to broader inspirational brand storytelling, including recommendations for selecting and using the product, as well as creating the perfect gift. We demonstrated elements of this within our Gingham offering, which was designed to be an immersive shopping experience. This included new fragrances in Gorges, Fresh, Vibrant and Gingham Legend for Men across multiple forms, as well as front of store and digital takeovers and beautiful gifting options. As we work to extend our reach, we are leveraging our core strength in fragrance and innovation to expand into adjacent categories, including fragrance haircare, men’s, wellness and laundries. We are also building on the success of our international business. As I mentioned, this quarter, we expanded our men’s product portfolio to include grooming. The first stage of our expansion focused on face and beard care and launched in the advance of Father’s Day. In September, we are expanding in men’s hair and shaving. As part of our ongoing innovation cycle, we tested fragrance haircare products last summer, and we are very pleased with the customer response to our fragrance led positioning. In the second quarter, we launched haircare in approximately 560 stores and online with shampoo and conditioner in five of our signature scent and dry shampoos in three. The launch has exceeded our expectations, and we plan to complete the rollout to all U.S. stores next spring. This month, we are excited to Elevate the Mundane with the launch of our laundry line, including many of our best-selling fragrances across a limited number of stores and online. Initial customer feedback from our previous sample event has been very positive with customers noting that our laundry detergent is an exciting new way to add another layer of their favorite scent to their daily routine. As we work to broaden our customer base and attract a younger customer, we know that lift products represent an important opportunity. Therefore, we are upping expanding and relaunching our in-store assortment and visual presentation of our lift products across a limited number of stores this fall with additional expansion to follow early next year. With the addition of fragrant haircare, laundry and lift, we are now able to offer our iconic fragrances across as many as 22 product forms. We are also committed to extending our reach geographically and continue to evaluate opportunities to build on the success of our international business and drive significant growth through further market expansion, new stores and digital growth with our partnership based model. As we look ahead to the third quarter, we are very excited about the launch of Halloween. We launched Halloween one week later this year to better align with the customer mindset. For the first time, we are placing this assortment at the front of our stores to give it additional prominence and we are expanding our most loved spend such as Vampire Blood across categories. For our fall assortment and scents, we have listened to the customers and are bringing back our iconic fall scents such as Leaves and Pumpkin Pecan Waffles in new and elevated packaging. And for Hispanic Heritage Month we are featuring a consumer series celebrating Patty Hidalgo and her longstanding contribution to our fragrance portfolio, including customer favorite Strawberry Pound Cake. Bath & Body Works is an outstanding beloved brand and we are excited about what’s ahead as we continue to deliver new compelling products and capitalize on opportunities for profitable global expansion. In closing, I’d like to thank our teams for their dedication to delivering industry-leading innovation and service and delighting our customers. And with that, I will turn it over to Eva. Eva Boratto: Thank you, Julie, and good morning, everyone. I am excited to join you today and honored to be part of this outstanding company. Over the past several weeks, I have spent my time immersing the business, while engaging with the executive leadership and finance teams. I have also had the opportunity to participate in the financial planning process and observe the progress the teams have made on the company’s strategic initiatives. The last few weeks have reinforced my belief that Bath & Body Works is on the right path to capitalize on the tremendous opportunities ahead and create significant long-term value for shareholders. Today, I will start by reviewing our second quarter financial results, then I will provide an overview of our guidance for the third quarter and fiscal year 2023. Starting with the second quarter results. we generated adjusted diluted earnings per share of $0.40, exceeding our guidance range of $0.27 per diluted share to $0.32 per diluted share. Our adjusted results exclude the gain on the early extinguishment of debt associated with the debt repurchases in the second quarter. We were pleased with our second quarter operational outperformance resulting from the benefits of our cost optimization initiative, increased AURs and improved merchandise margins. EPS also benefited from interest expense favorability in part associated with the repurchase and retirement of debt in the second quarter and tax rate favorability, resulting from the resolution of certain discrete tax matters related to the Victoria’s Secret spin-off. Net sales for the second quarter were $1.6 billion, in line with our expectations. The year-over-year decline of 3.6% was driven by a decrease in both transactions and average dollar sale. In U.S. and Canadian stores, second quarter sales totaled $1.1 billion, a decrease of 1% versus the prior year. Second quarter direct sales of $329 million decreased 10% compared to last year. Adjusted for BOPIS, direct demand decreased 6% in the second quarter. As a reminder, BOPIS sales are recognized as store sales and we completed the BOPIS rollout to U.S. stores in the first quarter. International sales were $86 million and declined 4% versus last year. Note, on a year-to-date basis, international sales increased 4%. There are two components to our international net sales. Royalties collected off franchise retail sales and wholesale revenue generated by the product we sell to our franchise partners and while wholesale revenue declined in the second quarter due to lower orders and shipments, total international system-wide retail sales posted a double-digit increase, propelled by new store openings and strong sales for the June semiannual sale event. Our guidance for the back half of the year assumes that our international sales returned to growth. Our gross profit rate for the second quarter decreased by 90 basis points compared to prior year Q2, representing a year-over-year sequential improvement of 255 basis points from the first quarter. Merchandise margin rate improved modestly year-over-year for the first time in nine quarters. This improvement was driven by deflation benefit, increased AUR and reduced transportation costs, partially offset by continued investment in product formulations and packaging innovation. Improvements in merchandise margins were offset by buying and occupancy expense deleverage primarily due to lower sales and increased occupancy expense from new store sales growth — sales. Total SG&A deleveraged by 200 basis points, representing a year-over-year sequential improvement of 90 basis points in the first quarter. Technology expense was the biggest driver of deleverage, reflecting our IT separation costs, as well as strategic investments to drive future growth. As expected, we partially mitigated the impact of technology investments with our cost optimization work, which produced efficiency in store labor hours and home office expense. All said, our cost optimization work produced benefits of approximately $30 million in the quarter across gross profit and SG&A. Second quarter total company operating income was $188 million or 12% of net sales. Turning to the balance sheet. We repurchased $115 million senior notes principal for $106 million in the quarter. We remain focused on disciplined inventory management and ended the second quarter with total inventory dollars down 16% compared to last year. Heading into the second half of the year, our inventory levels are well positioned. Our overall real estate portfolio remains very healthy, with 99% of the fleet profitable and store significantly outperforming pre-pandemic levels. In the second quarter, we continued to increase our off-mall penetration opening 30 new off-mall North American stores and permanently closing 17 stores, principally in malls. Our international business, our partners opened 16 new stores in the second quarter, ending the quarter with 444 stores. Now turning to our fiscal 2023 guidance. We are providing our 2023 guidance with comparisons to 2022. And as a reminder, fiscal 2023 includes the 53rd week, so the fourth quarter of fiscal 2023 will consist of 14 weeks. The impact of the 53rd week reflected in our guidance is estimated at $0.07 per diluted share and our guidance excludes the impact of any further debt or share repurchase activity. With that as context, we are updating our fiscal year guidance to reflect Q2 performance, narrowing our sales range, raising our gross profit expectations and factoring in the benefits of the debt and share repurchases through the second quarter, resulting in an increase to our EPS guidance. Now let me provide some additional color on these changes. For the full year, we now expect sales declines of 1.5% to 3.5%, reflecting our year-to-date performance, continued macroeconomic uncertainty, judicious consumer spending and post-pandemic category normalization across the industry. For the first two quarters of the year, our sales were in line with the midpoint of our projections. Factoring in year-to-date performance and improved visibility, we are narrowing our sales range around the midpoint of our prior guidance. The company is very adept at quickly reading and responding to changing business trends and we plan to leverage that agility to chase demand and maximize sales. We are enhancing our operational excellence and efficiency and plan to deliver approximately $100 million in cost savings in the second half of the year. Approximately 30% of the savings are related to reduced transportation expense, with the remainder reflecting other benefits of our program, including efficiency in store labor and selling productivity as we better align staffing hours to traffic, reduced expense as we optimize our call center, home office expense efficiency and decreased indirect spend. Gross margin exceeded our expectations in the first half of the year and we are now raising our forecast for the full year gross margin rate to approximately 43%. We continue to expect year-over-year merchandise margin rate to improve in the second half of the year supported by greater deflation benefits and efficiency produced from our cost optimization work. These benefits are partially offset by investments in formulation and packaging upgrades to reinforce our competitive position. Overall, we expect merchandise margin rate to expand by approximately 100 basis points in the second half of the year versus prior year, resulting in improved merchandise margin rate for the full year. We still expect buying and occupancy expense to deleverage for the year, driven by sales levels and increased expense from new store growth, with less deleverage for the remainder of the year, as our new direct-to-consumer fulfillment center ramps. Our guidance still assumes a full year SG&A rate of approximately 26% with deleverage driven by lower sales levels, technology expense and increased store wage rates, partially offset by the expected benefits of our cost optimization work. We now expect full year adjusted net non-operating expense of approximately $295 million, reflecting interest expense favorability from debt repurchases through the end of the second quarter. We still expect an effective tax rate of approximately 26% and weighted average diluted shares outstanding of approximately $230 million. For the fiscal year 2023, we are increasing our adjusted earnings per diluted share guidance range to $2.80 to $3.10, we continue to plan for $300 million to $350 million of capital expenditures in 2023 and we now expect to generate free cash flow of $675 million to $725 million in fiscal 2023. Turning to our third quarter 2023 outlook, we are forecasting sales decline of 2.5% to 4% versus the prior year, we expect gross profit rate of approximately 42% and an SG&A rate of approximately 31% of sales. We expect net non-operating expense of approximately $75 million and a tax rate of approximately 26% and weighted average diluted shares outstanding of approximately $229 million. Considering all these factors, we are forecasting third quarter earnings per diluted share of $0.30 to $0.40. Looking now at our capital allocation. Our first priority is investing in the business to drive profitable growth. We are also committed to returning cash to shareholders. In the first six months of the year, we paid $92 million in dividends and we plan to continue paying an annual dividend of $0.80 per share with an intention to increase the dividend over time as earnings increase. In the second quarter, we also repurchased 1.3 million shares for $50 million in the open market. In addition to returning cash to shareholders, we are committed to returning to our target leverage ratio of approximately 2.5 times gross adjusted debt to EBITDA over time. We ended 2022 with a leverage ratio of 3.1 times and through the second quarter of the year, we have repurchased $199 million principal amount of our senior notes in the open market. We will continue to take a balanced approach to capital allocation, considering options such as additional debt and share repurchases. In conclusion, I am excited about the future of our business and we are focused on taking the necessary actions to drive profitable growth and generate value for all stakeholders. At this time, we would be happy to take your questions and I will turn it over to Heather for Q&A. Heather Hollander: Thanks, Eva. For our Q&A session, we ask that participants limit their responses to one question and one follow-up. We will now move to the Q&A session. Operator? Q&A Session Follow Bath & Body Works Inc. (NYSE:BBWI) Follow Bath & Body Works Inc. (NYSE:BBWI) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Yes. [Operator Instructions] The first question in the queue is from Kate McShane with Goldman Sachs. Your line is open. Kate McShane: Hi. Good morning. Thanks for taking our questions. It was really encouraging to see that you grew AURs in the quarter. We wondered if you could talk to us a little bit more about this and what role it plays in your updated guidance today? Julie Rosen: Yes. So from an AUR perspective — this is Julie, by the way. Thank you for the question. We actually, as you know, semiannual sale plays a huge role in our Q2 and we took a very balanced approach to driving sales and improving merchandise margins. So our semiannual sales event sales were below last year’s event, but in line with our expectations. We executed well, we offered compelling price points on sale products, while also introducing full price new summer season product alongside the event. Customers responded very favorably to our event. They continue to carefully manage their spending in light of macroeconomic conditions, which had an adverse effect on the impact of the number of items added to the basket. Ultimately, we took fewer markdowns over the course of the event and delivered better-than-expected merchandise margin rate. I would also say that AUR increased slightly this quarter and remains significantly elevated since 2019. And as a note on pricing, we have taken price increases in spring 2023, we have created more differentiated assortments to drive pricing power. As a reminder, our AUR has increased slightly this quarter but significantly compared to 2019 and we do have a long track record of AUR growth in the positive low single-digit levels prior to the pandemic. Eva Boratto: And Julie, if I could just add, as it pertains to our guidance, we are assuming flat AURs in the back half of the year and we will continue to test for opportunities to increase AURs, as Julie has just explained and expand margin through more data driven targeted marketing efforts. Kate McShane: Thank you. And then if we could just follow-up with a question on the candle, soaps and sanitizers. Can you talk what — about what that category looks like on stack or versus 2019 and just how it performed also versus Q1? Julie Rosen: Yes. Thank you for that question. So though the home fragrance and soaps and sanitizers categories are normalizing post-pandemic. We have gained unit share year-to-date and we are a market leader in these categories and plan to build on that position. We do continue to innovate and position for growth in these categories. For example, wallflowers, as I mentioned, continue to outperform. So we are leaning into that demand. We also recently refreshed our core soap offering, including the completed rollout of our new formulation made without carbon sulfates and eyes and additionally rolled out our foaming hand soaps and recyclable cartons. So we are absolutely focused on our core businesses and innovating in them to drive growth. To 2019, all categories are up significantly in the double digits. So no category is below. Heather Hollander: All right. Thanks, Kate. We will take the next question please. Operator: Next question in the queue is from Alex Straton with Morgan Stanley. Your line is open. Alex Straton: Great. Thanks so much for taking the question. I have got two for you, one on guidance and then one on the longer term outlook. So on guidance, it seems like the full year update implies a deceleration in quarter over growth in the fourth quarter and I think a little bit lower sales than there. So what’s driving that more conservative view on the fourth quarter. And then, secondly, on the long-term, I know you guys have that 20% EBIT margin target out there. What do you view as the key factors holding you below that rate right now and how do you think about the time line to getting back to that goal in the future? Thanks a lot. Eva Boratto: Alex, this is Eva. I will start with your question as it pertains to the Q4 guidance. As you look at our back half of the year guidance first, right, in our full year guidance. What we have done is we have narrowed our sales range to the midpoint of what we had previously provided and that really reflects our performance that we have seen in the first two quarters that were in line with our performance. And it also reflects the cautious consumer and while we haven’t seen trade downs in our business, we are seeing the consumer be more thoughtful at the overall basket size. So as we have this visibility, there’s a lot of macro uncertainty, that’s how we thought about the topline in the back half of the year. Gina Boswell: And as it relates to — it’s Gina. As it relates to your question around the 20% operating income margin long-term, there’s a few things we feel very comfortable that as a long-term target, that’s the right one, 20% is the best-in-class operating income rate for our sector and we don’t want to limit ourselves to 20%, but we do think that, that number over time, best balances the investment in the business to drive future growth while maximizing shareholder return. Clearly, in the last couple of years, there have been step function increases in input costs and labor and certain parts of our business like technology, they require additional investments to fuel our growth and those are very important as we evolve our marketing program, our loyalty and our omnichannel. But I am pleased with the track that we have on our initiatives. I am pleased with what we expect in terms of margin recovery and a very disciplined approach to expenses. So very comfortable with that. Alex Straton: Okay. Thanks. Heather Hollander: Thanks, Alex. We will take the next question. Operator: Next question is from Ike Boruchow with Wells Fargo. Your line is open. Ike Boruchow: Hey. Good morning, everyone. I guess I wanted to ask a question around costs, your AUC more so into next year. Can you comment about some of your key raw materials, primarily soy what those costs look like today, how they should flow into the P&L come next year? Just curious for some high level thoughts over the next 12 months there? Thanks. Eva Boratto: Hi, Ike. This is Eva Boratto. From a deflation perspective, we saw — we experienced about $20 million of deflation in the Q2 and we expect $30 million in Q3. We expect that benefit to increase throughout the remainder of this year. As you look at raw materials, I will just add a few comments. Overall, we did see most prices peak in 2022 with expected deflation in 2023. Wax has been outlier with significant price volatility up and down year-to-date. We saw a spike in soy over the past 60 days with some concerns over dry weather impacting the crop. We have seen an impact being smooth via commodity risk mitigation processes and I think they are the key things that I would highlight. I think it’s premature to comment on what we expect in 2024 and will certainly come back as we are ready to provide our 2024 outlook. Ike Boruchow: Great. Thank you. Heather Hollander: All right. Thanks, Ike. Next question please. Operator: Next question is from Dana Telsey with the Telsey Group. Your line is open. Dana Telsey: Hi. Good morning, everyone. As you think about the new products that you are introducing, Julie, and what the gross margins could look like on some of the new products, is there any difference from the core gross margin to the business overall? And then the loyal members, any more color on the loyalty members and their acceptance of the new products and what statistics you are looking to hit for loyalty members by the end of the year? And then just lastly, on the off-mall stores, anything you are seeing at all in terms of productivity rates, anything with what we have heard with organized crime and shrink in what you are doing? Thank you. Julie Rosen: Thanks. Thanks, Dana. Nice to hear your voice. So starting with the new products, we have launched a lot of adjacencies that we are starting to test, optimize and roll. So I just want to review them very quickly and then I will talk to your margin question about them. So in men’s, as you know, in the second quarter, we successfully launched Men’s Grooming and in September, we are following with Men’s Hair and Shave. We continue to focus on APDO as it is the number one form in the men’s market and men’s continues to be our fastest growing category in body care. The men’s margin is commensurate with the shop. So we are very excited about that. Fragrance haircare in the second quarter was launched to 560 stores and online in July, and the launch has exceeded our expectations and we expect to complete that rollout to all stores next spring. We also have lift as we work to broaden our customer base and attract a younger customer. We are upgrading, we are expanding and we are relaunching our in-store assortment and visual presentation of our lift products across limited number of stores in the third quarter. Additional expansion will happen next year. And then finally, of course, there’s laundry, which we are very excited about to be launching this month across a limited number of stores and online. So initial customer feedback from our preview sample event has been very positive with customers noting that our laundry detergent is an exciting way to add another layer of their favorite sent to their daily routines. So some of those adjacencies are commensurate was shot from a margin perspective. Others are not quite there yet, but we have a longstanding history here at Bath & Body Works. As you have seen with wallflowers and tree works [ph] over the years, that with scale, we have no doubt that we will get there. So I will skip to the straight question, if that’s okay, and then I will have Gina come back to your loyalty question, if that works. So as is the case with the retailers, we have seen external pressures adversely impacting our shrink rate and it has gotten worse this year. That being said, the impact has been factored into our guidance and we are working with our stores, with government and community partners to achieve lower loss rates over time. So I will let Gina talk to loyalty. Gina Boswell: Thank you. So loyalty is — as you know, we are very proud of one of the best rollouts in Bath & Body Works’ history in terms of the enrollment speed among the fastest in the industry. So we are very pleased with the enrollment to-date. And as I mentioned, we are early stages of deriving the value from the program, but some of the things that Julie had mentioned in terms of the previews that we have used, whether it’s the laundry or the sneak preview of Halloween, we absolutely use the loyalty platform in ways to build the excitement around some of the launches and we will continue to do that. The benefits that we have planned going forward on new capabilities like accelerators, which you may see in other programs, that’s happening in the third quarter, so that’s sort of become. And then this — actually this month, we have our first annual member appreciation event, because we are celebrating the one-year anniversary. So you will be seeing a lot of surprise and delight product drops, you will see first looks, exclusive offers to reward our loyal customers. So lots going on in loyalty and with the 38 million members strong, that’s a lot to work with. So we are excited on the go forward there. And I think you may have had a question around off-mall as well and actually we are quite pleased Julie can chime back in, but we are quite pleased with the traffic, both in-mall and off-mall, and the off-mall sales performance exceeds the in-mall, but the traffics are actually quite good. Julie, did you want to add anything about in-mall… Julie Rosen: No. I think that you have absolutely answered that question. We do have opportunities with new stores as they continue to drive a great return for us. Dana Telsey: Thank you. Great. Heather Hollander: Thank you. Next question please. Operator: Next question is from Matthew Boss with JPMorgan. Your line is open. Matthew Boss: So, Gina, could you speak to categories of relative improvement that you saw throughout the second quarter? And then maybe as you just assess the performance of some of the new category launches and early feedback, maybe relative to the normalization curve that you spoke to around candles and soaps and sanitizers, just trying to put together or maybe bridge the path forward. Any way to think about a time line to return to low-to-mid single-digit same-store sales and the multiyear long-term target? Gina Boswell: Sure. We can talk to normalization as well. Julie, you might want to start with the home fragrance and soap… Julie Rosen: I actually, why don’t I talk to you about category performance relative to overall performance, just to give you a gauge of what’s happening in our business and then talk to you about how we are thinking about the back half. So body care was our top performing category this quarter and with positive sales propelled by Fine Fragrance Mist Travel and double-digit growth in the men’s business. I think the exciting thing about Fine Fragrance Mist is we just came out of Mother’s Day and that is what we hope to sell during Mother’s Day. Our frag — our home fragrance performed below the shop with declines driven by pressure in candles as was expected. We know this is an industry-wide trend as the category continues to normalize post-pandemic. Wallflowers performed above the shop and better than handles, because we are seeing people fragrance their homes in different ways. I do want to mention we are still the market leader in this category and we continue to gain unit share in — versus mass, even as the category experiences broader pressure. And then from a soaps and sanitizers perspective, just tearing those apart, I just want you to know that soaps performed in line with shop. We completed our rollout, as I said, of our new formulations, as well as our new foaming refill — foaming hand soap refills. It was sanitizers that performs well below shop as that category continues to normalize and this is a broader industry issue and we continue to gain unit share versus mass in both soaps and sanitizers. So our back half is really assuming similar trends and we are not really speaking to 2024 right now, no. Gina Boswell: Yeah. I was — Matt, thank you for the question. I was only going to say that we are not speaking to 2024. We did see normalization we have based on continued normalization into the back half of the year and as well as the macro pressures, too. Our intent and our strategies that we undertake are absolutely building the capabilities to build above industry growth going forward. We are pleased with gaining unit share in the categories that we have as they decline, and quite frankly, we are leaning into some of the pandemic trends that we believe will endure, right? So there’s areas like wellness and healthcare. We can have categories contract, but we can take our fair share or more and then hang on to the ones that sort of we can grow further from there. And given our track record, I feel comfortable that we will continue to do that, gaining market share and building the capabilities for future growth. So that when our categories normalize and our macroeconomic backdrop improves, we will have the customer that are frequent, as you know, they come in, they replenish and that’s why from a personal perspective, I think, unit share is a wonderful way to measure our performing. Matthew Boss: Helpful color. Best of luck. Gina Boswell: Thank you. Julie Rosen: Thank you. Heather Hollander: Thanks, Matt. Next question please. Operator: Yes. The next question is from Lorraine Hutchinson with Bank of America. Your line is open. Lorraine Hutchinson: Thank you. Good morning. The new guidance implies a nice year-over-year improvement in the fourth quarter gross margin. Can you talk about your expectations for the promotional environment over holiday and also the sustainability of these gains into next year? Thank you. Julie Rosen: So — hi, Lorraine. It’s Julie. From a promotional, sorry, from a promotional perspective, we are actually looking at promotions being in line with last year. As you know and have seen, we are incredibly, incredibly agile in our promos. So when we need to add something and we do and when we need to pull something out, we do. So we see it actually in line. Eva Boratto: Lorraine, this is Eva. I will add a little more color on the back half of the year trends and sequentially Q3, Q4, how we are looking at things. So as you look at the back half of the year, as you mentioned, we are seeing margin improvement and that’s coming from a few places. One, our Q3 and Q4 merch margin both quarters we expect to improve 100 basis points versus LY due to our continued efforts around supply, as well as price. We are also getting a benefit as our B&O deleverage improves, particularly in Q4, it’s a greater impact in Q4, obviously, we get the ramp of the sales line, but also the ramp of our new customer fulfillment center as we — as that ramps through the period. Finally, I will say our SG&A deleverage improves in the back half and sequentially Q3 to Q4, again, a sales increase, greater impact from our cost optimization and Q3 has cost — elevated costs related to staffing in the seasonality of our business that we experience each year. So hopefully, that provides you some additional color there. And in terms of durability, while we are not commenting to 2024 here today, right? From our cost initiatives, we continue to target $200 million of annual cost savings and we will continue to strive to achieve more. We are focused on our margins, reducing cost, but also driving the topline. Lorraine Hutchinson: Thank you. Heather Hollander: Thanks, Lorraine. We are ready for the next question please. Operator: Next question is from Adrienne Yih with Barclays. Your line is open. Adrienne Yih: Great and congratulations on the progress. It’s very nice to see the merch margins. So I guess I will start there with the merch margin. First time it’s up in nine quarters. So can you talk about, Eva, I think, this is for you. Can you talk about that merchandise margin relative to pre-pandemic? And then Gina, if you see the new packaging and the elevation in Julie as well. Can you talk about sort of how you think about weaning the business off of some of these promos that kind of come out semiannual, et cetera, as you make your way toward kind of a more elevated product in particular categories and how you think about price — further price appreciation, price taking in that higher elevated category? Thank you very much. Julie Rosen: Yeah. So I will start, Adrienne, with the merch margins since pre-pandemic. It is still downside slightly from pre-pandemic given the inflation that we have experienced over the last couple of years. Gina Boswell: Yeah. And your question around when can we expect, I mean, I think, everybody is clear on our strategies around how we elevate the brand and the product and the way we have been, and Julie explained well, in terms of what we do with semiannual sales, right, to sort of have the price is sort of adjust and so that we can eke out the margin that we had. I think from a longer term point of view and it’s not so long-term, because we are building those capabilities as we speak is, how do we move from broad-based promotions into more personalized and that has been something that we are now doing, because we have successfully completed the vast majority of our separation from Victoria’s Secret. So with that in the rearview mirror, we have been putting tests in place, and so as an example, we introduced some personalized recommendations to our website and our mobile app and it was a small initial test, but we see the conversion rates, people engaging with personalized content to a greater degree and that is the toolkit really to start targeting our promotions more effectively driving efficiency there and we will start to see those for sure in the quarters that follow, but we are testing that right now. And beyond that, the way we read, react, respond as it relates to where the customer is that is really a strength of this organization. So wherever we can get average unit retails without impacting. We basically have an analytical approach to drive elasticities like I have never seen at very real-time dynamics here. So I think when we have both testing, as well as week-to-week where is everybody at, we can drive the merch margin. Julie Rosen: Yeah. Just one final point on that is just promos will still be a traffic driver for our business. But I do believe, as Gina has said, by sharpening our approach with the right technology in place, we are going to really leverage that data and analytics deliver that more personalized targeted messages to our customer and what the hope is and what we know will happen is that we will increase trips, spend and engagement, while reducing our reliance on those broad-based promotions. Adrienne Yih: Fantastic. Great to see the progress. Gina Boswell: Thank you. Heather Hollander: Thank you. And Operator, we have time for one more question, please. Operator: Okay. The last question is from Olivia Tong with Raymond James. Your line is open. Olivia Tong: Great. Thanks and good morning. I want to ask you two questions. First, about trends exiting the quarter, your view in terms of back-to-school. You mentioned in earlier remarks, your expectation to provide AUR in second half. If you could talk about what’s driving that given that it had improved in Q2 and if that maybe factoring loan repayment is a piece of that. And then I also wanted to touch on your approach reacted to the core in terms of the new categories, whether it’s bringing in any new customers or expanding the share of wallet existing just where that consumer is coming from? Thanks so much. Eva Boratto: Sure. Hi, Olivia. I will — this is Eva. I will start with trends exiting the quarter. Sitting here today, as we look at our August performance for the first half of the month, it’s right in line with the expectations that we provided today. If your question was more asking about second quarter, our second quarter sales normalizing for timing of events that we have performed right in line with our expectations and there were no trends to really — there were no trends month-to-month to call out. Julie Rosen: As far as customers go, Olivia, we do know from the data that men’s is bringing in new customers and more customers who identify as mail and now customers also you younger, we know that from our data. The other thing we are starting to see that these are early stages is that our lift product is also engaging a younger customer. So as we roll out hair and laundry and lip and continue to test, optimize and work with men’s, we will grab the data and continue to let you know how we are tracking. Gina Boswell: Yeah. And I was simply going to say you mentioned the magic word for me, which is it is really about the core and more and so — and as much as we talk about how the customer develops around reaction to lift or men’s and younger and more diverse. There are certainly opportunities and our customer segmentation work is indicating that. The core categories are also supportive of our customer expansion and we think there’s equal amounts there that we can believe, so. Eva Boratto: And you had one additional question for me about flat AURs in the guidance. You are correct, we are assuming flat AURs in the back half of the year and we will continue to test for opportunities to increase the AUR and expand margin through data driven initiatives, targeted marketing efforts, et cetera. But flat is our guidance assumption. Olivia Tong: Thank you. Heather Hollander: All right. Thanks, Olivia. We want to thank you for joining today’s call. A replay will be available for 90 days on our website. Thank you for your interest in Bats & Body Works. Have a great day. Operator: This concludes today’s call. Thank you for your participation. You may disconnect at this time. Follow Bath & Body Works Inc. (NYSE:BBWI) Follow Bath & Body Works Inc. (NYSE:BBWI) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

How NewsGuard Became The Establishment Guard Against Independent Media Authored by Petr Svab via The Epoch Times, Company makes a profit - including from US government funds - through a business model that leads to defunding and censoring of independent media... As difficult as it is to run an independent media outlet, there’s a company making it substantially harder. Its name is NewsGuard. The company claims to rate online content, including from media outlets, for trustworthiness, but a closer look shows it does much more than that—its business model produces censorious pressure on news organizations. An investigation by The Epoch Times has revealed troubling questions regarding the quality of and the agenda behind NewsGuard's offerings. Founded in 2018, NewsGuard dispatches its “analysts” to prepare reviews of online content creators and to issue ratings “to help readers have more context for the news they read online.” The ratings display as small badges with scores next to search results. That, however, represents only a small part of the picture. The bigger picture shows that NewsGuard's most potent function stems from its relationships with advertising agencies, which have steered their clients to cut off advertising dollars for content creators disfavored by the company's "analyst" reviews. As it so happens, corporate, establishment-friendly media tend to receive high scores while independent media skeptical of the establishment tend to receive low scores, even if they adhere to high journalistic standards. The Epoch Times emailed NewsGuard questions regarding its products, activities, personnel, and funding, but received no response. Subjective Criteria NewsGuard presents itself as objective and nonpartisan. Its ratings, the company says, measure media quality on nine criteria, including transparency of authorship and ownership and adherence to standard editorial practice, such as issuing corrections and labeling opinion pieces. In practice, however, most of the score boils down to whether the media present content that, in NewsGuard’s opinion, is truthful. The first criterion specifically looks at whether the target repeatedly publishes false claims. Another examines whether it publishes news “responsibly.” But failing the first one means failing the second one, NewsGuard explains on its website. Yet another criterion is whether the target uses accurate headlines. Again, if the headline says something NewsGuard considers to be untrue, that counts as a failure. Another criterion looks for a policy of regularly correcting errors—or what NewsGuard considers to be errors. Together, these four criteria add up to more than 60 points of the 100-point score. Even if NewsGuard can’t find anything to dispute, it can still dock points if the target doesn’t sufficiently represent opinions the company would like to see. Such content providers “egregiously cherry pick facts or stories to advance opinions,” it argues. Meanwhile, at least 60 points are needed for NewsGuard to issue its “credible” rating. This methodology becomes particularly problematic when NewsGuard itself is wrong on the facts. For example, during the height of the COVID-19 pandemic, the company considered false the notion that the SARS-CoV-2 virus was leaked from a lab in Wuhan, China. If a news outlet with a perfect score responsibly reported on the extensive circumstantial evidence indicating a lab leak, it ran the risk of NewsGuard decimating its score and falsely labelling it an “unreliable” source that “severely violates basic journalistic standards.” The COVID-19 origins issue was a rare case in which NewsGuard eventually issued a correction, though it only went as far as saying that the lab leak hypothesis couldn’t be completely ruled out. Workers inside the P4 laboratory in Wuhan, Hubei province, China, on Feb. 23, 2017. (Johannes Eisele/AFP via Getty Images) While fact-checking others, NewsGuard apparently has its own opinions to advance. There have been many examples where media outlets found themselves in NewsGuard’s crosshairs for publishing views that question establishment orthodoxies on topics such as climate change, vaccine safety, COVID-19 restrictions, the Ukraine war, the World Economic Forum, and others. On these issues, NewsGuard seems to act as a guard of the establishment narrative, demanding that content creators toe the line. “I’ve had interactions with them where it was very obvious that they were anything but objective,” said John Tillman, chairman of the nonprofit Franklin Foundation, which runs newswire service The Center Square. More often than not, outlets poorly rated by NewsGuard tend to be on the right side of the political spectrum. The Media Research Center (MRC), a conservative media watchdog, reported that NewsGuard gave left-leaning outlets scores 22 points higher on average than right-leaning outlets. The 2021 report was based on a review of NewsGuard ratings for more than 50 major news outlets sorted for left or right bias by AllSides, a company that measures media bias based on blind studies of content and editorial reviews. Newsguard criticized the MRC report, saying it cherrypicked the outlets for the study and that the sample was too small. MRC retorted that the list included all news outlets reviewed by AllSides. When MRC repeated the study in late 2022, the disparity had increased to 25 points. Journalists and media crew members during election night event in New York on Nov. 8, 2016. (Robyn Beck/AFP via Getty Images) “Unlike the major fact-checking organizations, NewsGuard at least lives up to its name in that it’s a guard for the left’s news,” Matt Palumbo, researcher for conservative podcast “The Dan Bongino Show,” writes in his upcoming book “Fact-Checking the Fact-Checkers.” In November 2019, NewsGuard contacted the website RealClearInvestigations (RCI) and questioned its use of anonymous sources to reveal the alleged identity of the whistleblower who initiated the impeachment of President Donald Trump. RCI responded by asking NewsGuard if it was reaching out to The New York Times, The Washington Post, CNN, NBC, or BuzzFeed to question their use of anonymous sources. NewsGuard reportedly didn’t respond. When conservative education platform PragerU was slapped with a red label by NewsGuard, PragerU CEO Marissa Streit attempted to rectify the situation in good faith, she said. “We really believed it was a mistake,” she told PragerU founder Dennis Prager during an interview on his podcast. In response, she received “basically a list of demands,” she said. NewsGuard wanted PragerU to stop criticizing the COVID-19 lockdown policies, stop questioning the safety of the COVID-19 vaccines, stop talking about any COVID-19 treatments not endorsed by the government, stop questioning the seriousness of climate change—and the list went on. “Part of their demands were basically dictating to us what kind of content we’re allowed and not allowed to share,” she said. NewsGuard also demanded a list of PragerU’s donors, which the nonprofit refused to share out of concern that the donors would be targeted. “They want to smear these people. That’s the only reason they want their names,” Mr. Prager said. In PragerU founder Dennis Prager's view, NewsGuard lacks respect for the pursuit of truth through differences in opinion. (Samira Bouaou/The Epoch Times) Ms. Streit did try to make changes to satisfy some of NewsGuard’s demands and to see how it would respond. “The goalposts kept changing. Every time we would make a change, they would want more changes,” she said. When PragerU commentator Amala Ekpunobi did a podcast questioning the motives of the World Economic Forum, NewsGuard demanded that the video be taken down, Ms. Streit said. In Mr. Prager’s view, NewsGuard lacks respect for the pursuit of truth through differences in opinion. “I still haven’t noted what did we say that’s misinformation, as opposed to [an opinion on which] honorable people can differ,” he said. The bad rating caused PragerU’s video-hosting provider, JW Player, to abandon it, Ms. Streit said. PragerU has since launched an online petition against NewsGuard. “They are powerful in a very bad, malevolent, malicious, destructive way,” Mr. Prager said. NewsGuard has argued that its process is fair because it reaches out to the rated outlets for comment and includes the comments in the rating writeup. Yet based on PragerU’s experience, it appears this practice may well be a mere formality and whatever arguments the outlets present don’t affect the final rating. Sooner or later, it seems, the targeted outlets simply give up and write off NewsGuard from that point on. Anthony Watts founder and editor of WattsUpWithThat.com and a fellow with the Heartland Institute. (heartland.org) Anthony Watts and Charles Rotter run WattsUpWithThat.com, a blog for content skeptical of catastrophic consequences of climate change. In their view, NewsGuard is not acting in good faith. “They are purposefully focused on destroying the credibility of websites they don’t like,” Mr. Watts, a fellow with the Heartland Institute, told The Epoch Times. Earlier this year, NewsGuard staffer Zack Fishman reached out to Mr. Watts about several articles. One mentioned that the arrest of climate activist Greta Thunberg was “staged.” Mr. Fishman took issue with that, saying it was a real arrest. But Mr. Watts explained that he was talking about the manner in which Ms. Thunberg was arrested. A video circulating online showed that the police officers arresting her were posing for pictures holding her while she was smiling and laughing before they led her away. “It boils down to a disagreement with the reviewer,” Mr. Watts said. “They apply these sort of credentialist straw man games,” Mr. Rotter said. “It’s like, ‘We found this study that contradicts what this person said, therefore you’re wrong.’” But even if what Mr. Fishman found were real errors, it seemed too minor to impeach or call into question the credibility of the entire blog, which NewsGuard did. Newsguard attaches credibility ratings to news outlets and other content creators. (Petr Svab/The Epoch Times) Mr. Fishman brought to Mr. Watts’s attention three or four articles with claims he was able to contradict. But the site has posted tens of thousands of articles. NewsGuard itself suggested its ratings shouldn’t be a reflection of the factuality of a small number of specific pieces of content. “Our ratings do not mean that a site with a poor rating will never get a story right, or that a site with a strong rating will never get a story wrong,” Matt Skibinski, general manager of NewsGuard, told Breitbart. NewsGuard has argued that what it looks at is journalistic criteria—when it points out errors, are they corrected? But Mr. Watts wasn’t refusing to correct errors. He believed those weren’t errors to begin with, but rather issues of legitimate disagreement and opinion. “These people are like robots. It’s very difficult to actually have a discussion with them,” Mr. Rotter said. Establishment Guard According to Mike Benz, former head of the digital desk at the State Department and now head of the Foundation for Freedom Online, NewsGuard is part of a broader censorship industry that emerged over the past six years or so. The industry players aren’t primarily partisan, he noted, but rather pro-establishment. Right-leaning outlets can receive high NewsGuard scores—as long as they follow the establishment’s narratives on specific topics. The industry was born in response to the wave of populism that has swept the West since 2015, starting with Brexit and the election of President Donald Trump and continuing with major populist leaders in other countries, including Marine Le Pen in France and Matteo Salvini in Italy, Mr. Benz explained. President Donald Trump takes the oath of office during his inauguration at the U.S. Capitol in Washington on Jan. 20, 2017. (Drew Angerer/Getty Images) The establishment blamed online media, including social media, for citizens voting the “wrong” people into power, he said. “From the 1940s until the present, there has been this bipartisan conception of foreign policy," he said. "There is this uniparty axis that was being broken apart by the rise of free and unfettered news online that was growing to such popularity that the gatekeepers of national security state-aligned media, such as The New York Times, The Washington Post, and the majors, like CBS, ABC, NBC, were now no longer the dispositive forces on elections around the world, particularly in the U.S. and across the EU. “NewsGuard basically grew out of this soup in 2017 as the national security state and various opportunists on both sides of the political aisle, in particular the neoconservative wing of the GOP and pretty much all of the Democrat Party, except the anti-war left, joined together with various elements of the national security state, including the Pentagon, the State Department, and the intelligence services, to come up with basically a plan to end the popularity and availability of alternative news online.” Mr. Tillman reached a somewhat similar conclusion. “What they’re really trying to do is control information flow, because they don’t like the democratization of information,” he said. NewsGuard’s Advisory Board is littered with pro-establishment figures. Its most notable member is Gen. Michael Hayden, former head of the CIA and the NSA—an “apex predator of the national security state,” as Mr. Benz put it. Mike Benz, executive director of the Foundation For Freedom Online and a former State Department official. (Jack Wang/The Epoch Times) Mr. Hayden’s Twitter account shows blatant, even over-the-top disdain for Trump and his supporters. One tweet he shared likened Trump supporters to the Taliban terrorist group; another likened Trump supporters to Nazis; yet another called for the ouster of prominent Republican lawmakers, including Sen. Ted Cruz (R-Texas), Rep. Matt Gaetz (R-Fla.), and Rep. Marjorie Taylor-Green (R-Ga.). Other NewsGuard advisers include Anders Fogh Rasmussen, former secretary-general of NATO; Arne Duncan, former education secretary under the Obama administration; Don Baer, former Clinton White House spokesman; and Tom Ridge, the first head of the Department of Homeland Security, under President George W. Bush. Last year, NewsGuard was promoted by the World Economic Forum. Its reach extends beyond American borders to Canada, Australia, Europe, and increasingly other parts of the world, with an apparent goal of global, ubiquitous coverage. Its ratings are also utilized by other parts of the censorship industry, such as researchers and operatives, including those funded by the U.S. government, who are developing tools to detect and challenge disfavored views online. Talking about the dangers of misinformation in its 2022 white paper, NewsGuard said that “researchers using NewsGuard’s source reliability data found that anti-establishment networks disseminated content from a large number of NewsGuard Red-rated sites during the German Federal Election in 2021, proliferating anti-vaccination, anti-lockdown, and anti-climate protection content specifically.” NewsGuard was launched in March 2018 and maintains a staff of about 100. (Samira Bouaou/The Epoch Times) Pushed From the Top NewsGuard was launched in March 2018 by Steven Brill, former founder and head of several media organizations including The American Lawyer magazine and Court TV, and Gordon Crovitz, former Dow Jones executive and a former publisher of The Wall Street Journal. The company presents its product as giving more power to its users. “The objective is not to preclude access to any news content—an approach that would conflict with our nation’s free speech principles—but rather to empower readers with additional information on the source and reliability of that content as they consume and/or share it,” read a 2018 release announcing Microsoft's partnership with NewsGuard. NewsGuard landed its partnership with Microsoft before it even launched its product. (Samira Bouaou/The Epoch Times) The company often describes its rating as a “nutritional label”—merely providing the public with useful data. But the opt-in model, where customers have to pay to subscribe and download an app or an internet browser extension, seems to have hit a popularity wall. Its Chrome browser extension has less than 40,000 users, according to Chrome Web Store, and its iOS app sports a less than 3-star rating from fewer than 80 reviews. About half the reviews are 1-star from people complaining about the app's functionality and bias. Yet NewsGuard maintains a staff of about 100 and, according to its website, is hiring continually. It’s “analysts” get paid $70,000 to $80,000 annually, according to Glassdoor. Based on these financial figures, individual user subscriptions would appear to only cover a portion of the company’s running expenses. Mr. Crovitz acknowledged in a 2021 op-ed that while people can subscribe to NewsGuard on their own, they “more commonly get access through companies and other entities that license the ratings and labels, and provide them to people in their network.” That indeed appears to be its business model; more than catering to the public, the company seeks corporate and government clients. By all accounts, it’s managed quite well on that front. NewsGuard reached profitability in 2021 “thanks to licensing deals with advertisers and other firms that use its ratings,” CNN Business reported. The company landed its partnership with Microsoft by August 2018—before it even launched its product. It’s not clear how much the deal is worth. Microsoft made the NewsGuard plug-in available for free to all users of its web browser, Edge. The mobile version of the browser even included the ratings functionality by default, though it was left up to users to turn it on. It appears that the mobile version was scrapped sometime in 2021. In addition, Microsoft also sponsors NewsGuard licensing for libraries. “We’ve been able to get our news reliability ratings tool into more than 800 public libraries, where 7 million public library patrons use NewsGuard when they go to the library for their broadband access. And we’re already being used in dozens of public schools and universities, as well as independent schools,” Mr. Brill said in a January 2022 press release. The release announced NewsGuard’s partnership with the American Federation of Teachers (AFT), the second-largest U.S. teachers union, which licensed NewsGuard subscriptions for all of its 1.7 million members. The AFT is a major political lobby for various progressive causes and a large source of campaign funding for the Democratic Party. In 2021, NewsGuard received a nearly $750,000 Pentagon contract for a project called “Misinformation Fingerprints.” NewsGuard also applied for funding from DARPA, the Pentagon’s military technology investment arm, according to information on the LinkedIn profile of NewsGuard’s former project manager. It’s not clear whether the funding materialized. House Speaker Kevin McCarthy (R-Calif.) said in April that lawmakers will examine NewsGuard, including its Pentagon funding. (Joshua Roberts/Reuters) In addition, the company at its launch secured $6 million from about 20 investors, FinSMEs reported. According to its website, its top investor is Eyk van Otterloo, co-founder of a $1.3 billion investment fund and former owner of Chemonics International, a development consultancy that has derived almost all its revenue from U.S. foreign aid grants and contracts—worth more than $14 billion—since 2008. Government monies to Chemonics increased from about $400 million in 2015 to more than $900 million in 2016, $1.6 billion in 2017, and peaking above $2.2 billion in 2022, according to USASpending.gov. Chemonics employs consultants to travel the world to set up development programs for “diversity, equity, and inclusion," fighting climate change, managing “sustainable development,” and “strengthening systems of democratic governance to ensure accountability, justice, and inclusion.” Populist political movements commonly propose reducing or even abolishing foreign aid, which, given the company's historic revenue sources, would likely devastate Chemonics. The company transformed to employee ownership in 2011, but Mr. Van Otterloo remained on its board until 2019. It’s not clear how much Mr. Van Otterloo invested in NewsGuard. ‘Political Shakedown’ NewsGuard’s top corporate investor is Publicis Groupe, the third-largest ad agency in the world. Publicis’s involvement appears central to NewsGuard’s modus operandi. In fact, Publicis Chief Technical Officer Steve King sits on NewsGuard’s board of directors. Corporation giants including Disney, Verizon, Bank of America, and Pfizer are among Publicis's clients. (Charles Platiau/Reuters) Publicis has counted among its clients giant corporations including Disney, Verizon, Bank of America, and Pfizer. Moreover, a major part of the retail industry uses its products to manage advertising. “Four out of every 10 dollars in retail goes through platforms we manage,” said Nigel Vaz, chief executive of Publicis Sapient, the company’s “digital transformation” subsidiary, according to Adage. NewsGuard has also cultivated affiliations, partnerships, or licensing agreements with other top advertising houses in the world, including Omnicom Group and Interpublic Group (specifically its digital arm IPG Mediabrands). By enmeshing itself in the advertising industry, NewsGuard has positioned itself to steer advertising spending—a major source of income for the media industry. Corporations commonly hire ad agencies to place their ads. NewsGuard, in turn, through its rating system, tells the agencies which media outlets are “safe” and which are “unsafe” to advertise on. This leverage weighs heavily on smaller, independent outlets that often depend on “programmatic” or automated advertising. They offer ad space on platforms that sell it in bulk. Ad agencies or individual advertisers then pick which ad spaces to buy based on audience data. Usually, the process is automated. And when ad agencies insert the NewsGuard filter in the middle of the selection process, small, independent outlets disfavored by NewsGuard’s ratings won’t sell their space. Large, corporate media, on the other hand, can be virtually immune to poor NewsGuard scores, even if they receive them. They are themselves immensely valuable clients to the ad agencies and can negotiate with them directly. MSNBC, for example, had its Newsguard score slashed to 52 last year (it stood at 57 as of July 25). That would land the Comcast-owned cable network in the “misinformation” bucket. But there’s no sign that it has been blacklisted among advertisers. Its ad revenue dropped more than 8 percent in 2022, but that seemed to have more to do with its ratings cratering by 21 percent. Corporate media such as MSNBC can be virtually immune to poor NewsGuard scores. Even if they receive them, there's no sign that they have been blacklisted among advertisers. (Shaun Heasley/Getty Images) Mr. Brill and Mr. Crovitz suggested that they didn’t start NewsGuard with the idea of partnering with advertisers, according to a January 2019 New York Times report. “For them, it’s the whole problem of fake news being an issue for ‘brand safety,’” Mr. Brill told the paper. “I hadn’t even heard that term until we looked out for investors.” But NewsGuard has been aggressively pitching its advertiser product, BrandGuard, to the point of issuing reports that shame “top brands” for advertising on supposed “misinformation websites.” Meanwhile, services like Newsguard are pushed by the European Commission, the executive body of the European Union, through its Code of Practice on Disinformation, a voluntary set of guidelines for advertisers and tech platforms meant to reduce "disinformation" online. Last year, the code was updated with rules for companies “participating in ad placements” to “commit to defund the dissemination of Disinformation” by improving “the policies and systems which determine the eligibility of content to be monetised, the controls for monetisation and ad placement, and the data to report on the accuracy and effectiveness of controls and services around ad placements.” A week later, the Global Alliance for Responsible Media (GARM), an initiative launched by the giant industry group World Federation of Advertisers, added “misinformation” to the list of online harmful content that shouldn't be advertised on. Shortly after, Newsguard issued a release advertising BrandGuard as the most suitable way to ensure compliance with the European Commission and GARM rules, offering companies several months of free compliance consultations. “These new standards are only the beginning,” Mr. Brill said in the release. “As policymakers continue to learn of the extent and impact of the monetization of misinformation online, the enactment of further regulations on this topic is all but inevitable.” NewsGuard’s role in having advertisers defund outlets it disfavors “gives away the actual game,” Mr. Tillman said. “If all they wanted was transparency, they would simply do their rating, put it out there, and let the public make their own decision whether it likes that rating or not. But that’s not good enough," he said. "They want to demonetize people. And that tells you they have an agenda besides judging the news by their own standards.” NewsGuard’s advertiser defunding efforts have caught at least some negative attention from the government. In March, Mr. Gaetz called for an investigation into the company. In April, House Speaker Kevin McCarthy (R-Calif.) told Breitbart that lawmakers will examine the company, including its Pentagon funding. NewsGuard is funded by liberal groups who are trying to discredit conservative information, House Speaker Kevin McCarthy (R-Calif.) said in April. (Madalina Vasiliu/The Epoch Times) “This is a liberal organization, funded by liberal groups trying to do this— trying to discredit conservative information,” he said. “The one thing I firmly believe in, the freedom of the press. You have a right to deliver the news and people have a right to decide one way or another. But we cannot allow them to continue doing what they’re doing and you’re going to see within hearings we’re going to bring light to this.” A few months later, Reps. Virginia Foxx (R-N.C.), Burgess Owens (R-Utah), and Jim Banks (R-Ind.) questioned NewsGuard’s AFT partnership, in a letter. At the state level, Florida Chief Financial Officer Jimmy Patronis sent a letter to NewsGuard in March, threatening to “use the full force” of his office “to shed light on the organization.” “My concern is, we have a third-party group that shows up and says, ‘We’re going to start grading you,’ and issues demands on the way you present content. I see that as an attack on Florida businesses,” he told The Epoch Times. He called it “a political shakedown.” “They’re telegraphing, ‘You need to act more like The New York Times or NPR, and if you’re not, then you’ll receive a poor grade and then your advertising will dry up,’” he said, later adding that it’s “literally trying to discredit somebody through a scoring system in order to hurt them financially.” On the flipside, NewsGuard's issuing of perfect scores to legacy outlets creates false credibility, he suggested. “Honestly, I think the mainstream media’s record has not been good,” Mr. Patronis said, pointing to a number of instances where such media, according to critics, continually misinformed the public on major issues, including facts regarding the COVID-19 pandemic and the emergence of Hunter Biden’s laptop before the 2020 election. “I just don’t think you can rely on The New York Times or the NPRs of the world for our most important news information,” he said. If you don’t act like The New York Times, you’ll receive a low NewsGuard score and then your advertising will dry up, Florida Chief Financial Officer Jimmy Patronis said in March. (Samira Bouaou/Epoch Times) Mr. Patronis suspects that NewsGuard serves to shore up ad revenue for these legacy media. “It’s a way to handcuff businesses to certain media outlets that probably have lost their viewership or lost their following,” he said. Empty Credentials NewsGuard claims its reviews are conducted by “trained journalists.” That’s not always the case, or may be a long stretch, based on information its current and former workers shared on online professional platforms, such as LinkedIn. It appears many of its reviews have been done by interns with no background in professional journalism. A typical review, it seems, would be conducted by a young journalism graduate with limited work experience. Some only list previous jobs reporting on lifestyle topics, such as food and art. Others boast as their experience producing progressive social commentary pieces, such as “Deconstructing TikTok.” Mr. Fishman got his master's degree in journalism at Northwestern University in 2020 and then spent about a year at Fastinform, a small New York media startup, before joining NewsGuard. He’s since progressed to the role of “senior analyst.” NewsGuard has about a dozen “senior” and “staff analysts” and about two dozen part-time “contributing analysts.” Their job is to churn out up to two media outlet reviews a day. Thousands of such writeups are then funneled to one of about 15 editors for an additional check, and Mr. Brill and Mr. Crovitz allegedly take a look, too. Given that NewsGuard claims to continually rate more than 8,000 content producers, it’s not clear how such reviews could faithfully gauge the quality of entire media organizations, including the accuracy of their reporting on complex, controversial topics. As for the political views of the staff members, they lean progressive. The online footprint of a typical worker demonstrates a commitment to progressive causes, from climate change and social justice to preferred pronouns in social media bios. Some seem to have used their NewsGuard stint as a springboard to employment at progressive and pro-establishment outlets, including NPR, The Atlantic, HuffPost, and CNN. “I knew it wasn’t my end goal, but it was something that would help me get to New York,” Cambria Roth said about her “fact-checker” gig at NewsGuard, to Nevada Today. “I knew I wanted to do audience engagement, and I wanted to find a role that was more focused on that eventually.” During her six months at NewsGuard in 2019, she “created an editorial process for factchecking,” says her LinkedIn profile. In 2020, she landed a job at HuffPost as an audience editor, mainly browsing social media for article topics. She also writes on occasion, including a recent piece titled “Taylor Swift Is Apparently Dating An Alleged Racist—And Is Now Using A Black Woman To Cover Her [Expletive].” NewsGuard was launched in March 2018 by Steven Brill (L), former founder and head of several media organizations, and Gordon Crovitz (R), former Dow Jones executive and a former publisher of The Wall Street Journal. (D Dipasupil/Getty Images for TIME, Stephen Chernin/Getty Images) Ironic Founders Mr. Brill and Mr. Crovitz both spent decades in the news business and, given their past comments and endeavors, their running NewsGuard could be seen as ironic. Mr. Crovitz spent much of his career at Dow Jones & Co., which runs The Wall Street Journal and several other publications. He made it to vice president in 1998, and he was named the Journal’s publisher in 2006. But he left the following year when the company was taken over by Rupert Murdoch’s News Corp. Mr. Murdoch’s takeover was controversial. Some staff left the Journal over concerns that the new owner would influence the paper’s editorial line. Such concerns appear just as valid today. The Washington Post is now owned by Amazon’s Jeff Bezos; CNN is owned by Warner Bros. Discovery; NBC is owned by Comcast; and NPR is partly funded by the U.S. government. Yet the NewsGuard of today doesn’t even attempt to question the ownership status of legacy media. It would only go as far as noting state ownership or funding of foreign outlets, like Russia Today or those run by the Chinese Communist Party. Mr. Brill, meanwhile, knows intimately how difficult it is to start a media company from scratch. In the 1970s and 1980s, he founded The American Lawyer magazine and Court TV. He exited both companies in 1997 after he couldn’t convince Time Warner to sell him its share of the companies. In 1998, he founded a media watchdog called Brill’s Content. His focus at the time seemed quite different from NewsGuard’s. It was the corporate establishment media he was concerned about back then, warning that corporations that own media outlets could affect their coverage. He was affected by this personally at Court TV when Time Warner pressured him to spike a profile of a Federal Trade Commission official because it could affect the company’s pending merger. He complained about media’s lack of accountability, promising, “We can make it actually cost something for the NBCs of the world to mess up.” He lauded the arrival of online media as players capable of getting around the legacy gatekeepers. “The best thing about, not only the Web, but about the advances in the technology of printing that make it cheaper to design good stuff, is that the barriers to entry for alternative media aren’t as bad as they used to be,” he told Mother Jones back then. He also warned about government influence on media. “The only thing worse than lack of accountability is making the press accountable to the government,” he said. But Brill’s Content closed its doors after three years. The NewsGuard office in New York City on July 26, 2023. (Samira Bouaou/The Epoch Times) Today, NewsGuard hands out perfect scores to corporate outlets but penalizes independent media for not toeing official narratives closely enough. In 2009, Mr. Brill partnered with Mr. Crovitz to found a venture that was to help newspapers set up paywalls. They sold the business in 2011 for about $35 million. Mr. Brill then went on to author several nonfiction books, most recently in 2018 “Tailspin: The People and Forces Behind America’s Fifty-Year Fall—and Those Fighting to Reverse It.” The book details a litany of American ills, from poorly maintained infrastructure to high health care bills, and it places the blame largely on lawyers and bankers, casting the government as a victim that has been tricked and co-opted. His perhaps greatest claim to literary fame stemmed from his 2015 book “America’s Bitter Pill: Money, Politics, Back-Room Deals, and the Fight to Fix Our Broken Healthcare System.” The book shed light on the questionable practices in the health care and pharmaceutical industries. Ironically, today’s NewsGuard has relentlessly pursued critics of Big Pharma who have pointed out flaws in the COVID-19 vaccines. Mr. Brill now sits on his board with a top executive of Publicis, the same company that’s being sued by the state of Massachusetts for helping Purdue Pharma boost sales of opioid drugs that have been blamed for an overdose epidemic that has killed more than half a million Americans. Publicis collected more than $50 million from Purdue before the pharma giant was sued into bankruptcy in 2019. Mr. Brill seems to have different concerns now. In a CNBC interview shortly before the 2020 presidential election, he shared his seasoned journalistic view of the Hunter Biden laptop story. “My personal opinion is, there’s a high likelihood this story is a hoax, maybe even a hoax perpetrated by the Russians again,” he said. He then criticized social media for blocking the story, arguing that they don’t have the relevant expertise to do so. Instead, he suggested, social media platforms should partner with NewsGuard—let his company sort out what is true and what is not. Tyler Durden Wed, 08/16/2023 - 17:00.....»»

Open Lending Corporation (NASDAQ:LPRO) Q2 2023 Earnings Call Transcript August 8, 2023 Open Lending Corporation reports earnings inline with expectations. Reported EPS is $0.09 EPS, expectations were $0.09. Operator: Good afternoon, and welcome to Open Lending’s Second Quarter 2023 Earnings Conference Call. As a reminder, today’s conference call is being recorded. On the call today […] Open Lending Corporation (NASDAQ:LPRO) Q2 2023 Earnings Call Transcript August 8, 2023 Open Lending Corporation reports earnings inline with expectations. Reported EPS is $0.09 EPS, expectations were $0.09. Operator: Good afternoon, and welcome to Open Lending’s Second Quarter 2023 Earnings Conference Call. As a reminder, today’s conference call is being recorded. On the call today are Keith Jezek, CEO; and Chuck Jehl, CFO. Earlier today, the company posted its second quarter 2023 earnings release and supplemental slides to its Investor Relations website. In the release, you will find the reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Before we begin, I’d like to remind you that this call may contain estimated and other forward-looking statements that represent the company’s view as of today, August 8, 2023, Open Lending disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to today’s earnings release and our filings with the SEC for more information concerning factors that could cause actual results to differ from those expressed or implied with such statements. And now I’ll pass the call over to Mr. Keith Jezek. Please, go ahead. Keith Jezek: Well, thank you, operator, and good afternoon, everyone. Thank you for joining us today for Open Lending’s second quarter 2023 earnings conference call. I am pleased to announce we exceeded the high end of our Q2 guidance range for all metrics certified loans, revenue and adjusted EBITDA. During the quarter, we certified 34,354 loans, generated total revenue of $38.2 million, and adjusted EBITDA of $20.7 million. I would like to thank all of our team members at Open Lending who executed and delivered these positive results. Despite challenging sector and macroeconomic conditions. As we know, the auto industry continues to navigate through multiple challenges. As of June, there were 1.9 million new vehicles on dealer lots or in transit, representing a 75% increase compared to a year ago. While this is a significant year-over-year increase, these inventory levels are still well below pre-pandemic levels of approximately 4 million units. The improved availability of supply led to an increase in the new vehicle SAR to 15.7 million units at the end of July, up 5% sequentially since March 2023 and 15% higher than a year ago. Despite this increase, total new sales remain approximately 10% lower than pre-pandemic levels of approximately 17 million units. This improvement and new star was bolstered by average transaction prices in July, declining 0.7% versus June of 2023. In addition, OEMs are continuing to increase incentives, which reached the highest levels since late 2021. We are encouraged by these metrics and progress as they are an indication of a return to pre-pandemic conditions which are more advantageous to the consumer. Now, let’s turn to used auto. Used vehicle star ended June at 36.7 million units, up 7% sequentially since March 2023 and almost 3% higher than a year ago. However, this result remains 9% lower than pre pandemic levels of approximately 40 million units. As the industry continues to deal with the supply constrained environment, retail prices have declined only 3% to an average used vehicle price of approximately $27,000. This is still close to 40% higher than pre pandemic levels, creating continued affordability challenges for the near and non-prime consumer. Understandably, consumers are holding onto their vehicles longer than historical periods. With the average age of a passenger car on the road now exceeding 13.5 years. As cars age, the typical consumer is at risk for major repairs versus just routine maintenance costs. Accordingly, we believe there is a significant pent-up demand within the used auto market, creating a great opportunity for which we will be well positioned as the sector and macroeconomic conditions improve. So shifting to affordability, it remains the most significant challenge for the near and non-prime consumer and ultimately our business. Cox Moody’s Vehicle Affordability Index reported the median weeks of income needed to purchase a new vehicle in June decreased to 43 weeks, down slightly from 44 weeks in December. Even though this is moving in the right direction, it is still much higher than the historical average of approximately 35 weeks. While auto prices have slightly decreased, financing costs have not. As borrowing costs remain elevated due to the continued tightening actions by the Federal Reserve. For example, the average used auto loan interest rate increased to approximately 13.5%, while the average new auto loan interest rate exceeded 9% for the first time in over a decade. As we have seen in prior cycles, as supply returns, vehicle prices are expected to moderate and interest rates are likely to decline, which should lead to improved affordability for the near and non-prime consumer. Now, let’s turn to our credit union customers who, as you will recall, became the market leader of all auto loan originators in Q3 2022, reaching 28.4%. Market share are, however, over the past three quarters they have shrunk their market share due to continued liquidity challenges. We have seen credit unions tighten their underwriting standards in this environment and most recently, they turned their focus to prime and super prime borrowers. In fact, Fed data reflects auto loan originations in the 620 to 719 FICO band decreased 21% from Q4 2022 to Q1 2023. In this environment, all lenders are being extra cautious against going too far down the credit spectrum. As a result, auto loan rejection rates hit all-time highs in June, with the greatest increase occurring among near and non-prime borrowers, which we serve As market conditions improve, we expect credit unions to adjust underwriting standards in return to serving all of their members. As a company, we remain focused on positioning ourselves for the future by making measured and controlled investments with demonstrable ROI. Among these, we continue to refine and optimize our sales channels, enhance our technology offering, and attract and retain top tier talent. First, on the sales front, we added 13 new accounts in Q2 2023 as compared to 18 new accounts in Q2 2022. Importantly, we expect to generate more certified loans from the 13 new accounts added in Q2 2023 than from the 18 accounts that were added in Q2 of 2022. This is a result of our continued focus on adding mostly larger accounts. The new accounts added during the quarter represent a doubling in the average target share to us, per financial institution signed as compared to the prior period. These wins speak to the enduring and ever growing value that Open Lending brings to all players in the automotive retail ecosystem. Additionally, we continue to enroll financial institutions who operate loan origination systems for which we already have existing successful technology integrations, resulting an improved meantime to revenue by over 20% on several of our recent implementations. This significant improvement in operational efficiency will serve us well as conditions improve. Now, turning to marketing. We released our second proprietary research report loans within reach lending enablement benchmark. This fresh take on the automotive lending industry gathers insights from our group of U.S. based auto lenders to determine the role lending enablement solutions play in increasing ROA, reducing risk exposure, and improving decisioning speed. In this report, we reveal how using alternate data sources and AI driven analytics help lenders strategically cater to near and non-prime borrowers, a crucial component of a balanced portfolio. We found that lending enablement solutions provide a clear performance advantage to financial institutions surrounding speed, growth, and personalization. The release of the report garnered tremendous earned media, including a live Bloomberg Radio segment, coverage from Fintech, Nexus News, Global Fintech Series, Used Car News, and Automotive Technology. This earned media and prudent investments in marketing continue to lead to a growth in marketing qualified leads. During this time, we’re also making enhancements in our technology. A few highlights first, we completed our migration to the Azure cloud, removing our dependency on legacy data center colocations and improving our already fast decisioning response time by 25%. This important accomplishment provides enhanced stability, better performance and reduced costs. We’ve already seen meaningful savings on compute and storage costs alone, and we now have scalable resources immediately available to provide services within the application without manual intervention. Most importantly, this allows us to modernize our platform architecture and automate the delivery of code more safely and securely with less development overhead. Further, our application data is more accessible to our machine learning platforms, which empowers us to streamline modeling used in decisioning and pricing auto loans. In addition to completing our cloud migration, we are making enhancements within lenders protection to further support our lenders evolving needs. For example, we incorporated complex logic for decisioning, which cannot be easily changed by our lender customers within their own loan origination systems, thereby enhancing and improving their daily workflows. We also implemented enhancements that bolster our lenders ability to provide a better direct to consumer digital car buying experience, such as providing a prequalified decision without impacting the consumer’s credit score. This enhancement is critical given the industry’s progress towards a digital retail transaction. As you can see with these examples, we are laser focused on supporting and assisting our lender customers. Lastly, on talent. Hiring and retaining top talent continues to be a priority for us. We recently supplemented our executive leadership team by hiring Matt Sather, as our first dedicated Chief Underwriting Officer. Matt is an experienced insurance executive with over 30 years in specialty program underwriting at large insurance carriers. He is responsible for leading our Underwriting, Claims and Actuarial teams. In addition, we remain focused on building a strong people strategy that fosters a diverse and collaborative environment to support Open Lending’s long-term growth objectives. Now, I’d like to take a moment to thank John Flynn for his more than 20 years of leadership as a Founder, CEO and Chairman of the Board of Open Lending. As we announced last week, John will be passing over the reins to Jessica Snyder, as our new Chairman of the Board. It is important to note John will remain a valuable member of our Board of Directors, ensuring continuity and an orderly transition of leadership. Jessica, congratulations on assuming the Chairman role. We look forward to partnering with both you and John in the future. As discussed, having previously managed scaled businesses in the retail auto sector through the great recession, I remain confident about our future opportunity as we execute on our mission to help both lenders and underserved borrowers. We are delivering on our previously outlined plans and initiatives of gaining profitable market share by only signing targeted new accounts, adding technology capabilities relevant to our customers, and most importantly, thoughtfully growing our team. Given these actions, we expect to capture the pent-up demand as the sector and macroeconomic conditions inevitably recover. Now, with that, I would like to turn the call over to Chuck to review Q2 in further detail, as well as to provide our thoughts on the outlook for Q3. Chuck? Charles Jehl: Thanks, Keith. During the second quarter of 2023, we facilitated 34,354 certified loans, compared to 44,531 certified loans in the second quarter of 2022. It is important to note that if we exclude the refinance channel volume from both periods, which as we know, has been significantly impacted by interest rate increases over the past 18 months, certified loan volume was up 2% quarter-over-quarter. Total revenue for the second quarter of 2023 was $38.2 million, compared to $52 million in the second quarter of 2022. Notably, excluding the profit share revenue change in estimate impact in both Q2 and Q1, total revenues were up 4.5% sequentially compared to Q1 of 2023. To break down total revenues in the second quarter of 2023, profit share revenue represented $17.8 million. Program fees were $17.9 million and claims administration fees and others totaled $2.5 million. Now, let’s turn to profit share. As a reminder, profit share revenue is comprised of the expected earned premiums, less the expected claims to be paid over the life of the contracts, less expenses attributable to the program. The net profit share to us is 72%, and the monthly receipts from our insurance carriers reduce our contract asset each period. Profit share revenue in the second quarter of 2023 associated with new originations was $19 million, or $553 per certified loan, as compared to $26.3 million or $591 per certified loan in the second quarter of 2022. In the second quarter of 2023, we recorded a $1.2 million negative change in estimated future profit share related to business and historical vintages, primarily due to higher than anticipated prepayments and default frequency, partially offset by lower than anticipated severity of losses in the near-term. Concerning severity, the Manheim Used Vehicle Value Index, the movie experienced the worst May and June in the history of the index. Despite this significant decline, I will note that our conservative forecasting and modeling were in line with the movie as we exited the second quarter of 2023. As you may recall, and for reference, in Q1 of 2023, we recorded a 700,000 positive change in estimate. Looking at this on a year-to-date basis, our profit share change in estimate was approximately $500,000 negative, a nominal impact on cumulative profit share revenue. Gross profit was $32 million and gross margin was approximately 84% in the second quarter of 2023 as compared to $47 million, and gross margin of approximately 90% in the second quarter of 2022. Operating expenses were $16.3 million in the second quarter of 2023, compared to $14.2 million in the second quarter of 2022, as compared to $15.8 million in the first quarter of 2023. We continue to be prudent in adding incremental cost in the current environment. However, given that strength of our balance sheet, cash, and margin profile. We are making measured and controlled investments in our business to ensure we are well positioned for growth as market conditions improve. Operating income was $15.7 million in the second quarter of 2023, compared to $32.8 million in the second quarter of 2022. Net income for the second quarter of 2023 was $11.4 million, compared to net income of $23.1 million in the second quarter of 2022. Basic and diluted earnings per share were $0.09 in the second quarter of 2023 as compared to $0.18 in the previous year quarter. Adjusted EBITDA for the second quarter of 2023 was $20.7 million as compared to $34 million in the second quarter of 2022. There’s a reconciliation of GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. We exited the quarter with $386.8 million in total assets, of which $224.4 million was in unrestricted cash, $59.7 million was in contract assets and $63.3 million in net deferred tax assets. We had a $167.7 million in total liabilities, of which $145.7 was outstanding debt. Year-to-date, we generated $42.6 million in cash before acquiring $21.3 million, or $3.1 million shares of our common stock at an average price of $6.87 per share. Now, moving to our Q3 guidance. We are encouraged that auto supply appears to have dropped and absent of potential UAW strike, supply is expected to continue to improve. However, on the demand side, we are looking for signs of incremental improvements and have taken the following factors into consideration in our guidance. The impact of affordability on our target borrower due to elevated used car prices, inflation, and rising interest rates, near-term liquidity challenges for our credit unions. Tightening underwriting standards leading to a shift towards prime and super prime borrowers, lenders exiting the indirect auto lending channel as a response to current market conditions, increased percentage of cash buyers due to the current interest rate environment, and continued Federal Reserve actions and potential impact on our refinance channel volumes. Accordingly, with these considerations, our guidance for the third quarter of 2023 is as follows: total certified loans to be between 26,000 and 30,000, total revenue to be between $29 million and $34 million and adjusted EBITDA to be between $13 million and $17 million. In closing, we have a strong balance sheet, no near-term debt maturities and generate significant cash flow, which provides us with the financial flexibility to thoughtfully invest in our business as Keith outlined previously. Given these actions, we expect to capture the pent-up demand as a sector in macroeconomic conditions inevitably recover. We would like to thank everyone for joining us today and we will now take your questions. Q&A Session Follow Open Lending Corp (NASDAQ:LPRO) Follow Open Lending Corp (NASDAQ:LPRO) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Kyle Peterson from Needham. Please go ahead. Kyle Peterson: Great. Good afternoon guys. Thanks for taking the question. Wanted to touch a little bit on the refi activity, I guess just kind of looking at this first the 1Q level here seemed stable, slightly better as a percentage of total certs and just kind of an absolute number here. Borrowing any like additional rate hikes or big spikes in rates, do you guys have comfort that refi is kind of approaching a bottom or showing some signs of stabilization here in the overall mix? Charles Jehl: Yes, hey, Kyle, it’s Chuck. Thank you for the question. Refi in the second quarter was almost 11% of our volume that was up a little bit from about 8% in Q1, and on a year-to-date basis about 9.3%. So, as we’ve always said, we’re very close to our refi channel partners. And with the Fed actions and what we’ve seen over the last 18 months, 525 basis point increase in total. We don’t need rates to come back down to the pre Fed actions. We just need rates to stabilize for a call it four to six month period to where our refinance channel, we believe, is going to really come back, and there’s overpriced loans that we can go after with our channel partners. So it’s — again, the Fed had a recent action, I think 25 more bps still maybe some signals to — maybe 50% of the governors of the FMSC bank possibly maybe an action, maybe not. But again, we just need it to stabilize and not necessarily come down. We just need to stabilize to get that business going again. Kyle Peterson: Just to follow-up on some of the new logo wins. Good to see just 13 the quarter. It sounds like they could be de-size counts for you guys over time. How should we think about the ramp time frame from these guys? Whether are they going to kind of start out at whether it’s kind of testing volumes that are a little lower and then kind of fully ramp later? Or how quickly should we think about the spigot being turned on with these new logos? Keith Jezek: Yes, great question. And this is Keith speaking. Truth be told, they’re all over the map, whether they’re large or small. Importantly, none of these are pilots. These are all launches to go live, and they’ll just kind of ramp to their full maturity in each individual case, kind of on their own accord. But I think the important point is just that given the selection that we’re making with these targeted accounts, is that because of integrations that we have with their LLS and other factors, we’re able to get them installed and moving to first Cert production much more quickly than we have historically. Kyle Peterson: Got it. That makes sense. And that’s helpful. Thanks, guys. Keith Jezek: Thanks, Kyle. Operator: Thank you. The next question is from John Davis from Raymond James. Please go ahead. John Davis: Hey, good afternoon, guys. Nice to see the sequential increase in Certs, but Keith or Chuck? Chuck, you named several factors and kind of what’s weighing on the 3Q cert guide, but maybe relative to 2Q, if you could call out the most influential ones. Hopefully just trying to understand kind of the sequential decline expected in Certs and kind of what are the biggest factors that you’re seeing? Is it the credit union appetite for loans, affordability just maybe the top two or three of the kind of laundry lists you laid out? Charles Jehl: Yes. Hey, JD. Good to talk to you. Maybe thanks for the comment on Q2 and we’re pleased with the positive results in the second quarter. But I think it’s important maybe as we think about the guide even and step back a year or more here, record inflation. The Fed began raising rates now, just as I mentioned, 525 bps in total. We thought we were heading into a recession earlier this year with a hard landing. I think the biggest impact, and I think Keith said in the prepared comments, is consumers and affordability. On the consumer with this rate environment, with prices, prices are moderating a bit, but they’re still elevated 40% above pre-pandemic levels. So those are some of the biggest things that impact affordability, is price and interest rates. So if I had to point those out, but we are encouraged, though, as we said in the prepared comments, that supply has appeared to have troughed and absent this potential UAW strike. We think supply is going to continue to improve. And then on the demand side, which is driven by if you think about the affordability, we’re looking for incremental signs of improvement there, but it’s just not there yet. And I’ll also point that seasonally Q3 in the auto industry is a seasonally lower auto sales quarter, and then with an uptick in the fourth quarter. So liquidity challenges at the credit unions and also, I know this is a longer list, but they all impact our decision on the guide and cash buyers. For example, a 24% increase in cash buyers recently and it’s above 60% and we need a loan to participate at Open Lending. So all of those went into our factors in our conservative guide to put the guide out. So hope I answered the question. John Davis: Fair to say demand and seasonality is more of an impact than kind of credit union appetite for auto loans. I understand it’s a factor, but it seems like it’s more demand than anything else. Is that fair? Charles Jehl: Absolutely. Keith, you would agree, right, on the demand side, on the affordability, the price? Keith Jezek: Yes, for sure. I mean, I think the best metric that we track is affordability. And the reason for that is it kind of conflates or combines two different metrics, and one is simply the price of the vehicle and just interest rates. And what we are seeing is that, as we’ve said in the prepared remarks, and we’re all seeing in the data, is that we are seeing prices begin to moderate, if ever so slightly on the new sides, and again, if ever so slightly on the used side. John Davis: Okay, thanks. And it’s encouraging to hear that supply should be, fingers crossed, improving here. Just curious, any updates on conversations with the OEMs? Obviously, as they have supply come back online, maybe there’ll be more demand from them. Just curious kind of any conversations with OEM number three or four or anybody else, how those conversations are going? Charles Jehl: Well, I mean, first I’ll address our existing OEMs, number one and number two. We couldn’t be more pleased or encouraged with the performance that they’ve provided over the last couple of quarters. And they’re up 23% Q2 versus Q2 of last year, up 21% sequentially and up 17% year-to-date over prior year. So the performance of our existing OEM, number one and number two is fantastic. Concerning our pipeline, great news on that front for new OEMs and captives. First and foremost, the number of prospects that are in the pipeline are as high as they’ve ever been. The frequency of interaction with them are as high as ever been. And then kind of the flow through what I kind of call the different stage gates from a prospect to a sale, the quantifiable stage gates that are being crossed are getting better every day. Turning our attention to large lenders and other enterprise type accounts. We’ve added a seasoned Sales Executive and our pipeline from that cohort including banks, is double and higher than what it’s ever been. Yes, and I would just add a final thought there is just that. OEMs see, our value prop just gets getting stronger each and every day as we look at potential future accelerated depreciation. I mean that’s the safety net that we create for our lender partners to help them protect against that future potential accelerated depreciation. John Davis: Okay, great. Thanks, guys. Charles Jehl: Thank you. Keith Jezek: Thanks, JD. Operator: Thank you. The next question is from Faiza Alwy from Deutsche Bank. Please go ahead. Faiza Alwy: Yes, hi. Thank you. So I wanted to talk about affordability, which you just mentioned as sort of the biggest factor here. How do you think that gets resolved? Because it doesn’t look like financing rates are necessarily going to come down. And I’m curious like if the price of used car vehicles comes down, it seems like there’s sort of a contra adjustment to your revenues as it relates to profit share. So how should we think about the risk associated with that and maybe give us a sense of what you’re assuming in terms of severity of loss as you model out your profit share revenues? Charles Jehl: Yes, Faiza. It’s Chuck. I’ll start with maybe the backside of that question. And if you think about the moderation of price and the impact, the Manheim Used Vehicle Value Index, the movie as we call it or they call it, we monitor that. And as I mentioned in the prepared comments we were in line with both May and June were two of the single largest months on record of May and June on history declines, and we exited with — in line with the movie. So we have a robust process with our risk team. So we’re in good shape there. And we continue to, as we look out and project into the future with the future profit share estimation. We look at that and have stress built in for further declines of the Manheim of the movie. So we feel really good about where we exited Q2 there and into the future as it affects our profit share. So unless it’s outside of what we’ve already stressed, we’ve got that managed in our modeling and forecasting. I hope I answered your question. And then as it relates to affordability, I mean clearly we want the prices to come down because we want affordability for the near non-prime consumer to be healthier, which is going to drive our business and drive our Cert volume so. Faiza Alwy: Okay, understood. That helps. And then just on the credit union side, it seems like there are sort of these two interrelated points, one being just the funding issues that apparently are lingering. And then there’s the issue with the shift towards the prime and super prime consumer. Are those two issues linked? Because I would have thought like your value proposition is that the credit unions can go after and do business with the near prime consumer at a lower risk. So I’m curious what the dynamics are around that? What are you hearing from the credit unions? Keith Jezek: Yes, we see multiple things. I mean first of all, it’s important to note that they’re still the number one source of new loan originations in the U.S. And so they’re still larger than banks and still larger than Captive. So doing a great job and then very healthy. They’ve added over 5 million, almost 6 million new members over the past year. As we mentioned in the prepared remarks, I think what we’re simply seeing there is in a liquidity constrained environment, they’re seeking to just fulfill their mandate, which is to serve their members, which is people over profits, as they call it. And so kind of the first order of business is to make that loan to an existing member, which in many cases just happens to already be a prime or a super prime customer. So those are some of the dynamics that we’re seeing there. I would say also it’s important to note in the credit union space is that if you back out refi, so if you look at credit unions, x-refi year-to-date this year, compared to year-to-date last year, actually up 7%. So our credit unions are doing very, very well in this environment. Faiza Alwy: Great. Thank you so much. Charles Jehl: Yes. Thank you, Faiza. Keith Jezek: Thank you. Operator: Thank you. The next question is from Joseph Vafi from Canaccord. Please go ahead. Joseph Vafi: Hey, guys. Good afternoon. Nice to see the solid results here in Q2. Maybe any update or color on your insurance partners? We didn’t hear anything about it on your prepared remarks. So anything we should be aware of there? And then I’ll have a quick follow-up? Charles Jehl: Yes. Hey, Joe, it’s Chuck. I’ll jump in. Yes, recently we had all of our carriers in for an annual carrier roundtable and had great sessions with our partners, great relationships with the carriers and no capacity issues as it relates to volume or anything like that. I know there were concerns when we talked on the Q4 call. But yes, everything is going really well. We just hired as Keith pointed of Matt Sather, our first dedicated Chief Underwriting Officer and we’re welcoming Matt and brings a wealth of insurance experience to the team and we’ll further the good work that John and Ross and we’ve done over the years. So everything’s really good on that front and have ample capacity. Joseph Vafi: Great. And then secondly, maybe on the pipeline of new logos. I know we talked about some of the OEMs and the like and the fact that you’re bringing on more I guess you could call it market share or larger lenders in kind of each quarter’s worth of new cohorts. Just get a feel for even if we exclude the large OEMs how that pipeline of maybe new logos looks over the next few quarters relative to what seems like a really good performance here in Q2? Thanks a lot. Keith Jezek: Yes, thank you for the question. Yes, the pipeline is strong. I won’t give absolute numbers, but the pipeline of qualified prospects is actually up compared to this time last year. And importantly it’s comprised of what I would call the right targeted accounts. So we feel good about that. The pipeline is comprised of prospects and leads generated from our own marketing efforts and equally as importantly as some of our marketing representatives that help us do business for which we’re grateful for their help constantly. I would just say also that the targeting is very specific. I mean, we have to want to have the propensity to want a loan in this environment. Either because it’s the way you want to do business at a credit union or you’re trying to get something like CRA relief if you’re a bank that you’re large enough to have a target share that’s going to help us move our needle and help them move their needle. That as I’ve mentioned, they have a loan origination system for which we already have integration, that they have adequate liquidity for which to fund these programs. And then finally, that they’re going to open up three channels, both what we call direct, indirect and refi. So it’s kind of tough to make it onto that prospect list and that pipeline and that pipeline is larger than it has been. Joseph Vafi: Great, guys. Good luck with that and thanks for the time. Charles Jehl: Yes. Thank you, Joe. Keith Jezek: Thank you. Operator: Thank you. [Operator Instructions]. Your next question comes from James Faucette from Morgan Stanley. Please go ahead. James Faucette: Great. Thank you. Just wanted to ask and I appreciate the commentary so far, but wanted to ask part of the value add for Open Lending has been to help with underwriting history and input there. How has that been trending for Open Lending and what adjustments, if any, have you been recommending that your partners make to their underwriting standards, et cetera? Charles Jehl: Yes. Hey, James, it’s Chuck. I mean, I’ll start. I think from — if we think about it, we announced, I think it was Q2 of 2022, and then again recently in Q1 of ’23. You think about underwriting and risk. We put a premium increase — about a 12% premium increase back in Q1 of ’22 and then about an incremental 5% in Q2 of ’23. So as we think about risk and in the environment, we want to be paid not only us, but our customers as well as our carrier partners. So we appropriately price for the risk that we’re taking in the environment. So if you think about profit share and how that impacts that, we’re seeing better credit with the tightening and as well as more of a credit shift mix to improved credit. And with that, we charge lower premiums. But with the actions we took, we’ve preserved our profit share unit economics in that 550 assert range. So that’s how we kind of think about it. And then we do that through a vehicle value discount of the collateral. So to make sure we’re pricing appropriately. So I hope that answered your question. James Faucette: Yes, that’s helpful. Thanks. Operator: Thank you. Your next question comes from Alexander Villalobos from Jefferies. Please go ahead. Alexander Villalobos: Hey, guys. Thank you for taking my question. I just wanted to get maybe — sorry, I just wanted to get a little more color maybe on the mix between kind of credit unions and banks on the pipeline side. I know you guys are originating more Certs per relationship. But you guys mentioned it last quarter, I just want to see how you guys are doing this quarter. And then on the risk side, are you guys also continuing to originate longer duration loans, kind of those 84 month term loans and kind of what composition of the portfolio those were? Thank you. Charles Jehl: Yes, I’ll say on the credit union versus bank, I discussed the pipeline. I was speaking primarily of the credit union pipeline just a momentarily ago, so that pipeline is up. On the bank pipeline with the addition of that senior sales leader that I mentioned, that pipeline is a multifold. So we’re looking to be primarily our customers have been OEM captives, credit unions and banks, as you well know with banks being a bigger percentage than captives and the credit unions being the majority. But we’re targeting banks, and that pipeline is more than doubled for bank additions. Keith Jezek: Great. And Alex, I’ll jump in on the 84 month term you’d asked about that’s while still early, we’re encouraged, and that’s performing as expected and actually better than expected. We talked a lot about affordability for the near and non-prime consumer. And obviously, the term actually helps that for the payment buyers. And we didn’t really see — and we’re not seeing the incremental risk, and we’re pricing for it in our risk pricing. So our portfolio today, year-to-date 2023 is about 14% is 84 month term so. Alexander Villalobos: Perfect. Thank you so much, guys, and congrats on the good quarter. Keith Jezek: Yes, thank you. Operator: Thank you. Our final question comes from Vincent Caintic from Stephens. Please go ahead. Vincent Caintic: Good afternoon. Thanks for taking my question. First question, kind of broad question about the demand environment or the volume. If you could maybe describe kind of the conversations you’re having with your Cert partners is the — when we think about the volume. Is the Cert volume changes due to, I guess, changing partner appetite and/or is that from maybe the changing consumer landscape in terms of consumer credit? Thank you. Charles Jehl: Yes, I think. Hi, Vincent, it’s Chuck. Its more — if you think about our app volume is still very robust if we think about it. But lenders in this environment, especially in the credit union space, which is our primary customer, have tightened a bit. Obviously, we’ve talked about the continued liquidity constraints, so but with what they are lending is to that more super prime to prime lender to borrower today. So we support the near and non-prime, but the opportunity is going to continue to be there for us. The pent up demand for the near and non-prime is there, and we’re going to be well positioned. And we believe the liquidity crisis, as we kind of think forward into the last half of this year, into 2024, that there’s going to be improvement there and we’ll continue to see that and be ready for it. Keith Jezek: Yes, I would just add, I think, an important factor in the question-and-answer as we think about future volumes. As Chuck mentioned earlier, let’s all just recall that we’ve raised premiums, almost 18%. Open Lending has never and will never chase volume. So we’re pricing risk, appropriate the market as we see it. And that obviously has those raised premium rates obviously have an impact on volume. Vincent Caintic: Okay, that’s helpful. Thank you. Kind of the second question, kind of a different question, but in terms of the refinancing volume, that’s come down a little bit, but for the volume you are generating. I guess how much of that is kind of an improvement to the consumer’s rate that they’re getting on the loan versus consumers maybe wanting to extend out their terms of lowering their monthly payment? That was sort of one of the things I’ve been hearing about in terms of consumers are maybe stressed a little bit that they’re looking to manage their cash flows. So I’m just kind of wondering, in terms of refi volume, how that’s shaking out? Thank you. Keith Jezek: Yes, and this is Keith. What we’re seeing there is, I think, as you kind of guessed, it is an extension of term. And that extension of term translates into roughly a $65 a month savings. So most refi right now is being pulled through with an extension to term. Vincent Caintic: Okay, that’s very helpful. Thanks very much. Keith Jezek: Thanks, Vincent. Operator: Thank you. I’d like to turn the call back to Mr. Keith Jezek for closing comments. Keith Jezek: Well, thank you everyone for joining us today. We are pleased with results regenerated in Q2 2023 again. And I want to send a sincere heartfelt thank you to the entire Open Lending team for making these results possible. You’ve heard me say it before, but I think it’s worth repeating again. These cycles in the automotive industry rebound and are always led by used autos. Simply stated, consumers can defer the purchase of a new vehicle, but ultimately they cannot defer the purchase of transportation. Thank you all again for joining us today, and we look forward to speaking with you on our next earnings conference call. Charles Jehl: Thank you. Follow Open Lending Corp (NASDAQ:LPRO) Follow Open Lending Corp (NASDAQ:LPRO) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Udemy, Inc. (NASDAQ:UDMY) Q2 2023 Earnings Call Transcript August 4, 2023 Operator: Good day, and welcome to the Udemy Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice […] Udemy, Inc. (NASDAQ:UDMY) Q2 2023 Earnings Call Transcript August 4, 2023 Operator: Good day, and welcome to the Udemy Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President of Investor Relations. Please go ahead. Dennis Walsh: Thank you, and welcome to Udemy’s Second Quarter 2023 Earnings Conference Call. Joining me today are Udemy’s Chief Executive Officer, Greg Brown; and Chief Financial Officer Sarah Blanchard. During this conference call we will make forward-looking statements within the meaning of Federal Securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete, discussion of risks associated with these forward-looking statements we encourage you to refer to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements and we do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements except as required by applicable law. In addition during this call certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures assist management and investors in evaluating our performance in comparing period-to-period results of operations in a more meaningful and consistent manner as discussed in greater detail in the supplemental schedules to our earnings release. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations together with additional supplemental information are available on the Investor Relations section of our website. A replay of today’s call will also be posted on the website. With that I will now turn the call over to Greg. Greg Brown: Thank you, Dennis, and good afternoon to everyone on the call. Udemy delivered strong second quarter results. Revenue came in at more than $178 million, or a 16% year-over-year increase, and exceeded the high end of our guidance range. That growth was driven by a 36% year-over-year increase in Udemy Business revenue. On the bottom line we delivered our first quarter of positive adjusted EBITDA as a public company, thanks to our continued focus on operational efficiencies and prudent expense management. We are proud of our team for their commitment and continued execution against our strategic initiatives, particularly as we navigate this unpredictable macroeconomic environment. While the current backdrop presents some near-term challenges Udemy is well positioned to capitalize on meaningful long-term tailwinds for our business that are shaping the future of work. First, there is a profound transformation happening right now that impacts every industry: the rise of the skills-based organization; and second is the continued interest and application of generative AI across customers of all sizes. I’d like to take a few moments today to provide color on those trend, In conversations with enterprise customers across all industries and regions the number teheme –theme we hear from C EOs is that ensuring their workforce has the skills required to achieve their strategic objectives as a top priority. This represents a massive opportunity for Udemy to provide the necessary reskilling and upskilling that companies around the world will require for their workforce and that individuals need to stand out in the hypercompetitive job market. In addition the accelerating pace of innovation means that organizations require support to establish learning strategies and objectives for their teams and also a way to measure and validate skills acquisition. While degrees will always have relevance they do not validate the practical skills the individual has mastered which can lead to a qualified internal and external talent being overlooked. For this reason forward-thinking organizations are shifting to a more skills-based approach. By focusing on skills not just degrees companies can vastly expand and diversify their talent pool to fill open roles as well as drive increased internal mobility by reskilling and upskilling existing talent. As companies shift from offline to online to reskill and upskill their workforce they realize it is a more efficient and cost-effective solution that drives high ROI boost morale and provide significant cost savings. To give you a sense of the size of the potential savings a recent study found that the average per employee spend on L&D by employers worldwide was approximately $1300 per head in 2021. The cost for one Udemy Business license starts at just $360 per year. As you can imagine, the cost savings for a global enterprise are meaningful. When companies embrace a culture of continuous learning’s they future-proof their workforce. Demand for technical skills has never been higher with nearly 90% of companies reporting skills gaps within their organization. And many executives believing that finding talent with specialized skills is a major challenge. L&D leaders must understand the skill level of their workforce particularly within technology-focused areas. Yet one of their top concerns is that they do not have a reliable strategy for measuring the success of their learning programs. To help customers address this need, Udemy has introduced Badging as a part of its Integrated Skills Framework a comprehensive skill-building approach for organizations. The framework will enable customers to keep pace with innovation through a series of exciting new offerings. Working with Udemy organizations will be provided with a seamless way to quickly assess their current skills landscape and identify critical skills gaps. In addition, it provides employees with an effective way to acquire and demonstrate skill mastery through the acquisition of leading certifications and badges. At the core of our Badging program is Udemy’s certification prep center. We have made it simple to discover curated learning paths including labs and assessments to help professionals prepare for certification exams and badges. This will enable learners to validate mastery of in-demand skills such as AWS, Azure, CompTIA and more. As of today, our catalog includes certification preparation for nearly 200 highly sought after and reputable badges across more than 160 certification topics and nearly 30 subject areas. The other meaningful tailwind is the evolution of generative AI and its ability to accelerate change across all industries and geographies. Professional learners recognize the importance of understanding how generative AI will impact their role and how they can leverage these technologies to be more effective or to land their next job. On the enterprise side of our business, customers across all industries are asking Udemy to help them develop AI and digital transformation strategies to become more agile, durable and competitive. The level of engagement on our platform related to this topic is unprecedented. In the seven months since ChatGPT was launched, Udemy has seen more than 1.4 million enrollments in the more than 1,000 courses on the topic on our platform. Taking that a step further, the number of minutes consumed for ChatGPT-related content during Q2 increased nearly 300% from the prior quarter. This is a clear indication that people recognize the importance of understanding this technology and are discovering that they can receive high-quality skills training via Udemy. During the past few months we’ve continued to invest in further integrating generative AI throughout our platform. We are committed to delivering products and features that support instructors with content generation, deliver more personalized learning experiences and help organizations identify and address skills gaps. On our last call we shared plans to roll out new smart search capabilities, which is one of the several enhancements that leverage the power of generative AI to provide learners with more personalized bite-sized learning experiences. Subsequent enhancements will include skills-based guidance that automatically recommends Udemy learning paths based on defined objectives, including badge, acquisition and certification. In addition, we began to incorporate generative AI into our reports for our cohort learning solution Leadership Academy to provide admins with increased visibility into learning outcomes. We have also introduced further automation into the generation of these reports to speed up time to value and ensure leaders can access the right data as soon as they need it. Our investments in generative AI are expected to provide meaningful tailwinds for learner demand, enhance personalized learning, deepen our customer relationships and further accelerate the pace at which we can add new relevant and immersive content. You can expect to hear more updates over time on how we are leveraging this exciting technology. As you can see we believe that these trends the rise of skills-based organizations and generative AI will continue to increase in importance and are expected to present significant opportunities for our business. As companies embrace a culture of continuous learning with the goal of future-proofing their workforce we believe demand for Udemy will continue to grow. Before I turn the call over to Sarah, I’d like to highlight that we’ve significantly strengthened Udemy’s Board and leadership team with three seasoned professionals who will further develop our strategic vision and help scale our business globally. First, we welcome Sohaib Abbasi, as Independent Board Chairman. Sohaib brings more than 30 years of deep enterprise software and strategic leadership experience including more than 10 years serving as CEO of Informatica. We also recently bolstered our executive leadership team with two newly created positions. First, we appointed our Chief Marketing Officer, Genefa Murphy who brings extensive experience leading marketing initiatives for fast-growing software and technology companies. And second, we added a Chief Product Officer, Prasad Raje, who brings a wealth of enterprise SaaS product experience to Udemy. I’m very proud of the world-class executive leadership team that we have built as we heighten our focus on driving results at every level of the organization. We look forward to Sohaib, Genefa and Prasad’s contributions as we take Udemy to the next level and continue to lead the transformation to a skills-based economy. Now I’ll turn the call over to Sarah for a financial review. Sarah Blanchard: Thank you, Greg. I’ll focus my comments on the key financial highlights and then provide our outlook for Q3 and full year 2023. You can find the complete set of financial tables in our news release, which is available on our Investor Relations website. As Greg mentioned at the outset, we delivered solid Q2 results. Revenue increased 16% year-over-year to $178 million and exceeded the high end of our guidance range by $4 million. The year-over-year growth included a negative impact from foreign exchange or FX of 3 percentage points. Our Enterprise segment or Udemy Business drove our total revenue growth, delivering revenue of $102 million or an increase of 36% year-over-year. Included in the growth was a 3 percentage point headwind from changes in FX rates. This is a major milestone for Udemy, as it was our first quarter delivering more than $100 million in Udemy Business revenue. We ended the quarter with annual recurring revenue or ARR of $420 million, up 33% from a year ago. Our consolidated net dollar retention rate for Q2 was 108%. The rate was 115% for large customers or those with 1,000 or more employees. Gross dollar retention remained stable, large customer churn was minimal and growth in multiyear contracts continued during the quarter. This is a testament to the strength of our customer relationships, driven by the clear value and impact that Udemy provides to help them achieve their strategic outcomes. However, we do expect some pressure to continue on net dollar retention, as some companies remain hesitant to move forward with expansions and upsells during this unpredictable macroeconomic environment. The strong Udemy Business growth was slightly offset by a 2% year-over-year decline in Consumer segment revenue, which included a negative 3 percentage point impact from FX. We continue to be encouraged by the vibrancy of our marketplace, which fuels the powerful flywheel effect that has the ability to increase customer engagement and reduce acquisition costs over time. Traffic was up 8% year-over-year during Q2 to 34 million unique visitors, despite spending significantly less on performance marketing than we did a year ago. More than 80% of learners enroll in courses to develop professional skills, which creates a healthy funnel of leads for Udemy Business. Also attracting instructors organically to create courses continue to be a strength. As a result, we saw an 11% year-over-year increase in courses in the Udemy catalog, with nearly 5000 new courses added each month. As we move down the P&L, note that all financial metrics are non-GAAP unless stated otherwise. Q2 gross margin was 59%, a 100 basis point improvement from Q2 2022, driven by the continued revenue mix shift to Udemy Business since content cost as a percent of revenue are lower for that segment. Udemy Business accounted for 57% of total revenue in Q2, which represents a meaningful mix shift from 49% a year ago. With nearly 15,000 Udemy Business customers and growing, this mix shift is expected to continue toward our long-term target of approximately 75% of revenue. Total operating expense was $108 million or 61% of revenue and 500 basis points lower than Q2 of last year. Sales and marketing expense represented 39% of revenue, down 200 basis points year-over-year. R&D expense was 13% or flat compared with the same period last year. And G&A expense was 9%, down 300 basis points compared with last year. On the bottom line, net loss in the quarter was approximately $1 million or negative 1% of revenue. Adjusted EBITDA was approximately $2 million or positive 1% of revenue, which represents a 700 basis point expansion year-over-year and 400 basis points better than our high end of the guidance range. This was another major milestone for Udemy, as it was our first time showing positive adjusted EBITDA since our IPO. The better-than-expected adjusted EBITDA result was primarily driven by revenue outperformance and our disciplined approach to driving operational efficiency throughout the organization. We continue to maintain financial flexibility that allows us to make opportunistic investments that can accelerate or enhance our strategy and returns. Moving on to key cash flow and balance sheet items. We ended the quarter with $469 million of unrestricted cash, cash equivalents, restricted cash and marketable securities. Free cash flow for the quarter was positive $10 million due to improved collections timing and lower expenses. Now turning to our outlook for Q3 and full year 2023. During the second quarter, we did not see any signs that the macro environment is improving. Within Udemy Business, we are seeing further sales cycle elongation and additional layers for deal approvals. We are also seeing smaller deal sizes, as companies optimize their budgets during this time of uncertainty. As we continue to adapt and manage the business through this unpredictable macroeconomic environment, there are challenges that ultimately may impact our results in the near term. With that in mind, we expect Q3 revenue to be between $176 million and $180 million. Assuming foreign currency exchange rates remain constant, FX is expected to negatively impact Q3 year-over-year total revenue growth by approximately 2 percentage points. Due to the continued macro-related dynamics I just mentioned, we now expect Udemy Business growth in the near-term to be pressured more than we had originally anticipated. As a result, we currently believe a 2023, Udemy Business year-over-year revenue growth rate in the low 30s is achievable versus our previous view of mid-30s. On the bottom line, we anticipate Q3 adjusted EBITDA margin of negative 0.5% to positive 1.5%. Looking ahead, we are on track to deliver a profitable second half of the year, and now expect Q3 adjusted EBITDA to come in stronger than Q4 due to the better-than-expected consumer performance in the second quarter and result in Q3 revenue recognition. For the full year, we are narrowing our range on revenues to be between $712 million and $720 million which still anticipate 16% year-over-year growth at the midpoint. That growth includes an estimated three percentage point negative impact from FX assuming no further changes in rates. For full year 2023 adjusted EBITDA margin, we currently expect between negative 1% to breakeven or a 750 basis point expansion at the midpoint compared to 2022. Looking ahead, while we do not plan to provide formal 2024 guidance until our Q4 2023 earnings call, we’d like to provide color on how we are thinking about the business heading into next year. As a reminder, at our November 2022 Investor Day, we shared that we thought we would be able to drive 23% to 25% total revenue growth in 2024. Due to the deterioration of the macro environment since that time, we now believe our total 2024 revenue growth will be lower than the range what we had provided. That said, for full year 2024 we continue to believe Udemy Business will represent more than 60% of total revenue. Non-GAAP gross margins will be 58% to 59%. And we absolutely remain committed to delivering positive adjusted EBITDA for the full year of 2024. It is important to note, that while we are adapting in real-time and navigating some short-term obstacles we feel confident that the long-term opportunity available to Udemy is as strong as ever. In closing, Udemy delivered a solid performance in an uncertain environment. Our results illustrate the agility in our business model. We beat expectations on both top and bottom-line delivered more than $100 million Udemy Business revenue and reported our first quarter of positive adjusted EBITDA as a public company, ahead of plan. The foundation we are laying today is expected to yield sustainable recurring revenue growth and generate attractive profit and cash flows overtime. We look forward to continuing to deliver value to all of our stakeholders and updating everyone on our progress. So with that, we’ll open up the call for your questions, Moderator? See also 20 Countries With the Most YouTube Users in 2023 and 15 Best Medical Specialties for Female Doctors and Moms. Q&A Session Follow Udemy Inc. Follow Udemy Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Ryan MacDonald with Needham. Please go ahead. Ryan MacDonald: Hi. Thanks for taking my question and congrats on a nice quarter. Maybe just starting on the guidance you just provided especially as we think about fiscal 2024. As you think about what type of investments might need to be made to reinvigorate the growth rate in UB going into next year. How do you factor that? And I guess, around the targets for still being adjusted EBITDA breakeven into next year? Do you feel like the run rate of where you’re investing there right now is enough to sort of help drive that growth as the market recovers, or do you feel like new investments will be required? Sarah Blanchard: Hi, Ryan, thanks for the question. So as you can see like many companies we are currently adapting to a very dynamic environment. That being said, we feel good about the investments that we’ve made to-date in our go-to-market team and also in our product. And we’re committed to delivering an EBITDA positive full 2024, and that takes into consideration a range of outcomes based on what the macro does and the investment that we would need to make from a go-to-market perspective in order to achieve those outcomes. Greg Brown: I’ll add Ryan… Ryan MacDonald: All right. That’s clear. Maybe… Greg Brown: I’ll add Ryan real quick that, as soon as we see the macroeconomic environment improving and the impact on our sales cycle elongation coming back to a more normal cycle times we absolutely are going to lean in and start investing in go-to-market growth. And so as soon as that happens, we will trigger that. And as you just alluded to whether it be the back half of this year or next year we’re not sure when that’s going to happen. But when it does we will absolutely move. Ryan MacDonald: Super helpful color. Greg, maybe just to follow up with you, I appreciate the comments about sort of this evolving environment within the enterprise around a shift towards skills-based learning. I’m curious, what you think the impact or how will — what the impact will be in terms of how enterprise organizations choose to allocate spend in that environment? Do you think that this shift to skills-based learning accelerates the consolidation trend or creates sort of a new maybe funding environment or sort of reinvigorates the funding environment around L&D spending, for the skills-based learning? Greg Brown: It’s a good question, Ryan. And we’re already seeing that play out now. And I’ll give you a couple of examples Unilever gracious enough to let us talk about it. Significant expansion with Unilever this past quarter driven by their intent to re-skill and up-skill their entire workforce to “future-fit” their organization with the skills necessary for them to achieve their organizational objectives. They want to get this done by 2025. In addition to that they’ve selected us to support their digital university program, which they’ve just launched this past year in accordance with their focus around skills development. And so this is real, it’s happening in real-time. And we’re seeing examples of this and wins reflected in the commitment organizations have and shifting from long-form learning and degrees to skills that can be applied now to get work done. And in fact interestingly enough as we’re preparing for the call the White House this week came out with a report on a National Cyber Workforce and Education Strategy. And I’m just going to read a couple of lines that are relevant here, a skills-based approach is critical to connect more Americans to good careers. They should compete for jobs based on what they can do rather than merely credentials. So we’re seeing it pretty much from all sectors; federal government, we’re seeing it from customers, we’re hearing it from employees. And so this is a massive secular shift that we’re seeing that we’re on the front-end of that is not only going to drive — that plays to our favor and it’s going to drive organizations to us based on our marketplace and our unique position that we have to keep up with the pace of change and aid them in developing the skills necessary for them to stay up with the technological advancements that are coming at us in real-time. We, obviously, know what’s going on with generative AI. And we saw a couple of key wins just to add briefly — just to add a couple of key wins this last quarter from large multinational enterprises that told us they selected us because of the breadth and depth in our marketplace around AI. These organizations are focused on upping the digital literacy across the organizations but specific to AI. And they need investments in our platform and us as a long-term strategic partner as a result. So it’s playing out right now Ryan and we’re on the front end of a big trend. Ryan MacDonald: Thanks for taking the time. I’ll hop back in the queue. Operator: The next question comes from Terry Tillman with Truist. Please go ahead. Connor Passarella: Great. Good afternoon. This is Connor Passarella on for Terry. First question maybe a little bit more high level just on the recent executive hires, Chief Product Officer, Chief Marketing Officer. I guess, how do you see the evolution of the platform from a product and messaging standpoint evolving as you continue to position yourself to take a skills-based platform approach to learning with these executives?.....»»

Confluent, Inc. (NASDAQ:CFLT) Q2 2023 Earnings Call Transcript August 2, 2023 Confluent, Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $0.06. Operator: Hi, everyone. Welcome to the Confluent Q2 2023 Earnings Conference Call. I’m Shane Xie from Investor Relations, and I’m joined by Jay Kreps, Co-Founder and CEO; Steffan Tomlinson, CFO […] Confluent, Inc. (NASDAQ:CFLT) Q2 2023 Earnings Call Transcript August 2, 2023 Confluent, Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $0.06. Operator: Hi, everyone. Welcome to the Confluent Q2 2023 Earnings Conference Call. I’m Shane Xie from Investor Relations, and I’m joined by Jay Kreps, Co-Founder and CEO; Steffan Tomlinson, CFO and Rohan Sivaram, our incoming CFO. During today’s call, management will make forward-looking statements regarding our business, operations, financial performance and future prospects. These include statements regarding our financial guidance for the fiscal second quarter of 2023 and fiscal year 2023 and growth in our market opportunity and market share. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. Further information on risk factors that could cause actual results to differ is included in our most recent Form 10-Q filed with the SEC. We assume no obligation to update these statements after today’s call, except as required by law. Unless stated otherwise, certain financial measures used on today’s call are expressed on a non-GAAP basis and all comparisons are made on a year-over-year basis. We use these non-GAAP financials measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. These non-GAAP financial measures have limitations and should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release and supplemental financials, which can be found on our Investor Relations website at investors.confluent.io. And with that, I’ll hand the call over to Jay. Jay Kreps: Thanks, Shane. Good afternoon, everyone and welcome to our second quarter earnings call. We delivered a great quarter, for the ninth time in a row we exceeded the high end of all guided metrics. Before going into further detail in the quarter, I’d like to share some organizational news. Steffan Tomlinson will be stepping down from his role as Confluent’s CFO and will be joining Stripe as their CFO. Rohan Sivaram has been named Confluent’s next Chief Financial Officer. Rohan is a seasoned finance and operations leader with nearly two decades of experience at leading companies across financial services, cybersecurity and data infrastructure. Rohan joined Confluent pre-IPO in 2020. He’s been instrumental to the success of our organization across corporate finance, investor relations, treasury and business operations. Over the last three years, I’ve had the opportunity to work very closely with Rohan and could not be more excited to see him assuming this new role as our CFO. And Steffan, I wanted to take a moment to thank you for everything you’ve done for us. You’ve had an impact on every aspect of Confluent, including growing and scaling our operations, building a world class team and taking us through all nine quarters of earnings as a public company. Thank you and best of luck with your new role. Steffan Tomlinson: Thank you, Jay. It’s been an amazing experience and career milestone to work with you and the talented team at Confluent. We’ve built a deeply differentiated platform that’s powered our robust growth, which positions the company very well for the future. I couldn’t think of a better leader than Rohan to help guide the company to the next level as Confluent’s new CFO. Rohan is truly an exceptional leader. We’ve known each other for nearly a decade and worked closely at both Confluent and Palo Alto Networks. Congratulations, Rohan, you’ll do great in your new role. Rohan Sivaram: Thank you, Steffan. Congratulations to you as well. It’s been a pleasure working with you over the years and I’d like to wish you the very best in your next role. We have a world class innovation engine and an amazing team at Confluent. We are a market leader in a $60 billion TAM and we’re just getting started. I very much look forward to driving efficient growth in the years ahead. Now back to you, Jay. Copyright: dizanna / 123RF Stock Photo Jay Kreps: Thanks Rohan. Turning now to our Q2 results, total revenue grew 36% to $189 million. Confluent cloud revenue grew 78% to $84 million and non-GAAP operating margin improved 24 points. We have driven more than 30 points of margin improvements in the last 18 months and are well on our way to breakeven in Q4 this year. Achieving this sustained level of high growth despite ongoing market challenges underscores the mission critical nature of data streaming and reinforces our product leadership. In May, we hosted Kafka Summit London 2023. This year more than 1500 members of the community from over 50 countries joined us in person with greater than 2300 tuning in virtually. On our Q1 earnings call, we talked about the opportunity for monetizing Kafka and Confluent Cloud. This was emphasized at Kafka Summit with the unveiling of Kora, the next generation engine that powers Confluent Cloud. We shared with the audience some of the architectural elements that enable our cloud to drive a 10x advantage in performance while delivering a 60% TCO improvement. Our Kafka business has phenomenal growth ahead of it. Modern data architecture is increasingly centered around streaming and this has driven Kafka to be adopted by hundreds of thousands of organizations, including over 75% of the Fortune 500. This open source user base is growing rapidly and we are still in the early days of monetizing it. The inherent TCO and performance advantages of our cloud offering mean that in addition to the natural growth of this user base, we believe we can dramatically improve the proportion that is monetized as usage shifts to the cloud and can be captured by a managed service. If that were the extent of Confluent’s opportunity, that would be a very exciting prospect and enough to sustain our growth for many years but Kafka is just the start. In this call, I want to outline the evolution Confluent is driving in the streaming space and how we stand to benefit from it. This evolution is the rise of the data streaming platform. Kafka is the foundational layer in this platform but I outlined today the five key areas of capability that significantly extend the reach and value of streaming infrastructure and that we think are essential elements to the rise of data streaming platforms. The key capabilities of a DSP are the ability to stream, connect, govern, process and share. These capabilities capture the full life cycle of streaming data, how to get it, process it, use it, manage it and share it between systems. Kafka is the stream of data. It allows companies to produce and consume real time streams of data at any scale with strong guarantees on the delivery of data. It is the foundational hub of data exchange in a modern data architecture and today it comprises the substantial majority of our Confluent cloud revenue. But these other capabilities are not mere add-ons. They are essential components of the emerging platform and represent significant opportunities for monetization for Confluent that are still early in their realization. I’ll walk through each of these capabilities. Discuss the evidence that each is growing into a broadly adopted portion of the DSP and talk about how Confluent is adding these capabilities to Confluent Cloud. Our Kafka business and Confluent Cloud is growing very fast, but even today these non-Kafka components are growing even faster. Over time, we expect these capabilities to drive the majority of our cloud revenue even as they help to accelerate the use of Kafka as the underlying strength. Let’s start with connectors. Connectors may seem mundane, but they are in fact a key capability. Indeed, many ETL and integration products differentiate in large part on their pool of connectors. They are central to our vision as well. To build a central nervous system for your business you have to be able to connect all of your systems to capture the real time streams of data. Confluent Cloud makes it possible to run any Kafka connector in a cloud native way, making them serverless, elastically scalable and fault tolerant. This has driven the development of over 120 connectors created and owned by Confluent to some of the most common enterprise systems. However, the ecosystem of connectors is far larger than just these. There are many hundreds of open source connectors to less common systems that are available. We are still early in monetizing this area in Confluent Cloud as fully unlocking it requires ease of use across cloud networking layers and disparate data and SAS systems. We took a major step towards this in Q2 with the release of our custom connectors offering, which allows running any open source connector inside Confluent Cloud, expanding our reach beyond the set of connectors we ship with out-of-the-box. We believe this is still in the early phases of full unlock. On premise in our Confluent platform product Connect has approximately an 80% adoption rate. But we are still in the early days of ramping that level of usage in our fully managed offering Confluent Cloud. As data streaming use cases grow and real time data flows across internal systems and applications it’s critical that users can discover, monitor and reason about the security and integrity of that data. You need to control who has access to the data to find how that data is allowed to evolve and visualize and monitor where it ultimately goes. Creating a central nervous system for data is only possible if you can stream data safely. What do these governance concerns have to do with streaming, you might ask? Well, it turns out that governance concerns come into play precisely when data moves between systems, when it’s exchanged between teams or is transported between Regents, or as processed from one form to another. In other words, data governance needs arise directly from the primary use of data streaming. Because Confluent handles this movement and processing, we are uniquely positioned to directly integrate governance of that movement automatically and seamlessly in a way that no other vendor can with a bolt on product. This is the role of stream governance, one of our first moves up the stack and a large product opportunity for Confluent. Stream Governance is our fully managed governance suite that delivers a simple self-service experience for customers to discover, trust and understand how data flows across their business. We have taken a freemium approach to stream governance giving basic functionalities to every customer and more recently, starting to monetize with our Stream Governance Advanced offering. Two thirds of our Confluent Cloud customers are using Stream Governance today and revenue growth from Stream Governance Advanced is the fastest of any product we’ve launched today. The next area of the DSP is Stream Processing. This is an easy one to understand. Data processing is a key component of any major data platform and SQL and other processing layers are a key component of modern databases. Stream Processing extends these processing capabilities to real time data streams. We believe that Apache Flink is emerging as the de facto standard for stream processing. Flink has the most powerful implementation of stream processing of any technology, open source or proprietary, fully realizing streaming as a generalization of batch processing and making it available across a rich ecosystem of programming languages and interfaces. It is widely popular in the open source community and is used by some of the most technically sophisticated companies in the world, including Apple, Capital One, Netflix, Stripe, and Uber. We’ve discussed the criticality of Stream Processing to our strategy in the past. The easiest way to understand the potential in this area is to understand that for each stream in Confluent Cloud today, there’s likely to be some application code processing or reacting to that stream of data. That application code represents complex software engineering and the opportunity for Flink from the customer’s point of view is to simplify that development effort, from Confluence point of view this allows us to monetize not just the data, but the application itself while helping the customer to realize efficiencies in both the development and operational costs that are possible with the cloud native stream processing layer. We took a major step forward on our Flink strategy this last quarter when we announced the early access program at Kafka Summit, opening up this offering to the first customers who are now actively using the platform. Early feedback is very encouraging with particular enthusiasm for the direct integration into the other capabilities of Confluent Cloud. For customers, this means their streams of data in Kafka are automatically available for processing in Flink’s SQL and that everything works together with the shared model of governance and security. We’re incredibly excited about this product and look forward to its broad availability later this year. The final capability is about making it easy to share data streams. Sharing within a company has been a mainstay of our platform for some time. However, now we have extended that between companies with a feature we just launched at Kafka Summit, Stream Sharing. This intercompany sharing is a pattern we noticed was gaining startling traction in our customer base in recent years. Customers in financial services and insurance needed to integrate and provide key financial data streams with a complex set of providers. Customers in travel needed to exchange real time data on flights between airports, airlines, bookings companies and baggage handling companies. Retailers and manufacturers had to ingest real time streams from suppliers to manage an end-to-end view of their inventory or supply chain. Oftentimes these companies would have teams working out complex systems to mediate this sharing, only to realize on further discussion that on both sides the foundational layer that they were opening up was the same. It was Kafka. Stream Sharing allows these companies to enable this inter organizational sharing for any of their existing streams and to do so in a way that enables the same governance and security capabilities that they’d use internally with added capabilities to address the additional concerns of allowing access from external parties. This means extending our central nervous system vision for something that spans a company to something that spans large portions of the digital economy. By doing this the natural network effect of streaming where streams attract apps which in turn attract more Streams is extended beyond a single company, helping to drive the acquisition of new customers as well as the growth within existing customers. It’s essential to understand that these five capabilities stream, connect, govern, process share, are not only additional things to sell, they are all part of a unified platform and the success of each drives additional success in the others. The connectors make it easier to get data streams into Kafka, which accelerates not just our core Kafka business, but also opens up more data for processing in Flink, adds to the set of streams governed by Stream Governance where they’re shareable by Stream Sharing. Applications built with Flink drive use of connectors for data acquisition and read and write their inputs from Kafka. Governance and sharing add to the value proposition for each stream added to the DSP. Each of these capabilities strengthens the other four. The full value of this will not be realized overnight. Cloud infrastructure takes time to mature and reach completion. Each of these areas is earlier in the S curve of maturity and adoption than Kafka, but over time, we think these will directly contribute revenue larger than Kafka itself in addition to driving further consumption of Kafka. Most importantly is what these capabilities let our customers do. As these parts come together, they comprise a data platform that is as complete as data warehouses, data lakes or databases have grown to be over the years. We think this data streaming platform will be of equal size and importance to these other platforms serving as the fundamental nervous system for a modern company. This complete platform resonates with companies of all sizes, industries and geographies serving an endless number of use cases. One segment of our customer base that has been under particular pressure in this macro environment is digital native tech companies who are under increasing pressure to drive new efficiencies. But this is also a high performing segment of our business, a testament to our execution and the TCL advantages of our platform. This includes customers like Instacart, Netflix, Plat and Square. We are seeing particularly strong traction in this segment in India, including customers like Meesho. Meesho is a high growth Indian e-commerce company who last year was one of the most downloaded shopping apps in the world. It was the fastest shopping app to cross 500 million downloads and regularly sees huge traffic spikes that see over 1,000,000 requests per second. Kafka is used broadly across Meesho’s business including its real time recommendation engine to deliver great user experience for customers and sellers. But manually configuring and tuning open source Kafka wasn’t aligned with their overall push for sustainable solutions and driving business efficiencies. So they migrated to Confluent Cloud. Confluent now processes its shopping transactions and is a key part of the architecture that delivers exceptional experiences for its buyers and sellers. Policy Genius is an online insurance marketplace that covers more than 30 million customers and their life, disability, home and auto insurance needs. Today’s customers demand real time in all aspects of their life, even when shopping for insurance. By combining modern tech with real agents, Policy Genius delivers quotes from leading insurance companies side by side in minutes and helps customers through the selection and purchasing process. Initially, they relied on the competitors Kafka compatible data streaming technology to stream policy information to their agents, but they found themselves spending too much supporting the platform and were caught off guard by surprise costs. And as they look to expand use cases, they needed a more complete data streaming platform they could grow alongside them. After two months trialing Confluent as a pay-as-you-go customer, they went all in on Confluent Cloud in Q2. With Confluent Cloud, Policy Genius can save money while helping their customers feel good about finding the right insurance online. Recursion Pharmaceuticals is a leading biotech company that uses advancements in AI and biology to accelerate and industrialize the discovery of new drugs. Traditional drug discovery is often slow and expensive, relying on manual bespoke processes and experiments influenced by human bias. Recursion, on the other hand, runs over 2 million experiments per week to generate a massive biological and chemical data set to train machine learning models that discover new insights beyond what is known in scientific literature. Confluent is the backbone stream infrastructure for experimental data that feeds their AI models, with more than 23 petabytes of real time biological and chemical data improving the predictions of the models. This approach rapidly accelerates the time it takes to discover and develop drugs, and ultimately as how they improve the lives of patients all around the world. In closing, I’m pleased with our strong second quarter results. Our results show that data streaming has emerged as a mission critical component of the modern data stack and our rapid pace of product innovation puts us in an excellent position to continue capturing more of this $60 billion market opportunity. With that, I’ll turn the call over to Steffan to walk through our financials one last time. Steffan Tomlinson: Thanks, Jay. We delivered another strong quarter beating our guidance on all metrics. Key highlights for the second quarter include robust top line growth, strong customer expansion and substantial margin improvements. These results underscore our leadership position in a $60 billion data streaming market and our team’s track record of driving durable and efficient growth. Turning now to the results, RPO for the second quarter was $791.4 million, up 34%. Current RPO, estimated to be 65% of RPO, was $514.8 million, up 41%. Our growth rates in RPO, while healthy were impacted by a continuation of lower average deal sizes, a result of customer scrutinizing their budgets in the current environment. Despite the budget scrutiny, we remain encouraged that customers continue to derive value from using Confluent and consume more than their commitments, which is reflected in our revenue but not in our RPO results. In Q2, we added 140 net new customers, ending the quarter with approximately 4830 customers, up 17%. The growth in our large customer base remained robust, driven by continued expansion of use cases. We added 69 customers with 100K or more in ARR, bringing the total to 1144 customers up 33%. These large customers contributed more than 85% of total revenue in the quarter. We also added 12 customers with $1,000,000 or more in ARR, bringing the total to 147 customers, up 48%. And our $5 million plus cohort continued to grow. Our expansion momentum shows that Confluent is the platform of choice for data streaming from early stage adoption to cross company standardization and ultimately the central nervous system of our customers’ modern tech stack. For Q2 and NRR was above 130% in GRR was above 90%, NRR for Cloud was above 140%, reflecting the power of the industry’s only cloud native platform made possible with Quora. Turning to the P&L, total revenue grew 36% to $189.3 million. Subscription revenue was very strong and grew 39% to $176.5 million and accounted for 93% of total revenue. Within subscription, Confluent platform grew 16% to $92.9 million, exceeding our expectations and accounted for 49% of total revenue. Q2 marks the second quarter this year in which Confluent Platform overperformed relative to expectations. It was driven by strength in regulated industries such as public sector and financial services. These industries are still in the early stages of moving workloads to the cloud, but have a high demand for on-prem data streaming. Confluent Cloud revenue grew 78% to $83.6 million. We guided sequential revenue growth of $7.5 million to $8 million for Q2. The actual sequential increase came in at $9.9 million, exceeding the midpoint of our guidance range by $2.2 million and it was driven primarily by higher than expected consumption from select customers. From a product mix standpoint, cloud revenue accounted for 44% of revenue compared to 34% of revenue a year ago and cloud as a percentage of new ACV, bookings exceeded 50% for the 7th consecutive quarter. Turning to the geographic mix of revenue, revenue from the U.S. grew 30% to $113.9 million, revenue from outside the U.S. grew 45% to $75.4 million. Moving to the rest of the income statement, I’ll be referring to non-GAAP results unless stated otherwise. Total gross margin was 75%, up 440 basis points and above our FY23 target range of 72% to 73%. Subscription gross margin was 79.1%, up 230 basis points, gross margin outperformance was driven by our strong Confluent platform margin that continued improvement in efficiency, optimization of underlying hardware profile and increase multi tenancy and Quora, our core Kafka engine and Confluent Cloud. Turning to profitability and cash flow, operating margin improved 24 percentage points and negative 9.2%, representing our 4th consecutive quarter of more than 10 points in improvement. Q2 operating margin was driven by subscription revenue outperformance and our continued focus on driving efficiency across the company. We drove improvement in every category of our operating expenses with the most pronounced progress made again in sales and marketing improving 14 percentage points and we’re pleased to achieve $0.00 net income per share in Q2. We’ve included all related shares, outstanding amounts used to calculate historical and guided net loss or income per share and our earnings presentation on our website. Free cash flow margin improved 8 percentage points to negative 18.6%. We ended the second quarter with $1.85 billion in cash, cash equivalents and marketable securities. Now turning to our outlook, I’d like to provide context on how our approach to guidance continues to evolve in response to what we’re seeing in the business environment. At the beginning of the year, we prudently took into consideration and have been navigating the tough selling environment and the macro related factors of additional budget scrutiny and changes in customer buying behavior, both of which have led to sales cycle elongation. We’ve learned through the first half of this year that customers are more inclined to sign shorter duration contracts, start with smaller initial deal sizes and are okay consuming more than their committed contracts, which has been reflected in our results. Our point of view is the choppy macro environment we’ve seen will continue throughout the remainder of the year. Even with these macro dynamics at play, our data streaming platform continues to grow at outsized rates. Our subscription revenue growth of 39% in Q2 tells the story. From a product mix standpoint, Confluent platform, which is prevalent and regulated industries has overperformed relative to our expectations. We expect Confluent Platform to continue to perform well in the second-half, trending above the expectations we had at the beginning of the year. Our cloud business continues to be a bright spot given the high net retention rates, product market fit, strong TCO and ROI it delivers to customers. We expect cloud to continue to grow at a substantially higher rate than the rest of the business in the second-half. We’ll continue to monitor the signals of our business and proactively manage the rate and pace of investments. If the macro sentiment improves, we’d expect to benefit from that, but it’s too soon to call. Moving on to our guidance, I’m pleased to share that we’re raising total revenue, gross margin, operating margin and EPS for both the quarter and the year. For the third quarter of 2023, we expect revenue to be in the range of $193.5 million to $195.5 million, representing growth of 28% to 29%. Cloud revenue to be approximately $92.2 million, representing growth of 62% and accounting for approximately 47% of total revenue based on the midpoint of our guide. Implied in that is a sequential revenue add of approximately $8.5 million which is above our prior quarter guidance range of $7.5 million to $8 million for Q2 23. Non-GAAP operating margin to be approximately negative 10% and non-GAAP net loss or income per share to be in the range of negative $0.1 to $0.00. For the full year 2023, we expect revenue to be in the range of $767 million to $772 million representing growth of 31% to 32%. Non-GAAP operating margin to be approximately negative 10% and non-GAAPp net loss per share in the range of negative $0.5 to negative $0.2 cents. Additionally, we’re raising our FY23 target range for non-GAAP gross margin to approximately 74% for Q 4 2024 targets we continue to expect to land within the range of 48% to 50% for cloud as percentage of total revenue, but likely at the lower end due to the factors we called out before and the strength in our Confluent platform business impacting product mix shift. And we continue to expect to achieve break even for non-GAAP operating margin. The timing of free cash flow margin break even will roughly mirror that of our operating margin. In closing, I’m pleased with the continued momentum we see across Confluent Platform and Confluent Cloud. Our market leading data streaming platform is winning and we’re continuing to execute well in a choppy macro environment. Looking forward, we’re well positioned to drive durable and efficient growth. Now Jay, Rohan and I will take your questions. See also 15 Easiest Countries to Get Citizenship Without Investment and 25 Easiest Countries to Find a Wife. Q&A Session Follow Confluent Inc. Follow Confluent Inc. We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thanks, Steffan. To join the Q&A, please raise your hand. And today, our first question will come from Jason Ader with William Blair, followed by Wells Fargo. Jason, please go ahead. Jason Ader: Yes. Thanks Shane and good luck to you Steffan. You really do have the Midas touch, with your job choices, but my question is on the consumption side. Confluent Cloud has been out for a few years now. Are you seeing a trend where customers are over consuming more than they previously had and you talked about kind of the annual commitments that they’re making, are they tending to make lower annual commitments because of the economy and therefore overconsume more and then how does that manifest in the numbers? Steffan Tomlinson: Yes that’s a great question and that dynamic is present. I would attribute it to two facts, internally we have been really shifting our go-to market to emphasize driving consumption, more use cases coming on to the platform as quickly as possible even outside of the term of new commitments. And then externally, yes, there’s real market pressure and so companies are being very thoughtful about how, what they commit to up front, how much they pay ahead et cetera, and so, both those dynamics are present and that is reflected in a really strong consumption results. I think it’s ultimately healthy. This is kind of the intention of these consumption models that’s certainly how we treat consumption vendors internally. But it does show up you know when you look at the kind of RPO, CRPO split and RPO versus kind of revenue performance for Confluent Cloud. Jason Ader: All right and one quick follow up just on Fed ramp, when are you guys expecting to get Fed ramp authorized for Confluent Cloud? Steffan Tomlinson: Yeah, we haven’t given any you know public timeline for that. It’s obviously a big focus for us and we’ve seen really strong results in the public sector even though we’re effectively kind of fighting with one hand tied behind our back. So we’re very excited about that coming online. Jason Ader: Thanks very much and Congrats to you, Rohan. Rohan Sivaram: Alright, thanks Jason. We’ll take our next question from Michael Turrin with Wells Fargo followed by Goldman. Michael, please go ahead. Michael Turrin: Hi, thanks. Appreciate you taking the question. I apologize the video operator seems to be not too kind on my side, but quick question just on Cloud, obviously a big point of focus came in strong in Q2, just wondering if you can add commentary on the progression you saw during the quarter, visibility you have into rest of the year as a result and then it looked like 3Q guidance is now sequentially down a touch as of starting point versus where Q2 came in. Was there anything unexpected that came through in Q2 or maybe just help us think through the progression of what you’re expecting to see on Cloud from here? Thanks. Jay Kreps: Yes, we saw really great results on consumption. I would say particularly set a larger customers drove kind of over performance there. We didn’t think that that indicated necessarily equal over performance on each subsequent quarter. But overall the trajectory for Cloud consumption is very strong and we feel really good about it. So I don’t know if you want to add anything to that Steffan? Steffan Tomlinson: Yes. The only other thing I’d add is at the beginning of the year we had called for sequential increases in Cloud revenue and we’ve been delivering that in Q1 and Q2. We had guided $7.5 million to $8 million for Q2 and we came in $2.2 million above the midpoint of the range and so when you when you take out a little bit of that over performance and you look at our guide for Q3 that will, that is a sequential increase relative to our original guide in Q2. So the underlying strength and drivers of the cloud business very strong and we are seeing adoption across cohorts and we’re seeing very good adoption in the marketplace......»»

Omnicell, Inc. (NASDAQ:OMCL) Q2 2023 Earnings Call Transcript August 1, 2023 Omnicell, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.28. Operator: Good afternoon and welcome everyone to the Omnicell Second Quarter 2023 Financial Results Call. Please note that this call is being recorded. All lines have been placed on mute to prevent […] Omnicell, Inc. (NASDAQ:OMCL) Q2 2023 Earnings Call Transcript August 1, 2023 Omnicell, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.28. Operator: Good afternoon and welcome everyone to the Omnicell Second Quarter 2023 Financial Results Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be question and answer session. [Operator Instructions] I will now turn the call over to Kathleen Nemeth, Senior Vice President of Investor Relations, you may begin your conference. Kathleen Nemeth: Good afternoon, and welcome to the Omnicell second quarter 2023 financial results conference call. On the call with me today are Randall Lipps, Omnicell Chairman, President, CEO and Founder; Nchacha Etta, Executive Vice President and Chief Commercial Officer. This call will contain forward-looking statements, including statements related to financial projections or other statements regarding Omnicell’s plans, strategies, objectives, goals expectations, cost savings actions or outlook that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release issued today in the Omnicell annual report on Form 10-K filed with the SEC on March 1, 2023, and in other more recent reports filed with the SEC. Please be aware that you should not place undue reliance on any forward-looking statements made today. All forward-looking statements speak only as of the date hereof or the date specified on the call. Except as required by law, we do not assume any obligation to update or otherwise release publicly any revisions to our forward-looking statements. Our results were released this afternoon and are posted in the Investor Relations section of our website at ir.omnicell.com. Additionally, we would like to remind you that during this call, we will discuss some non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are included in our financial results press release issued today. With respect to forward-looking non-GAAP measures, we do not provide a reconciliation of forward-looking non-GAAP measures to the comparable GAAP measures on a forward-looking basis as these items are inherently uncertain and difficult to estimate and cannot be predicted without unreasonable effort. With that, I will turn the call over to Randall. Randall? Randall Lipps: Good afternoon, and thank you all for joining us today. Today I will walk through our performance this quarter including our key customer wins and trends we’re seeing in our business and the industry. I’ll also provide an update on our outlook for the remainder of 2023. Let me begin with our results which reflects sequential revenue growth and we believe continued financial discipline from the Omnicell team. Through strong execution we exceeded our second quarter 2023 guidance ranges for total product and service revenues non-GAAP EBITDA and non-GAAP EPS. We generated total revenues of $299 million non-GAAP EBITDA of $47 million and non-GAAP earnings per share of $0.57. Our better than expected performance this quarter was primarily driven by higher technical and advanced service revenues, favorable customer and product mix and cost management. Nchacha who we recently welcomed as Omnicell CFO will speak to our financial results and key drivers in more detail during his remarks as well as walk through the outlook for the second half of the year. On last quarter’s call, we provided an update on the integration of ReCept acquisitions. ReCept now called Omnicell Specialty Pharmacy Services, FDS Amplicare and Market Touch Media noting that integration was largely complete. Throughout the second quarter of 2023 we continued to focus on executing our go-to-market strategy for these acquisitions and we are pleased with the progress we have seen today. With this momentum underway and what we believe is a robust portfolio we find that we remain uniquely positioned to continue to support pharmacy operations across the entire care continuum delivering mission critical medication management solutions for our customers globally. Now turning to the customer landscape and our recent customer wins. Customers continue to choose Omnicell solutions to maximize clinical and financial outcomes which we think further demonstrates the important role we’re playing in automating and modernizing global medication management infrastructure. We’ll start with the customer wins for advanced services. Following the successful implementation of inventory optimization service for a group of its hospitals a major southern health system is now expanding the service to approximately 20 hospitals across its health system. The customer indicated that its increased need for visibility insights and analytics for inventory control and cost savings led to the decision to expand the solution. In addition with a continued challenge of labor shortages this health system is also seeking insights from the Omnicell platform in an effort to improve pharmacy technician efficiency. Recognizing the potential value in delivering secure solutions in the pharmacy supply chain a Florida health system has chosen Omnicell’s IV compounding service to help it as it seeks to gain better control over medications and decrease reliance on 503b outsourcing. This customer is also expanding its central pharmacy automation footprint with Omnicell carousels and premium software license for their entire fleet of XT automated dispensing systems. In terms of competitive conversions a central pharmacy customer in Minnesota has decided to convert their automated dispensing system footprint to Omnicell’s XT cabinets while expanding system-wide pharmacy inventory management with inventory optimization service. This combined technology strategy should increase visibility and efficiency better aligning to the health system’s patient safety initiatives. Furthermore a current XT customer based in southern California has chosen Omnicell’s specialty pharmacy services to support the launch of a health system owned specialty pharmacy. This customer not only cited Omnicell’s deep expertise as a key factor in this decision but also recognized what it saw as an opportunity for a comprehensive technology strategy to support continued growth across the care continuum. In live and health has also reached a significant milestone entering the Medicaid market with a new medication synchronization partnership with a leading Medicaid plan. The partnership aims to enhance medication adherence among underserved populations by offering personalized support to patients. We are proud of the role Omnicell plays in improving patient health. And lastly, a northeast pharmacy chain selected in live and health to support personalized IVR. In just 120 days the chain saw a notable rise in automated prescription refills a significant reduction in pharmacy interruptions and lowered call transfers by approximately 17%. Moving on to the market environment and what we are currently seeing in the overall health care industry we continue to take what we believe is a prudent approach to managing the business but as evidenced by our [customer-wise] this quarter we are pleased that Omnicell products software and tech-enabled services appear to be resonating with the market. Our health system customers have faced many challenges in the last few years and are evaluating technology and innovative solutions that are designed to help them achieve their long-term strategic goals. With salary cost pressures as well as labor constraints remaining key challenges for hospitals we think Omnicell is an important part of the solution. For us the need to automate optimize and modernize the medication management process is becoming clearer which should help ease the pressure on hospitals to implement the services and solutions they purchase at the outset. While these should be a long-term tailwind for Omnicell we are also seeing some near-term headwinds as some customers choose to delay adopting new technologies in order to mitigate additional training requirements for the workforces. As we look ahead to the second half of the year we expect full-year bookings to trend towards the lower end of the full-year guidance range we previously provided due to ongoing CapEx budget constraints and some of the factors I just outlined. Considering the strong first half performance and solid expense management we are raising our full-year 2023 guidance for toll revenues non-GAAP EBITDA and non-GAAP earnings per share. As I mentioned Nchacha will discuss our guidance in more detail but long-term trends appear favorable as we expect customers need for automation tools and software enabled services to offset continued pressure driven by labor constraints. Now moving on to ESG. At the start of the second quarter we were pleased to publish our third annual ESG report. We continue to make progress towards our goal of creating positive change and delivering innovative technologies that are intended to help our customers build a healthier world. This entails designing our products with a view to minimize our environmental footprint while maximizing patient outcomes. We also continue to support a diversity equity inclusion and belonging initiatives that are intended to foster an engaging and inclusive workplace. Through our ESG efforts we aim to ensure healthy lives and promote well-being for all. Before I turn it over to Nchacha to discuss our financial results for the quarter in more detail I want to note the most recent addition to our board and speak to some leadership changes. In July we were pleased to have Kaushik Bobby Ghoshal join our board as the independent director as part of Omnicell’s ongoing refreshment process. The addition of Bobby expands our board to 10 members. Bobby is an established leader who brings more than 30 years of global SaaS and healthcare technology experience to Omicell currently serving as the president of SaaS for ResMed Incorporated and is an important addition to our board. He has an impressive track record leading high-performance teams and software products and is responsible for the vision, strategy and day-to-day operations of ResMed’s rapidly expanding SaaS portfolio. We are also pleased to have welcomed Nchacha as Omnicell’s new CFO at the beginning of June. Nchacha is a seasoned financial and accounting executive with more than 20 years of experience leading and working in global financial organizations across healthcare and consumer products industries. It’s a pleasure to work with Nchacha this far. He is commercially focused and collaborative leader and shares our passion for improving patients health. We find we are already benefiting from his insights and I know he’s looking forward to speaking to some of his priorities with you today. In addition to welcoming Nchacha, we also announced a number of other organizational changes designed to create a more streamlined organization with a continued focus on operational excellence. This included the appointment of new members to our leadership team as well as a number of motions within the organization. We believe we have put the right team in place to lead the next phase of our performance as we seek to continue to deliver value for our shareholders, our employees, our healthcare partners, and their patients. With these changes, I want to emphasize that our strategy remains the same. We are simply moving into the next phase of Omnicell’s evolution. We believe we must adapt to continue meeting the ever-changing needs of the industry and our customers. This new leadership structure reflects this effort and should enable us to operate more nimbly and further strengthen our position as a leading medication management provider. We’ve worked hard to build a strategy that we believe will transform the pharmacy care delivery model globally. Now we’re laser focused on execution and bringing in people with the right skill sets that are keenly focused on profitable growth and I believe we are well positioned for the future. Now with that, I’ll turn it over to Nchacha to introduce himself and provide further details on our performance and outlook. Nchacha Etta: Thank you for the warm welcome, Randy, and thank you to the entire Omnicell team for the support through my onboarding over the last several weeks. I am excited to be here with all of you today and I am looking forward to meeting many of you in the weeks ahead. I believe in the company’s mission and vision and I am thrilled to be leading Omnicell’s finance and IT organization, which play a key role in enabling the overall strategy and driving operational excellence. Since joining in June, I have been working closely with the executive team and others to enhance Omnicell mission to continue to be the healthcare provider’s most trusted partner for medication management. My time here so far has reaffirmed why I joined Omnicell. Omnicell has a differentiated strategy to transform the pharmacy care delivery model along with incredibly strong customer relationship and impressive brand recognition. The talented team here at Omnicell is mission-driven and fully committed to improving patient care and ensuring positive healthcare outcomes. These are just a few of the reasons why I believe the company is well positioned for long-term success. Now, before I discuss our financial results, I would like to share with you my immediate priorities in the second half of the year and going forward. First, I intend to leverage data analytics and insights to strengthen our financial performance and improve the predictability of our business. Second, I will seek to ensure that we are strategically deploying capital to support innovation and swell sustainable profitable growth. And third, I will work to ensure that we continue to operate with financial discipline as we work to improve operational efficiency throughout the organization. I have really enjoyed my first few weeks at Omnicell and I look forward to working with the team as we move the company’s strategy forward and continue to deliver long-term value to our stakeholders. Now, turning to our financial results. Our second quarter 2023 total GAAP revenues were $299 million, an increase of $8 million or 3% over the prior quarter, and a decrease of $32 million or 10% compared to the second quarter of 2022. The year-over-year decrease reflects lower point of care revenues primarily as a result of ongoing healthcare systems capital budget constraints. Services revenue were $111 million, an increase of 13% versus the second quarter of 2022, primarily driven by growth in advanced services. Total revenues in the quarter were $11 million above the top end of our previously disclosed second quarter 2023 guidance range, primarily due to favorability within technical and advanced services, which is not expected to reoccur in the second half of the year. Non-GAAP growth margin for the second quarter 2023 was 46.8% , an increase of 200 basis from the prior quarter, primarily due to higher services revenues and the result of our prior cost containment actions. In addition, we saw lower costs for semiconductors still and free compared to the prior quarter. A full reconciliation of our GAAP to non-GAAP results are included in our second quarter ending express release and is posted on our investor relations website. Our second quarter 2023 earnings per share in accordance with GAAP were $0.08 compared to a loss of $0.33 in the prior quarter, an income of $0.20 per share in the second quarter of 2022. This improved performance compared to the first quarter of 2023 reflects the absence of impairment and abandonment charges for operating leaves right of use assets and other assets, profit from higher revenue as well as the full benefit of prior cost containment actions. As we have previously shared with you, sustained GAAP profitability is a key objective for the company. Our second quarter 2023 non-GAAP earnings per share was $0.57 compared to $0.39 in the prior quarter and $0.84 in the same period last year. Our second quarter non-GAAP EBITDA was $47 million, an increase of $20 million compared to the previous quarter and a decrease of $9 million when compared to the same period last year. Our second quarter 2023 non-GAAP EBITDA and non-GAAP earnings per share exceeded guidance primarily due to higher services revenue, customer and product mix timing within the year, and strong cost management. The operational favorability in the second quarter non-GAAP earnings per share was offset by higher than expected second quarter income taxes. The impact from the income tax expense reflects timing within the year and is expected to be favorable in the second half of the year. At the end of the second quarter of 2023, our cash balance was $399 million, up from $340 million as of March 31, 2023. As of June 30, 2023, we had $418 million of availability under our revolving credit facility and there was no outstanding balance. In terms of accounts receivable, this sales outstanding for the second quarter of 2023 was 85 days, a decrease of 17 days over the prior quarter primarily due to strong cash collections as well as timing of invoicing within the quarter. Inventories as of June 30, 2023 were $131 million, a decrease of $11 million from the prior quarter. Reflecting continued strong progress, our global supply chain team is making on key process improvements and inventory management initiatives. Free cash flow during the second quarter of 2023 was $58 million, driven by strong cash collection. Now moving on to our full year and third quarter 2023 guidance. As Randall mentioned earlier, we continue to take a prudent approach to managing the business. We expect the full year bookings for 2023 to trend towards the lower end of the previously provided range of $1 billion to $1.1 billion. Customers are showing signs of caution implementing new workflows that stress already stretched nursing and IT labor, which is continuing to impact the timing of new capital and software projects. We are pleased with our strong first half performance, underscoring our solid execution and prudent cost management. Considering the strengths in our advanced services and technical services, as well as continued strong execution, we are raising our full year 2023 total revenues to range between $1.16 billion to $1.2 billion, an increase of $10 million from the top and bottom end of our previously provided guidance range. We are reaffirming our full year 2023 product revenues to range between $740 million to $760 million. Due to the solid execution in the first half, we are raising our full year 2023 service revenues to range between $420 million to $440 million, an increase of $10 million from the top and bottom end of our initial guidance. We expect advanced services revenue to be between $205 million and $215 million, an increase of $5 million from the top and bottom end of our original guidance. This reflects its 13% increase at the midpoint compared to 2022, and approximately 18% of 2023 total revenues. We expect technical services revenues to range between $215 million and $225 million in 2023, an increase of $5 million from the top and bottom end of our original guidance. This represents an increase of 6% at the midpoint as compared to 2022. Please refer to the Slide number 14 in our earnings presentation published on our investor relations website for a summary of the total year revenue guidance component. We expect total year 2023 non-GAAP EBITDA to range between $130 million and $145 million, an increase of $10 million from the top and bottom end of our initial guidance, which reflects the incremental profit from higher expected services revenues for the year and prudent cost management. We expect 2023 non-GAAP earnings per share to be between $1.75 and $2 per share, an increase of $0.20 from the top and bottom end of our initial guidance. The full year non-GAAP EBITDA and non-GAAP earnings per share guidance includes the impact of the previously disclosed $50 million of annual operating expense savings derived from the recent reduction in falls and other expense containment efforts, primarily within SG&A. We continue to expect 2023 operating expense annual savings will be largely offset by the impact of year-over-year inflation in employee salaries and increases in expected performance-based compensation, vendor cost increases and investments in R&D. We expect non-GAAP operating expenses to be flat to down year-over-year. Included in these numbers is a higher expected blended tax rate in 2023 as a result of the increased profit expectations. For the full year 2023, we are now assuming an effective blended tax rate of approximately 11% in our non-GAAP earnings per share. For the third quarter 2023, we are providing the following guidance. We expect total third quarter 2023 revenues to range between $290 million and $300 million. We expect product revenues to range between $185 million and $190 million and services revenues to range between $105 million and $110 million. We expect third quarter 2023 non-GAAP EBITDA to range between $31 million and $37 million. And we expect third quarter 2023 non-GAAP earnings per share to range between $0.42 and $0.52. The third quarter non-GAAP EBITDA and non-GAAP earnings per share guidance includes the expected impact of product and customer mix and planned investments in innovation and advanced services as well as [business] third quarter expenses. Additionally, the third quarter 2023 non-GAAP earnings per share guidance reflects the income tax timing benefit compared to the second quarter. In summary, we believe the long-term opportunities for Omnicell are compelling and we are committed to delivering strong financial and operational performance. With that, we would like to open the call for questions. Q&A Session Follow Omnicell Inc. (NASDAQ:OMCL) Follow Omnicell Inc. (NASDAQ:OMCL) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Your first question comes from Scott Schoenhaus with KeyBanc. Your line is now open. Scott Schoenhaus: Hi team, congrats on the very, very strong results and outlook. My first question is really on the operating expense line. Seeing SG&A coming down 17% sequentially from last quarters and nice operating leverage there, what’s driving that? Is that mostly headcount on the point of care side or there is, there other cost efficiencies that we should be aware of? Thanks. Nchacha Etta: Thank you, Scott. There are definitely other cost efficiencies that you need to be aware of. As we previously announced, a reduction in force and other expense containment efforts which achieved $50 million of annual operating expense savings. Based on timing, it is reasonable to assume that we saw slightly less than half of the savings in the first half and we will see the full remaining impact of cost savings in the second half of the year. Scott Schoenhaus: Great. Just as a follow up, you mentioned headwinds continuing related to labor environment at the hospitals around nursing and technicians. Do you guys have any expectations for that to improve over the remainder of the year or is built into your guidance? Really just the similar levels of kind of labor issues that we’re seeing at hospitals right now. Thank you. Nchacha Etta: So while we’re seeing incremental improvements as the year progresses, Scott, our health systems are still challenged by continued macroeconomic uncertainty and labor constraints which, of course are impacting our customers’ buying decisions. While advanced services including our technology-enabled solutions help to drive automation and reduce the need for labor, near-term labor challenges continue to impact our customers’ ability to adopt new technologies which is contributing to our decision to guide towards the lower end of the range. Randall Lipps: Yes, this labor and concerns about committing to new projects particularly in advanced services where you have more disruption than you would in just ADC business which is we’re not seeing that in that particular area but mostly in advanced service areas where you’ve got new robots and new things to install. You need IT and technical people on the organizational side to commit. Scott Schoenhaus: Thanks, Randy. You bet, Scott. Operator: Your next question comes from Allen Lutz with Bank of America. Your line is now open. Allen Lutz: Thanks for taking the questions. The product revenue was up quarter-over-quarter and I guess you’re kind of guiding for sort of flatter sequentially but I guess three quarters kind of in this range, it seems to me that things have at least bottom. It doesn’t seem like they’re getting worse. I guess what are you seeing in the pipeline? Is the pipeline today better than it was three months ago, six months ago? Just trying to get some perspective on what you’re seeing there. Randall Lipps: Yes. I would have to say that the customers are excited about our products and the pipeline continues to expand. I think it’s all about what is the funding timing on these products. I think we all would have to agree that the modernization of medication management has to take place. There needs to be robots. There needs to be automated software doing these things so that we can run pharmacies at near perfection or get us to the autonomous pharmacy. I think the industry has bought into that vision and it’s bought there. It’s just a question on the timing of that. We’re engaged as much as we ever have been. It’s just the uncertainty about the funding piece. Allen Lutz: Great. And then to follow up on Scott’s question, Randy you mentioned that hospital budgetary pressures on new solutions. Can you bifurcate between, I guess, the in-live and product suite, the products you acquired, and then the products that you built in-house? Is there a difference in growth rates between those two business lines? Or is there any difference you’re seeing with prospective clients on either of those? Thanks. Randall Lipps: Well, I think the in-live-in is very exciting area. We’ve developed a lot of new products. We talked about the go-to market with the Medicaid product for the Medicaid plan, which I think is very unique for us. And so there’s a lot of opportunity there. What’s probably more interesting is we’re bringing that mostly retail product solution set into our core customers because these big provider networks, big hospital networks, they want to engage patients in the same way in an outpatient format and even all the way to the home. So they need the same kinds of tool sets that have traditionally been sold in the in-live-in environment, which has been to retail pharmacies. So we’re really starting to see that crossover begin to happen. And that’s the exciting piece. I think most of the headwinds is not in the retail piece, but it’s mostly in these big provider hospitals where nursing and IT people particularly are redlining or exhausted, some pharmacy techs as well. So it’s just a matter of time before they get those positions funded and get the relief and it doesn’t know exactly when. I think we’re seeing the for-profit hospitals are already probably ahead of the regular market as far as getting better results and getting better alignment on some of those things. But I think the pipeline is strong and the in-live-in product is really an exciting place not just because of what it’s doing there, but that we’re actually crossing it over into our core product expansion of our marketplace. Allen Lutz: Great. Thank you. Operator: Your next question comes from Stan Berenshteyn with Wells Fargo. Your line is open. Stan Berenshteyn: Hi, thanks for taking my questions and a warm welcome to Nchacha. Maybe we can start on booking guidance. I mean, you guided lower here on the lower side of the range. Can you maybe just share some details as to what’s impacting that on any particular products or services to call out? Nchacha Etta: Yes, Stan. Thank you for the warm welcome. Like I mentioned earlier, as well as in my prepared remarks, again, our customers are still challenged with labor constraints as well as macroeconomic uncertainty. But we’re also seeing some near-term headwinds in advanced services, particularly IV, as customers are navigating a very complex regulatory environment. Stan Berenshteyn: Okay. Randall Lipps: Yes, just to expand on that a little bit, if I can Stan, on that. The IV has gone through an FDA filter to get some insights and has gotten made through that. Now it’s going through individual states, pharmacy boards to set further regulations or compliance rules. So in some states, it’s just going slower than other states. And so that’s holding back certainly some decision making until they understand how that’s fully going to be executed. Stan Berenshteyn: Okay. And I guess to square that with guidance. I mean, it seems like you are performing advanced services side. Product bookings was reiterated. Maybe if we just take a step back here. You started the year with about $500 million in short-term backlog. You essentially need $250 million in entry or bookings to hit that. We’re over 50% of the way through the year. What kind of visibility do you have here? And where are you versus where you thought you’d be at the start of the year? Randall Lipps: Well, I think we have really strong visibility. And we’ve implemented particularly on revenue and earnings, particularly for the second half of the year because much of it is already scheduled. And we’ve brought in new processes and new disciplines to lock in those that visibility. So we feel really strong about that piece as we move forward. And I think the part that we’re talking about where there’s less visibility is when are people going to commit their capital or commit to these new projects? Not necessarily. Some of it may be financial, but a lot of it is when is the organization going to be ready to take on these newer platforms which really require new workflows, new training, or they require IT to go in and spend some time integrating these new platforms into their operation. That’s where we see the hesitancy mostly. Stan Berenshteyn: Okay. Thanks so much. Operator: Thanks, Stan. Your next question comes from Matt Hewitt with Craig Hallum Capital Group. Your line is now open. Matt Hewitt: Good afternoon. Thank you for taking the questions. And it’s nice to speak with you Nchacha. Maybe the first question, there recently was a Supreme Court ruling that prompted CMS to announce a $9 billion with a B payment to hospitals related to the 340B program. I realize that that market has been pretty challenged over the past couple of years, but does this change things? And what does that mean for your 340B platform going forward? Randall Lipps: Well, it probably means that a couple of things. We have two angles to 340B. One is the 340B where we have contracted pharmacies, and that we have said is relatively flat for this year, $30 million to $35 million, and we continue to believe that is what that outcome will be. But it does mean that in our specialty pharmacies where we’re spinning up services, remember, it means there are bigger rebates for our customers, which means there’s more advantage to deploying our services, and it means slightly more revenues for us, but not significant in that specialty pharmacy services. Probably the bigger opportunity, frankly, is the $9 billion rebate, which has been discussion about whether it’s going to actually hit two hospitals in either Q4 or Q1, no one really knows, is an opportunity for hospitals to spend more money, obviously, on our solution sets. Now, I haven’t really seen that connection point take place yet where a CFO has said, [indiscernible] I know I’ve got this X millions coming in, now I’m ready to spend it on this project. My guess is they’re going to wait until they get the money in the bank and then decide what to accelerate in the light. But I think that’s a big opportunity for us, and it reaffirms that 340B, I think, the program to have your own in-house pharmacy, you’re going to get richer rebates, you’re going back to the old rebate amounts, which were significantly higher in many cases, so that just bolsters that program to be adopted by more people. Matt Hewitt: That’s great, and maybe one separate question here regarding gross margins. A nice step up here this quarter, I think much of it was on the services side, but when I think back to a year ago, you faced three specific challenges, steel, semiconductor chips, and transportation costs and gas. It sounds like you got a little bit of benefit this quarter from on the semiconductor side and then on the transportation. As we look at the remainder of this year, are you expecting some further benefits from those three areas as you kind of work through either inventory on hand or as the prices for those products come down? Thank you. Nchacha Etta: Yes, so as we disclosed during the Q4 2022 prepared remarks, inventories as of December 31, 2022 included approximately $18 million of advanced purchases and resets of semiconductors. The balance was really deeply consistent as of June 30 of this year compared to December 31. We believe that also we have some resets of remaining buybacks that we have committed to purchase to a short continuity of our supply chain. Matt Hewitt: Got it. Thank you. Operator: Your next question comes from Bill Sutherland with the Benchmark Company. Your line is now open. Bill Sutherland: Hey, thank you. Welcome, Nchacha. I guess my main question for you at this point might be as you evaluate the capital deployment, kind of what’s going into your thinking and what’s that process going to be? Nchacha Etta: Yes. So we will continue to evaluate our capital deployment strategy and we’ll make the right investment decisions to fuel our sustainable growth from an innovation standpoint. Randall Lipps: I think M&A is definitely a long-term strategy that will be there, I think, but I think that Nchacha is looking at the balance sheet and then we definitely have nice cash flows. We’ve got maybe some debt. We need a restructure eventually. I don’t think it feels like there’s anything immediately at this point, but something to really consider as we move forward. Bill Sutherland: Got it. And then can’t have a call this quarter without asking about AI and what your thoughts are as far as implementing that technology across your products? Randall Lipps: I think AI has a lot of potentials for many of the obvious areas that many companies are looking at, software development, customer interaction, communications both internally and externally with customers, and the ability to gain unique efficiency. So we love the fact that AI here, we think it eventually will accelerate the ability to get to the autonomous pharmacy sooner, and that’s really important to us. I think it’s a little too soon to say where and exactly how those impacts will be, but we have AI is on top of our list as we move forward to have specific strategies around specific use cases, mostly internal to the company, and we want to be very careful as we use them externally because of, just regulatory and proper use of such a powerful tool when we use it outside the full loss of the company. Bill Sutherland: So it’s been mostly an internal focus, Randy? Randall Lipps: I think the first steps are internal and, we may have some proof cases that we may use with certain selected beta customers but and many of our customers, we are very encouraged by them. They are actually leading some of the way on some of these projects and bringing us then to them. So I think there’s a lot of a excitement about solving, large unstructured data questions that can be easily answered. So there’s a lot of unstructured data in healthcare. So lots of opportunities for sure, right? Bill Sutherland: Right. Okay. Thanks so much. Randall Lipps: I would just make a Bobby Ghoshal from ResMed and SaaS. He is one of the reasons we got him and put him on this board. He is AI pro and he’s, he’s helping us think through the process as well. And we’ve got a lot of resources. [indiscernible] on our team is top notch. So I just feel like we have lots of opportunities there but, we’re not ready to share how that’s going to impact us directly but it’s definitely a part of our strategy. Operator: Your next question comes from David Larsen with BTIG. Your line is now open. David Larsen: Hi. It’s my understanding that you were increasing prices for your products in 2023. Just any color around that? And are those price increases more than offsetting inflation for semiconductors? And then over what time period should we expect to see these price increases continue to occur? Will they be sort of complete at 12/31/23? Thanks. Nchacha Etta: Yes. So we will continue to assess our price increase strategy. But as we continue to, we continue to, we are continuing to see the benefit of pricing actions put in place over our last, over the last two years. We are also seeing modest reduction in cost for semiconductors on freight and steel, which had been subject to significant inflationary pressures on recent periods. So in the second quarter for the first time, we saw the benefit of pricing actions outweigh the impact of these inflationary costs, which will modestly be favorable to product and gross margin in the second half. Randall Lipps: And I’d also add to that some of our pricing actions are, you can’t implement them every year. Only for those customers that renewing service contracts coming up that year, can you renew them for. So they’re ongoing as we move forward as customers come around. So there are some increases as we move forward and I think where our strategy is to, to be prudent about that. David Larsen: Okay. And then how far along are you in terms of like the XT sort of upgrade process? Are you like 60% of the way through that process? And then it’s my understanding that at some point, everybody’s going to have to upgrade because you’ll sunset support of the more legacy solutions. Is that correct or not? And then once you do get through these XT upgrades, won’t there simply be another version of the automated dispensing cabinets that you sort of bring to market and there will be a whole new cycle that starts? Just any thoughts or color there will be very helpful. Randall Lipps: Yes, we are significantly way through the XT upgrade. It’s well over 60%. And we don’t believe that the whole 100% of the market is even going to convert. So we’re getting to the end of that, but we continue to add on with what we call expansions, which is a big part of our XT business as well as competitive conversions. We usually have a 10-year lifecycle to our systems and we generally, cycle new products. On that I believe we started in 2017. We don’t time it exactly with those days, but certainly we have to continue to upgrade our hardware to take on new software solutions and really looking to add more value, create more value for our customers. And so you’re right in assuming that we don’t have any timelines to talk about, but you’re right. We do have product cycles that we traditionally do and we’re nearing the end of the XT. David Larsen: Great. And then just one last quick one if we can squeeze it in. Did I hear you say, Randy, that the $9 billion from CMS will be paid in 4Q of ’23 and 1Q of ’24? Randall Lipps: There hasn’t been, it’s still up for grabs, whether it’s Q1 or Q4 of this year. But as far as my current understanding is that it will be a lump sum and it will be in Q4, Q1. Just coming up Q4 or Q1 of the new year. And those extra dollars I think, are waiting to be seen by these hospitals I think to be sure of what those dates are, but I think that will have an impact on the ability to spend money. David Larsen: Okay, thanks very much. I’ll hop back into the queue. Kathleen Nemeth: Thanks, Dave. Next question. Operator: Your next question comes from Jessica Tassan with Piper Sandler. Your line is now open. Jessica Tassan: Hi, thanks for taking the question and congrats to Nchacha on the start date. So I think my first question is just on product growth margins. Those have been kind of moving around quite a bit in the last couple quarters. I’m hoping you guys can describe the structure of product cost of goods and maybe the mix between fixed and variable and just what you would expect for normalized product growth margins, like where should they be trending, ’24 or ’25? Nchacha Etta: Thank you, Jessica. So we really cannot comment on 2024 or 2025, but I’ll tell you that in 2023, the key drivers of our gross margin were higher services revenue, favorable customer and product mix, as well as the full impact of cost containment actions that we took last year. Jessica Tassan: Got it. So just, I guess we’re trying to understand, right the impact of incremental products revenue on the product growth margin. So can you help us maybe understand the mix between this fixed versus variable cost of goods within product growth margin? Nchacha Etta: The mix is really primarily between, again like I said, customer and product mix, as well as higher services revenue. Jessica Tassan: Okay, got it. So maybe for Randy, is the Medicaid deal that you mentioned the first payer deal within and live in health? And if so, can you just help us understand kind of the context for that deal and maybe the pricing? Does Omnicell have any exposure to outcomes or any sort of value-based components of that deal? Randall Lipps: Well, it’s always somewhat outcomes driven as the medication synchronization is based on signing up customers and keeping them synced up to the regular use of their medication management. And that’s around a plan that’s more holistic that is, they are the provider and the pharmacy, if you so to speak. So I think that’s the unique opportunity that came here to come outside of what I would call the retail customer base to be inside of a plan where you see more of this engagement directly with the patient in order to get better outcomes. And we know it’s really hard to service the Medicaid market. So I think we’re really excited about that. I think, there were, I feel like we’re the only company doing these kinds of things that are really making the difference at these multiple levels and multiple market penetration points. And because of these services are so uniquely put together and can be formulated if you have, a good patient interaction, scenario to go after. And certainly this is one that fits well with us. Jessica Tassan: Got it. And my last question is just that you guys see the high end of services, revenue guidance now two quarters in a row. So is that upside relative to the high end of guidance coming from better than expected implementation? And if that’s the case, just why wouldn’t that strength persist in the second half when the, the operating environment is arguably going to get better for hospitals? And you potentially have this $9 billion remuneration payment hitting in 4Q. Thank you. Nchacha Etta: Yes, services revenue is expected to be approximately flat due to the strong performance that we saw in Q2, primarily from the favorability in timing of revenues, which is driven by technical services. We knew all timing as well as advanced services, which we do not expect to reoccur in Q3 and the second half of this year. Randall Lipps: We just had a lot of renewals in Q2, and sometimes those renewals come with back payments for a few months they hadn’t paid for. And so you get an extra few payments there. And so a lot of that happens in Q1 and Q2. It doesn’t happen as often in Q3 and Q4. Jessica Tassan: Okay, got it. That makes sense. Thank you. Kathleen Nemeth: Thanks, Jess. Operator: There are no further questions at this time. I will now turn the call back over to Omnicell Chairman, President, CEO, and Founder, Randall Lipps. Randall Lipps: Well, I’d really like to thank the Omnicell team for delivering a solid quarter, getting us, I would say, back on track, the new management team, particularly having Nchacha join us. He’s been such a great help to us getting our heads straight, moving the company forward. And it’s just an exciting time for innovation, exciting time for our customers to deploy these new products and get back to this predictable, profitable, scalable growth infused with great envision. So thanks for being here and we’ll see you next time. Operator: This concludes today’s conference call. You may now disconnect. Follow Omnicell Inc. (NASDAQ:OMCL) Follow Omnicell Inc. (NASDAQ:OMCL) We may use your email to send marketing emails about our services. 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Old National Bancorp (NASDAQ:ONB) Q2 2023 Earnings Call Transcript July 30, 2023 Operator: Welcome to the Old National Bancorp Second Quarter 2023 Earnings Conference Call. This call is being recorded and has been accessible to the public in accordance with the SEC’s Regulation FD. Corresponding presentation slides can be found on the Investor Relations page […] Old National Bancorp (NASDAQ:ONB) Q2 2023 Earnings Call Transcript July 30, 2023 Operator: Welcome to the Old National Bancorp Second Quarter 2023 Earnings Conference Call. This call is being recorded and has been accessible to the public in accordance with the SEC’s Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months. Management would like to remind everyone that certain statements on today’s call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statements legend in the earnings release and presentation slides. The company’s risk factors are fully disclosed and discussed within the SEC filings. In addition, certain slides contain non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investors understanding of performance trends. Reconciliations for those numbers are contained within the appendix of the presentation. I’d now like to turn the call over to Old National CEO, Jim Ryan. Mr. Ryan, please go ahead. Jim Ryan: Good morning. We are pleased to be with you today to share details about our strong second quarter performance. Simply put, the quarter was business as usual for Old National, with growth in deposits, solid liquidity and credit quality, disciplined loan growth and well-managed expenses. The strength of our franchise remains evident in the results outlined on Slide 4. We reported EPS of $0.52 for the quarter, adjusted EPS was $0.54 per common share with adjusted ROA and ROATCE of 1.33% and 22%, respectively. Our adjusted efficiency ratio was a low 49%. Tangible book value, excluding AOCI, also increased 15% year-over-year. Deposit balances were up 4% during the quarter, with growth in core deposits of 2% as we continue to compete for new banking relationships effectively. Our total cost of deposits was 115 basis points and we maintained our deposit pricing discipline with a low 23% total deposit beta cycle to date. Our credit quality remained stable with 6 basis points of non-PCD related charge-offs. We remain watchful and consistent with other banks, are focused on potential pockets of softness. Like our deposit portfolio, our loan portfolio is granular and relationship driven, which should continue to serve us well. We remain confident in our client selection and underwriting. And as you know, Old National has taken a proactive approach to managing credit. This approach has served us well in the past and you see evidence of that stance this quarter’s work to address any credit deterioration aggressively. On the client side, engagement remained high in the quarter. We expect full relationships with our borrowing clients. And to the extent that new or existing clients lack that potential, we will manage accordingly. We do, however, continue to expect disciplined loan portfolio growth in 2023. In other areas, it’s more of the same. Our below peer deposit costs should drive a funding advantage, we expect to see organic growth of our wealth management client base and we continue to focus on disciplined expense management, while building tangible book value. We also continue to invest in top revenue-generating talent and expand into dynamic new markets within our footprint. We recently celebrated the opening of our first Metro Detroit area commercial banking office with a terrific new team, and we announced two prominent commercial relationship managers have joined our Nashville wealth management team. Before I turn things over to Brendon, I also want to take a moment to share that our Old National family continues to recover and heal from the Louisville tragedy on April 10 that claimed the lives of five of our team members and impacted so many others. More than three months later, our ONB family continues to do our best to love, care for and support one another. Additionally, in June, our Downtown Louisville team began serving clients at a new location in the heart of Downtown Mobile. Once again, I want to thank countless individuals and organizations who have cared for and supported our family during this challenging time. I also want to acknowledge and thank our team members for their resiliency and their commitment to supporting one another. With that, I will now turn the call over to Brendon to cover the quarterly results in more detail. Brendon Falconer: Thanks, Jim. Turning to our quarter-end balance sheet on Slide 5. We continue to effectively navigate the challenging operating environment, achieving a more efficient balance sheet. We improved our earning asset mix with cash flows from our investment portfolio reinvested in loans, while their funding mix improved through higher deposit balances and lower borrowings. As a result, our loan-to-deposit ratio improved by 100 basis points, while strong earnings bolstered our capital levels and contributed to tangible book value growth despite facing AOCI headwinds. On Slide 6, we present the trend in total loan growth and portfolio yields. Total loans grew by 2%, in line with our expectations. We sold approximately $300 million of non-relationship C&I loans at par during the quarter as we look to manage liquidity while prioritizing lending to our clients with full banking relationships. The investment portfolio decreased by 2%, mainly due to portfolio cash flows and declines in fair values. Despite rate shifts, the duration remained steady at 4.4 years and is not expected to extend further. Cash flows from the portfolio are expected to be $1.2 billion over the next 12 months. Moving to Slide 7. We show our trend in total deposits, which increased $1.3 billion or 4% quarter-over-quarter. Core deposits grew approximately $800 million, including $490 million of normal seasonal public inflows. The trend in average deposits reflects the continued mix shift away from non-interest bearing accounts into money markets and CDs. Market conditions continue to put upward pressure on deposit rates with interest-bearing deposit costs increasing 57 basis points to 1.66% and resulting in a cycle-to-date interest-bearing deposit beta of 33%. Total deposit costs were relatively low at 1.15%, which equates to a cycle-to-date total deposit beta of 23%. While it’s challenging to estimate the terminal beta, we had a strong track record of managing deposit rates and are confident we can maintain our funding cost advantage throughout the remainder of the rate cycle. Our disciplined approach to exception pricing has allowed us to successfully defend deposit balances and our targeted promotions have resulted in above peer deposit growth. Slide 8 provides our quarter-end income statement. We reported GAAP net income applicable to common shares of $151 million or $0.52 per share. Reported earnings includes $6 million in pretax merger-related and other charges. Excluding these items, our adjusted earnings per share was $0.54. Our profitability continues to be strong with an adjusted return on average tangible common equity of 22.1% and adjusted return on average assets of 1.33%. Moving on to Slide 9. We present details of our net interest income and margin. Both metrics surpassed our expectations as we reported a linked quarter increase in net interest income and experienced lower-than-anticipated margin compression. Our strong performance was bolstered by the 0.25 point rate hike by the Fed in May and our better-than-expected deposit growth. Furthermore, we continue to make progress towards achieving our targeted neutral rate risk position by the end of the rate cycle, while prudently adding protection against any sudden reversal and Fed rate policy. Slide 10 shows trends in adjusted non-interest income, which was $82 million for the quarter. Our primary fee businesses remained stable, but we did benefit from a $4 million increase in other income that we would not anticipate in our run rate next quarter. The items driving that increase were company-owned life insurance revenues, a recovery from a prior charged-off asset and positive derivative valuations associated with the transition from LIBOR to SOFR. Continuing to Slide 11, we show the trend in adjusted non-interest expenses. Adjusted expenses were $241 million, and our adjusted efficiency ratio was a low 49.4%. Our expenses were well controlled and consistent with the previous quarter, excluding a $5 million increase in incentive accruals related to our strong year-to-date performance. This would equate to a Q3 run rate of $237.5 million. On Slide 12, we present our credit trends, which remained stable, reflecting the strong performance of both our commercial and consumer portfolios. Delinquencies have decreased and net charge-offs have remained steady at a modest 6 basis points, excluding the 7 basis point impact from PCD loans. The rise in non-performing loans primarily stems from the anticipated migration of PCD credits as we maintain an aggressive approach to resolving these loans. While charge-offs from this portfolio are expected to remain elevated in the short term, we expect minimal impact on provision expense, given that we currently carry a $39 million or approximately 4% reserve against this book. Our second quarter allowance, including reserve for unfunded commitments stands at $338 million or 104 basis points of total loans. The modest reserve increase was largely driven by loan growth, partially offset by adjustments in our economic forecast. We continue to rely on a 100% weighted Moody’s S3 scenario that projects peak unemployment of 7.2% and negative GDP growth of 3.1%. Barring any significant deterioration beyond these economic assumptions, we expect provision expense to remain limited to portfolio performance and loan growth. Shifting to key areas of focus on Slide 14, you will see further details on our loan portfolio. Our commercial loan book, which constitutes approximately 70% of our total loans is granular and well diversified. Our non-owner occupied CRE is also well diversified across various asset classes and geographies. Regarding non-owner occupied office properties, the majority of the portfolio was comprised of suburban or medical offices with a significant portion of credit tenant leases. Only a negligible percentage, less than 1% of total loans is attributed to properties located within central business districts that are geographically dispersed across 11 Midwestern cities in our footprint. On Slide 15, we provide highlights from a recent examination of fixed rate CRE maturities over the next 18 months, less than 1% of total loans that are non-owner occupied CRE mature within 18 months and carry a note rate of less than 4%. Our approach to underwriting CRE includes a 300 basis point margin over the current rates at the time of origination. While these maturing credits have surpassed the original underwriting stress coupon, we have observed improved net operating income from higher rents. This improvement has been sufficient to uphold debt service ratios in line with our underwriting guidelines, and we believe the refinance risk in this portfolio to be minimal. Slide 16 details our Q2 commercial production. The $1.9 billion of production was well balanced across all product lines and major markets. As discussed on last quarter’s call, we have tightened our pricing standards, enhanced our credit structure and reinforced with our RMs, the importance of acquiring a full banking relationship for new loan requests. As a result of these actions and strong Q2 production, our pipeline has decreased to $3.1 billion and is consistent with low to mid-single-digit loan growth we expect in the back half of the year. On Slide 17, we present further insights into our deposit base. Our average core deposit balance is meaningfully lower than peers. 81% of our accounts have less than $25,000 on deposit and carrying an average balance of just $4,500. It’s important to highlight that we maintain strong enduring relationships with our deposit customers, 50% of which have been with the bank for over 15 years. Our top 20 deposit clients represent only 5% of total deposits and have a weighted average tenure of greater than 30 years. Lastly, our broker deposits were 3.5% of total deposits at the end of the quarter, which we expect to be well below peer average. On Slide 18, we provide a comprehensive overview of our capital position at the end of the quarter. We observed improvements in all regulatory capital ratios and maintain stability in our TCE ratio despite facing the negative impact of increasing AOCI. Our above peer return on tangible common equity, coupled with our peer average dividend payout ratio should result in us accreting capital at a faster rate than most. Additionally, we anticipate 30% of our outstanding AOCI to accrete to capital by the end of 2024. We did not repurchase any shares in the quarter and do not intend to do so in the near term as we focus on capital growth. In summary, our strong second quarter performance marked the successful conclusion of the first half of 2023, with results slightly exceeding our expectations. We have improved the efficiency ratio of our balance sheet through a better earning asset mix, strong core deposit growth led to a better funding mix, and we grew tangible book value per share by 15%, excluding OCI impact. Despite the challenging rate environment, our net interest income grew quarter-over-quarter, largely due to the strong execution of our deposit strategy. We have demonstrated an ability to both expand our customer base while maintaining peer-leading deposit costs. Our credit portfolio remains stable and our disciplined approach to managing expenses is evident in our quarterly adjusted efficiency ratio of 49.4%. Slide 20 includes thoughts on our outlook for the remainder of 2023. We believe our current pipeline should support second half 2023 loan growth in the low to mid-single-digit range, with full year growth in the mid to high single-digit range. We continue to target at or above industry deposit growth and we are reconfirming our guide on 9% to 12% year-over-year net interest income increase with a stronger conviction towards the higher end of this range. The key assumptions in this guidance include one more rate hike and a through-the-cycle interest-bearing deposit beta of 43% to 53% by year-end and non-interest bearing deposits falling to 28%. We expect fee businesses to be stable in the back half of 2023 with the exception of the $4 million in non-run rate items we noted earlier. Our expense outlook is adjusted to approximately $949 million for full year 2023, excluding merger-related charges and property optimization related expenses. This reflects our prior guidance of $939 million, adjusted upward by $10 million for higher incentive accruals. $5 million of this has already been accrued at quarter end. Provision expense share continue to be limited to loan growth, portfolio changes and non-PCD charge-offs as we believe we have adequate reserves against the PCD book. Turning to taxes. We expect approximately $8 million in tax credit amortization for the remainder of 2023 with a corresponding full year effective tax rate of 25% on a core FTE basis and 23% on a GAAP basis. With those comments, I’d like to open up the call for your questions. We do have the full team available including Mark Sander, Jim Sandgren and John Moran. Q&A Session Follow Old National Bancorp (NASDAQ:ONB) Follow Old National Bancorp (NASDAQ:ONB) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] We’ll take our first question from Ben Gerlinger with Hovde Group. Please go ahead. Ben Gerlinger: Hey, good morning, everyone. Jim Ryan: Good morning, Ben. Ben Gerlinger: Hate to do a modeling question upfront, but you guys gave a lot of guidance with both the left and right side of the balance sheet, more specifically to the cost of liabilities and deposits going forward. The one piece that I think was missing and I kind of just backed into it a little bit, what was the average earning asset yield or what you might see an uptick in terms of the next rate hike. So putting it all together, I’m coming up with a margin around 3.4% kind of at year-end. I might be off by a couple of bps here and there, but is that — do you think that’s a fair assumption? And then what would be some possible factors that could be above or below that? Brendon Falconer: Yeah. I think you’re in the ballpark, Ben. I think what we need to think about is what is the velocity of deposit pricing going forward and how well can we do against that deposit beta guide we got. I can tell you today, the velocity does seem to have slowed. I know we’re one month into the third quarter. But I think there’s some potential upside there. And we do have still a significant amount of fixed asset repricing, fixed pricing assets that we’ll replace for the next 12 months, that’s meaningful. It could and it should help defer a lot of this kind of late cycle deposit repricing that we have. So I think those are the two items that probably offset margin pressure going forward. Ben Gerlinger: Got you. And then just kind of following up on that. Is it just erring on the side of conservatism, because you guys do have a really healthy deposit franchise that your beta kind of — that doesn’t whipsaw nearly as much as some of the lower quality peers, I guess, you could say. So like is it more just elongation? It just seems a little conservative to me, but you guys probably have a better advantage point. Brendon Falconer: I think our through the cycle deposit beta that we put out there, I think that range, I think, seems reasonable. Time will tell. But what we continue to say whatever the deposit betas do for the industry, we think we outperform it at the end of the day. That’s our best guess today in this environment and will we try to outperform it? Absolutely. One thing we’re certainly confident is we can be better than peers. Ben Gerlinger: Got you. That’s great. And then one more kind of just changing topics a little bit. You guys kind of historically modeled for the worst-case scenario based on Moody’s S3 and with that as the backdrop, if you guys are slowing loan growth, does that kind of negate the economic factors associated with CECL? Or is it more bad could get worse and their modeling, therefore, you go lower. What I’m really getting at here is you’re slowing loan growth, should the provision come down as well, assuming there’s no credit events? Brendon Falconer: See, our provision should be generally limited to loan growth and non-PCD charge-offs. And so if loan growth moderates a little bit, that should moderate provision expense going forward. Ben Gerlinger: All right. Sounds good. Appreciate it. Great quarter. I hope the rest of year continues this trend. Jim Ryan: Thanks, Ben. Operator: Next, we’ll go to Scott Siefers with Piper Sandler. Your line is open. Scott Siefers: Good morning, guys. Thank you for taking the question. Just wanted to ask a question on NII. So obviously, really good performance. I’m glad to see the sturdy guide. Brendon, maybe if you could offer just sort of any thoughts you might have or be comfortable with sort of when and why you would see NII ultimately bottoming? And to the extent possible, what would happen to it thereafter? I mean, presumably, it becomes a function of loan growth and sort of back book repricing, but maybe just sort of nuances of upcoming ebbs and flows in NII in the aggregate? Brendon Falconer: Scott, yeah, I think it’s impossible to predict with any level of kind of precision when on bottoms out and at what level, I can tell you that we continue to run an asset under the balance sheet, and the next rate hike will help offset any deposit headwinds as we’ve talked about a little earlier. I think the pace of deposit repricing has slowed a little bit. So I don’t want to call the end. But certainly, there’s more probably downside pressure than upside opportunity at this point. Scott Siefers: Okay. And as it relates to the non-interest bearing deposits, which — so I think we have gone down to — or assume they go down to 28% from roughly 30% today. Maybe just sort of a background as to what you guys are thinking that leads you to believe that’s the right number? In other words, what are sort of the risks, but also what you’re seeing that suggest they will settle out fairly soon? Brendon Falconer: Yes. We’re monitoring the pace of that transition out of non-interest bearing into higher interest-bearing account. This is probably maybe the most aggressive of the assumptions in there, but probably has maybe the smallest impact in terms of our guide. So I don’t think it moves around our NII guidance significantly if we missed that by a couple of percentage points. But Scott, honestly, it’s our best guess. That’s a tough one to call, but we’re monitoring the behaviors, and we feel comfortable with that level now, and we’ll update you if that changes. Scott Siefers: Okay. Perfect. All right. Thank you very much. Jim Ryan: Thanks, Scott. Operator: Thank you. And next, we’ll go to David Long with Raymond James. Your line is now open. David Long: Good morning, everyone. Jim Ryan: Good morning, David. David Long: Let’s stick with the deposit discussion here. And the question I have is, it seems like June, there was a lot of competition as banks wanted to show deposit growth in the quarter. Is your sense that maybe deposit competition has eased in July? And then as a second part of that, throughout the second quarter and into here in July, where are you seeing the biggest competition? Is it the G-SIBs? Is it the regionals? Is it the community banks? Where is it most competitive? Thanks. Mark Sander: Yeah. I don’t think that — David, it’s Mark. I don’t think that competition has eased. I would say the pace of increase has eased is what Brendon was trying to convey. So we stay competitive. We’re staying in the upper half of the market in terms of our rate positioning. And I just think there’s still fierce competition and where it’s coming from, frankly, everywhere. And so more of a midsized banks than anything else, the SIFIs don’t have to compete as much as — but all of our markets have plenty of competition, and I think it’s still pretty healthy out there. David Long: Got it. Cool. Okay. And then Secondly, I wanted to ask about your appetite to hire additional commercial bankers. I know you guys have had a lot of success over the last year or two in that. Are you still looking to hire within your footprint? And if so, what is the commercial banker that’s attractive to look you like? Mark Sander: The answer to your question is yes. So we’ll always stay in the market. We’ve got a long-term view, and we’ve suspend — a lot of it will repeat it. Good revenue producers pay for themselves quickly even in this environment. We’re building a model for the long term. And people — we’ve got a good story to tell, and we want to take advantage of that when people are looking to make a move and frankly, being proactive with people who might not be looking to make a move. We have slowed the pace of hiring this year largely because we don’t need to add folks, we just are being opportunistic. But we still hired nine revenue producers across wealth and commercial in Q2, and we’ll continue to look for it. The prototypical profile is a seasoned 10 to 15 or more year banker who’s relationship banking within our markets, I guess, is the best way to put it. David Long: Got it. Thanks, Mark. Appreciate it. Thanks, everyone. Jim Ryan: Thanks, David. Operator: Next, we’ll go to Chris McGratty with KBW. Your line is now open. Chris McGratty: Good morning. Jim Ryan: Good morning, Chris. Chris McGratty: Hey. Brendon, maybe another one for you. I think the market consensus is that we stay higher for longer after this week’s Fed move. If that plays out to the earlier comments on margins. Should the narrative get a little bit harder next year? Or is it kind of a balancing effort you can kind of hold margins? Brendon Falconer: I think it’s a balancing act, right? It’s that fight to hold margin, which we all play — and I think we have an advantage over most others given the quality of our deposit franchise with the velocity of deposit costs can slow. Like I said, we have a lot of earning assets at fixed rates that are going to reprice meaningfully higher. Our fixed rate book is going to reprice 180 basis points above kind of run-off fields. Our invest portfolio that we’re reinvesting into loans is plus 400 basis points. So I think we have the tools and the balance sheet to help fight for flat in a higher for longer rate environment. Chris McGratty: Okay. That’s helpful. And then in terms of capital, Jim, you talked to just about everything is kind of on hold given the environment. What are you looking for to kind of make a switch to returning more capital? Jim Ryan: There’s an awful lot to play out here with respect to the economy and the last rate move. I think like all investors, right? I mean I think we’re trying to answer those questions. And then I think we get more comfort in how do we think about returning capital in which form. So I think we get more clarity as the year continues to progress and would have better OpEx heading into next year. Chris McGratty: Okay. And maybe if I could just sneak one more in. Brendon, I think you mentioned $4 million of kind of non-run rate fees. So that would put you kind of $77 million, $78 million kind of ballpark for quarterly fees. I want to make sure I understood that. And then given the tax benefit in the quarter, I know you gave a full year guide, but do you have what the back of the envelope is for the back half of the year with that adjustment? Brendon Falconer: Yeah. So I think that $78 million, $77 million is the right — the right number for fee going forward given sort of mortgage and capital markets headwinds. And then on the tax rate, I think that full year guide probably approximates the back two quarters. Chris McGratty: All right, perfect. Thanks. Jim Ryan: Thanks, Chris. Operator: Thank you. Next, we’ll go to Terry McEvoy with Stephens. Your line is now open. Terry McEvoy: Hi. Good morning, everyone. Jim Ryan: Good morning, Terry. Terry McEvoy: Maybe the decline in the loan pipeline, the $5.4 billion to $3.1 billion, how much of that is internal focus on the full relationship and just tightening things up versus just less market demand out there? Mark Sander: Yeah. Terry, it’s Mark. I wouldn’t put percentages on it, but more is driven by our internal, our focus than it is external. I mean, certainly, CRE markets have retracted a bit and they are not as active. So there’s some of that, but more of it is, frankly, our rationing our balance sheet. And as Jim and Brendon both alluded to in our comments, we’re a relationship bank, and we always are that way. But occasionally, in the past, you’ve got times where you lead with credit in this environment, we’re not doing that. Deposits have to come day one. And if the pipeline didn’t have — reflect that, we move them out of the pipeline. So we’ve rationed our pipeline down proactively. Terry McEvoy: I see. And then just overall managing the size of the balance sheet, what’s your appetite for additional loan sales? And will the cash flow from the securities portfolio be utilized to fund loan growth? Brendon Falconer: Yeah, Terry, this is Brendon. Yeah, we’re lastly use the best portfolio to continue to fund loans. And I think to the extent that deposits continue to grow to fund our loan growth. We’ll use that. If it doesn’t, there’s opportunities to continue to pair, but it won’t be significant or sizable. Terry McEvoy: And maybe just one last one. I mean the expense guide, I just want to make sure it fully captures what Jim talked about in terms of the Southeast Michigan and Detroit build out, what you’re doing in wealth management, what you’re doing in Nashville, you’ve got a lot of growth initiatives, but you’ve really been able to self-fund it. And haven’t raised the expense guidance, which I think has been a real positive surprise. I’m just making sure all those initiatives you feel like are captured in that — in the expense guide for this year? Brendon Falconer: Yes, Terry. Absolutely, it’s all captured in. Jim Ryan: That’s the goal, right? I mean I think we have continued opportunities to invest in people and any technology needs. But at the same time, we’ve got to figure out ways to self-fund that. And so we want to be incredibly disciplined around with what that looks like. Terry McEvoy: I totally agree. Thanks for taking my questions. Jim Ryan: Thanks, Terry. Operator: Thank you. Next, we’ll go to Brody Preston with UBS. Your line is open. Brody Preston: Hey. Good morning, everyone. Jim Ryan: Good morning, Brody. Brody Preston: Hey. I just wanted to follow up, Brendon, I think you said that there might be some I think upside on NII or maybe it was Jim that said that just dependent on what happens with the velocity of the deposit beta guide. I think the spot rate in the deck — excuse me — you said was 1.98%. And so I guess how has the velocity change from that 1.98% level? Brendon Falconer: Yeah, it slowed materially. But it’s early days in the quarter, and so we don’t want to declare victory and say that’s a permanent change of velocity, but we have seen some positive trends on that front. And obviously, we’ll continue to watch it. Brody Preston: Got it. And I saw the uptick in brokered deposits quarter-over-quarter, and it looked like it was fairly spread out between the front end and the back end. But I wanted to ask just like just given NIBs came in a bit better than what I expected. Are you guys planning on maybe slowing the pace of brokered? Or is there a potential for you to pay brokered deposits back? And would that kind of feed into maybe a slowing of the increase in the deposit cost trajectory? Brendon Falconer: Yeah, it’s all about core deposit growth trajectory to the extent that we continue to grow core deposits at rates better than brokered. We’ll continue to do that and deemphasize our use of brokered. Brody Preston: Okay. Okay. And then the last one for me, just in terms of the loan pipeline, I’m sorry if I missed it. Do you have a sense for, I guess, what portion of it is kind of fixed rate versus floating rate at this point? And what kind of new fixed rate origination yields are? Brendon Falconer: Yes, we do. It’s about 75% floating and 25% fixed. Brody Preston: Okay. And is there a difference between what the origination yields are on the fixed rate versus the floating rate? Brendon Falconer: Yeah. We actually put it in the slide deck. Our floating rate just in June was 7.61%, and fixed was around just above 6%. That could move up a little bit, given our potential, obviously, rate hike coming here shortly. Brody Preston: What drives that delta, Brendon, between commercial fixed and commercial floating being 150 to 160 basis points kind of difference at this point in the rate cycle? Brendon Falconer: Yeah, it’s just a walk curve. You think about the average tenure of these fixed rate deals, five years, that 5-year swap service is about that below. Brody Preston: Got it. Got it. Okay. Great. Well, thank you very much for taking my questions. I appreciate it. Jim Ryan: Thanks, Brody. Operator: Next, we’ll go to Jon Arfstrom with RBC Capital Markets. Your line is open. Jon Arfstrom: Hey, thanks. Good morning. Jim Ryan: Good morning, Jon. Jon Arfstrom: Hey. A couple of follow ups. Just on the margin, Brendon, to just put it all together, do you feel like is the margin inflecting now? I mean if the Fed is done this week, is it inflecting imminently in your mind? Brendon Falconer: I think, as I said, I think there’s probably more downward pressure than upward opportunity in this, but it’s so dependent on, again, the velocity of deposit repricing and where these terminal betas. And there’s opportunities to continue to grow NII on the earning asset side because fixed rate assets repricing. Is it enough to offset it? We just don’t know yet. Jon Arfstrom: Okay. Slide 14. This is great because it’s — you don’t have exposure to the central business district. So I think the banks that don’t have the exposure to tend to talk about it more openly. But you’re in a lot of big cities. What are you seeing in terms of central business district office real estate? Is it — do you feel like it’s as big of a problem as we make out to be on the outside? Just curious what you’re seeing. Jim Ryan: I think you just answered your own question. I think it’s not as big of a problem as it’s made out to be and yes, we all have our eye on it. It’s not like it’s robust and there aren’t much in the way of new opportunities, certainly, but the risk there exists. I think it’s perhaps a little overly stressed in the media. I think we have ours well circled and to the extent we need to well reserved for the couple of opportunities that where there are issues. Jon Arfstrom: Okay. Okay. Good. And then, Jim, one for you. Anything on regulatory that concerns you on the — you are well under $100 million, but what — anything that you’re hearing that you think would have an over — outside impact on Old National? Jim Ryan: No. I think obviously we’re paying really close attention to what’s being set out there. And we have always been in the position of having good regulatory relationships, and this is now not the time to reduce any emphasis on the work you do, right? And so we just got to continue to improve at every single thing we do to meet regulatory expectations, exceed regulatory expectations. But as I see those things, I think that the toughest one seemed to be aimed at banks north of $100 million. And obviously, there’s a lot of distance between where we’re at today and that number. So I think we’re in a great spot. I actually think we’re in the sweet spot for kind of profitability in terms of bank of our size, where we have the scale to go off and hire and invest in technology. And yet we’ll maybe miss some of the toughest things that come to our industry. So I think we’re in a really strong spot to be for the next few years. Jon Arfstrom: I agree. Returns look really good. So all right. Thank you. Appreciate it. Jim Ryan: Thanks, Jon. Operator: There are no further questions at this time. I’ll now turn the call back over to Jim Ryan for closing remarks. Jim Ryan: Well, as always, we appreciate your participation. Thanks for the one or two questions that I actually got that weren’t directed towards Brendon and Mark. Lynell and John and Brendon and the whole team are here to answer any follow-up questions. So once again, thank you for all your participation and support. Operator: This concludes Old National’s call. Once again, a replay along with the presentation slides will be available for 12 months on the Investor Relations page of Old National’s website, oldnational.com. A replay of the call will also be available by dialing 800-770-2030, access code 5258325. This replay will be available through August 8. If anyone has any additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation. 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AGNC Investment Corp. (NASDAQ:AGNC) Q2 2023 Earnings Call Transcript July 25, 2023 Operator: Good morning and welcome to the AGNC Investment Corp’s Second Quarter 2023 Shareholder Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event […] AGNC Investment Corp. (NASDAQ:AGNC) Q2 2023 Earnings Call Transcript July 25, 2023 Operator: Good morning and welcome to the AGNC Investment Corp’s Second Quarter 2023 Shareholder Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Katie Wisecarver, Investor Relations. Please go ahead. Katie Wisecarver: Thank you all for joining AGNC Investment Corp.’s second quarter 2023 earnings call. Before we begin, I’d like to review the Safe Harbor Statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC’s periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC’s website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, Director, President and Chief Executive Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President and Chief Investment Officer; Aaron Pas, Senior Vice President, Non-Agency Portfolio Management; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I’ll turn the call over to Peter Federico. Peter J. Federico: Thank you, Katie. Market conditions in the second quarter, on balance provided further support for our favorable investment outlook for agency MBS and made us increasingly confident that we are at the forefront of one of the most compelling investment environments that we have experienced in our 15-year history. Historically attractive asset valuations, strong funding markets, and gradually improving hedging conditions as the Fed ends its monetary policy tightening campaign underpin our favorable return expectations. Macroeconomic factors continue to be the primary driver of Agency MBS performance in the second quarter. Debt ceiling uncertainty, and the possibility of a government default weighed heavily on Agency MBS performance and push spreads to the widest level since the great financial crisis. Fixed income markets were also pressured by hawkish Fed minutes and continued strength in the labor market. At current valuation levels, Agency MBS look extremely attractive on a standalone basis and provide investors a compelling alternative to U.S. Treasuries. At a spread to the 10-year Treasury of about 175 basis points, new production Agency MBS give investors the ability to earn a 5.5% yield on a security that is backed by the explicit support of the U.S. government. This combination of yield and credit quality makes Agency MBS appealing to a wide range of investors on both a levered and unlevered basis. Agency MBS also look compelling relative to investment grade corporate debt, particularly in light of a worsening credit outlook. To illustrate this point on Slide 12 of the presentation, we show the Treasury spread differential between current coupon Agency MBS and the Bloomberg Investment Grade Corporate Bond Index. From 2010 to 2022, the average spread differential between these two instruments was negative 75 basis points, which is to be expected given the superior credit quality of Agency MBS. Recently however, this long standing spread relationship has reversed with current coupon agency MBS now trading at a wider spread to Treasuries than this investment grade corporate bond index. At today’s spread differential of positive 15 basis points, Agency MBS are about 90 basis points cheap to the historical average. Over time, this spread relationship will likely revert to the norm as investors take advantage of this opportunity and move up in credit quality. Also important, the short-term funding markets for Agency MBS and U.S. treasuries remain strong in the second quarter, despite debt ceiling concerns. The stability and resiliency of the repo market for these two government backed securities is due to the actions of the Fed in the now well-established reverse repo and standing repo facilities, which together provide a clear, upper and lower bound for short-term repo rates. Following the debt ceiling resolution, the Treasury Department issued a significant amount of short-term debt in an effort to replenish its general account at the Fed. This issuance was readily absorbed and largely offset by a decline in the Fed’s reverse repo facility balance, leaving the funding market for Agency MBS largely unaffected. Finally, the interest rate environment has begun to show signs of improvement, with the Fed nearing an inflection point in monetary policy and interest rates perhaps having already reached their cyclical high point. Fixed income investments are an increasingly attractive asset class. Consistent with this more favorable interest rate outlook, bond funds have continued to experience substantial inflows. Interest rate volatility has also declined from the highs of last year and will undoubtedly decline further once the Fed reaches its desired short-term rate level. Declining interest rate volatility is beneficial to Agency MBS valuations and over time lowers the cost of interest rate related rebalancing. Looking back over the last couple of years, the U.S. Treasury and Agency MBS markets have undergone a dramatic repricing as the Fed transitioned from an ultra-accommodative monetary policy stance to its current restrictive stance. We believe this transition is largely complete and that one of AGNC’s most favorable investment environments is now emerging. When an investor buys a share of AGNC stock, they buy into a levered portfolio of Agency MBS and Hedges that is fully mark to market. At current spread levels we believe our portfolio can generate mid to upper teen returns on a go forward basis, either through strong earnings if mortgage spreads remain at these elevated levels or a combination of favorable earnings and net book value appreciation if mortgage spreads tighten somewhat over time. With the macroeconomic and interest rate environment still unsettled, short term deviations from this promising path are possible. Nevertheless, we remain confident that over the longer term, this investment environment will prove to be one of the best for Agency MBS investors. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail. Bernice E. Bell: Thank you, Peter. For the second quarter, AGNC had comprehensive income of $0.32 per share. Economic return on tangible common equity was 3.6% for the quarter, comprised of a slight decrease in our tangible net book value of $0.02 per share and $0.36 of dividends declared per common share. As of last Friday so far for July, tangible net book value was largely unchanged. In light of the continuing rate volatility we maintained our disciplined risk management strategy throughout the second quarter. Leverage at the end of the quarter was unchanged at 7.2 times tangible equity, while average leverage decreased from 7.7 times for the first quarter to 7.2 times. During the quarter, we opportunistically issued $106 million of common equity through our At The Market offering program at a significant price to book premium. As of quarter end, we had cash and unencumbered Agency MBS totaling 4.3 billion or 58% of our tangible equity and 80 million of unencumbered credit securities. Net spread roll and dollar income, excluding catch up amortization, was $0.67 per share for the quarter, a decline of $0.30 per share from the first quarter due to a somewhat smaller asset base. Our net interest spread increased to 3.26% for the second quarter compared to 2.88% for the prior quarter. The increase was largely due to a higher ratio of our legacy low fixed pay rate, interest rate swap hedges to our funding liabilities for the quarter. Lastly, the average projected life CPR on our portfolio at the end of the quarter was largely unchanged at 9.8%. Actual CPRs for the quarter averaged 6.6% compared to 5.2% for the prior quarter. And with that, I’ll now turn the call over to Chris Kuehl to discuss the Agency mortgage market. Christopher J. Kuehl: Thanks, Bernie. The Agency MBS market faced several major headwinds in the second quarter, including a supply shock following the second largest bank failure in U.S. history, a debt ceiling standoff that risked triggering a U.S. debt default, and a further repricing of market expectations for tighter Fed monetary policy. Agency MBS underperformed Treasury and swap based hedges in April and May, with par coupon spreads reaching post-GSE wides in late May when the debt ceiling uncertainty was at its peak. Spreads recovered somewhat in June following the debt ceiling resolution and a subsequent decline in interest rate volatility. The price performance of Agency MBS varied considerably across the coupon stack with lower coupons meaningfully outperforming higher coupons due to strong index based investor demand throughout the quarter, stemming from fixed income fund inflows. From a total return perspective however, the performance differences across the coupon stack were much more muted given the significantly higher yield associated with higher coupon MBS. Hedge position was also an important driver of Agency MBS performance during the second quarter as the yield curve flattened 50 basis points with the yield on two-year treasuries increasing 87 basis points and the yield on 10-year treasuries increasing 37 basis points. For AGNC, having a significant amount of short and intermediate hedges was beneficial to our overall performance. Despite the volatility early in the quarter, as Peter mentioned, there are a number of reasons for optimism. First, interest rate volatility is likely to decline, which is a positive for Agency MBS. Second, the stresses in the regional banking system have largely abated and further forced bank liquidations are unlikely. Third, the SVB liquidation has gone better than most market participants expected and as of today, more than 70% of the combined agency pass through and CMO holdings have been sold. At the current pace, we expect this FDIC liquidation process to be largely complete within the next two months. And lastly, as Aaron will describe further, with primary mortgage rates near 7% and relatively muted housing activity and slowing seasonals, we expect the supply of Agency MBS over the remainder of the year to be very manageable. Given this improving outlook, we added approximately 2 billion in Agency MBS during the quarter, bringing our portfolio to 58 billion as of June 30th. With respect to portfolio positioning, we continued to move up in coupon, increasing our higher coupon holdings by approximately 5 billion versus reducing lower coupon positions. As a result, the weighted average coupon of the portfolio increased to approximately 19 basis points during the quarter. Since quarter end, we’ve continued to take advantage of attractive valuations, adding MBS and bringing our at risk leverage to 7.5 times as of the end of last week. Our hedge portfolio totaled 61.2 billion as of June 30th, and our duration gap was 0.4 years. Our hedging activity was relatively minimal during the quarter as we modestly increased our hedge position given the move higher in rates and the increase in our MBS holdings. With the debt ceiling standoff behind us, clarity with respect to the supply outlook for Agency MBS and greater confidence that we are near the inflection point of this Fed policy cycle, we expect the second half of the year to be an attractive earnings environment for Agency MBS. I will now turn the call over to Aaron to discuss the non-Agency markets. Aaron Pas: Thanks, Chris. During the second quarter, both Triple A and credit spreads generally performed well, tightening modestly by quarter end. Technical factors continue to be very impactful in the residential mortgage credit space. Limited housing supply driven by elevated primary mortgage rates have caused both purchase and refinance origination volumes to remain low. Existing borrowers with deep out of the money mortgages are effectively locked into their current mortgages, reducing housing inventory. This can be seen in the depressed existing home sales data, which have been running well below levels seen over the last decade. Lower overall levels of housing activity drive lower mortgage issuance volume and are also supportive of house prices given limited supply, which together provide a favorable technical backdrop for mortgage credit. Additionally, the fundamental picture has improved modestly as well. The downside risk associated with a significant credit event has declined as expectations increased for a soft landing in light of encouraging signs seen in recent inflation readings. In addition, firming house prices and a resilient employment landscape provide further reason for optimism. The technical backdrop within the credit risk transfer market has driven strong outperformance in this sector. First, due to a decline in MBS issuance, there are significantly lower credit protection needs from the GSEs as compared to last year. Second, tender offers and pay downs have further reduced CRT flow. Taken together the impact on CRT securities outstanding has been a decline of approximately 8% over the last year. Turning to our holdings, our non-Agency portfolio ended the quarter at just over 1 billion, a decline of approximately 250 million from March 31st. We continued to reduce our CMBS position over the quarter while also opportunistically selling some CRT securities and rotating further dominant [ph] capital structure. The notional amount of our CRT holdings declined over the quarter as we rotated into a deeper but seasoned credit. Lastly, just a note on the repo market for non-Agency securities, spreads were largely unchanged in the quarter with a bias towards being slightly wider. With that I will turn the call back over to Peter. Peter J. Federico: Thank you, Aaron. With that, we’ll now open the call up to your questions. Q&A Session Follow Agnc Investment Corp. (NASDAQ:AGNC) Follow Agnc Investment Corp. (NASDAQ:AGNC) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions]. Our first question comes from Douglas Harter with Credit Suisse. Please go ahead. Douglas Harter: Thanks and good morning, hoping you could talk about how you’re viewing the dividend in light of the comments around where you see current returns and then whether you view the coming maturity of a lot of legacy shorter dated swaps as having any impact on the dividend level? Peter J. Federico: Sure. Thank you for the question, Doug. I know that’s a question on a lot of investor’s minds. I think there’s a couple things to point out in that answer. First, I’ll start with if you look at the net interest margin on our portfolio, this quarter it actually increased to 326 basis points. I think it is probably the all-time high from a net interest margin perspective, which demonstrates the fact that we had such a significant portion of our short-term debt fully hedged out for this rate increasing environment. But that spread is not indicative of the true economic earnings of the portfolio going forward. And similarly, if you look at our net spread and dollar roll come at $0.67 that’s also not reflective of the economics. I think you’re getting to the correct question is, if you look at the portfolio on a mark to market basis, fully from an asset liability and hedge perspective, the net interest margin is clearly not 326 basis points, it’s much more in today’s environment, probably in the neighborhood of 175 to 180 basis points. If you look at new current coupon mortgages, for example, hedged with a mix of 5 and 10-year swap, and Treasury hedges, you’re probably in the neighborhood of 180 basis points, which is historically very attractive. That’s why we’re so excited about this environment. If you lever that something like 7.5 times, given the current coupon spread, and given our operating expense of a percent, you should come out in the high teens in terms of an economic return on the portfolio on a go forward basis. That’s what we look at when we think about the playability and durability and sustainability of our dividend. Our dividend yield today on our book value is right in the 15% range, the economic earnings on the portfolio to economic earnings on their portfolio on a go forward basis is as I said, probably in the high to mid-teens. So I think those two things align very well and that’s one of the reasons why we’ve been so disciplined in keeping our dividend where we have kept it over the last couple of years despite our net spread and dollar roll income being more than two times our dividend at time. So that’s the way we think about it going forward. We’re very comfortable with where our dividend is right now, versus the economics of the business. The other thing that I would also point out is that you talked about the fact that we will have short-term swaps rolling off over the next year, and that will lead to some compression. But again, it should bring that net interest margin down more in line with the economics and our net spread and dollar roll income more in line with our dividend. So we’re comfortable with where it is and we think they aligned well from an economics perspective right now. Douglas Harter: Right appreciate the answer. Peter J. Federico: Sure, thank you. Operator: Next question comes from Trevor Cranston with the JMP Securities. Please go ahead. Trevor Cranston: Alright, thanks. Good morning. Peter J. Federico: Good morning Trevor. Trevor Cranston: You guys laid out pretty well I think the favorable case for MBS. I was wondering if you could talk a little bit more about how impactful you think the end of the FDIC portfolio sales would be on the MBS market, sort of spread volatility in general? Thanks. Peter J. Federico: Yes. Thank you for the question. We are very optimistic about the outlook, and we think we’re at an important turning point somewhere in the next several months. If you think about it, the market has really struggled, and it’s been multiple quarters now of just an environment where the reasons for concern and uncertainty have clearly outweighed the reasons for optimism. But what’s happened and particularly now, as we got through the second quarter, is a lot of those sources of uncertainty have now fallen away. If you think about it, the Fed is clearly close to being done, whether they’re done tomorrow and even former Chairman Bernanke thinks that tomorrow is the last move. But if it’s not tomorrow, it may be one more move. We do have to get through some economic data, but the Fed is near the end, and that’s certainly positive. The Fed’s balance sheet runoff is sort of on autopilot, there’s no issues there. The regional banking crisis seems to now be well in the rearview mirror, which is very positive, and the big movement in deposits has been put in the past. As Chris pointed out, there doesn’t seem to be another balance sheet-related banking crisis. And the Silicon Valley Bank is largely done. I don’t expect that to have really any impact on the market that has been absolutely easily absorbed without any disruption. So there’s lots of reasons to be optimistic about the direction of mortgage performance. I think that’s one of the reasons why we’re encouraged by the outlook, is that we still have some uncertainty to contend with the Fed and the way that they talk about the economy and inflation. But over the next couple of months, really the key to stability is going to be the inflation data. And if the inflation data continues to be in line with expectations or even lower, that is going to lead to an important decline in interest rate volatility, which is an important positive for Agency MBS. Chris, do you want to add to that? Christopher J. Kuehl: I would just say, look, the FDIC, the failure of Signature Bank and SVB was clearly a supply shock that the market had to deal with and spreads widened into that. More specifically to your question, when this process ends, the liquidation by the FDIC, market technicals should improve materially. The timing will also likely coincide with lower housing seasonals, which means less organic issuance. And so that should be a tailwind for performance in the second half. Of the $82 billion, $83 billion of Agency MBS that had to be liquidated, there’s 13 billion pass-throughs left, 10 billion in CMOs. And as Peter said, the process has gone very well, much better than some had feared. And we can credit yield levels and strong inflows into index-based fixed income managed funds is the reason the liquidation has been so easily absorbed. Trevor Cranston: Got it, okay. And then you guys mentioned adding to the portfolio since the end of the quarter, can you talk, in general, sort of where you’re adding in the coupon stack, I mean a lot of the comments are focused on current coupon spreads. So I was curious if you guys are generally looking at 6s and higher at this point or where you’re at it? Christopher J. Kuehl: Sure. So relative value across the stack is still very much upward sloping given current valuations. And our marginal purchases are concentrated in production coupons. And importantly, this — our view on relative value is not unique to us or unique to our models. The steep upward slope in spread curve across the stack exists because the dominant bid for mortgages is coming from index-based investors, driven by fixed income fund inflows that need to buy low coupons or index coupons that aren’t being produced outside of the FDIC liquidation. The low coupon float is locked up outside of what’s been sold through the FDIC. It’s locked up at the Fed and banks that don’t want to sell because they don’t want to take a hit to capital. And so there are very few true arbiters of value currently and all the supply, by definition, is in production coupons. Trevor Cranston: Okay, appreciate the color. Thank you. Operator: Our next question comes from Bose George with KBW. Please go ahead. Bose George: Hey guys, good morning. I wanted to ask about leverage. Can you just remind us how you view kind of normalized longer-term leverage? Peter J. Federico: Sure. First, I would say, Bose, that our leverage outlook is dependent on the environment. It’s situational, it always is. It depends on the interest rate environment, our expectations about the interest rate volatility. As we look ahead, it depends a lot on where mortgage spreads are, whether they’re at historically wide or historically tight levels. So it obviously changes over time. We’ve obviously been operating with a very defensive position really for eight quarters. If you look back at our asset balances, for example, they’ve been declining or stable for eight quarters in a row. It was actually in the second quarter that marked the first change in that trajectory, where our asset balance actually increased. And that is consistent with our changing view on the investment outlook being more positive. As Chris said, we added to our portfolio. And importantly, as Chris mentioned in his prepared remarks, our current leverage is now higher than it was at the end of last quarter. We were currently operating at around 7.5 times. So we have a lot of capacity to take leverage higher as the market conditions continue to unfold. And as we get increasingly confident in the outlook, we’re operating, as you know well, with a significant amount of unencumbered cash and mortgage-backed securities at 4.3 billion or 58% of our unencumbered — of our equity. So we have a lot of capacity to be opportunistic. And as Chris mentioned, we’re continuing to add mortgages in this environment, and we’ll likely do so over time. Bose George: Okay, great, makes sense, thanks. And then just from a capital raising standpoint, just given the efficiency of your ATM issuances, is that likely to be the way you issue capital going forward? Peter J. Federico: Well, it’s a highly efficient way of raising capital. From a cost perspective, it’s extremely low cost, it gives you a lot of flexibility to do those capital raises at a time when you really believe that they’re accretive to your existing shareholders and at a time when you can deploy that capital very quickly. We did opportunistically raise about another $100 million. We did so at levels that were very accretive to our book value for existing shareholders. But again, we’re going to continue to be opportunistic with that. And we also importantly, believe that we’re operating at a very desirable scale and size. And so as I mentioned before, that is something that we consider with respect to our capital raising. So I think you can expect us to continue to be very disciplined and very opportunistic with those capital raises, always looking at it from the perspective of our existing shareholders, making sure that we’re operating with the desired leverage level for our existing shareholders first, then looking at the capital markets, can we raise capital accretive from an earnings and from a book value perspective, can we deploy those proceeds in a way that is beneficial to our existing shareholders. So we’ll continue to take that approach. And the ATM program really gives you a lot of flexibility because it is so low cost. Bose George: Okay, great, thanks. Operator: Next question comes from Rick Shane with J.P. Morgan. Go ahead. Richard Shane: Good morning everybody and thanks for taking my questions. I wanted to — first of all, when we look at Page 25, the interest rate sensitivity, I think one of the things that is worth mentioning is, over the last couple of quarters ordinarily when we look at rate sensitivity, it is both symmetric and linear. And when we look right now, it’s pretty linear in a rising rate environment, but you have non-linearity and it is not as asymmetrically favorable as rates fall. Is that a function of the swaptions and also potentially some amortization of premium of higher coupon securities in a falling rate environment, what drives that? Peter J. Federico: Now what’s happening — that’s a good question and you actually can see that on Page 11 of the investor presentation, but it just shows you the duration gap sensitivity. And what it’s showing is that from a rate perspective, overall, we are above the peak convexity point in the mortgage universe. The mortgage universe is far out of the money right now. In fact, it would take a 200 basis point rally in order for there to only be about 20% of the universe to be refinanced. But what it shows is that we have more down rate risk. In fact, said another way, our duration will move quicker in a down rate scenario than it will in an uprate scenario. That is one of the reasons why we continue to operate with a small positive duration gap. Our duration gap actually hurt our performance in the second quarter because we did have a small positive duration gap and rates were rising. But in the current environment, where we stand right now, there’s clearly more two-way rate risk in the market. And as you point out, there’s a little bit more sensitivity to our portfolio, to a falling rate scenario. So we’ll likely continue to operate with a small positive duration gap, and you can see that in the sensitivity table that you point out. Richard Shane: Peter, that’s a great answer. And it actually leads me to my next question, which is that, look, you guys — this is not an easy business, but there are three or four basic decisions that you guys make, where you play in the stack, how much leverage you run, what your hedge ratio is. So those are the big levers within the model. And you’ve indicated that you see an opportunity, at this point, to modestly increase leverage. I don’t think anybody expects you’re going to double leverage or increase leverage to 30% overnight. But I am curious, as you do that, given where we are, is the intention to let the — as we saw the duration extend modestly from the first quarter to the second, should we expect the duration to modestly increase as well given where we are in the rate cycle? Peter J. Federico: Are you referring to the duration gap? Richard Shane: Yes, I’m sorry. Yes, I apologize. Peter J. Federico: Yes. So no, I appreciate your summary, and you point out the three key variables. I’ll actually address two of the variables. We already talked about leverage and from a duration gap perspective, I would say, generally speaking, no. In the current environment, because of the shape of the yield curve, the inverted yield curve, having a positive duration gap actually is negative carry on the portfolio. In today’s market, a one-year duration gap is something equivalent to about a 1% drag in ROE. So we are cognizant in an inverted yield curve environment that there is a cost of doing that. So we’ll keep our duration gap likely low. There will come a time in the future, to your point, once the yield curve is positively sloped again, which it inevitably it will be, operating with a positive duration gap and maybe even a larger positive duration gap may be very profitable, if you will, from an ROE perspective, both in terms of the level of rates and the carry that we’ll generate on that position. But for the foreseeable future, I don’t expect that to change very much. The other variable that you point out, I want to also address, which is the hedge ratio. So that is, obviously, a key driver of performance. We’ve operated with a very high hedge ratio, meaning all of our short-term debt was essentially termed out into synthetically longer-term debt. Our hedge ratio was still at 119%. As you look forward in our portfolio, we will have swaps rolling off in our portfolio. We actually provide the one-year component of our swap portfolio, which is about $12 billion. Those swaps are not all rolling off in this calendar year. In fact, only about $5 billion of those $12.5 billion are rolling off in the next six months. I point that out because as it sits right now, you could see a scenario where as our short-term swaps roll off over the next 12 months and then particularly throughout 2024, that could also coincide quite nicely with the scenario where the Fed is actually lowering short-term rates. So in a scenario where the Fed is lowering short-term rates, monetary policy and shifting toward an easing policy, we will likely operate with a lower hedge ratio, perhaps well under 100% at some point, which would be another source potentially of earnings potential on our portfolio. So we’ll look at our hedge ratio. We’ll look at our duration gap. We’ll look at our overall leverage as key drivers. It’s also important to point out since we’re talking about the hedge ratio and the fact that there will be compression coming from short-term hedges rolling off, which have been very beneficial to us. It’s also important to point out that the average yield on our portfolio today is still only 390 versus a mark-to-market yield of well over 5%. It’s probably something like 5.1% or 5.2%. So said another way, our assets are still 100 to 120 basis points below market yields. That, too, will change over time as we roll out of old assets into new assets. Hedges roll off, that will be a source of compression. As we roll into new assets, that will be a source of benefit. So I just wanted to point that out, but thank you for that question. Richard Shane: No, it’s a great answer and I think I’m going to have to go over the transcript about 15 times in order to really get everything out of it, but I appreciate it. Thank you so much. Peter J. Federico: Yes, appreciate the questions. Operator: Your next question comes from Vilas Abraham with UBS. Please go ahead. Vilas Abraham: Hey everyone. Some of my questions have been asked and answered. Maybe some commentary, Peter, just on the net supply expectations and the kind of puts and takes around that, that you think could impact spreads over the next couple of quarters? Peter J. Federico: Sure, and Chris pointed this out in his prepared remarks, from a net supply perspective, I think everybody still expects there to be something in the neighborhood of about $200 billion worth of organic supply, which is very manageable. Add to it what the Fed’s runoff is putting — actually the Fed’s portfolio is running off a little bit faster than it was a quarter ago, but that’s still about another $200 billion. So for the year, I still think the private sector has to absorb about $400 billion worth of mortgages, but I think the private sector can easily absorb that amount of mortgages. And as Chris pointed out, we’ve gone through sort of the — perhaps the peak cyclical point for the seasonals for the mortgage, for the housing market. And we expect the second half of the year to be some slowing where mortgage rates are, affordability. All those things should keep mortgage supply well contained in the second half of the year, which would be a positive for mortgage performance, particularly as the demand from fixed income remains as robust as it currently is with the inflows. I suspect that, that equation is going to work out well for Agency MBS. And when you look at Agency MBS, not only from — just from a supply perspective, but when you look at Agency MBS in particular, relative to other fixed income investments, we pointed out the performance of Agency MBS versus corporates, I think that rotation is a significant source of demand that takes time to occur, but I think it will occur. So even though banks may be not quite the buyers of mortgages in the second half of the year that we thought they may be because of the capital issues that they face, the flow of money into fixed income and in particular, the flow of money that should ultimately make its way to the Agency MBS market because it is so cheap relative to Treasuries, for essentially the same credit quality, I know it’s not exactly the same credit quality, but from a government guarantee perspective, they are exceedingly cheap to Treasuries and they are exceedingly cheap to investment-grade debt. And I think that’s going to draw dollars into the Agency MBS market. That takes time. But that, coupled with the positive seasonals, I think, makes for a better second half of the year. Vilas Abraham: Okay. And then just across the coupon stack, you touched on this earlier. So does that kind of imply that lower coupons continue to outperform a little bit as bond funds on buying or just how do you think about the dispersion and performance across the stack? Peter J. Federico: Yes, I’ll start with that, and then Chris might add to that. But that’s exactly right. That’s what happened in the second quarter, is that there was steady, very steady. Every week, we saw bond fund inflows. Those bond funds, as Chris pointed out, are buying the index. The index is more than 50%, 2 and 2.5. So they are buying those coupons. So from a price perspective, those coupons performed very well. When you think about the performance of the coupon stack, though, adding in carry, the performance differences were much more muted because the higher coupons offer so much better carry. But there was still outperformance of the lower coupons in the quarter because of the fixed income demand and the lack of supply. Vilas Abraham: Okay. Great. And did you guys give a quarter-to-date book value update? I don’t know if I missed that? Peter J. Federico: Bernie mentioned that it was roughly unchanged on the quarter so far. Vilas Abraham: Okay, thank you very much. Peter J. Federico: Yup, thank you Vilas. Operator: Your next question comes from Eric Hagen with BTIG. Please go ahead. Eric Hagen: Hey, thanks, good morning. I got a couple here. Lots of divergence between swap performance versus treasuries last quarter. Do you have any views on what may have driven that divergence and does it have any bearing on how you hedge going forward? And then second question here, I mean imagine that you guys have seen — have been following the expectation for new bank regulations, which expand the scope of Basel. We could maybe even see some of that later on this week. Do you see that being a source of volatility for MBS, do you see any like broader connectivity between banks, lightening their footprint in mortgage finance and the performance of MBS in the secondary market, maybe more generally? Peter J. Federico: Sure. I appreciate all those questions. First, with respect to hedge, you’re absolutely right. There’s been some performance differences between using swap hedges and treasury hedges. It’s a very volatile market, and that does make hedging very challenging. We see that in the shape of the yield curve and the fact that the two and five year parts of the curve outperformed so much. The five-year part of the curve, in particular, outperformed. Five year treasuries outperformed so from a hedging perspective last quarter so that would have been one of the sort of the ideal hedge position. But we’ll continue to use a mix of hedges, with swap spreads being as negative as they are. We’ll likely bias towards a little bit more swap hedges in our mix going forward. But I think it’s important, from an overall performance perspective, over the long run, to have a mix. We’re going to have quarter-to-quarter volatility and performance because of the hedge mix. We saw that this quarter and also because of the coupon mix. But over the longer run, we think the right mix from an asset perspective is in the middle to high coupons, where we’re concentrated right now. They give us the best carry, the best return profile. And from an overall hedge mix, again, using a blend of hedges, 5 and 10 years, in particular, we have increased the weight of those hedges that hurt us in our performance last quarter. About 65% of our portfolio, close to 70% of our hedges now are five years and out, in particular, in the 7 to 10-year part of the curve. With the yield curve being as inverted as it is, I suspect that, that is going to be a beneficial trade for us to have over time. The yield curve will ultimately invert. So we want less short-term hedges, more long-term hedges. And we’ve positioned for the re-steepening of the yield curve and our hedge position. So I think that’s going to be the biggest driver of hedge-related performance as opposed to the mix between swaps and treasuries. With respect to bank capital, there’s no doubt that the banks face increasing capital requirements. We do not expect this to be a short-term issue in the Agency MBS market. This is much more of a longer-term, probably multiyear issue that banks will face. But I also do believe that ultimately, when the banks face higher capital requirements or increased capital requirements related to interest rate risk, that ultimately, on its face, it sounds like that would be negative from a demand perspective for Agency MBS, but I think you could also look at a scenario where there actually may be benefits to owning Agency MBS over treasuries because of the significant yield and carry differential. So there could be a substitution effect also over time for banks out of treasuries into the much higher yielding Agency MBS. I think that’s something that’s going to play out over the long run. I don’t expect that to be a 2023 issue. Eric Hagen: I appreciate the color. Thank you. Operator: Next question comes from Crispin Love with Piper Sandler. Please go ahead. Crispin Love: Thanks, and good morning. Appreciate you taking my questions. Just looking at Slide 12 in your presentation, which I think is a new one, you highlight the Agency MBS spread relative to investment-grade corporates, which definitely shows the relative opportunity there, which you’ve hit on a little bit. But what do you think are the key drivers in the kind of the spread relative to corporates, is it all based on agency technical, or just kind of curious other factors that might be…? Peter J. Federico: It’s a great question and it’s a complicated question. But I think it’s really, really important because the point that we’re trying to make here is that the environment that we’re currently in is actually one that is very rare in terms of agencies being this cheap relative to investment-grade corporates, given the fact that post-Great Financial Crisis, the agency mortgage-backed security essentially has the backing — the explicit — does have the explicit backing of the U.S. government in terms of the support for the GSEs. So you can really make a very clear credit differentiation between these two instruments as to why we chose it. Interest rate volatility is a big driver of it with the amount of interest rate volatility that we’ve had, interest rate volatility is always negative for Agency MBS, and you can see that. So to some extent, that makes sense that agencies have underperformed. The other point is that when you have rapidly moving markets, particularly in the downturns, we make this point all the time. Agency MBS tend to underperform other asset classes. They lead in the downturn, if you will. And they lead in the downturn because they are a unique security, and that they are short of all their liquid and their spread products. So from a — when investors have to liquidate, particularly in bond funds, when you have to liquidate, you liquidate what you can sell what is liquid, and Agency MBS is that security of choice. So as interest rates were going up and the market was worried about the Fed and the balance sheet runoff, Agency MBS were uniquely negatively impacted. So when you look at this equation, I think the thing that’s most mispriced in it is probably not corporates, they may actually be sort of neutral, maybe a little bit rich. But it’s Agency MBS that I think are exceedingly cheap in this comparison. The other sort of interesting point is that despite the Agency MBS market being the second most liquid market in the world, relative only to U.S. Treasuries, and being $8.5 trillion, it’s a very difficult asset class for investors to access if you’re not an institutional investor. If you want to put money to work, you can go to Fidelity and you can buy a corporate bond. Corporate bonds are much more liquid from that perspective in terms of retail’s ability to access that market and to understand that market. Agency MBS is a fixed income asset class that’s dominated by institutional access. Makes it more difficult and so that’s why you could have environments like we have right now where Agency MBS, despite being AAA-rated, are trading at a wider spread to Treasuries than single A-rated corporate bonds. Crispin Love: Appreciate the answer Peter, and that is all I had for questions. Peter J. Federico: Thank you. Operator: We have now completed the question-and-answer session. I’d like to turn the call back over to Peter Federico for concluding remarks. Peter J. Federico: Thank you, everybody for participating on the call today. Just want to sort of recap that we think that we’ve obviously gone through a long period, a couple of year period where Agency MBS have been challenged by the repricing that has occurred in the fixed income markets, but I do believe that we’re getting close to the end of that process. And as I mentioned, we believe a very favorable investment environment is now starting to emerge. So we look forward to talking to you again at the end of the third quarter. Thank you for listening today. Operator: Thank you for joining the call. You may now disconnect. Follow Agnc Investment Corp. (NASDAQ:AGNC) Follow Agnc Investment Corp. (NASDAQ:AGNC) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

LendingClub Corporation (NYSE:LC) Q2 2023 Earnings Call Transcript July 26, 2023 LendingClub Corporation beats earnings expectations. Reported EPS is $0.45, expectations were $0.04. Operator: Hello, everyone. Thank you for attending today’s LendingClub’s Second Quarter Earnings Conference Call. My name is Sierra, and I will be your moderator for today. All lines will be muted during […] LendingClub Corporation (NYSE:LC) Q2 2023 Earnings Call Transcript July 26, 2023 LendingClub Corporation beats earnings expectations. Reported EPS is $0.45, expectations were $0.04. Operator: Hello, everyone. Thank you for attending today’s LendingClub’s Second Quarter Earnings Conference Call. My name is Sierra, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers around the end. [Operator Instructions] I would now like to pass the conference over to Artem Nalivayko, Vice President of Finance with LendingClub. Please proceed. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub’s second quarter earnings conference call. Joining me today to talk about our results and recent events are Scott Sanborn, CEO, and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to the questions from analysts, we will also be answering some of the questions that were submitted for consideration via email. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts, and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantages and strategy, macroeconomic conditions and outlook, platform volume, future products and services, and future business, loan and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today’s press release and our most recent Form 10-K as filed with the SEC, as well as our subsequent filings made with the Securities and Exchange Commission, including our upcoming Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks today also include non-GAAP measures relating to our performance, including tangible book value per common share and pre-provision net revenue. We believe these non-GAAP measures provide useful supplemental information. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in the presentation accompanying our earnings release. And now, I’d like to turn the call over to Scott. Scott Sanborn: All right. Thanks, Artem. Welcome, everyone. We delivered solid results in the quarter, thanks to disciplined execution and by continuing to leverage the strategic advantages of our marketplace bank model. The quarter’s $2 billion in originations was in line with our guidance, reflecting planned lower balance sheet retention. Total revenue was $232 million and pre-provision net revenue, which is revenue less non-interest expenses, was $81 million, which was exceeding the high end of our guidance range and made possible by continued marketing and operating expense efficiencies. As a result, we delivered our ninth straight quarter of profitability. Now, let me provide some context on the current operating dynamic. The bank portion of our business is demonstrating its resilience with net interest income stable quarter-over-quarter. However, we are facing, what we believe to be, temporary headwinds in the marketplace, which is resulting in pressure on our outlook for our non-interest income. First, as we signaled last quarter and as is evident in regional bank earnings reported thus far, banks are currently moving to the sidelines as they address their capital and liquidity concerns. And their pullback will have an impact on our near-term origination volume. And while we continue to have productive discussions with our bank partners, and though the appeal of our high-yield short-duration asset is more clear now than ever, bank’s capacity to invest is, for now, likely to remain restricted. And second, to strengthen their capital position, banks are selling loan portfolios at deep discounts. That’s adding significant supply to a market that’s already saturated with investment options. On the positive side, asset managers are raising capital and they are stepping in to buy; however, they’re seeking higher yields to offset their higher cost of capital. And this is putting pressure on loan sales pricing. We don’t believe that this market dynamic is sustainable. And in the meantime, we’re leaning into our bank advantages to create new profitable structures to support marketplace volumes. I mentioned our structured loan certificate program last quarter, which is essentially a two-tier private securitization in which LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price. This effectively provides low friction, low cost financing for the buyer, and in exchange LendingClub earns an attractive yield with remote credit risk and without upfront CECL provisioning. So as a bank, this is something we are uniquely positioned to deliver for our marketplace investors. We’ve had good initial reception to the program and we have a solid pipeline of forward interest. Another advantage of our bank is our ability to hold and season loans for investors, earning interest income for LendingClub while increasing the certainty around future credit performance for the buyer, which is especially important in this environment. We recently sold $200 million of seasoned loans at a gain, and we are receiving interest from investors to broaden the program. I should also note that to deliver the returns required by loan investors in this rate environment, we are continuing to raise coupons. We’ve now priced in the majority of the Fed rate increases for near prime originations where we generally compete with non-bank lenders. Our pricing on our prime portfolio, where we generally compete with banks, is now up roughly 265 basis points. We’re being deliberate and disciplined here to avoid adverse selection, and we’re continuing to test our way up on pricing. Now let’s turn to credit, where our data advantaged from over $85 billion in loans, our flexible infrastructure, and our seasoned team has enabled us to continue delivering losses below the competition. And while we’re pleased with our credit outperformance and the strong returns we’re generating in our held for investment portfolio, delinquencies are modestly above our expectations on vintages booked before the prolonged inflation fully manifested and before we evolved our underwriting strategies and models. The actions we have taken since then have resulted in consistent credit performance and we’ll continue to read the signals and adapt to maintain strong credit for loan investors and for ourselves. Looking ahead, federal student loan payments are set to resume this fall after a multiyear hiatus. And while we’re carefully preparing ourselves and our members for this new financial reality, we currently believe that any impacts to the portfolio will be muted, and that’s given a 12 month on-ramp period the government is providing, the many reduced payment options available, proactive credit actions we’ve taken to reduce exposure to what we believe are the higher risk segments of this population. Even so, we are taking additional steps to make sure our members stay on track, and that includes educational outreach to ensure that student loan debtors understand the size and timing of coming payments, they’re aware of the reduced payment options available to them from the government, and if needed, of custom hardship plans on their LendingClub loan if they need to bridge a gap. As we demonstrated during COVID, a high touch proactive approach to helping our members can result in lower delinquency rates and increased loyalty. Our long-term ambition remains growing our member base and surrounding them with products and services that help them keep more of what they earn and earn more on what they save. We have continued to innovate, and starting over the next six months, we plan to test and launch an integrated mobile app that combines lending, spending and savings into a single experience; a debt monitoring and management tools fully integrated into this mobile experience, allowing members to easily view their debts, and prioritize and optimize their payments to reduce cost; and a pre-approved installment line of credit that allows existing members to seamlessly sweep any new credit balances into a loan at a fixed rate. Importantly, this last feature will be built on a new revolving platform that will be able to eventually support additional new products. So, as I said earlier, the environment will continue to challenge our ability to drive meaningful growth for at least the remainder of 2023. But we do believe this period is temporary resulting from a confluence of macro events that won’t persist over the long term. And we remain prepared to accelerate when the environment stabilizes and we see the following: th`e Fed stops raising interest rates and, ideally, begins to lower them; banks have repositioned their capital and liquidity levels, enabling their return to the marketplace; and/or the current oversupply of investment options is subsided. As the partner of choice in this asset class, we expect to be a primary beneficiary of a return to more normal market conditions. And we believe that we are well positioned to capture historic opportunity to refinance record high credit card balances at record high rates. Until that happens, we’re leveraging the benefits of our marketplace bank business model to maintain near-term profitability, bolster our long-term resiliency and create a more differentiated member experience. As always, I want to thank the LendingClub employees for their continued hard work and commitment to building towards our bigger future. And with that, I’ll turn it over to you, Drew. Copyright: kritchanut / 123RF Stock Photo Drew LaBenne: Thanks, Scott, and hello, everyone. Let me walk you through the details of the results. I’ll start with originations in the second quarter. Originations were $2 billion compared to $2.3 billion in the prior quarter and $3.8 billion in the second quarter of 2022. Of the $2 billion in originations, marketplace sold loans were $1.4 billion, up $67 million compared to the previous quarter. As Scott mentioned, we’ve had early success in facilitating marketplace sales through the structured certificates. We issued approximately $180 million in the quarter, which helped drive growth in marketplace sales. Loan retention came back within our expected 30% to 40% range to $657 million, down from $1 billion in the first quarter as we normalized retention levels in line with our available earnings. Now let’s move on to pre-provision net revenue, or PPNR. PPNR was $81 million for the quarter compared to $88 million in the prior quarter and $121 million in the second quarter of 2022. The outperformance compared to our guidance was driven by a $3 million revenue gain from a pending portfolio sale that was completed in early July, and a $6 million sequential improvement in expenses, primarily due to our previous streamlining of operations as well as proactive expense management in marketing and other areas. As Scott mentioned, we are seeing increasing investor demand for personal loans that have been seasoned, and we are originating a portfolio of approximately $250 million in loans for this purpose in the third quarter. These loans will come on the books at fair value with discount that approximates our observed whole loan sale prices. Total revenue for the quarter was $232 million compared to $246 million in the prior quarter and $330 million in the same quarter of the prior year. Let’s dig into the two components of our revenue. You can find revenue details starting at Page 9 of our earnings presentation. First, net interest income was a $147 million, flat sequentially and up 26% over the prior year. Our net interest margin was 7.1% compared to 7.5% in the prior quarter and 8.5% in the prior year. The change was primarily due to higher average cash balances as well as increased cost of interest bearing deposits, which was partially offset by a higher yield on unsecured consumer loans. Marketplace revenue was $83 million in the quarter compared to $96 million in the prior quarter and $206 million in the same quarter of the prior year. The change in marketplace revenue was primarily due to lower loan pricing, as well as a non-recurring $9 million benefit in the first quarter. Now, please turn to Page 13 of our earnings presentation where I’ll discuss expenses. Non-interest expense of $151 million in the quarter compared favorably to $157 million in the prior quarter and $209 million in the same quarter last year. The sequential reduction was primarily due to lower variable expenses in marketing and operations. Comp and benefits also improved as a result of slowing our pace of hiring across the company. Our expense run rate fully reflects the $30 million annual cost savings target we had communicated at the beginning of the year in which we are on track to exceed. Now let’s turn to provision. Provision for credit losses was $67 million for the quarter compared to $71 million in both the prior quarter and the second quarter of 2022. The sequential decrease was primarily the result of lower day one CECL due to fewer loans retained in the quarter, partially offset by more accretion on a larger back book of loans and an increase in reserves on the 2021 and 2022 vintage. As you will see on Page 15 of our earnings presentation, we have modestly increased our range of estimates for the expected net lifetime loss rates on the 2021 and 2022 vintage, which reflects the impacts of inflationary pressure on borrowers. While it’s still early to judge the ultimate performance of the 2023 vintage, our initial observations are that it is now showing stable performance, benefiting from the tightened underwriting we’ve implemented over the last several quarters. On Page 16, we have updated our marginal return on equity on personal loans to a range of 25% to 30% to reflect a lower net interest margin due to higher funding costs and higher quality mix. In addition, we thought it would be helpful to share the marginal returns on our structured certificates, which generated a marginal ROE of approximately 20% and using our current balance sheet leverage. It is also important to note that the risk weighting on these securities is 20%, which means that these returns are even more attractive on a risk-adjusted basis. Now, let’s move to taxes. Taxes in the quarter were $4.7 million, or 32% of pre-tax income. As I mentioned in the last quarter, we will have some variability in the effective rate from quarter to quarter. Our effective tax rate is 27% year-to-date, and we continue to expect that to be in line with our long-term tax rate. Now, let me touch on the balance sheet. Few things to note here. Total assets were $8.3 billion for the quarter compared to $8.8 billion at the end of the previous quarter. The decrease was primarily due to lower cash balances as a result of the planned maturity of brokered deposits. Our securities portfolio grew to $524 million in the quarter. The increase of $143 million primarily reflects growth in our structured certificate program. As I mentioned earlier, we retained the senior tranche of the security and hold it on our balance sheet. In addition to the senior tranche, we also hold a 5% whole loan security as required by Dodd Frank. You will see the securities portfolio continuing to grow as the program scales. Loans held for sale at fair value were $250 million at the end of the quarter as we moved approximately $200 million in held for investment loans into held for sale for the transaction that was completed in early July, which I spoke to earlier. As I mentioned, we are seeing increased demand for these types of seasoned loans. We are planning on growing this program and completing more transactions in the future. Our consolidated capital levels remained strong with 12.4% Tier 1 leverage and 16.1% CET1. Our available liquidity remains healthy with $1.2 billion of cash on hand and 85% of our deposits are insured. Additionally, we continue to maintain substantial amounts of unused borrowing capacity at both the Federal Home Loan Bank and Federal Reserve Bank, with a total of approximately $4 billion at June 30. Now let’s move to our guidance for the third quarter. As Scott mentioned, we expect bank demand to be constricted with marketplace volume going primarily to asset managers at lower prices. This is informing our outlook. For the third quarter, we expect originations between $1.4 billion and $1.7 billion. And we expect PPNR to range from $40 million to $50 million, which includes up to $10 million of one-time benefit related to recouping volume-based purchase incentives from the bank investor channel. It is our objective to remain profitable for the quarter on a GAAP basis by continuing to execute with discipline on expenses, and reducing our held for investment loan retention. Our guidance for the quarter assumes 30% to 40% balance sheet retention, which includes both held for investment and held for sale originations. Putting it all together, we are planning to maintain the size of our balance sheet in third quarter through a combination of held for investment whole loans, growing the structured certificates program, and held for sale extended seasoning. Held for investment loans will reflect the upfront CECL provisioning of structured certificates, and held for sale loans will be under fair value accounting. We continue to diversify our balance sheet through these new structures and programs, which will enable us to earn attractive recurring revenue via interest income while also helping to facilitate marketplace sales. We believe that a recovery in the marketplace will take longer than initially expected given the continued pressure on banks and aggressively priced secondary loan sales. While we’re not giving fourth quarter guidance at this time, we expect these pressures to continue at least for the remainder of the year. But regardless of the market conditions, we have a resilient business, and we will remain focused on profitability versus growth. As we look further ahead, there’s a massive opportunity in front of us. We are well positioned to accelerate quickly as conditions improve. In the meantime, we will continue to execute with discipline, innovate on our offerings, and leverage our strategic advantages as a bank to evolve the marketplace. With that, we’ll open it up for Q&A. See also 13 Best Big Tech Stocks To Buy Now and 12 Best Performing Bank Stocks in 2023. Q&A Session Follow Lendingclub Corp (NYSE:LC) Follow Lendingclub Corp (NYSE:LC) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Our first question comes from Bill Ryan with Seaport Research Partners. Please proceed. Bill Ryan: Good afternoon. Thanks for taking my questions. First question is just on your origination volume. I mean, kind of looking at it, you’re within guidance this last quarter. And looking at it year-over-year, it just seems like you’re either tightening up on credit again right now because the volume of — range that you’re giving relative to a year ago, looks like it’s going to be a little bit softer on a year-over-year comp basis, or are you just kind of originating based on what you see the investor demand is right now and then what you can put on the balance sheet? Scott Sanborn: Hey, Bill. This is Scott. Yes, it’s really the latter, which is basically with the impact of bank purchases. As we mentioned in the prepared remarks, it’s really — we’re originating for the available investor demand economics that we find acceptable. So, we’re — it’s not a credit story. We are, of course, continuing as always to manage credit, but origination volumes are really targeted to demand at the prices that we’re willing to take. Bill Ryan: Okay. And a follow-up question just on the NIM. We… Scott Sanborn: And I’m sorry, Bill. Just… Bill Ryan: Yes. Scott Sanborn: Just stating the obvious, the TAM right now is enormous. I mean, we touched on it in the remarks, but, credit card interest rates have moved up yet again. They’re currently at 20.7%, the highest they’ve ever been and it’s over $1 trillion in assets there. So, we are — this is not about borrower demand. Bill Ryan: Okay. And just to follow-up on the NIM outlook. You guided last quarter that it would be down talking about the structured certificates buildup of liquidity on the balance sheet. Sort of looking forward, are we getting close to a bottom here, or do you see potentially a little bit further margin compression from here? Drew LaBenne: Hey, Bill. It’s Drew. First of all, exactly correct on the decrease from Q1 — in NIM from Q1 and Q2, about half of that decrease was the buildup in cash. Going forward, we’ll continue to have, I think, more modest pressure on NIM downward for a quarter or two, but I would say it does depend on, if the Fed does anything else in the future and kind of the competitive nature of the deposit market and if that evolves in any way. But I think we’re — if those two things remain stable, then I think we’re close to the bottom on NIM, little bit further to go. Bill Ryan: Okay. Thanks. Operator: Our next question comes from Reggie Smith with JPMorgan. Please proceed. Reggie Smith: Good evening, and thanks for taking the question. I guess a follow-up to Bill’s question earlier. So, it sounds like, like you said, the volume or rather the demand for loans is still high. And just kind of looking across the landscape, it feels as though most personal loan issuers are kind of pulling back now. So my question is, with that dynamic, why aren’t you able or maybe you are able to charge more either APR or origination fee? Like, what’s the sensitivity? Because it would seem that with a smaller origination basis, you could probably squeeze in pricing out. What am I missing there? Scott Sanborn: Yeah. Hey, Reggie. So, I’ll try to touch on this. It really depends on what segment of the market you’re talking about. So, in, let’s call it, the near prime portion of the portfolio where the competition is non-bank lenders, that includes fintech, but also specialty finance companies, whose cost of funds is moving and locked up with the forward curve, we are able to pass the price on, and indeed, we’ve done that already. So, the pricing on our near prime portfolio that we’re — we don’t hold that, but the stuff we’re issuing is actually pretty close to the amount that the Fed has already moved. But in the prime space, we’ve moved up credit quality, given the environment we’re in. And given the outlook, we’ve moved most of our origination upmarket, both for what we hold, but also what we sell, because that’s where the investor interest is highest right now......»»

CapStar Financial Holdings, Inc. (NASDAQ:CSTR) Q2 2023 Earnings Call Transcript July 21, 2023 Operator: Good morning, everyone, and welcome to CapStar Financial Holdings Second Quarter 2023 Earnings Conference Call. Hosting the call today from CapStar are Tim Schools, President and Chief Executive Officer; Mike Fowler, Chief Financial Officer; Chris Tietz, Chief Banking Officer; and Kevin […] CapStar Financial Holdings, Inc. (NASDAQ:CSTR) Q2 2023 Earnings Call Transcript July 21, 2023 Operator: Good morning, everyone, and welcome to CapStar Financial Holdings Second Quarter 2023 Earnings Conference Call. Hosting the call today from CapStar are Tim Schools, President and Chief Executive Officer; Mike Fowler, Chief Financial Officer; Chris Tietz, Chief Banking Officer; and Kevin Lambert, Chief Credit Officer. Please note that today’s call is being recorded. Replay of the call and the earnings release and presentation materials will be available on the Investor Relations page of the company’s website at capstarbank.com. During the presentation, we may make comments which constitute forward-looking statements within the meaning of the federal securities laws. All forward-looking statements are subject to risk, uncertainties, and other factors that may cause the actual results and the performance or achievements of CapStar to differ materially from those expressed or implied by such forward-looking statements. Listeners are cautioned not to place undue reliance on forward-looking statements. A more detailed description of these and other risks, uncertainties and factors are contained in CapStar’s public filings with the Securities and Exchange Commission. Except as otherwise required by applicable law, CapStar disclaims any obligation to update or revise any forward-looking statements made during this presentation. We will also refer you to Page 2 of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures and other information. With that, I will now turn the presentation over to Tim Schools, CapStar’s President and Chief Executive Officer. Tim Schools: Good morning, and thank you for participating on our call. In the first quarter, we reported earnings per share of $0.37 and a return on equity of 8.95%. As you are aware, that return on equity is on very strong capital levels with our tangible equity capital ratio being 9.64% after having repurchased approximately 450,000 shares of common stock during the second quarter. We all more enjoy and wish for economically strong and stable operating environments. As you are aware, this is not one of those environments and I could not be more proud of our team. While we demonstrated in 2020 through 2022 our ability to grow our balance sheet, operate profitable fee businesses as well as improve our NIM and operating expense, the past year, we have shown tremendous discipline in credit and liquidity management. This quarter, we looked further and identified approximately $3 million of annualized expense reduction opportunities we have already begun to introduce and hope to achieve over the remainder of the year. Mike, Chris and Kevin will provide more detail, but I would like to highlight a few points. First, we were early in our identification of the forthcoming deposit pressures on this same call last summer. Sharing the outlook was challenging, while many banks stated they would grow deposits the second half. With that outlook and the prospects of a credit event, we curtailed investor property lending early last year. Second, we have progressed CapStar in so many ways. One of the areas that remains is funding as CapStar was largely built as an asset generator. If you study CapStar’s historical funding, a high percentage was comprised of larger, high-cost money market accounts and correspondent banking. Our three community bank acquisitions have balanced our funding profile, but deposits are still a tremendous opportunity for CapStar. Our team has done a great job this year fighting what everyone in the industry has been fighting. We have been working to retain customers and expand customers where there were concerns or we did not originally obtain deposits. On new deposits, the market has been intense, starting in the fall with normal spreads to wholesale alternatives, migrating in January to where banks began offering close to wholesale rates, and subsequent to the termination of the First Horizon deal, where they disrupted the market by offering rates higher than wholesale alternatives. So, liquidity has come at a cost in this environment, but our deposits stabilized in June and has continued in the third quarter to date. Additionally, our team has lifted our insured and collateralized deposit ratio to over 75% of total deposits from the low 60%-s at the beginning of this year. Third, we have outstanding fee businesses as we have previously exhibited. This environment, however, is not conducive to their historical performance or potential. Combined, we lost about $0.02 per share this quarter pre-tax — well, that’s after tax, I apologize, among our mortgage and Tri-Net divisions. We could have shut them down and reported earnings per share of $0.39 per share. Looking pre-pandemic, in 2019, the same two divisions contributed $0.05 per share per quarter. That is a $0.07 per share per quarter lift from the current second quarter level or an equivalent of $0.44 per share. Hence, these are very valuable businesses that we believe are an important part of CapStar’s long-term franchise value and worth experiencing a small loss for in the short term. Fourth, our expenses were essentially flat with first quarter as we had a small additional amount for the new stock buyback proposed tax related to the large amount of stock we repurchased in the second quarter. As I previously stated, we challenged our employees from the ground-up, not top-down, to seek expense reduction opportunities, which totaled about $3 million. We want to certainly always be looking for excess and better ways of doing things, however, we do not want to cut to the bone or impair our franchise. I hope we will begin to see these benefits in the third quarter. Fifth, we have an outstanding credit culture and our current metrics are outstanding as well. We have not done a participation of any type in three years and essentially leave nearly 100% of our relationships. Further, our new loan review — not new. Further, our loan review firm states our top 25 customer concentrations to capital are about half of the industry average. While current metrics are likely not sustainable long-term, they are welcomed along with our strong capital levels in uncertain environments such as we are in. Lastly, we have been proactive in our capital management. Our dividend was increased again this year and is up 120% over the past four years. We also repurchased [453,833] (ph) shares this quarter, and over the past 18 months, have now repurchased about 1.5 million shares or about 7% of CapStar’s total outstanding shares. In our newest authorization, we communicated capital targets. Personally, I believe our stock is cheap. Our tangible book value adjusted for AOCI is $16.95 per share. We have a small relative securities portfolio; it is all held and available for sale. We have strong insured and collateralized deposit levels. We have ample liquidity. We have strong credit. And we have strong capital. Therefore, there is more opportunity to return capital essentially — excuse me, especially at our current stock price, but it is prudent to abide by these capital targets to be conservative at the moment. As you can see, a tremendous amount of hard work has and is being put in by our employees as we work to deliver an outstanding customer experience and strong shareholder results. I’ll now turn it over to Mike. Mike Fowler: Thank you, Tim, and good morning, everyone. I’ll touch on a few key performance highlights, starting on Slide 8. As Tim noted, we continue to navigate through a very challenging operating industry for CapStar and the industry, mindful of near-term profitability, while also maintaining a longer-term view regarding issues such as franchise value and retaining and attracting profitable customer relationships. We focus on four key drivers of profitability: First, we target annual revenue growth greater than 5%, which has been challenging in the current environment given headwinds for net interest margin and several key fee businesses. Second, we target a net interest margin of 3.6% or more. Chris will provide more color in a minute on both sides of the balance sheet. So, I’ll note that the NIM peaked at 3.50% in the third quarter of last year. And as we’ve seen throughout the industry, our margin has declined in recent quarters due to deposit pricing pressures, falling to 3.06% in the current quarter, and we could see further modest downside in the next quarter or two. Number three, I would direct you to Slide 16, we target an efficiency ratio of 55% or less. The second quarter ratio was 66.6%. We did achieve or were near our target for several quarters in 2022. Reaching our target, again, will require movement on both revenue and expenses. As Tim noted, we expect to see material improvement next quarter having identified approximately $3 million of annualized expense reduction with partial implementation in late June, and the remainder expected to be implemented through the rest of 2023. We always strive for expense discipline, and in the current environment, we will be — we will have very limited hiring with an increased emphasis on improved efficiency. Fourth, we target annualized net charge-offs of less than 25 basis points. Kevin will review credit in a few minutes. So, annualized net charge-offs of 3 basis points for the quarter remain unchanged from the prior quarter. Next, I’ll shift to capital briefly on Slide 17. As Tim noted, we maintain strong capital levels, while continuing to execute a balanced strategy for deploying capital. Chris will comment shortly on how we’re managing organic growth opportunity in the current environment. Second, we generally target 20% to 30% dividend payout ratio. And in the second quarter, we announced a 10% dividend increase. Third, as Tim noticed — as Tim noted, we have purchased shares year-to-date through June, 920,000. When in May we announced completing the $10 million buyback program and authorization of the new $20 million buyback program, as Tim noted, we announced our intent to maintain above industry capital levels with target tangible common equity of 8.5% and target common equity tier 1 ratios of 12%. Our TCE remains a solid 9.64% despite 166 basis point drag from AOCI. And as Tim noted, a 100% of our investment portfolio is classified as available for sale. So, all realized — all unrealized losses are reflected in TCE. Balance sheet strength is always a top priority, both from the perspective of capital and liquidity, and especially in the current environment. A few brief slides on liquidity, turning to Slide 5. We have $1.5 billion of on- and off-balance sheet liquidity sources. And our bankers have been very proactive with current and potential depositors, discussing alternatives to maximize FDIC insurance in the wake of SVB in order to reduce the risk of runoff over safety concerns. As Tim noted a minute ago, you can see on the bottom left chart, we have increased the percent of deposits, which are either insured or collateralized from a strong 66% as of Q1, up to 76% as of 06/30. I will now turn it over to Chris. Chris Tietz: Thank you, Mike. I’ll be touching on the content of a number of slides to give you insight into the drivers and challenges we have across our diverse revenue spectrum. I’ll be offering you insight into where we are and how we intend: first, to address deposits and deposit growth; and second, to manage loan growth and assure adequate yields to enhance our net interest margin; and then finally, I’ll give you insight into our fee businesses and help to define expectations there. Given the precious nature of deposits, let’s start there. We entered the quarter on the heels of the mid-March failures of Silicon Valley Bank and Signature Bank, followed by the emerging issues with First Republic Bank in April and their failure on May 1. Then on May 4, the TD merger with First Horizon was called off. With this, there was a confluence of two very different dynamics that we had to confront competitively: first, the generalized market concern over industry stability; and then, the competitive considerations of a large local competitor becoming hungry for deposits to enhance their liquidity, which has become tight, leading up to the planned merger. We are very proud of our team, especially our bankers in our community markets. While our slides give you quarter-to-quarter comparisons, right now it’s important to understand what happened within the quarter. First, as shown in the slides, we achieved net growth in quarter one for customer deposits of about $30 million. This is shown on Slide 4. Also on Slide 4, you’ll see the customer deposits declined $75 million between March 31 and June 30. The nuance into the second quarter decline with the backdrop of the confluence of events I mentioned earlier is revealed in review of month-end balances. Our end-of-period deposits declined $76 million in the month of April and another $41 million by May 31. In June, we turned this around with $41 million of growth, and we are very pleased with continued improvement so far in July showing strong growth on track to exceed June. Needless to say, as Tim indicated earlier, this came at a cost as we have often needed to match the deposit rates of highly-motivated competitors and this resulted in reductions in our net interest margin that I’ll talk about in a few minutes. But first, let me tell you what we are doing. First, incentive plans are modified to place emphasis and priority on core deposit generation. Second, we are focused on building a culture of avoiding the commodity trap of being price-only competitors and seeking to understand and meet needs with the deposit products we sell continuing to leverage our sales of our superior treasury management services. We underscore these aspirations by driving this point home to our team in our daily oversight activities and our weekly pipeline meetings. And finally, we intend to reward our deepest and broadest relationship profiles with the best lending rates we have to offer. On lending and loan growth, touching on Slide 9. First, as Tim has mentioned in past calls, we have had an extraordinarily high loan prospect pipeline, but we lacked an equally large deposit prospect pipeline. Therefore, we have intentionally reduced our rate of loan growth as we shift our emphasis to quality funding and expansion in solution-based depository relationships. In this period of shifting fundamentals for success, it is our intent to focus on quality of growth rather than quantity of growth. Our emphasis will be on expanding share of wallet with existing customers, and holding ourselves to the expectation of growing our deposits faster than loans overtime. This emphasis will come in a number of tactics. We have established elevated yield expectations with pricing benchmarked to matched FHLB funding rates. As a side note, I’ll note that spreads to funding costs were much higher when I started my career nearly four decades ago. Over the last 10 to 15 years, expected spreads have narrowed, but I think our industry will see widening spread expectations in coming years. These higher yield expectations in current markets would result in us pricing loans in a range of 7.25% to 8.25% range depending on term, risk and the depth of the borrowers’ non-credit relationship with us. The position in this range would be highest for a loan-only relationship and lower based on the share of wallet we have in the customers relationship with us. These targets will be applied to renewing loans and any new loans. It should be noted that about 25% of our loans have a maturity within the next 12 months. Some of these loans will complete a scheduled amortization and payoff. Of the loans renewing, fixed rate loans will be priced into our target range, and variable rate loans will be evaluated to assure ample spreads. Pricing enhancements will be available to customers who expand their non-credit relationship with us by moving balances and fee business from other competitors. nick-pampoukidis-t-UV1rZqPuY-unsplash Competitively, we may lose some existing balances in the lower end of our current yield spectrum. But in doing so, we intend to redeploy this funding to relationships meeting our strategic targets. We’re not quite there yet. On Page 9, you will note that our new origination yields in the second quarter were nearly 7.8% and near the range we are targeting using FTP protocols as a benchmark for cost of funds. We believe this will enhance our net interest margin, but it will take time in a market challenged by tight liquidity. So, let’s talk about net interest margin and expectations. As noted earlier, our deposit balances are stabilizing and starting to grow again. In the fiercely competitive marketplace, I hesitate to make a prediction on deposit costs for the near term future. However, I note that one large competitor in our marketplace indicated earlier this week that they expect to be less aggressive in pricing deposits in coming months. In addition, it appears that First Horizon was successful in their fundraising campaign in the second quarter and this may assist in settling the unexpected spike that occurred with their aggressive pricing posture. Relating to loans, as noted on Page 10, yields are improving and, as I mentioned earlier, we will have an opportunity to address pricing as needed on up to 25% of our portfolio that matures in coming quarters. In addition, we have unfunded commitments with expected funding in the yield range we’ve noted and we believe that this will continue to enhance our overall yield to mitigate higher deposit cost. In short, while the pressure will continue, we will actively work to manage the variables within our control. One other tactic that I want to note relating to net interest margin isn’t specifically referenced in the slides. As some may recall, with our merger of Athens Federal community bank a few years ago, we added their consumer finance subsidiary, Southland Finance, to our business lines. Southland is a secured consumer finance company with average loan sizes in the $4,000 to $6,000 range, and it’s operated for over three decades with one branch in Athens, Tennessee. Several years ago, Athens Federal opened a second branch in Cleveland, Tennessee that we relocated to a new high visibility location in the last several weeks. The business model is simple. The yield is about 25%. Their losses are relatively low and consistently offset by loan fees. The non-interest expense is about 15% of assets, and the resulting pre-tax ROA is about 10%. Right now, their portfolio is small, but their overall contribution to annual earnings is about $0.02 to $0.03 per share each year. The reason I’m highlighting this subsidiary for the first time is that we are excited to let you know that we opened our third Southland branch in Chattanooga on July 3 and it’s off to a great start. It’s already achieved its six month growth goal in the first two weeks of operations. We will watch this location’s development closely as we use it as a benchmark for gauging the benefit of further expansion, leveraging their efficient delivery of high yield secured consumer paper to enhance our net interest margin. Finally, let me focus on some key fee revenues, as noted, starting on Page 13. Let’s start with mortgage. This is as challenging a time as any seasoned mortgage lender has seen in their career. While CapStar operates in a robust housing market and we have a good market share for mortgage originations primarily in the Nashville MSA, higher interest rates have limited both volumes and spreads on sale. It should be noted that Nashville area volumes are in line with activity levels not seen since 2014. When we consider the appreciation in the housing market since then, it underscores that the number of transactions is actually down substantially since 2014. As noted on Page 14, we remain committed to a model primarily focused on purchase money transactions rather than the more volatile refinance market. While volume in the second quarter was higher, margins were lower. We believe that there will be a competitive shakeout in the marketplace that will offer opportunity for us to expand our capacity and leverage our skilled mortgage delivery team by layering on more origination capacity. Our guidance is to maintain expectations at current levels in the near term until we see a break in interest rates. As to Tri-Net, after record volumes in prior years, Tri-Net remains mostly on the sidelines. We are pleased to see opportunities emerge on a handful of transactions that allowed us to make a little revenue in the second quarter. We’ve adjusted our model to originate to presales-only targeting transactions where we have identified a buyer before closing. This business has historically been driven by 1031 exchange money. I’ve seen recent statistics indicating that 1031 exchanges are down about 65% for lack of motivated sellers. The limited volume that we observed in the marketplace is generally landing with either a bank that will price its spreads close to treasuries or to cash buyers. We are committed to doing this profitably and we will not compete with low price competition, as our value proposition has always been speed to execute and reliability to close. Our guidance is that Tri-Net revenues will remain low in coming months. On Page 13, there is an appearance that SBA revenues are down quarter-to-quarter. There are some relevant factors to consider when assessing this. First, please reference Page 15 to see the larger trend that includes the various components of recurring income in addition to the net fee revenue shown on Page 13. Second, there are two types of originations that occur in the SBA space: loans with close that are available for immediate sales; and loans with deferred funding like a construction loan where the project needs to be complete before the guaranteed portion is saleable in the secondary market. In addition to this, there are two ways of sourcing transactions: transactions directly sourced by one of our business development officers; or transactions working with a referral source who has paid a referral fee for the transaction when it closes. This is relevant for two reasons. We made our origination targets for the first half of this year, but a substantial amount of that volume in the first half was in transactions with delayed funding characteristics. Under the current arrangement with our referral sources, we pay the referral fee at closing even though the gain on sale will not be recognized until construction is complete generally six to nine months in the future. Thus, we unintentionally create a timing difference that front-end loads the expense without the revenue. The approximate impact of this in the second quarter is about $150,000 to $200,000 of front-end loaded expenses without an offsetting revenue. Thus, you see the reduction in net SBA lending fees noted for the second quarter on Page 13. But there’s an upside. At June 30, the anticipated gain on sale from loans closed in the first half of the year, for which the referral fees have already been paid is approximately $1 million and this is in addition to normal production levels that we expect to continue into the third and fourth quarters. This will enhance our revenue at higher levels in the last half of 2023. In general, my guidance is to expect higher gain on sale revenues over the balance of the year than we’ve had in the last two quarters. But, because of the inherent complexities of managing the timing to recognition of the gain on sale, I hesitate to give specific guidance parsing between the third and fourth quarters. In short, we are very proud of what this SBA team has accomplished in a short period of time. Their efforts are evident with their placement as the 49th largest originator in the 7(a) SBA program based on the nine months ending June 30. We are very pleased with the results and the trend of growth that they’ve established. Finally, there is one other fee business that I want to highlight as an example of how we seek to grow revenues. Another business that we obtained through the Athens Federal merger is Valley Title. They are a title agency located in Athens, Tennessee. While small and contributing about $0.01 per share to earnings annually, we are targeting it for growth as we seek to get a bigger share of earnings from our own transaction closing volumes. We are evaluating ways that Valley can do more on CapStar originated transactions, particularly higher gain commercial transactions secured by real estate. This will include an expansion of licensing to multiple states over time, so that we can capture a bigger share of cost that we would otherwise outsource to other agencies. While the overall contribution is small, their pre-tax earnings through June are five times what they were for the same period last year despite reductions in overall mortgage activity levels. I’m not offering this to suggest that you should modify your guidance in any way, but rather to underscore our commitment to evaluating everything we can whether big or small to offset the NIM compression that will challenge the industry for the foreseeable future. This concludes my comments on revenue. And with this, I’ll turn it over to Kevin to discuss asset quality. Kevin Lambert: Thank you, Chris. We are very pleased with the excellent second quarter credit results for the bank, as detailed on Slide 11, which continue to indicate a very sound portfolio. Past dues of 15 basis points are near a five-year low for the bank and this is also true with the bank’s criticized and classified loans, which totaled only 1.36% of the portfolio at the end of the quarter. We had a somewhat unexpected payout for one of our largest substandard loans during the quarter as well as an upgrade to a pass on a special mention relationship that has always performed well. In total, the bank reduced its criticized and classified loans by an outstanding 25% during the period. While non-performing assets ticked up slightly to 48 basis points, two relationships totaling $8 million in this category are expected to be upgraded and return to accrual status during the upcoming quarter. While there’s always inflows and outflows to loans in our risk rating categories, we’re very happy with the positive movements during this quarter and the prospect of even better results during the next few months. As could be expected with the low past dues and minimal level of substandard loans, the bank continues to have a very low level of charge-offs, as Mike mentioned earlier. The second quarter percentage of only 3 basis points was identical to the ratio reported in the first quarter and is much lower than the target of 25 basis points that we try to adhere to. Beginning over a year ago, we started tightening CRE guidelines and the portfolio continues to perform very well. Presently, the bank has no large CRE loans, none over $500,000 that are not pass-rated. All loans are routinely stressed at origination and renewal. We continue to monitor our portfolio for signs of weakness. We continue to avoid speculative real estate construction projects and remain focused on maintaining a balanced loan portfolio with the current emphasis on C&I and consumer lending. Our markets continue to be vibrant and we believe that our portfolio is well positioned in the event of an economic downturn. In summary, management is very pleased with asset quality metrics this quarter with extremely low past dues and charge-off percentages and an overall reduction of 25% in special mention and substandard loans. Also, we recently completed one of the bank’s biannual loan reviews as well as our annual safety and soundness exam, and we are very pleased with the results. While we are not permitted to disclose specific ratings from the exam, the regulators did concur with their credit ratings for all loans reviewed, and we had no downgrades. Again, just a great quarter for the bank. Tim, I’ll turn it back over to you. Tim Schools: Okay. Thank you, Kevin. We appreciate everyone’s support as we continue to work hard to provide great service to our customers and ensure we protect the financial soundness of the bank. That concludes our presentation, and now we’re happy to answer any questions. See also 15 Deep Learning Courses for High Salary Jobs and 10 Oversold Energy Stocks You Can Buy. Q&A Session Follow Capstar Financial Holdings Inc. (NASDAQ:CSTR) Follow Capstar Financial Holdings Inc. (NASDAQ:CSTR) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Will Jones with KBW. Your line is now open. Will Jones: Hey, great. Good morning, guys, or I guess good afternoon at this point. How are you guys? Tim Schools: Doing good. Thank you. Good morning. Will Jones: So I just wanted to start on expenses. I know they came a little bit higher than your guidance from last quarter, which I think was $18 million to $18.5 million or so. But it was good to see the cost savings plan announced. And I know you guys really like to focus on the expense to average asset ratio. But just as you think about where expenses need to be in this environment relative to the challenged revenue outlook, where do you feel like that ratio really needs to be? And does this cost savings plan and get you there? Tim Schools: Well, I think mathematically — this is Tim. So I think mathematically, I’d love to run a bank that the efficiency ratio is 50% to 55%. I think that’s a healthy range where you’re prudent, but you’re not overly frugal. I think we’re in a revenue compressed environment. Like I said, we could improve our efficiency ratio immediately by shutting down mortgage in Tri-Net. So, I think it’s a good question to ask, but it’s a very unusual environment. So, I guess, I’m thinking more — I don’t think this is a period to manage to the efficiency ratio or to the expenses to assets, I think it’s a longer-term thing to monitor. It feels to me that, like I said last quarter, I would have hoped it would have come in, in second quarter. We were a little late, to me, in delivering these where I would have liked to, but I still think we can see our expenses come to those levels we talked about. So, I’m hopeful and optimistic that this quarter, you’ll see those come through. And hopefully, the second half of the year, we began to operate more closer to the $18 million a quarter range until revenue returns. And many of these are ideas that were submitted from the bottom up are sustainable long-term things that even when revenue returns, certainly, you’ll have commissions and incentive plans, there’ll be an expense growth along with some of that revenue, but some of these are permanent revenue ideas. I was very pleased with the suggestions. Will Jones: Got you. That’s helpful. So it’s really — it’s kind of fair to assume that you guys will exit the year at a lower expense run rate than what we’re seeing in the second quarter? Tim Schools: That is my expectation, and that is my hope. Will Jones: Great. And then, I don’t want to pin it any ’24 guidance or anything, but if we exit the year at a lower rate and then you just kind of think annually 2024, could — can ’24 expenses really be flat with ’23 or maybe even down? Or how do you think about this longer-term expenses? Tim Schools: Again, some of it’s hard — we’re in such a drastic unusual environment right now, and I would think every bank is, because this would be in line with my previous banks. I mean, right now, sales incentive plans are going to be down, corporate incentive plans are being accrued at lower levels, we have no mortgage commissions. So, a lot of it is you look at the outlook for rates and you hear some folks saying that, “Okay, rate cuts may begin January 31.” I saw it was possibly the earliest next year. Some people say it’s later. Well, if rates come down, we really think there’s going to be an immediate refi in the mortgage market, and we think we’re well positioned for that. So, our revenue would shoot up, but our expenses would go up......»»

In this article, we’ll discuss the top 10 AI tools cooler than ChatGPT. You can skip our detailed analysis of the growth of AI tools, companies investing in AI technology, and the emerging trends of AI and go directly to the Top 5 AI Tools Cooler Than ChatGPT.  Artificial Intelligence (AI) is experiencing a surge […] In this article, we’ll discuss the top 10 AI tools cooler than ChatGPT. You can skip our detailed analysis of the growth of AI tools, companies investing in AI technology, and the emerging trends of AI and go directly to the Top 5 AI Tools Cooler Than ChatGPT.  Artificial Intelligence (AI) is experiencing a surge in popularity and attention. With applications like ChatGPT, AI is showcasing remarkable power and capabilities.  The promise of AI lies in its ability to enhance productivity and alleviate the burden of mundane tasks. Tech companies emphasize this point, highlighting how AI can make individuals more productive by eliminating the need for repetitive and time-consuming work. “We believe this next generation of AI will unlock a new wave of productivity growth”. Said Microsoft CEO Satya Nadella.  By delegating routine responsibilities to AI, individuals are freed to focus on more creative and fulfilling endeavors, rediscovering the joy of creation. With AI as a productivity-boosting ally, the possibilities for personal and professional advancement are vast. AI’s impact on the global economy is far-reaching, exemplified by its transformative influence on diverse industries. Wimbledon, renowned as the world’s oldest tennis tournament, demonstrates the potential of AI in enhancing productivity and efficiency. By leveraging AI tools developed by IBM, Wimbledon’s editorial team is able to save numerous hours by automating the generation of match highlight reels.  With AI’s assistance, tournament organizers can achieve more with the same workforce, unlocking new possibilities for content creation and streamlining operations. This example highlights how AI’s integration into traditional processes can revolutionize industries, drive cost savings, and augment the capabilities of human workers. The proliferation of AI technologies brings forth a multitude of possibilities, but it also raises concerns regarding unintended consequences. The sheer number of new AI options entering the market can be overwhelming, leading to questions about whether these innovations will meet expectations or result in unintended outcomes. For instance, there are worries about AI enabling cheating or rendering certain job roles obsolete. These concerns highlight the need for careful consideration and ethical frameworks to guide the responsible development and deployment of AI technologies. In response to the rapid advancement of AI, countries like China are taking proactive measures to regulate its use and even some countries have banned ChatGPT. China has taken a leading position in this regard by publishing new rules specifically targeting generative AI, the technology behind popular services like ChatGPT. The Cyberspace Administration of China, the country’s primary internet watchdog, recently announced updated guidelines to manage this rapidly growing industry, set to go into effect on August 15.  Amidst the advancements in AI and the increasing popularity of ChatGPT, you might wonder if there is a better AI than ChatGPT? or if there are any tools like ChatGPT? The answer is in the affirmative. Tech giants like Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), and JD.com, Inc. (NASDAQ:JD) are actively participating in this race by developing their own versions of AI chatbots. Alibaba Group Holding Limited (NYSE:BABA)’s Cloud, for instance, has introduced Tongyi Qianwen, a large language model that serves a ChatGPT-like interface for all its business applications. Alibaba Group Holding Limited (NYSE:BABA)’s other applications include the DingTalk workplace communications app and the Tmall Genie personal assistant speaker.  Similarly, Baidu, Inc. (NASDAQ:BIDU), a prominent Chinese tech giant known for its search engine and map services, unveiled “Ernie” (Enhanced Representation of Knowledge Integration) as its answer to ChatGPT and GPT4. Baidu, Inc. (NASDAQ:BIDU)’s founder, Robin Li, showcased Ernie’s remarkable capabilities in a prerecorded video presentation, highlighting its ability to comprehend human intentions and deliver responses approaching human-level understanding. JD.com, Inc. (NASDAQ:JD) has also made significant strides in the field of AI by introducing ChatRhino, a large language model designed for enterprise use. Initially deployed within JD.com’s e-commerce, logistics, and marketing units, ChatRhino signifies JD.com, Inc. (NASDAQ:JD)’s dedication to harnessing AI’s potential for optimizing various aspects of its operations. Now if you want to explore more AI tools cooler than ChatGPT then read on and explore our list of top 10 AI tools cooler than ChatGPT.  Photo by NeONBRAND on Unsplash Our Methodology For our list of AI tools cooler than ChatGPT, we conducted extensive research and considered various factors such as performance, versatility, innovation, user-friendliness, integration, and industry impact. AI tools were carefully identified and evaluated based on performance metrics and unique features. Industry relevance and future potential were taken into account to assess their long-term value. Each tool was then ranked on a scale of 1 to 5, with higher scores given to those demonstrating greater potential, versatility, and innovation.  Here is the list of the Best AI tools cooler than ChatGPT.  10. Stable Diffusion 2 Average Score: 3 If you’re seeking an AI tool that delivers realistic images/graphics, then Stable Diffusion 2 is the cooler choice for you. Similar to DALL-E 2, Stable Diffusion 2 has the remarkable ability to generate incredible AI-generated images. However, it distinguishes itself by defaulting towards producing more realistic visuals, while DALL-E 2 leans towards abstraction.  Though slightly less user-friendly, Stable Diffusion 2 offers a wide range of options to enhance your creative process. You can select from various styles such as Enhance, Anime, Photographic, Digital Art, Comic Book, Fantasy Art, Analog Film, or Neon Punk. It also provides separate prompt boxes for regular prompts and negative prompts, allowing you to specify elements you want to avoid in your images.  Moreover, the advanced options let you fine-tune the prompt strength, number of generation steps, model selection, and even the seed used for generating images. With its advanced customization features, Stable Diffusion 2 empowers you to explore the nuances of AI-generated imagery to a greater extent. 9. Dall-E 2 Average Score: 3.5 Have you ever yearned for an AI tool that could bring your visual ideas to life? DALL-E 2 is precisely what you’ve been looking for. In contrast to ChatGPT, which focuses on text-based interactions, DALL-E 2 is an exceptional image generation AI tool cooler than ChatGPT. With DALL-E 2, you can explore the realm of visual creativity by simply providing a text prompt. Whether it’s imagining “an oil painting of a cat in a police uniform on the moon” or any other imaginative concept, DALL-E 2 utilizes deep learning to generate stunning images that align with your ideas. This extraordinary ability to bridge the gap between words and visuals makes DALL-E 2 a remarkably cool AI tool for unleashing your artistic vision.  8. Lumen5 Average Score: 3.8 Introducing Lumen5, the ultimate AI tool for aspiring video editors. With Lumen5, you can dive into the world of video creation without the need for extensive editing skills. This web-based AI tool offers a user-friendly interface that makes customization effortless even for non-technical individuals. Lumen5 harnesses the power of AI to empower users to easily create educational, marketing, or business video content. Its simple drag-and-drop interface allows you to seamlessly craft engaging videos without the need for actual video editing. Whether you’re a beginner or a seasoned creator, Lumen5 is the cool AI tool that will guide you on your video editing journey.  7. Gen-1 Average Score: 4.2 Gen-1 is a revolutionary tool that allows you to transform existing videos based on text, images, or videos as inputs. This remarkable AI technology operates similarly to a style transfer tool, but with a unique twist. It generates entirely new videos as output rather than applying filters.  With Gen-1, you can take a video, such as someone cycling in the park, and apply different aesthetics or themes to it. Want to give it the appearance of a watercolor painting or a charcoal sketch? Gen-1 makes it possible. What sets Gen-1 apart from other text-to-video models is its exceptional ability to deliver high-quality results by transforming pre-existing footage. Novice users will appreciate its user-friendly interface, while experienced users can take advantage of advanced options to fine-tune their creations or experiment with more extreme settings. Gen-1 empowers users to unleash their creativity and breathe new life into videos, offering endless possibilities for visual expression. 6. Legal Robot Average Score: 4.3 Legal Robot is a game-changing platform that leverages machine learning, particularly deep learning, to comprehend legal language. Legal Robot analyzes contracts and performs various valuable functions. It distinguishes between boilerplate and custom language, assesses language complexity and readability, and identifies the rights, responsibilities, and terms outlined in an agreement.  What sets Legal Robot apart is its ability to present this information in an engaging and easily understandable manner, eliminating the traditional complexities of legal jargon. Through Legal Robot, you can explore contracts with a higher level of interest and comprehension. You can quickly interpret contract components, quantify risks, and identify and address any defects. As a result, people gain greater confidence in understanding and signing contracts, enabling them to make informed decisions with clarity and peace of mind. Legal Robot empowers users to navigate the intricacies of legal language effortlessly, promoting transparency and trust in contractual agreements. Click to continue reading and see the Top 5 AI Tools Cooler Than ChatGPT. Suggested Articles: Top 10 Programming Languages for AI and Natural Language Processing 12 Easiest Programming Languages for Kids 11 Nanotech Penny Stocks to Consider Disclosure: None. Top 10 AI Tools Cooler Than ChatGPT is originally published on Insider Monkey......»»

Investment management company Kerrisdale Capital released an investor letter in June 2023 about its short position in Carvana Co. (NYSE:CVNA). A copy of the same can be downloaded here. You can check the top five holdings of the firm to know its best picks in 2023. Headquartered in Tempe, Arizona, Carvana Co. (NYSE:CVNA) is an […] Investment management company Kerrisdale Capital released an investor letter in June 2023 about its short position in Carvana Co. (NYSE:CVNA). A copy of the same can be downloaded here. You can check the top five holdings of the firm to know its best picks in 2023. Headquartered in Tempe, Arizona, Carvana Co. (NYSE:CVNA) is an e-commerce platform for buying and selling used cars. On June 23, 2023, Carvana Co. (NYSE:CVNA) stock closed at $21.41 per share. One-month return of Carvana Co. (NYSE:CVNA) was 82.37%, and its shares lost 29.43% of their value over the last 52 weeks. Carvana Co. (NYSE:CVNA) has a market capitalization of $3.802 billion. Kerrisdale Capital made the following comment about Carvana Co. (NYSE:CVNA) in the investor letter: “We are short shares of Carvana Co. (NYSE:CVNA), a $4bn market cap online platform for buying and selling used cars. Originally hyped up as an innovative disruptor, Carvana is now recognized to be just a poorly run auto retailer struggling under the challenges of a severe industry downturn and the unsustainable burden of $6.5bn in debt. While many have shared concerns over Carvana’s business before, we voice ours at a time when shares have risen 165% in only a month on misguided optimism for profits that amount to little more than buffing the paint job on a totaled car. Over its history of burning billions of dollars of investor capital to manufacture topline growth, Carvana has never generated sustainable profits or free cash flow. Even during the pandemic, when Carvana was virtually the only online option for scores of desperate car buyers willing to pay any price, the company failed to turn an annual profit. As the prospect of bankruptcy loomed, last year management began slashing costs, shrinking its operations and finessing working capital to try to generate positive free cash flow, and still failed. The company is pursuing a last-ditch attempt to sell markets on a new narrative, but ultimately, the business can’t escape the following reality: 1) whether a small local dealer or a tech-driven online platform, flipping used cars is a tough, capital-intensive business with lousy margins and, 2) any company can grow quickly and take share if run irresponsibly on costs, especially if capital markets are willing to foot the bill. Rather than representing true disruptive change, Carvana is a flawed player, armed with tools no better than the competition it seeks to disrupt and led by a management team which lacks seasoned automotive, operational experience. Carvana didn’t make money even when cars sold themselves, interest rates were low and used car prices were skyrocketing. Today, none of that is true anymore, and the company has no hope but to eventually restructure its massive debt load…” (Click here to read the full text) Carvana Co. (NYSE:CVNA) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held Carvana Co. (NYSE:CVNA) at the end of the fourth quarter which was 36 in the previous quarter. We discussed Carvana Co. (NYSE:CVNA) in another article and shared the list of best meme stocks to buy. In addition, please check out our hedge fund investor letters Q4 2022 page for more investor letters from hedge funds and other leading investors.   Suggested Articles: Dogs of the S&P 500 Strategy 12 Easy To Install Wireless Outdoor Security Cameras Without Subscription 12 Best Metaverse Stocks To Invest In Disclosure: None. This article is originally published at Insider Monkey......»»

 Gatehouse Capital Partners and Fort Amsterdam Capital, along with Crayhill Capital Management, today announced they have provided an $85 million condo inventory loan to Fortis Property Group, a vertically-integrated real investment management company with a portfolio valued in excess of $3 billion. The loan is collateralized by 102 residential condominium units and one retail... The post Gatehouse Capital Partners, Fort Amsterdam Capital, Crayhill Capital Management Provide $85M Bridge Loan for Boston Luxury Condo Tower appeared first on Real Estate Weekly.  Gatehouse Capital Partners and Fort Amsterdam Capital, along with Crayhill Capital Management, today announced they have provided an $85 million condo inventory loan to Fortis Property Group, a vertically-integrated real investment management company with a portfolio valued in excess of $3 billion. The loan is collateralized by 102 residential condominium units and one retail condominium unit at The Parker, a new, 168-unit luxury tower overlooking the Boston Common in Downtown Boston. The loan and additional sponsor equity were used to refinance the in-place construction loan, fund construction completion, and provide runway to sell out the remaining condos. The Parker is one of the city’s most sought-after residential properties, with one of its penthouse units recently breaking a record for the highest sales price in Boston’s Midtown neighborhood at $5.368 million. “We’re very pleased to deliver this highly-customized and flexible financing solution for Fortis at The Parker,” said Jonathan Dembling, Co-Founder and Managing Principal of Gatehouse Capital Partners. “This loan will provide our seasoned borrowing partner the opportunity to successfully deliver best-in-class condo residences in a top-tier, supply-constrained Boston market.” The Parker, built in conjunction with AECOM Tishman, is located at 55 Lagrange Street at the southeast corner of the Boston Common. It offers a hotel-like living experience amenitized with an ultra high-end hardscaped roofdeck, speakeasy-inspired cocktail lounge, billiards room, screening theater, and fitness center designed by Rob Gronkowski’s Gronk Fitness. “This is a very exciting luxury condo tower located in a high barrier-to-entry market with limited competing supply, proven demand, liquid price points and near-term unit closings,” said David Schwartz, Founder and Managing Partner of Fort Amsterdam Capital. “We look forward to working with the Fortis team to support the sell-out of this thoughtfully built and ambitious project.” With the commercial real estate market enduring an unprecedented array of headwinds — from continued inflationary concerns, to elevated interest rates and the ongoing regional banking crisis — sophisticated, well-capitalized private lenders continue to serve as a lifeline for projects and sponsors in need of support. Schwartz added: “Getting this deal done for Fortis in this market speaks to Fort Amsterdam Capital’s and Gatehouse’s ability to solve problems swiftly and effectively for the borrower community.  We remain very much open for business and are excited for the opportunity to provide capital solutions for other excellent developments of The Parker’s caliber.” The financing arrangement was negotiated by Galaxy Capital’s Henry Bodek. The post Gatehouse Capital Partners, Fort Amsterdam Capital, Crayhill Capital Management Provide $85M Bridge Loan for Boston Luxury Condo Tower appeared first on Real Estate Weekly......»»

Hopes are high that Ukraine's military can liberate more territory. But that depends on how effective their brigades are in taking and holding territory. Ukrainian soldiers fire a cannon near Bakhmut, an eastern city where fierce battles against Russian forces have been taking place, in the Donetsk region, Ukraine, Monday, May 15, 2023.Libkos/AP Photo The fate of Ukraine's counter-offensive depends on how effective its brigades are in taking and holding territory. The author helped train elements of the 31st's reconnaissance battalion. They expected to be at the front of the counteroffensive. A June video showed Ukrainian armored vehicles driving across a field, targeted by artillery and mines.  This column was written by Military.com reporter Adrian Bonenberger, who trained Ukrainian units for the counteroffensive from March to May.The video is grainy. It cuts from shot to shot of distant armor driving in single file across a field, hitting mines and getting struck by artillery. Watching it, my stomach twisted into a knot. As I understood it, the video had been recorded by Russian drones. It claimed to prove that the Ukrainian counteroffensive for which so many had such high hopes was foundering.A failed counteroffensive was bad enough. But there was another reason I viewed the video with trepidation. The accompanying description claimed that one of the units involved in the fighting was Ukraine's 31st Separate Mechanized Brigade — that dozens of vehicles had been destroyed. Russia had claimed as many as 1,500 Ukrainian troops were killed in the early part of the counteroffensive.For two weeks at the end of April and beginning of May, I helped train elements of the 31st's reconnaissance battalion. They expected to be at the front of the counteroffensive.The brigade, fitted out with a variety of U.S.-supplied equipment including MaxxPro mine-resistant, ambush protected vehicles, or MRAPs, was created this year. Its purpose was to take part in Ukraine's counteroffensive. My portion was a company that was itself part of a reconnaissance battalion. The soldiers were to be among the first on the attack in its sector.When they arrived in the training area where I was living with and training elements of another Ukrainian unit at the end of April, the soldiers of the 31st had already received individual training with weapons and equipment. Some had been soldiers years before. Many were in their 40s, or older. About a dozen appeared to be in their late 50s.As a unit, the 31st was not prepared to fight when we started training.Placed on the back foot by Russia's invasion on Feb. 24, 2022, Ukraine has been locked in a bitter struggle with Russia's military ever since. The initiative has swung back and forth between Ukraine and Russia, with Russia seizing large swaths of territory at the outset, and Ukraine returning a good portion of the land to its control over the course of the summer and autumn of 2022. Most recently, Ukraine pulled back from the city of Bakhmut, a strategically inconsequential but symbolically significant battle in which tens of thousands of Russians and Ukrainians lost their lives.Long awaited and hoped-for, a major operation by Ukraine's Ministry of Defence, involving at least a dozen units and tens of thousands of soldiers, is currently unfolding in the country's north, east and southeast. Hopes are high that the military can liberate more territory. But that depends on how effective the brigades are in taking and holding territory.Ukraine's MoD has issued cryptic and contradictory messages on social media, with some saying that the counteroffensive is happening, others that it began a week or more earlier, and others still that it has yet to begin in earnest.That early video of the fighting that showed the battlefield — and potentially attacks on the 31st — was shared on June 5 via Telegram by Russians, and subsequently shared on Twitter. It showed Ukrainian armored vehicles driving across a field targeted by what appeared to be artillery and mines. Russia claimed to have destroyed a number of vehicles, and that the remainder had been driven back.Wondering whether the units were from the 31st, or could have been, I reached out to sources in Ukraine. One of them confirmed that the unit engaged was, in fact, the unit that I had trained, reconnaissance soldiers with the 31st Separate Mechanized Brigade. On June 6, the source claimed that the unit had lost one MRAP in the engagement and that fighting was ongoing.In war, both sides tend to claim that the enemy is exaggerating its casualties. I was relieved to hear that the unit had suffered less than I feared at first. But more heavy fighting was still ahead for them, and the other brigades taking part in the counteroffensive.When I was training them, I was not sure where the 31st would go. In late April or early May, Bakhmut still seemed as though it could be a possible destination. I had some indication that the recon elements might be used for more than finding the enemy in maneuver war. I wasn't sure whether that was a good thing or not. It's always better to use soldiers according to the tasks they're trained for. Training units at the squad and platoon level in urban movement, and close-quarters battle, or CQB, I had the impression some of them might be used to assault, instead of to reconnoiter.CQB is a very difficult skill to master — perhaps the most difficult, alongside those dealing with trench lines or bunkers. A week of training is not sufficient to do anything more than familiarization with the principles. Elite units in the U.S. dedicate much of their time and energy to training for specific CQB scenarios, constructing replicas of buildings they expect to encounter, and training on them with live-fire rounds for weeks.This unit, elements of a reconnaissance battalion, expected to be entering villages and possibly larger urban areas, and wanted to know how to clear buildings safely if necessary. They were also not thrilled about using MRAPs in reconnaissance, and had concerns about the vehicle's survivability and tall profile.By the time we finished training together — I left on May 11 — the battalion was capable of carrying out missions at the squad level, and had some experience as platoons. It was learning company- and battalion-level logistics and coordination, things that are not simple to perform for seasoned groups, and challenging under the best circumstances. In the ensuing two weeks, before they moved forward to their positions and began the counteroffensive, they continued to make progress.When I left, it was with a sense of worry for the Ukrainians who would soon be at the front of Russian guns, mixed with admiration for their commitment to victory and stoic attitude. There was no question that the unit had come much closer to being capable of offensive operations than when it started.The offensive is finally underway, and it looks as though the new units that were mustered mere months ago are making progress against Russia's defensive lines.Read the original article on Business Insider.....»»

Rethink that retirement party. More and more, seasoned workers are defying expectations and staying put in the workforce for a ... Read more Rethink that retirement party. More and more, seasoned workers are defying expectations and staying put in the workforce for a compelling reason—they simply can’t afford to retire. That’s the finding from a new study by Korn Ferry that found that the number of clients with investment powerhouse Fidelity who can afford to cover all their expenses in retirement dropped from 83% last year to 78% this year. For help managing your own retirement planning, consider matching for free with a vetted financial advisor. The Big Problem The Korn Ferry study isn’t the only data showing a problem. Payroll services company Paychex found that about one out of every six current retirees (about 17%) were considering going back to work, with more than half of them reporting that they needed more money. The increase in older workers staying on the job is causing concerns in the executive suite because corporate planners have been expecting their expensive older workers to retire which would open senior-level jobs for younger workers looking to advance their careers. “You’re in a little bit of a box if the performance of the older workers is good,” says Ron Porter, leader in Korn Ferry’s global human resources center of expertise. That’s a big switch from 2020 when corporate types were desperate to keep older workers on the job in the early phases of the COVID-19 epidemic. The resulting labor shortages that continued prompted many large companies to launch “returnship” programs aimed at recruiting and training people who’d been out of the workforce for any length of time, including parents and retirees. In 2023, however, many firms are looking to cut costs or restructure, and executives want to see higher-paid 50- and 60-somethings move into retirement. Impact on Younger Workers In fact, many corporations have been expecting the older members of their workforce to move on as naturally as the aged-in to qualifying for Social Security and could start making withdrawals from tax-deferred retirement accounts without penalty. The expectation was that younger workers with different skills could help reshape how they do business. That desire could turn out to be bad news for middle-aged and younger workers. Because age discrimination by employers is illegal, it’s risky to target older workers. That could give older workers some new leverage with their employers, who could turn to offering buy-outs. Another option is the nascent practice of retirement-track positions. These jobs are designed to allow older workers to transition to retirement by putting them in positions to oversee and train younger workers, transferring knowledge and skill, and moving to shortened work weeks. The Bottom Line Older workers worried that they can’t afford to retire are staying on the job longer, causing concern among corporate executives who want their higher-priced employees to move on and open senior positions for younger workers. Retirement Planning Tips A financial advisor can help you get ready for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. Use SmartAsset’s free retirement calculator to get a sense of if you are on track to meet your retirement goals. The post Retirement Crisis: Older Americans Struggle to Afford Life After Work appeared first on SmartAsset Blog......»»

In a video posted by Trump, DeSantis and Elon Musk are joined on Twitter Spaces by Adolf Hitler, the FBI, Dick Cheney, George Soros, and Klaus Schwab. Ron DeSantis (left) and Donald Trump.Mario Tama/Getty Images; Lev Radin/Pacific Press/LightRocket via Getty Images Donald Trump on Wednesday posted a video of Ron DeSantis featuring voice-cloning AI. The tongue-in-cheek parody shows DeSantis and Elon Musk speaking to the devil and Adolf Hitler. It's the latest sign, and perhaps the most prominent yet, of AI being used as a political weapon. The Trump-DeSantis 2024 showdown officially kicked off on Wednesday evening, and artificial intelligence is smack dab in the middle of the political fray.About a dozen posts into his Truth Social tirade knocking Gov. Ron DeSantis' 2024 campaign launch, former President Donald Trump reposted a video featuring a conversation that clearly deploys voice-cloning AI.It's not the first time Trump has posted AI-generated content. But the two-minute clip, uploaded on a private Rumble account, is the latest sign — and perhaps the most prominent yet — of AI creeping into the political sphere as a tool to steer narratives or attack opponents.The video is a parody of DeSantis' glitch-plagued launch on Twitter Spaces.The Florida governor and Elon Musk feature, alongside a sample of Trump's laundry list of people he dislikes — billionaire George Soros, World Economic Forum chair Klaus Schwab, and former Vice President Dick Cheney. The parody is evident from the get-go, with the inclusion of characters like Adolf Hitler, the devil, and the FBI."Hi everyone, welcome to our Ron DeSantis Twitter Spaces," Musk's voice says in the clip."Hello? Is my microphone working correctly?" Soros' voice interrupts.What follows next is a chaotic blend of old audio, new voice lines spoken by an unknown person, and AI-generated dialogue that sounds eerily like the people being imitated.—Andrew Torba (@BasedTorba) May 25, 2023"Everyone just shut the hell up so I can make my announcement, okay?" DeSantis' voice says."Would you please shut up already? I'm running for fucking president, okay?" his voice later adds."Yeah, we kind of already knew," everyone responds.Musk's AI-cloned voice even mimics his speech patterns."Uh, uh, guys from the FBI, this is not a private call, this is a public Twitter Space, everyone can listen in," the voice says at one point.At the end of the clip, Trump's voice interjects."Hold your horses, Elon! The real president is going to say a few words. The devil, I'm going to kick your ass very soon. Hitler, you're already dead. Dick Cheney, sounds like you'll be joining Hitler very soon," the voice said."Klaus Schwab and George Soros, I'm putting both your asses in jail. And Ron DeSanctimonious can kiss my big beautiful 2024 presidential ass. Trump 2024 baby, let's go," Trump's voice continues.The clip is reminiscent of AI-generated "gaming presidents" memes, which deploy the voices of Trump, President Joe Biden, and former Presidents Barack Obama, George W. Bush, and Bill Clinton trash-talking each other over "Call of Duty," "Overwatch," and "Fortnite." @voretecks presidential overwatch debate (the sequel) #overwatch #overwatch2 #ow #ow2 #fyp #overwatch2edit #overwatchclips #trump #biden ♬ GigaChad Theme - Phonk House Version - g3ox_em Joe Rogan and Musk sometimes feature in such memes as well.But Trump's newly reposted Twitter Spaces parody comes as politicians around the world slowly start using AI to serve their ends. The Republican National Committee released an ad attacking Biden in April using AI-generated images. New Zealand's center-right National Party has also been posting AI-generated images on Instagram, from a photo of two nurses to a bizarre version of a Fast and Furious poster. View this post on Instagram A post shared by NZ National Party (@nznationalparty) National Party leader Christopher Luxon said his party was using AI to make "some stock images" for social media, per The New Zealand Herald.Trump himself shared a clip on May 11 that used voice-cloning AI. It features CNN anchor Anderson Cooper saying the former president was "ripping us a new asshole here on CNN's live presidential town hall."Avid global attention on generative AI has prompted concerns from cybersecurity and tech experts about its ability to distort the truth and mislead voters when used for political gain.Trump's DeSantis parody is overtly tongue-in-cheek, and clearly a joke, but fake images and videos can produce immediate consequences if believed. On Monday, a false photo of the Pentagon exploding — suspected to have been at least partially AI-generated — sent the stock market into a dip.A spokesperson for Trump did not immediately respond to Insider's request for comment sent outside regular business hours.Read the original article on Business Insider.....»»