TQ Morning Briefing
Broadcom's gross margin fell more than two points last quarter, and the company guided it lower again for this one. The reason is the memory stacked inside its own chips. Its chief executive spent the call asking the street to stop looking at that line.
Wednesday was relief. The three main indexes snapped a three day slide together.
Then the night undid part of it. Broadcom (AVGO) beat and fell. Snowflake (SNOW) beat and ran.
Equity futures are flat. The Nasdaq and the Russell 2000 sit a shade lower, the Dow a shade higher. Nothing has moved.
The currency market has. The dollar is broadly weaker. The yen is up sharply, on rising bets that the Bank of Japan hikes this month and fresh talk of intervention.
Gold and crude are both climbing with it.
The ten year Treasury yield has not moved at all. It closed Wednesday exactly where it closed Tuesday, and it is unchanged again now.
Market Implication
Currencies and commodities are repricing while equities sit still. The cost of inputs shows in two places this morning. A chip maker's gross margin, and a crude price the dollar has stopped holding down.
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The accelerator has a bill of materials now
Broadcom's AI chip revenue came in about where the company guided it in June. The gross margin did not.
It fell more than two points in a quarter. Amie Thuener, the finance chief, gave the reason. There is more memory stacked inside every accelerator than there was in the spring.
Then she guided it lower again.
Broadcom does not set the memory price. It pays it. Each extra chip it ships carries a cost it cannot engineer away.
Hock Tan wanted the call looking somewhere else. "Stop focusing on gross margin is what we're saying. Look at where it matters, operating margin, at the end of the day."
That is a chief executive asking the street to stop reading a line his own finance chief had just guided down.
Six buyers, and a very long number
Tan also put a figure on the next two years. He called it a judged number, and it runs to hundreds of billions of dollars of chips.
All of it goes to six buyers. No seventh was named.
So the demand is not in doubt. What each unit of it earns is.
Structural Setup
Custom silicon is levered to the memory cycle now, and three companies make almost all the memory. A chip designer who cannot push that cost onto the buyer shows it in gross margin first. Revenue will not warn you.
Snowflake raised its revenue guide and its margin guide in the same release.
The stock jumped hard after hours.
Nothing it sells has a part inside it. When memory gets dearer it reaches Snowflake slowly, through a cloud bill, months later.
That is the whole difference. The market found it inside an hour.
NetApp (NTAP) did it again hours later. It beat, raised its full year guide, and is the biggest faller on the pre-market screen.
Three hardware names sold on a good quarter, inside one night.
Wednesday had already started sorting the software side too. Palo Alto Networks (PANW) fell hard on its own numbers and took the security group with it.
Zscaler (ZS) reports into that tonight. Samsara (IOT) follows.
Sector Read
Technology is being sorted by what each company has to buy. Watch whether the software guides hold their margin tonight while hardware keeps trimming. A market that sells three good quarters in a night is not reading the revenue line any more.
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Two prints this morning ask the same thing of the whole economy. Who is absorbing cost.
Revised second quarter unit labor costs land at half past eight. The first estimate had them rising slowly, with productivity rising faster.
Governor Christopher Waller speaks on the economic outlook in the same minute. Nobody else at the Federal Reserve is scheduled to speak again before the room goes quiet on Saturday.
Labor is not where the pressure sits. A tame revision leaves the rest of the inflation in goods and inputs.
The services survey at ten asks the second half. It measures whether service firms pass costs on or swallow them.
Watch Signal
The prices line inside the services survey is the one to take seriously. Still hot and firms are passing costs forward. Cooling and they have started absorbing them, and margin compression stops being a technology story.
The supplier that pushed back
Ciena (CIEN) reports before the open. The call is at half past eight.
Its last quarter did something odd. Adjusted gross margin went up while its cloud mix went up.
That combination is not supposed to happen. Cloud providers are close to half its revenue now. Two customers alone are about a third of it.
Concentration like that usually costs a supplier its pricing. It did not.
Marc Graff, the finance chief, called the method "value exchange" conversations. That is a polite way of saying the company went back and asked for more.
The rest came from engineering cost out of the product itself. Photonics names have run hard all year on the belief that both can keep working at once.
The Read
If Ciena holds its gross margin this morning, the cost problem stops at memory heavy silicon. If it slips, every supplier into the buildout is a price taker. Order books then stop meaning what the market has been paying for them.
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Economic Data: Challenger job cuts, 5:30am ET. Weekly jobless claims, July trade balance, and revised second quarter productivity and unit labor costs, 8:30am ET. S&P Global services PMI final, 9:45am ET. ISM Services, 10:00am ET. EIA natural gas storage, 10:30am ET.
Fed Speakers: Governor Christopher Waller, 8:30am ET, "Economic Outlook," Reuters NEXT Newsmaker Interview.
Earnings: Ciena (CIEN), Toro (TTC), Campbell's (CPB), Victoria's Secret (VSXY), Genesco (GCO), Brady (BRC), Lands' End (LE), John Wiley (WLY) before open | Zscaler (ZS), Lululemon (LULU), Samsara (IOT), DocuSign (DOCU), Guidewire (GWRE), UiPath (PATH), Ambarella (AMBA), Asana (ASAN), Oxford Industries (OXM), Quanex (NX) after close
Overnight: Nikkei 225 −0.17%, Shanghai Composite +0.02%, FTSE 100 +0.5%, DAX +0.05%
Somebody has to pay for the memory inside the chips. There are two places that bill can go.
It can go into the price of the accelerator. Then the six buyers carry it in their own capital budgets. Building a model gets dearer with the price of a part.
Or it stays where it is. The margin keeps stepping down on a schedule the company has already published.
The first version shows up in the next round of cloud spending guides. The second is already inside this quarter's.
Tonight a room full of software companies reports with no component cost between them. Watch which side gets the benefit of the doubt after the bell.