Closing Bell - Closing Bell Overtime: Chips Slide Extends Into Second Day; C3 AI CEO On Quarter; ZScaler CEO On Weak Billings Guidance 9/4/24

Episode Date: September 4, 2024

Stocks pared losses into the close, but the Nasdaq was lower for the second-straight day as the slide in chips continued. C3 AI CEO Tom Siebel discusses the latest quarter in first comments before the analyst call while ZScaler CEO Jay Chaudhry breaks down the weak billings guidance that scared investors. Palo Alto Networks CEO Nikesh Arora on closing its IBM deal and the impact of Crowdstrike. Plus, Grant’s Interest Rate Observer founder Jim Grant on what’s next for inflation and the Fed. 

That's the end of regulation. Strive ringing the closing bell at the New York Stock Exchange. Notable capital doing the honors at the Nasdaq. Well, the Dow closing, it looks like, fractionally higher for the Nasdaq and S&P 500, finishing fractionally lower as NVIDIA fails at a comeback attempt, even after Jim Cramer just reported moments ago that the company denied it received a Justice Department subpoena. That's the scorecard on Wall Street, but the action's just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Ford. Well, we have a huge hour coming your way, including earnings results from Hewlett Packard Enterprise, C3 AI, AeroVironment, and more. And we're going to talk to C3 AI CEO

Tom Siebel about the quarter before he talks to Wall Street on the analyst call. Plus, Fed watcher Jim Grant joins us with his take on the market volatility and if a soft landing is looking harder to achieve. And two can't miss interviews in the cybersecurity space. Zscaler's chief joins us as his stock tanks on a weaker outlook. And Palo Alto Network CEO Nikesh Arora

weighs in on M&A tech spend and how the CrowdStrike outage is impacting his business. Well, let's get straight to our market panel. Joining us now, Lori Calvacina from RBC Capital Markets and Phil Campreale from J.P. Morgan Asset Management. Great to have you both here. Phil, you're on set. I'm going to start with you. You've got a real bumpy start to the month, but historically, September is always the weakest month.

You've got a 10-year treasury yield at 3.75 right now. How does this position us for the rest of the year? Yeah, honestly, Morgan, we've been, as asset allocators, we've been waiting two years for this exact environment. So what do I mean by that, right? Jerome Powell, the time has come for policy to adjust. I'm telling you, we've been waiting two years for that because two years ago, it was the economy needs to go through some pain in order for us to achieve our dual mandate. So this is why this all matters. We were hoping for the soft landing to start to become a reality. Hope is not an investment strategy. And the reality is that it's here. So we believe a soft landing is a 2% GDP growth number. Atlanta Fed GDP now is at 2% right now, and about a 3% inflation number. It's

5% nominal growth. That sounds nice. That allows us to avoid equity in this environment. But at the end of the day, what we really like as multi-asset investors is that finally fixed income could be the defense in the portfolio. Because remember, we went through years where we didn't really know how to protect ourselves because inflation was the risk. Inflation is going way back now behind the labor market. Labor market is becoming in focus. So if we're wrong on our lean into risk, both in equities and in high yield bonds, we think we can protect ourselves with core bonds. Now, that's a really important dynamic for us as we head into the second half of the year. But make no mistake about it, we only have a 20% probability of recession over the next 12 months. A consequence of a soft landing is a slowing in growth and a

renormalization of the labor market. But we're not ready to make that jump to recession or weakness. We're not even saying weakness. We're just saying normalization. I think that's the right word. Lori, how do you see this market right now? I mean, we had we had a weaker than expected jolts number this morning. We had a key inflection for the economy. And if so, what does that mean for stocks and other asset classes? So, look, I agree with a lot of what Phil just said. I like the word normalization very much. And I think we have to go back and remember that the Fed did want to see a cooling off of the labor market. And look, I think that we have had just an extraordinary recovery. We're getting to this

point where we're fretting over minutia. And I think that what's happening is the market is taking sort of the worst case scenario on a day like today and interpreting it as potential reality. But that's something that makes sense when you've got extended valuations, when you've got extended positioning. If you look at AAII net bullishness, we're basically back to one standard deviation above the long-term average last week. And that's a level that's proved tricky for equities to navigate in the short term. So expensive valuations, full positioning, full sentiment, you're going to see market that doesn't react well to a little bit of bad news. I think in general, if you zoom out, again, I go back to Phil's word of normalization. You know, when I go through

earnings call transcripts, when we look at really what companies are saying, we see things that are consistent with a softening in the growth rate, a cooling in the labor market, but not an economy that's on the precipice. And so I think we have to sort of look through this short-term noise and stay focused on the bigger picture. So Phil, if you've got this defense capability in the portfolio now that you didn't have before, what kind of risks are you then willing to take in this market environment? Is it a different level or different type of risk or same? Yeah, John, I would almost make the case that uncertainty is lower now. I know we're all talking about, oh my goodness, is the Fed going to go 50 or 25? I mean, but the risk that we're

really talking about here is go be overweight equities, three quarters of our weight. So in a 60-40 type portfolio, John, we're talking about a 68% allocation to stocks. That's an 8% overweight, with about three quarters of that in the US. It remains our biggest, our highest confidence view is the US, the soft landing view, the no recession environment. And then akin to that on the fixed income side,

are corporate bonds. Like high yield is a no recession asset class, where we're getting this quiet yield, very, very similar to what we can get the equity market with lower volatility. I think what we're seeing over the past few weeks, though, is this is a new chapter now. Like March of 2022, Fed starts raising rates, a lot of volatility. November of last year, we've seen enough evidence to pause our interest rate cycle. We saw the equity market and the bond market have incredible months in November. I think that's what we're trying to deal with now is should you be making the leap to that worst-case scenario of recession,

or is this a necessary consequence for the Fed to be able to start cutting rates? And I think it's the latter for us, John, which, again, leads us into a cycle extension with easier financial conditions. 5% nominal growth. I'm raising my hand for that in portfolios. Well, we've got some earnings starting to come in. Hewlett Packard Enterprise earnings are out. Kate Rooney has the numbers. Kate? Hey, John.

So it was a beat for HPE, at least on the top and bottom line, for HPE Enterprise, driven by strong AI demand in the quarter. Start with that adjusted EPS number. This was $0.50, a $0.03 beat there. Revenue of $7.71 billion. That was also stronger than expected, up about 10 percent from a year ago. Gross margins expanded in the quarter to 31.8 percent. That was slightly light. The street was looking for around 33 percent.

Operating margins, though, in line at 10 percent. So an effect there of some of the cost controls going on. Guidance for Q4 is in line. And then server revenue, slight beat, while intelligence edge, intelligent edge, rather, was a slight miss. But AI was really a bright spot. HPE saw $1.3 billion in AI systems revenue. That was up 39% from last quarter. I did catch up with CEO Antonio Neri. He says, quote, we see acceleration in AI, which is driving revenue growth, and we grew profitability in all three businesses. Tells me that they have the right strategy going forward.

Also says there are no signs, as he put it, of cannibalization. They are seeing growth in both AI compute as well as traditional server compute. And then said the server market is in recovery mode. Also says that $14 billion Juniper acquisition is expected to close in 2025. Says they've already gotten some key regulatory approvals. Guys, back to you. All right, fantastic. Thank you, Kate.

Now, C3 AI earnings are out as well. Julia Boorstin has those numbers. Julia. John, C3AI beating on the bottom line, an adjusted loss of $0.05 per share. That's better than the $0.13 per share loss that analysts had expected. Revenues of $87 million right in line with expectations. Well, first quarter, and this is the quarter we're talking about here, fiscal first quarter subscription revenues were a miss, $73.5 million versus the $79.2 million analysts expected.

Now, the company's fiscal second quarter revenue guidance is for a range of roughly $87 million to $94 million, pretty much in line with estimates, while the company is guiding to a fiscal second quarter adjusted operating loss that's a bit worse than anticipated. It's full year revenue estimates basically in line with what analysts are expecting, but that worse than expected outlook seems to be weighing on this stock down 14 plus percent. Back over to you. All right, Julia, thank you. And coming up, CEO Tom Siebel is going to discuss those results with us before he dials in to the analyst call. And we we keeping Lori filled with us or are we moving on? All right, Lori, I'll give you the last way in here. We've had a number of companies reporting with guidance that maybe not bad, bad, but a bit

disappointing, a bit tepid and very negative reaction. Does that tell you anything about this market? It tells me that this is a market where there's some fatigue. And one of the things we've noticed is that if you look at funds flow data, for example, we're still getting money coming into U.S. equities, but it's way off the peak. So I think it's also a reflection of, frankly, the expensive valuations that we've got. If you look at the median stock in the S&P 500, it certainly looks better than a market cap weighted multiple, but neither one of those look cheap at this point in time. And I think at this point in time, markets are really commanding something better than expectations in a pretty significant way. And we're just not getting that at this point. So again, I just

think it goes back to fatigue at the end of a long year. We've had a big run. We're expensive. We're crowded. Sentiment's been pretty frothy. Things look pretty full right now. OK, Lori, Phil, thank you. Now let's bring in senior markets commentator Mike Santoli for a look at what's driving Berkshire Hathaway to record highs. Mike. Yeah, John, Berkshire hitting another all time high today, holding above that one trillion dollar market cap that it hit for the first time last week. You see it here relative to the S&P 500. It's really separated itself from an index which, you know, historically over many years,

it's actually kind of hugged pretty closely. So you see almost really more than doubling the S&P year-to-date performance. Now, a lot of this, I think, has to do with the market's preference for very high quality businesses. So take a look at some of the peer groups, the comparable parts of the market that are very much represented inside of Berkshire Hathaway. That would include insurance up 25 percent year to date. Utilities, of course, one of the bigger wholly owned parts of Berkshire Hathaway. He's a huge utility business. This is the high-quality ETF within the S&P 500, also outperforming, and also a very similar kind of cadence of returns so far this year. And then that's relative to the S&P itself. So what do you have with Berkshire Hathaway? You have a $300 billion public stock portfolio, mostly in high-quality businesses.

Of course, Apple's in there, still have Bank of America, even as they've trimmed back on those positions. You obviously have $277 billion of cash. Put that all together, you almost get to $600 billion. And then you have operating companies that are producing, you know, $40, $50 billion of annual operating income. And so it's not that much of a mystery as to why people are buying it. It's not about what are they going to do with all the cash. It's not about Warren Buffett and his next brilliant move. It's kind of a sum of the parts story right now and in the right parts of the market for current investor desires and preferences. Mike, we were just talking about how expensive the market might be overall right now. How

expensive does Berkshire Hathaway look relative to how investors typically value it? It's on the more expensive end. And price to book value is usually the way to look at it because it has all the other public portfolio and things like that. So it's, I think, 1.7, 1.8 times book value at this point. Now, it's been higher than that. If you go back to pre-global financial crisis, it's been briefly higher than that since then, like early 2018. So, you know, the market is richly rewarding the company for those attributes I mentioned. It's just interesting how it's right now a bit of a favorite hiding place from some of the macro concerns. Indeed. Mike Santoli, thank you.

Well, we are just getting started on overtime. After the break, the CEO of C3 AI is going to join us ahead of this call with analysts to break down the quarter as that stock pulls back more than 15 percent. And later, Fed watcher Jim Grant weighs in on the growth concerns creeping up in the market. And if he thinks the Fed is behind the curve, we're going to talk about the yield curve, too. All right. We're back in two. Welcome back to Overtime. We've got AeroVironment earnings out. And for the defense contractor, it was a beat on both the top and bottom lines. EPS coming in at 89 cents per share. That was better than estimates of 65 cents per share. Adjusted EBITDA of $37.2 million as well. Revenue also better than expected, $189.5 million.

This was another record represented 24% growth year on year for the maker of kamikaze drones and other systems that are used in places like Ukraine and elsewhere. Backlog, though, that came down a little bit from the April end quarter to $372.9 million. So it was a little bit lighter than the $400 million we saw last quarter. It also reaffirmed full-year guidance, both revenue and EPS. That was despite this Q1 beat, which is perhaps why you're seeing shares under pressure, despite a relatively strong report here, down about 7 percent in overtime. Don't miss Jim Cramer's exclusive interview with AeroVironment's CEO, Waheed Nawabi. That is coming up at 6 p.m. Eastern on Mad Money.

And meanwhile, shares of C3 AI right now down sharply in overtime, almost 16 percent after missing on first quarter subscription revenues. C3 AI CEO Tom Siebel joins us now in exclusive interview. Tom, welcome. So the numbers, as reported, the top line, bottom line look pretty good to me. The revenue guidance right about spot on in line. But the profitability, the non-gap loss from operations guide, maybe that's what's got people concerned. Stock's down this much, so I've got to start there. And you're not alone. There are a number of companies reporting where the guide's not quite what the street expected. What's going on there?

It was a solid. Hi, John. It was a solid quarter. We John. It was a solid quarter. We beat revenue expectations, beat profitability expectations, beat cash flow expectations, cash flow positive for the second quarter, cash flow positive in Q4, cash flow positive in Q1. It was a solid quarter and just across the board. I get that. I tried to set that up as well. But there are these questions about expectations and people expected something a bit different, particularly in the guide. So is it just a matter of people expecting what you're delivering that you feel is great and maybe a bit less than they had in mind?

I mean, it sounds like the government part of the business in particular is performing quite well. You've got a solid cash reserve. Okay. I think we have about three quarters of roughly three quarters of a billion dollars in the bank. Our subscription revenue was within the guidelines. We did not have a miss in subscription revenue. We were within the expectations there. I mean, it was a solid quarter. Markets moved around a little bit from day to day, but I think across the board, it was solid. State and local, diversity is good. Federal government is good. Number of contract growth is great. The business that we're doing with the partner ecosystem,

particular Google Cloud, AWS, is huge. There's just nothing not to like about it. So in light of that, Tom, what does that mean in terms of reacceleration of growth, of revenue here, and the traction for your AI offerings in the marketplace? Great question, Morgan. I mean, our growth rate in the quarter, year-over-year growth rate, was 21% year-over-year growth. I think that might be the 10th fastest growing company in the public software universe. I believe our guidance, the consensus guidance that we have for growth this year is 23% top-line growth. I think that is like the 7th to 10th fastest growing company in the software universe, in the public software universe. So we have definitely, our growth rate in the last five quarters has gone from, you know,

0% to 11% to 17% to 19% to 21%. This is a company that has, now that we're through our transition to the subscription-based pricing model, we have absolutely accelerating growth. So what does that mean for profitability? I know you talked about cash flow positive, but when do we see some of those other profitability metrics begin to kick in then? Great question. We have a structurally profitable company. I mean, our gross margins are much, much greater than our cost of sales. Our revenue growth rates substantially exceed our expense growth rates. So profitability just comes with scale. I mean, this is a mathematical certainty that, you know, as we scale the business, it continues to be, it will cross into continually cash flow positive.

And, you know, it's a mathematical certainty that we, that, you know, if we continue to grow the business, non-GAAP profitability accrues. So we've talked in the past about your new features that are kind of in the Gen AI universe and tuned specifically to the enterprise. What can you tell me about the specific use that, let's say, government customers might be getting out of that at this stage as these questions arise about ROI? Generative AI is just huge, John. And the use cases that we're seeing are remarkable. I would say when we deal with public benefits programs like Medicare, Medicaid, Affordable Care Act, to be able to take the amount of information associated with these programs that are biblical

in scale and use these to feed a learning model. This would be basically a small learning model or an enterprise learning model where you can ask any question about any program, Medicare, Medicaid, whatever it might be, in any one of 133 languages and get the right answer the first time. Regenerative AI is being used in the Air Force for predictive maintenance applications. It's being used in the intelligence agencies. It's being used in the private sector for the most interesting and diverse applications they would never expect. The law firms for writing their S-1 and 10-K filings. This generative

AI area is unexpectedly diverse and unknowably large all right tom siebel c3 ai ceo appreciate you joining us here on overtime before the call we'll let you get ready for that all right well shares are under pressure in the meantime we are getting some news out of top golf callaway and kate rooney has details kate. Hey, Morgan. So Topgolf Callaway is planning, according to a press release, to split into two companies. It's going to be Topgolf as one company and then Callaway as another. They say here in the press release that the spinoff is going to create two standalone companies and Topgolf will be its own standalone public company. They say

that's the most likely separation path here. Company will continue to evaluate other options for separation, they say, to maximize shareholder value. There is a quote in the release here. They say over the past decade, we have transformed Callaway into the number one brand of golf equipment. They say they believe this business on a standalone basis will be well understood and valued by the market. And then they say here, since the merger with Topgolf, they've made considerable investments in both businesses, dramatically expanded the scale. And as you can see, Street Likes It shares up more than 11 percent here after hours. Guys, back to you.

All right. Kate Rooney, thank you. Well, up next, longtime Fed expert Jim Grant on why the market may now be expecting something harder than a soft landing. Plus, a double dose of cybersecurity CEOs. We're going to hear from Palo Alto Networks' Nikesh Arora about whether his company has gained customers in the wake of a massive CrowdStrike cyber outage. And CEO of Zscale is going to join us to break down last night's soft guide that sent the stock tumbling. Be right back. We've got more earnings just crossing, Varent, and ChargePoint. Let's get back to Julia Boorstin. Julia? Varent missing on both the top and bottom lines, reporting EPS of 49 cents versus estimates of 53 cents,

revenue of $210 million, also falling short of estimates of $213 million. You see shares are now down about 14%. The company's full-year revenue guidance is for $933 million. That's $3 million light of the estimates. The company also guiding to full-year EPS of $2.90. That's a penny light of estimates. The company says it has strong AI momentum in Q2, with AI bookings increasing more than 40% year over year. But that Q2 revenue was flat with a year ago period.

Now, shifting gears over to ChargePoint. ChargePoint's revenue is missing estimates at $109 million versus $114 million. The estimated UC shares there down about 9%. The company reported a gap loss of 16 cents per share. We're not comparing that since analysts use a non-gap loss in their estimates. More news from ChargePoint here. The company announcing it's cutting 15% of its workforce and also guiding to third quarter revenue in a range of $85 to $95 million. That's far below the estimate of $137 million. The company says it's aiming for EBITDA profitability in 2026. Shares now down about 9.5%. Back over to you. Julia Boorstin, thank you. Well, amid today's market action, the yield curve de-inverted. With the 10-year yields

surpassing the two-year yield, the move could be a clue on whether the market is expecting a soft or hard landing. Joining us now, Jim Grant, founder of Grant's Interest Rate Observer. Jim, it's great to have you back on the show. And that's exactly where I want to start with you. The fact that we saw the 2.10 spread go positive today, what is that signal about the state of the markets? And at a time where you have growth fears and recession fears pricing into the bond market, how do we think about this as an indicator? My friend, Jim Bianco, I think was among the first to point out that what matters with the yield curve is not so much whether it is inverted, that is to say whether long rates are higher than short, but rather what matters is the time in which it un-inverts, in which the short rates fall under the longer rates, all of which is to say that when the Fed decides or the market decides for the Fed that the economy needs

some monetary jolt, the two-year yield will plummet and it will, on form, fall beneath the 10-year yield and longer-dated interest rates. And this, the un-inversion, is this inflation, this sometimes reliable, like all other indices, sometimes reliable recession indicator. And so speaking of the word jolt, jolts came in softer than expected today. We had Beige Book this afternoon showing consumer spending ticked down in most districts, that we're seeing those signals of cooling growth, waning inflation. Is the case for a 50 basis point cut by the Fed later this month now on the table? Well, I expect it is. I mean, the Fed, this is a very interesting moment, isn't it? By some reckonings, the Fed is not restrictive and never has been. The Fed's own financial conditions index, the one produced by the Chicago Federal Reserve

Bank, has never once registered stringency since 2022, when all this tightening began. But you can see evidence of aringency in, for example, the sharp rise in bankruptcies in the first half of this year. You can see it in the fact that, according to a survey by Lincoln International in the second quarter, of like 5,500 private equity firms, two-thirds of them showed that they bore interest expense or debt service costs greater than free cash flow. So there are plenty of signs of stringency, not least, of course, in housing and commercial real estate. And yet, as we see by record high valuations in the stock market, there are also signs of great monetary accommodation.

So the Federal Reserve, of course, has an impossible job. It kind of asked for it. It deserves it. But it is not meant to be, but it has become a central planning outfit as much as a classical central bank. Jim, if I recall correctly, first half of the year, you were iffy on do we get two rate cuts? I take that to mean probably 50 basis points worth or a hike. It could go either way. Now the market's expecting 100 basis points worth of cuts this year, I believe. Which is closer to right? Well, the market insists on being bullish. It indeed is pushing the Fed in that direction.

I expect the Fed wants to be loose, wants to be looser, and it will cut. I had thought and I still believe that inflation will be much more persistent than the market seems to expect. It seems to me that in a democratic society, in a social democratic society, inflation is, for example, it's kind of an underground coal fire in Virginia, the kind that flames underground for years and years, and you feel it periodically in the soles of your shoes, and then once in a while it bursts above the surface. That, to me, is inflation. Inflation has been defined by a very great economist I know is a continuous overstraining of a national economy. And I think that's what we're looking

at. Look no further, for example, than our presidential candidates for this season. Donald Trump is out with his vice presidential nominees, saying that they would cut taxes to the tune of $10.5 trillion over 10 years. $10.5 trillion. So there is a whole school of economic thought that inflation is a fiscal phenomenon. John Cochran is responsible for that idea. And if that's so, I think that inflation is clearly on the agenda. And there are many other reasons as well to explain. The more they cut interest rates, the more it helps

inflation sensitive sectors of the economy that heretofore have been helping inflation readings dwindle. But it strikes me that if the Fed eases as much as the market expects, and the market is very, very bullish indeed, that inflation is likely to find itself in the receipt of a monetary stimulus once more. Okay. Jim Grant, always great to have you on. Thanks for joining us. Well, thank you. Well, now let's get a CBC News update with Bertha Coombs. Bertha? John, we have an update on that mass shooting at a North Georgia high school this morning. Police say four people were killed at Appalachee High in Barrow County, and nine were taken to the hospital with injuries.

The alleged shooter is in custody, and senior law enforcement officials say he is a teenager, but they are still working to figure out whether he was affiliated with the school. Hunger in the United States reached its highest point in a decade last year, according to a new report from the Department of Agriculture. The report did not explain the reason for the increase, but anti-hunger group Feeding America tells Reuters there's a $33 billion shortfall in order to meet people's food needs based in part on higher prices at grocery stores. And Walmart is reportedly teaming up with sneaker market ace StockX to offer dozens of pre-verified shoes, including Nike Air Jordans and collaborations with music star Travis Scott. At that, according to Bloomberg, which reports that hundreds of items will be available on Walmart's website starting next week.

StockX will verify the products and fulfill orders. Sneakerheads rejoice. Back over to you, John. Bertha, thank you. Well, commodity prices are plummeting, and that's potentially good news for consumers. Mike Santoli returns next with a look at the changing dynamics between wages and gas prices. And later, cloud security company Zscaler sitting near the bottom of the Nasdaq 100 today after earnings guidance widely missed the mark. The company's CEO joins us to discuss what's behind that soft outlook. Over time, we'll be right back.

Welcome back. Mike Santoli returns with a look at commodity collapse and the U.S., how the U.S. worker could be benefiting from it. Mike. Yeah, Morgan. So really just accentuating that goods driven inflation is kind of yesterday's issue. Take a look at the Goldman Sachs Commodity Index. It's a two year look, basically plumbing the lows we've seen over the last year. By the way, this chart looks an awful lot like the chart of the 10 year Treasury yield as well. It's been tracking those inflation pressures as well. Take a look here at the relationship between the price of a gallon of unleaded gasoline and the average hourly earnings of Americans, non-supervisory and production workers.

This is actually expressed in how many minutes the average worker needs to put in to afford a gallon of gas. And so right now we're in that seven minute range at this point. And this goes back to the mid 90s. I wanted to just point out it's really at the lower end of its 21st century range right here. So it doesn't mean that everything's cheaper and everything's affordable. People are forgetting about inflation, but it does create a little bit of an offset or a buffer on the consumer side as we worry about the sustainability of consumer spending and jobs soften up a little bit, Morgan. And of course, maybe it's perhaps one more factor weighing on

crude and other types of refined product prices and the fact you're seeing energy stocks take it on the chin. For sure. I mean, all of it is a little bit of a circular relationship. Naturally, China has incremental demand. We still have record production domestically. So all that feeding together is at least providing this this modest amount of relief as wages have at least continued to grow in nominal terms. All right. Mike Santoli, thank you. Now still ahead, the CEOs of two cybersecurity companies, shares of Zscaler plunging after issuing weaker than expected guidance. Up next, CEO Jay Chaudhry is going to join us exclusively to discuss what's driving that outlook. Plus, Palo Alto CEO Nikesh Arora on whether the recent massive crowd strike outage is helping his company gain new customers. And U.S. Steel,

those shares down sharply on a report that President Biden will block the company's nearly $15 billion acquisition by Japan's Nippon Steel. U.S. Steel CEO warning plants will be closed if that deal does not go through. You can see right there on your screen, 17.5% decline today. Stay with us. Welcome back to Overtime. We brought you Zscaler earnings yesterday right here on this show. That stock is way down today, more than 18.5%. Worst day since 2019 on worries about its billings guide. And joining us now is Zscaler CEO, chairman and founder, Jay Chowdhury.

Jay, good to see you. So strong growth overall here. You say demand is strong as well. But this Billings Guide issue, you got some first half versus second half dynamics at play that the street didn't expect. And your go to market motion is changing as you mature. Please lay it out for us. So, John, thank you for having me back. We are very proud of the numbers we deliver. Q4 was strong. And as you said, we beat all metrics. We did a billion dollar in billings in a single quarter. We exceeded a major milestone of $2.5 billion ARR. Our guidance for the full year was pretty strong. It was 19 to 20% bookings year over year, and that's at scale. I think the market reacted to

the fact that the first half growth was smaller than the second half growth. And the reason for that was simple. It's a historical reason. When in calendar 22, the macro got tightened, that was our fiscal 23 first half. That was a weaker first half. Those three are deals done, essentially reflected in lower contract booking. That makes the first half small and the second half bigger. But the entire year is the same. I like to say you don't really judge the results of a football game on a quarterly basis. You look at the whole game. I think you look at holistically what the East Clear is doing.

It's a strong guidance, but it's a little bit offset for first versus second quarter. But we even told the street that we expect to cross $3 billion in ARR this year. So we are very bullish about the way our positioning is, the way our platform is. Say some more about the go-to-market motion, the way you're looking to team up differently with partners in the ecosystem to keep your pace, your momentum of sales going, and how you expect that to affect share gains in the enterprise? John, every company has to scale. You scale incrementally, then you have a step function change every few years. We brought a very strong leader to run our global sales, and we are up-leveling the sales to be more account-focused, where we can deal, we can engage with large customer

CIOs, CTOs, and CISOs. And there's a special way of dealing with that. And you also need channel partners, the system integrators, like Accenture, like TCS The World, were working with us to drive that growth for us. And we already have a number of indications where the results are working well. We have over 60 customers who pay us over $5 million per year. We have 567 customers who really pay us over a million dollars per year. The number of customers is growing up significantly. The demand is strong for cyber and they want a platform story,

not some legacy technology repackaged as a platform. So I think everything is aligned well. And yes, there's changes in the sales team that are going on. We expect some bigger results in second half of fiscal 25. And that's also factored in our guidance. So, Jay, we're talking about some company-specific changes. We're talking about seasonality. I mean, we've seen Palo Alto Networks and SentinelOne as some recent examples that have boosted aspects of their guidance. And that's been in part because of the

impact of what we've seen with that outage at CrowdStrike. What have you seen in response to that outage and what does that mean for you for future market share? The biggest thing the outage did is it raised the awareness in the mind of CIOs that services like Zscaler are mission critical and they want to depend upon companies that can provide service without impact five nines of availability. So of the 1,000 largest Zscaler customers, we actually briefed over half of them in the first three weeks about how strong our service is. So it has increased the confidence of our customers to work with us. It's overall a good thing because we were the first company in the world to launch a business continuity plan or disaster recovery service for such an incident.

And about 40% of customers have already deployed. The only company in the security market that has a service being used by customers. Regarding CrowdStrike, it's a great company. It built an innovative technology. I think the overreaction will go away, and CrowdStrike will do good. It has well integrated Zscaler. Some of the largest companies use it. All right. Jay Chowdhury, good to hear from you on what's really happening behind the scenes and under the covers there at Zscaler.

John, always a pleasure to talk to you. Up next, the CEO of Palo Alto Networks on closing his company's acquisition of IBM's QRadar business and whether he is seeing any signs of a tech spending slowdown. Speak of. And check out shares of AS2 space mobile really taking off today after announcing it will launch its first five commercial broadband satellites as soon as next week those shares up 12 and a half percent stay with us it's more than just a deal because it's a validation that all the work we've been doing on AI and consolidating security operations is actually coming to fore.

Arvind and his team realized that to provide a seamless transition to something they've been doing really well in the SOC market, so we're basically transitioning QRadar customers to Palo Alto's XIM. And that is Palo Alto Network CEO Nikesh Arora talking about the closing of his deal to buy part of IBM's Qradar security business for an undisclosed sum. I caught up with him this morning at the Citi TMT conference here in New York on that. I also asked whether he's managing to gain share from rival CrowdStrike in the wake of that software glitch. CrowdStrike is in a space called XTR. We have a

product there called Cortex XTR, which is part of the XIM suite. You know, we were number 14 in the market with 14 players three years ago. Today, I think we're in the top three. And we've been slowly and steadily building momentum in being able to deliver that technology in the market. When things like this happen, customers pause and say, look, have I explored my options enough? And hopefully we'll get enough consideration where we can prove our merit and our metal in the market. And it's not a sprint, it's a marathon. So we're going to get there. We talked about AI and whether hackers are using it to make their email phishing attacks more sophisticated. Well, I think we're going to get the other end of quality. I think you're going to see perfect emails showing up.

You're going to wonder, oh my God, that couldn't have been written by anybody, you and I. So I think we're on the other end of the spectrum. Look, it's a lot easier to launch phishing attacks, a lot easier to launch SMS attacks. You've seen Zoom calls being intercepted with fake videos. So you are seeing a lot of that. And again, I think that's the 1% scenario.

The 99% scenario is still a positive scenario. You are seeing a lot of positive things coming out of AI in terms of the productivity capabilities and the options where the same quality that you're talking about. Imagine if you improve coding quality, we wouldn't have any of these errors that we're talking about. Finally, on the enterprise spending environment, with some tepid guidance coming in from some earnings reports yesterday and today, I asked how eagerly companies are opening their wallets. I think what you are seeing with interest rates where they are, people want value for money. They want to say, I understand that I need to make this investment. What is my ROI? And I think to that end, on the margin, you're seeing ROI conversations.

And that's where I think consolidation becomes an important play, especially in cybersecurity, because we're saying, listen, we can put all this stuff together, give you better security, give it faster, give you new technology, and do it at the right economic price. Part of the bottom line there,

M&A is not done in cyber after QRadar. But Nikesh did also give me some examples of where he's deciding to build internally, particularly when it comes to AI rather than buy. All right. Great stuff, John. Well, up next, all the overtime earnings movers that need to be on your radar and the key name to watch for tomorrow's calendar. Plus, how presidential candidate Kamala Harris proposed capital gains tax differs from President Biden's. Welcome back. Presidential candidate Kamala Harris is breaking with President Biden on his proposal to increase the top capital gains tax rate. And Megan Casella has the details. Hi, Megan. Hey, Morgan. That's right. So it's still a jump, just not as big of one. Harris is calling to raise the top capital gains tax rate to 28% for people making at least a million dollars a year. That's up from the current level of 20%,

but it's well below the 39.6% level that President Biden has been proposing. In announcing the move today, Harris described 28% as a level that she says would increase business investment and boost growth. She announced it during a speech broadly focused on plans to support small businesses, including a proposal to increase the small business tax credit to $50,000 from $5,000. Now, this shift on capital gains represents a break from Biden in a more moderate direction on one of her key tax proposals. But she does continue to stand by Biden on other proposals, more progressive ones. She wants to impose a minimum income tax on billionaires, raise the corporate tax rate and quadruple taxes on all stock buybacks. But I will note, guys, that the campaign has not said anything today about Harris's support for a tax on unrealized capital gains. That's garnered some

significant criticism over the past week, but it was not listed today as part of her plan to crack down on billionaires, but also notably not included when she broke with Biden more broadly over capital gains. So potentially still some debate there. Guys, back to you. All right. We'll see how that one plays out. Megan Casella, thank you. Excuse me. Let's check in on the big overtime earnings movers. Well, C3 AI is sinking on a mixed report. Revenues were in line with estimates. While the company's loss per share was narrower than expected. You got to take this one over. Yeah, I will. Yeah. You got an air environment topping estimates on earnings and revenue and reaffirming its full year guidance, which was below fact set estimates. Variant systems missing on the top and bottom lines and giving light guidance and Hewlett Packard Enterprise beating on earnings and

revenue. Now, tomorrow will be another big day for earnings. Broadcom, the big name on the calendar, but we'll also get results from DocuSign, Samsara and Neo. On the economic front, we'll get the weekly jobless claims and the August ADP employment report, the ISM services index, and the latest productivity and unit labor cost data. So more data to chew over as the markets continue in a somewhat turbulent direction. Yeah, and of course all of that before jobs report on Friday at a time where you are seeing the labor market cool. The question is, are we at an inflection point where you see

deeper slowing set in or is this truly soft landing materializing the way it ought to be? Jim Grant wasn't kind of getting off his position that inflation might not be dead, that stocks might not get what a lot of investors are expecting that they will. We'll have to see. That does it for us here at Overtime. Yeah. Fast money begins now.