Strategic Movements January 2023

Penske Automotive Group Pricing Spine-o-meter: 2 of 5 Vertebrae

Penske Automotive Group, a multinational firm with major operations in retail automotive and retail commercial trucks (lorries), had a survivable Q3 2022. Revenue increased 6.5% while earnings before taxes declined 1.9%.

To understand what led to this performance, we reviewed their earnings call held on 26 October 2022.

Management spoke regarding the unique challenges in the retail automotive and truck industry at that stage in the pandemic.  Shortages in chips led to shortages in supply for some automotive and truck units.  This challenge was lower for Penske than other retail automotive and trucking dealers due to Penske’s greater dependence on luxury cars and high-value trucks yet nonetheless weighed down potential sales volume.

CEO Roger Penske mentioned the negative impact of foreign exchange rate changes on revenue and profitability. With major operations in the United Kingdom and the deterioration of the pound sterling, exchange rate changes impacted Penske particularly hard.

CFO Shelley Hulgrave spoke of the strength of the financial quarter reflecting the operational efficiencies and cost reductions.

When asked if investors should expect the gross margin per unit sold to remain somewhat constant as the unique challenges of the pandemic pass, CEO Roger Penske indicated that he suspected they would.  He cited the number of “bespoke orders” and the “backlog” of orders to support his hypothesis that margins would remain strong.

Overall, management freely discussed their efforts in cost management and concerns regarding sales volume being limited by affordable inventory, they did not specify any specific efforts in using price management to drive revenue and profits.

Research into the quality of Penske Automotive Group’s pricing team indicated a poor state of affairs.  While many professionals in sales, marketing, finance, and operations list pricing as a skill, it is difficult to find professionals dedicated to pricing at Penske Automotive Group.

While pricing capabilities may not be a specific priority at Penske Automotive Group, management is doing some things right.  As probed by an analyst and addressed by the CEO and CFO, margins per unit, or “grosses” in their vernacular, were strong for the quarter if we strip out currency fluctuations.

Given the importance and capability of pricing at Penske Automotive Group as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of January 2023.

Penske Automotive Group Pricing Spine-o-meter:  2 out of 5 vertebrae.

PAG (Penske Automotive Group Inc.) rose from 103.8 on the day prior to their earnings call to 125.5 one month later. 2021 revenue of $25.6 B with a 2.7% EBIT margin and P/E ratio near 26.

Contact Wiglaf Pricing for your Pricing Spine-o-meter(TM) to benchmark against competitors and discover where your pricing practices can be improved. 

Nvidia Pricing Spine-o-meter: 3 of 5 Vertebrae

Nvidia, a software and fabless chip company focused on accelerated computing, had a challenging quarter ending 30 October 2022.  Revenue declined 17% to $5.9 billion and EBIT declined 78% to $0.6 billion.

What led to the poor performance?  According to management earnings call held on 16 November 2022, largely temporary exogenous factors but they would prefer to not focus on the past and discuss their strategy to capitalize on secular industry trends and requirements.

Nvidia has business units focused on Gaming, Data Center, Professional Visualization, Auto, and OEM & Other.

The Gaming business unit declined 51% over same quarter last year.  According to CFO Colette Kress, gaming suffered a temporary challenge in inventory (too much in the channel) and reduced demand in China due to COVID lockdowns.  Forward-looking, the Nvidia Ada Lovelace GPU architecture sold out quickly in many locations indicating future demand will be robust.

The Data Center business unit grew 31% over same quarter last year despite “macroeconomic challenges, new export controls and lingering supply chain disruptions” according to CFO Colette Kress.  Growth is driven by the demand for cloud computing and AI solutions.

The Professional Visualization business unit declined 65% over same quarter last year.  While management expects this sector to improve and added significant customer brands, it appears they are tempering expectations on the timeline for strong results in this sector.

And the Auto business unit grew 86% over same quarter last year driven by an increase in demand for AI automotive solutions.

Overall, Nvidia’s strategy is based on the hypothesis that Moore’s law is dead and Amahdal’s law is reigning, an overture to a belief that Nvidia is the future and Intel is the past.  Removing the jargon, the technical approach to making computing faster and cheaper for the past 50 years by making circuits smaller is reaching limits set by the rules of quantum mechanics and thermodynamics, and a new approach, the one Nvidia is using, is required to keep progressing.

Given my science background, I found Nvidia’s claim very appealing. (My PhD is in quantum mechanics and thermodynamics.)

Given my business background, I know Intel and others won’t idly sit on the sidelines.  (My MBA is in corporate strategy and marketing.)  This industry is characterized by what D’Aveni would term hypercompetition, and no one should count their chickens before they hatch.

Volatility in revenue and earnings is the norm for companies in high-growth and semiconductor industries.  Nvidia recent quarter’s results show they too are subject to this volatility.  As to their future, it is a gamble on their management team and the belief that their hypothesis regarding industry trends and market strategy is correct.

And while I greatly enjoyed the name-dropping of a plethora of business brand names, the interjection of specific products and their market reception, and the overall clarity by which CEO Jensen Huang related evolving customer and industry needs to market strategy in their earning’s call, management statements were uninformative regarding Nvidia’s pricing capability.

Research into the quality of Nvidia’s pricing team indicated a positive state of affairs.  Pricing professionals were found in sales price controller, analyst, data scientist, manager, and director roles. Pricing was an important part of the responsibilities of product managers, salespeople, business development managers, and business unit managers or vice presidents.

At Nvidia, pricing itself can be identified as a core capability.

Given the importance and capability of pricing at Nvidia as indicated in financial reports, management comments, and our pricing team research, and given their business performance, we have come to the following conclusion as of January 2023.

Nvidia Pricing Spine-o-meter:  3 out of 5 vertebrae.

NVDA (Nvidia Inc.) rose slightly from 163 on the day prior to their earnings call to 166 roughly one month later. 2022 revenue of $26.9 B with a 37% operating margin and P/E ratio near 68.

Contact Wiglaf Pricing for your Pricing Spine-o-meter(TM) to benchmark against competitors and discover where your pricing practices can be improved. 

HP Enterprise Pricing Spine-o-meter: 4 of 5 Vertebrae

Hewlett Packard Enterprise, an “edge-to-cloud” global firm with major business units of Intelligent Edge (platforms delivering network security), Compute (servers), Storage (data storage), and High Performance Computing and AI (supercomputers and such), had a positive Q4 2022. Revenue increased 4% and margins increased 1.8 percentage points over the same quarter.

What drove revenue growth and margin improvements?  HPE management identified pricing in their fourth quarter 2022 earnings call held on 29 November 2022.

CEO Antonio Neri identified the importance of price in driving performance stating: “Through a combination of pricing actions, portfolio mix shift, and cost discipline, we sustained our margins in fiscal year 2022, even in the face of supply constraints, and higher components and logistic costs.”

Neri even alluded to the importance of price structures in mentioning cloud metering and usage improvements – both of which must be priced within the price structure to translate metrics into revenue.

CFO Tarek Robbiati added details to clarify pricing’s role in HP Enterprise’s performance.

In regards to pricing’s impact on margins and strategy, Robbiati stated:  “Our non-GAAP gross margins remain resilient, thanks to the pricing actions we have taken. We retain our pricing discipline and continue to shift our mix of business towards higher-margin, software-intensive as-a-service offerings”

With regard to competition and market volatility, Robbiati stated “We have clearly outperformed the competition in fiscal year ’22 and our dynamic pricing strategy has helped us navigate a volatile supply climate while maintaining a healthy margin profile.”

And later, Robbiati added, “Our growing gross profit and margin are a testament to the success of our strategic pricing actions through the supply challenges and the favorable mix shift we are driving towards higher margin products across our portfolio.”

When pressed by analysts on why margins were high in the Compute business unit, Neri reiterated the importance of pricing discipline and related pricing power to innovation.

Some of HP Enterprise’s price increases were related to cost increases.  As to whether cost deflation would lead to price deflation, CFO Robbiati clarified that there is no single simple answer.  In some areas, it might, and in others, it looks improbable.  Key for Robbiati was that a pricing decision could be reflected into action globally within a day.  Such pricing responsiveness and flexibility reveal a deep investment in pricing-capable technology.

Research into the quality of HP Enterprise’s pricing team indicated a positive state of affairs.  Pricing is managed by a number of vice presidents, directors, managers, and analysts.  Pricing professionals address challenges from product management issues of offering pricing and pricing strategy to front-line sales issues of configure-price-quote and pricing analytics.  Pricing professionals are dispersed regionally across the globe.  And pricing professionals are responsible to the needs of individual business units or product groupings.   I could not identify if pricing software to accelerate pricing analytics is used by HP Enterprise but could identify that some pricing software is used in relationship with sales operations.

Not all was rosy at HP Enterprise. They sell fast-evolving technology that requires continued innovation. The armed conflict in Ukraine has led to the disengagement of business with Russia and Belarus.  With 55% of revenue earned outside of the home market, foreign exchange rate changes related to a strengthening U.S. dollar impaired earnings. Supply constraints (chips) led to higher component costs alongside globally elevated logistics costs.  And yet, management perceives pricing as strategically important given all these other important issues.  (Research does indicate that pricing capability is more important in fast-changing industries than others, so this is best practice and should be the norm.)

Given the importance and capability of pricing at HP Enterprise as indicated in financial reports, management comments, and our pricing team research, we have come to the following conclusion as of January 2023.

HP Enterprise Pricing Spine-o-meter:  4 out of 5 vertebrae.

HPE (HP Enterprise Co.) rose from 15.45 on the morning of their earnings call to 15.92 one month later. 2022 revenue of $29 B with a 2.7% Q4 EBIT margin and P/E ratio near 26.

Contact Wiglaf Pricing for your Pricing Spine-o-meter(TM) to benchmark against competitors and discover where your pricing practices can be improved. 

Jabil Pricing Spine-o-meter: 2 of 5 Vertebrae

Jabil, a global manufacturing services firm with business units of Diversified Manufacturing services, Electronics Manufacturing Services, had a positive quarter ending 30 November ‘22.   Revenues increased 11% to $9.6 billion and gross profit increased 10% to $743 million compared to the same quarter last year.

CEO Mark Mondello contributed this performance to “The combination of strong demand, more favorable product mix and excellent execution… .”

In their earnings call held on 15 December ’22, CFO Mike Dastoor spoke on their strategy to increase earnings.  “We have intentionally structured our business with the aim of delivering core operating margin expansion, sustainable earnings growth, strong predictable cash flows and shareholder returns. With that in mind, … we have identified certain cost savings mainly in our SG&A and support organization for the second half of our fiscal year as we continue to look at doing more with less.”

Mondello continued to clarify their strategy by stating “our team is doing an exceptional job of proactively managing costs and controlling what they can control in today’s environment.”

When pressed for clarity on how Jabil is delivering profits, Mondello stated “We’re just being proactive largely in terms of overhead costs and maybe costs that sit on top of the factories.”

Management statements lead to the conclusion that Jabil’s business performance is driven by cost management and reduction in a somewhat favorable economic environment and steadied by the diversification of industries served.  (Diversified Manufacturing Services targets industries of Auto & Transportation, Healthcare & Packaging, Connected Devices, and Mobility.  Electronics Manufacturing Services targets industries of Digital Print & Retail, Industrial and Semi-Cap, 5G Wireless & Cloud, Networking & Storage).

Research into the quality of Jabil’s pricing team indicated of a poor state of affairs.  Many leaders within Jabil have had experience or list skills in pricing and pricing strategy but pricing itself is not identified as a core capability.  Pricing skills can be found in professionals working as business unit directors or working in strategy, finance, supply chain, and elsewhere, yet few to no professionals were dedicated to managing pricing or defining pricing strategy itself. Transfer pricing and quoting were identified as key business functions at Jabil, but this is not pricing strategy.

Given the importance and capability of pricing at Jabil as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of January 2023.

Jabil Pricing Spine-o-meter:  2 out of 5 vertebrae.

JBL (Jabil Inc.) rose from 72.6 on the day prior to their earnings call to 72.9 roughly one month later. 2022 revenue of $34.5 B with a 3.4% operating margin and P/E ratio near 10.

Contact Wiglaf Pricing for your Pricing Spine-o-meter(TM) to benchmark against competitors and discover where your pricing practices can be improved.