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Thanks everyone for joining this afternoon for the Polling Capital webinar, for the Focus Growth portfolio for Q 2/20/24 as always. I'm Steve Atkins and Floor Manager, Strategy and Analyst, Paul Capital, and joined by my friend and colleague, the Lead PM of Focus Growth, Dan Davidowitz. Dan, as always a pleasure to see you, Steve. Always a pleasure. So let's go ahead and get started and talk about what was a very unusual quarter in the market and when we look at the sort of returns for both Focus Growth and the market overall. It was a fairly large divergence in Q2 and when we look at sort of the details of how the market performed, what we found is a very, very narrow market. So I'm just going to throw some stats out towards you, Dan. So based on on the research we've seen in Q2 for the Russell 1000 growth, nearly 75% of the of the indexes return was driven basically by just text hardware and semis. Which would include Apple and NVIDIA on a year to date basis. The S&P just throwing another stat here returned about 15%, but the equally weighted S&P, the non cap weighted returned about 4%. So a very large divergence did the first half of the year and in in Q2 we estimate only about 20% of the Russell 1000 growth index constituents actually outperformed the index, so a very, very low number. And the meeting constituent in the index returned -4.8%. So throw a bunch of stats. Out here, but the bottom line is the very narrow market both in Q2 and really in the first half of the year driven by select number of companies led by NVIDIA. And if you weren't there, it probably was difficult to keep up with the market. So I'm going to throw it to you with those thoughts. Yeah, it wasn't just if you weren't there, it was almost as if you if you were standing in the way of the of anything else, it was negative. And what I mean by that is this positive, almost exuberant. AI hype environment that we're in, you know, which is, you know, mostly invidia driven, but seriously driving a ton of semiconductor companies, industrial companies that are part of the supply chain for data center build outs, even electrical utilities because we're going to need a lot more electrical infrastructure. There's this AI hype cycle that's kicked in. And it's not just about the positive ones. It's also about the ones that would be negatively impacted. And there was this crazy narrative that came out in the in the second quarter, toward the end of the second quarter. That not only were hardware companies, you know, great for AI, but software companies were terrible right there. And it was catalyzed off of a couple of our companies reporting earnings late in the quarter, Salesforce and Work Day, both of which saw moderate slowdowns in the case of Salesforce and a very modest slowdown in the case of Work Day. That they were both saying we're macroeconomic related and seemed to be very macroeconomic related and the narrative out there was that AI is what's going to be killing these software companies that. There is a limited budget dollars and they're going away from software to hardware and AI. And then in the long term because these companies sell their subscriptions based on seats or the number of employees that utilize them that when Jim and I, you know creates this efficient way of of business operations that you'll have fewer and fewer employees who have fewer and fewer software license too. So there's this kind of bubbled up at the end of the quarter. And so a lot of our underperformance in the quarter was our software companies, which by the way we think are. Very positively put pre predetermined revenue growth coming from generative AI and and there was this negative narrative that hit them. So a lot of the the AI hype positive and AI hype negative is just, you know, it's that is what it is. We believe it's hype and for the companies that we own that sell mission critical software, we believe that not only is Gen. AI not a negative, it is a positive for these companies, some of them already generating. Revenue from generative AI or will be in the very near future. So when we look across our portfolio, I can firmly say that about 50% are a little bit more than 50% of our waiting are in companies that will in the next 12 months have revenue producing generative AI products and services. And then market narrative that hardware eats software is completely wrong. We think it has completely wrong. And so that hit us quite hard in the quarter I. Look at our companies and even the ones that are seeing a little bit of slower growth, we think that their long term growth profiles are basically unchanged and that the growth profiles that we're looking at have not even included generative AI as a positive on it. We've only been looking at what we think is already known and well in motion, but there's even more to come. So yeah, this has become a very narrow market. It's been very narrative driven. It is a very, very unique set of circumstances right now and what's important for us. Is to separate signal from noise, understand what's truly going on in the world. Gen. AI is nothing today, it's very small except for NVIDIA. And because NVIDIA is laying that foundational infrastructure and that's great and NVIDIA is great. The question is, is it sustainable? Is there sustainable growth there, durable growth that will last for years and years and years. We have some questions about that and we can get into why we think we have some good questions about that. When we look at the companies we own and the ones that we will own, we're looking for. Very durable continuous growth that can drive mid teens earnings growth in our portfolio sustainably mid teens because that mid teens earnings growth drives mid teens returns as it has in our portfolio. We believe it will as it has for 36 years and that is an important compounding engine. But it's important to do it with a lot of discipline because you can't do it for 30-40 fifty years if you don't do it with discipline. That, that's great color. Then when we think about sort of the the semis versus software narrative that unfolded during the quarter, you sort of talked about what seems to be this sort of structural bare thesis for for software kind of creeping in from what based on our research and talking to the companies that that we own in the portfolio that we follow appears to be much more of a short term macro issue where companies are consolidating their budgets. Enterprises are optimizing their budgets right now and having to make some difficult decisions about what to cut back on, and some software has been part of that. We've also seen that in the IT services side with companies like Accenture. So there does seem to be sort of a macro issue that's cutting across a lot of software, but it's happening at a time where it seems to be feeding into what, as you mentioned, seems to be the sort of structural bear thesis related to Gen. AI for software, even though we haven't seen anything. Data wise, that actually would support that. Is that, is that a fair statement? Yeah. I mean, we, we, we have a lot of good research and intelligence on where generative AI deployment is today and it's in pilot stages. Most companies are in pilot stages with generative AI now. Is there some, you know, incremental dollars that may be shifting toward these pilot projects and maybe a little bit slower growth in software? Of course that can happen. That happens all the time. There's always tradeoffs between different types of technologies in the short term. What's gonna be funded by budgets? But the reality is not many companies are deploying Gen. AI at scale today because they don't even have their data organized properly to do that, right? We're already hearing from Accenture that they're getting a lot of bookings from companies to organize the data properly, move their data to the cloud properly. So down the road they can do Jen AI, right? So that is what's happening today, the software businesses, even the ones like Salesforce that are growing even a little bit slower than what we had. Helped are still probably growing revenue at a double digit pace. So the the the concern of, you know, the the negative long term case on these companies just is not playing out. They're still growing at double digit rates. Yes, they may be growing slightly slower, but they're still growing and we think they'll be continuing to grow for a long period of time. So it's a very interesting set of narratives. But again, when we separate signal from noise, a lot of this is noise, you know, a lot of the consistency that we see in this. Remember these software businesses that we own, not only are they mission critical software, right? You can't run your business without Microsoft Office. You can't run your business without ServiceNow is automation. You can't be a creative professional without Adobe software. There is no alternative. Oftentimes in these cases, and they have 100% recurring revenue. These are subscriptions, right? These are recurring revenue businesses. There are not many like them in the world. Semiconductors are not recurring revenue businesses. They go through boom and bust cycles. Not just talking about NVIDIA here, I'm just talking about semiconductors in general, hardware in general, you know, and so I think we just have a much more durable way of of getting consistent growth. We will have a lot of revenue across our portfolio from Gen. AI in the future as well and that will be incremental to what we already have. And we're not going to have to predict when the inevitable downside is going to come when the inevitable cycle rolls over for our our company. So but yeah, that bear thesis, we have no indication that the bear thesis on software structurally correct. OK, that that's great And maybe I could just pull on a couple of threads here. The 1st is on the software side real quick. To the extent that there is some truth to the belief that Gen. AI and it's a proven and productivity will reduce the need for more people basically in the number of software seats. What is a way that you think software companies could essentially counter balance that if that risk did become demand start to manifest at some point? Yeah. So, yeah, as you said, software licenses most of the time when they sell them to enterprises are seat based. At least in the companies that we tend to own, they are seat based. And so you pay based on the number of employees that are using the software. In other places, we've seen seat based pricing change. And you can do that when you have something that a customer can't live without, right. And so like I said, our companies sell mission critical software. There's typically not a competitor. Or or very few competitors for what they do. So in in the case where generative AI really allowed companies to run with far fewer employees, I don't believe that's going to be the case. But let's just say it is, you know, what would our software companies do in that case? Well, they would change their contracting terms to be more value based instead of seat based. And if they really do create mission critical value, they'll be able to do that. So let me give you an example. In our business, you know, we have to pay for index subscriptions, right? We have to pay MSI and Russell, you know, and, and we have to buy those subscriptions. We don't want to pay for them. We barely use them. But in order to benchmark ourselves and have access to the index data for our clients, we have to pay those subscriptions. And those are seat based and location based, right? When we talk to MSCI, they need to know who's using them and how many places are using. And even if we were to. You know, say, you know, are Waltham office no longer uses MSCI anymore and these employees no longer use MSCI anymore. We go back to them and say, hey, we know these people aren't using it anymore and these locations aren't using anymore. So we would like to adjust our subscription. Whenever that happens, MSI goes back, they do their calculations and magically it becomes more expensive, not less. And they'll say things like, oh, you lost your multilocation discount and you lost your, your medium employer discount or whatever. They always have some way of solving for. X because they know that we have to have it and so there's always a way to price for value and I think the companies that we own that provide again mission critical software, they will be able to do that. In addition, as I mentioned, almost all of them you know will or in the near future have generative AI add-ons and a lot of those are being priced in a different way. They're being priced on consumption. And so the more you use, the more you pay, which is similar to to cloud infrastructure pricing. It's similar to the way that. Some other companies in technology work that don't do see based pricing. So there are other ways and we're already hearing from our companies that are exploring other ways of generating revenue outside of seats. So, Dan, I'm gonna pull on the the Gen. I thread then one more time on that. But when we talk about, you know, the, the sort of the Genia hype and how that's impacted the market in the first half of the year and the very narrow market effect that it's had as a result, you know, we talked about that height. But at the same time, we do talk about our companies, many of which will benefit, we think from Jen AI over the long term, over the next few years. So how would you sort of respond to a client who's saying, well, on one hand, it seems like you're. Who pooling the Jennat height, but the same time we're talking about how our cup is benefit from it long term, like try it maybe kind of sort of disconnect those two things the the the wheel Jenny I that we actually think will be revenue beneficial, but at the same time the height that's crept in certain parts of the market.