>>> Spirit Aerosystems sees Q3 revs below consensus (17.19)

Spirit Aerosystems sees Q3 revs below consensus (17.19)
  • Co issues downside guidance for Q3 (Sep), sees Q3 (Sep) revs of $1.43-1.45 bln vs. $1.51 bln FactSet Consensus.
  • Gross (Loss) Profit (Net Revenues less Cost of Sales): Gross loss of $50 to $60, down compared to gross profit of $83 for the same period of 2022, primarily driven by higher changes in estimates recognized in the third quarter of 2023 including forward loss charges of $100 to $105 primarily related to the Boeing 787 and Airbus A350 programs, as well as negative cumulative catch-up adjustments of $60 to $65 primarily related to the Boeing 737 and Airbus A320 programs.
  • The forward losses on the Boeing 787 (BA) and Airbus A350 (EADSY) programs were driven by higher estimates of supply chain, labor and other costs. The unfavorable cumulative catch-up adjustments on the Boeing 737 and Airbus A320 programs were driven by increased supply chain, labor and other costs and, to a lesser extent, rework costs related to the quality issue on the 737 aft pressure bulkhead and unfavorable foreign currency movements on the A320 program.
  • Free Cash Flow(1): Free cash flow usage of $135 to $140, compared to usage of $73 for the same period of 2022, reflects higher negative impacts to working capital, partially offset by the expected $50 customer cash advance received during the third quarter of 2023.

>>> US Research Calls

Research Calls
  • Upgrades:
    • 4D Molecular Therapeutics (FDMT) upgraded to Outperform from Market Perform at Leerink Partners; tgt $24
    • Brinker (EAT) upgraded to Strong Buy from Outperform at Raymond James; tgt lowered to $40
    • Broadstone Net Lease (BNL) upgraded to Outperform from Peer Perform at Wolfe Research; tgt $17
    • Dow (DOW) upgraded to Neutral from Underperform at BofA Securities; tgt raised to $59
    • Editas Medicine (EDIT) upgraded to Neutral from Underweight at JP Morgan; tgt $8
    • Elastic (ESTC) upgraded to Buy from Hold at Jefferies; tgt raised to $100
    • First Watch Restaurant Group (FWRG) upgraded to Strong Buy from Outperform at Raymond James; tgt lowered to $22
    • Hudson Pacific Properties (HPP) upgraded to Neutral from Underperform at Mizuho; tgt lowered to $7
    • Huntsman (HUN) upgraded to Buy from Underperform at BofA Securities; tgt $27
    • LyondellBasell (LYB) upgraded to Neutral from Underperform at BofA Securities; tgt raised to $107
  • Downgrades:
    • Albemarle (ALB) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $161
    • AngloGold Ashanti (AU) downgraded to Equal-Weight from Overweight at Morgan Stanley
    • ArcelorMittal (MT) downgraded to Neutral from Buy at BofA Securities
    • Dorian LPG (LPG) downgraded to Hold from Buy at Fearnley; tgt $34
    • Gold Fields (GFI) downgraded to Underweight from Equal-Weight at Morgan Stanley
    • Harmony Gold (HMY) downgraded to Underweight from Equal-Weight at Morgan Stanley
    • Lithium Americas (LAC) downgraded to Hold from Buy at Deutsche Bank; tgt lowered to $7
    • Olink Holding (OLK) downgraded to Market Perform from Outperform at Leerink Partners; tgt $26
    • Sibanye-Stillwater (SBSW) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt lowered to $6.50
    • Sibanye-Stillwater (SBSW) downgraded to Underperform from Neutral at BofA Securities
    • Sherwin-Williams (SHW) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $275
    • Sociedad Quimica y Minera (SQM) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $59
    • Westlake Corporation (WLK) downgraded to Underperform from Neutral at BofA Securities; tgt lowered to $129
  • Others:
    • Alpine Immune Sciences (ALPN) initiated with a Buy at Berenberg; tgt $18
    • Arm Holdings plc (ARM) initiated with an Overweight at KeyBanc Capital Markets; tgt $65
    • ASML (ASML) named EU Semicap top pick at BofA Securities
    • Avis Budget (CAR) named Catalyst Call - Buy Idea at Deutsche Bank
    • CrowdStrike (CRWD) initiated with a Buy at DZ Bank; tgt $215
    • Enviva (EVA) assumed with a Neutral at JP Morgan; tgt lowered to $10
    • Fortinet (FTNT) initiated with a Hold at DZ Bank; tgt $58
    • Genmab (GMAB) initiated with an Underperform at Exane BNP Paribas
    • Lithium Argentina (LAAC) initiated with a Buy at Deutsche Bank; tgt $11
    • Nu Holdings (NU) initiated with a Buy at Redburn Atlantic; tgt $!!
    • Palo Alto Networks (PANW) initiated with a Buy at DZ Bank; tgt $310
    • Pinterest (PINS) initiated with a Hold at Jefferies; tgt $30
    • TeraWulf (WULF) initiated with a Buy at Stifel; tgt $3
    • Vestis (VSTS) initiated with a Buy at Stifel; tgt $20
    • Vigil Neuroscience (VIGL) initiated with a Mkt Outperform at JMP Securities; tgt $23
    • WK Kellogg Co (KLG) initiated with a Market Perform at TD Cowen; tgt $11

>>> Morgan Stanley beats by $0.07, reports revs in-line (80.33)

Morgan Stanley beats by $0.07, reports revs in-line (80.33)
  • Reports Q3 (Sep) earnings of $1.38 per share, excluding non-recurring items, $0.07 better than the FactSet Consensus of $1.31; revenues rose 2.2% year/year to $13.27 bln vs the $13.22 bln FactSet Consensus.
  • James P. Gorman, Chairman and Chief Executive Officer, said, "While the market environment remained mixed this quarter, the Firm delivered solid results with an ROTCE of 13.5%. Our Equity and Fixed Income businesses navigated markets well, and both Wealth and Investment Management produced higher revenues and profits year-over-year. We completed the integration of E*TRADE in the quarter, further executing on our strategy of building revenue synergies across channels and attracting clients to our best-in-class advice offering. Our ability to gather assets, together with our strong capital position and leading client franchises, position us to deliver continued growth and strong shareholder returns going forward."
  • The Firm expense efficiency ratio year-to-date was 75%. The quarter included integration-related expenses of $68 million.

TechCrunch : GM delays $4B EV truck factory plan by another year

GM delays $4B EV truck factory plan by another year

General Motors is pushing its $4 billion plan to convert its Orion Assembly plant into an EV truck factory to late 2025, a year later than scheduled.

GM’s reasoning behind the delay — which will mean Orion will sit idle for two years — is “to better manage capital investment while aligning with evolving EV demand,” the company said in a statement sent to TechCrunch. The company also said it’s identified engineering improvements that will be implemented to increase profitability of its products.

In other words, EV demand has changed and maybe isn’t as strong as expected. That softening demand, which we’ve seen at other companies such as Lucid’s deliveries numbers reported Tuesday, is forcing automakers to adjust timelines and plans to pour billions into new factories or conversions of existing ones.

GM’s Orion Assembly Plant, with some 1,271 employees, is currently where the Chevy Bolt and Chevy Bolt EUV are assembled. GM plans to end production of those two vehicles at the end of the year. Union employees at Orion will be offered other jobs in Michigan, including positions at Factory ZERO Detroit-Hamtramck Assembly, where the GMC Hummer EV pickup and SUV, Chevrolet Silverado EV and Cruise Origin are being produced. Factory ZERO workers will also start making the GMC Sierra EV next year. GM said production at this facility has been increasing with plans to add a second shift in 2024.

GM announced in January 2022 it would invest $4 billion to convert the Orion factory to produce electric trucks using the GM-developed Ultium Platform. The project, as originally outlined, would include expanding the existing facility, adding new body and paint shops as well as new general assembly and battery pack assembly areas.

That conversion is part of a larger $7 billion investment in four Michigan factories focused on battery cell and electric truck manufacturing, including a third plant with partner LG Energy Solutions.

>>> US Gapping down

Gapping down
In reaction to earnings/guidance
:
  • WAFD -6.3%, UAL -5%, IBKR -3.3%, SCL -3.3%, JBHT -3.1%, ASML -3.1%, CFG -3%, CBSH -2.7%, MS -2.3%, WGO -1.8%, ALLY -1.6%, PNFP -1.1%
Other news:
  • BAER -6.2% (commences $70 mln public offering)
  • MIRM -5.9% (FDA extends review of sNDA for LIVMARLI)
  • RARE -5.1% (commences $300 mln stock offering)
  • BIO -4.7% (CFO to resign)
  • GOGO -4.6% (selected by AirSprint Private Aviation for upgrade)
  • LXRX -4% (highlights upcoming presentations of two studies re financial impact of INPEFA)
  • TEX -3.2% (CEO to retire; names new CEO raises FY23 outlook)
  • SGHT -3.2% (10% workforce reduction)
  • ANTX -2% (received an exclusive license from the University of Georgia Research Foundation to advance the development of a boron-containing small molecule for Chagas disease)
  • YMAB -1.9% (FDA clears IND application for CD38-SADA)
  • LECO -1.8% (increases dividend)
  • THS -1.7% (SJM to sell four brands to THS for $20 mln)
  • AMAM -1.5% (files $300 mln mixed shelf securities offering)
  • AAL -1.5% (in sympathy with UAL earnings)
  • DAL -1.3% (in sympathy with UAL earnings)
  • ALK -1.3% (in sympathy with UAL earnings)
  • NVDA -1.3% (disclosed last night it does not anticipate that the additional restrictions will have a near-term meaningful impact on its financial results)
  • BHP -1.3% (Q3 production)
  • TAK -1.1% (settles tax dispute with Irish Revenue over break fee received by Shire) .
Analyst comments:
  • LAC -3.3% (downgraded to Hold from Buy at Deutsche Bank)
  • SQM -3.3% (owngraded to Underperform from Neutral at BofA Securities)
  • MT -3% (downgraded to Neutral from Buy at BofA Securities)
  • SHW -2.4% (downgraded to Underperform from Neutral at BofA Securities)
  • ALB -2.2% (downgraded to Underperform from Neutral at BofA Securities)

>>> US Gapping up

Gapping up
In reaction to earnings/guidance
:
  • ABT +2.5%, WTFC +2%, MTB +2%, HWC +1.5%, PG +1.5%, GBDC +1.4%, FULT +1.4%, ELV +1.2%
Other news:
  • ARDX +16.8% (receives FDA approval for XPHOZAH; amends debt financing agreement with SLR Capital Partners to provide $50 million of additional committed capital)
  • CDT +9.2% (stock offering by selling shareholders)
  • FND +9.1% (to join S&P MidCap 400)
  • FRLN +8.8% (Majority shareholder Syncona files amended 13D; submitted acquisition proposal for outstanding shares)
  • VKTX +8.4% (new results from trial of VK2735 featured in oral presentation)
  • SAGE +4.7% (announces FDA granted SAGE-718 orphan drug designation for the treatment of huntington's disease)
  • TALS +3.9% (receives stockholder approval of merger with Tourmaline Bio)
  • FREY +3.5% (provides Redomiciliation updates; anticipates that the Redomiciliation Transaction will become effective in the fourth quarter of 2023)
  • CCO +3.4% (signs share purchase agreement to sell its France Business to Equinox Industries)
  • NTLA +1.6% (FDA has cleared its Investigational New Drug (IND) application for NTLA-2001 for the treatment of transthyretin (ATTR) amyloidosis with cardiomyopathy)
  • WDS +1.3% (provides Q3 update; narrows FY23 production guidance)
Analyst comments:
  • HUN +2% (upgraded to Buy from Underperform at BofA Securities)
  • LYB +1.5% (upgraded to Neutral from Underperform at BofA Securities)
  • DOW +1% (upgraded to Neutral from Underperform at BofA Securities)

WWD : Saks and Brunello Cucinelli Partner on Exclusive Capsule and Visual Takeov

Saks and Brunello Cucinelli Partner on Exclusive Capsule and Visual Takeover of Saks New York Flagship
Saks will launch Cucinelli's first fragrances as the exclusive wholesale partner in the U.S.

When Brunello Cucinelli came to New York this week, he received a great big welcome from Saks.

Saks and Cucinelli are celebrating 25 years of partnership with an exclusive capsule collection, a visual takeover of Saks’ New York flagship, a private dinner in New York City and digital content across Saks’ channels.

In tandem with the capsule launch and New York City flagship takeover, Saks will launch Cucinelli’s first fragrances as the exclusive wholesale partner in the U.S.

Saks recently unveiled newly renovated Cucinelli women’s and men’s shops at the New York flagship, which have both expanded significantly in size and feature new design elements.

“We’ve been talking to Brunello and their team for awhile to figure out what we can do to celebrate our partnership,” said Tracy Margolies, chief merchandising officer at Saks. “All the stars were aligned for this year.”

“We’re launching their fragrances exclusively at Saks, and we put together a beautiful, exclusive capsule of about 30 skus [stock keeping units]. It’s all about craftsmanship and elegance and timeless silhouettes. It’s a collection that merges their brand and our brand and really characterizes his craftsmanship,” she said.

Asked how the brand is performing this fall at Saks, Margolies said, “We’re very happy with our partnership with Brunello Cucinelli.” She said what draws the Saks customer to the collection is “the quality, the craftsmanship, the timeless silhouettes and the consistency. It’s the finest craftsmanship, and it’s elegant,” she said.

Cucinelli’s exclusive capsule collection for Saks consists of women’s and men’s ready-to-wear and accessories. A neutral, muted color palette, inspired by Italy’s fine marbles, travertines and pietra serena is the basis for the timeless pieces that can dressed up or down for any occasion.

Women’s items range in price from $1,695 to $10,995, while men’s items are $530 to $9,495. The fragrances are $210.

The capsule will be featured heavily online and in-store.

In a Zoom interview with Brunello Cucinelli last week, he said Saks is one of his biggest clients worldwide. They have been doing business together since 1998 when Cucinelli was just making women’s and men’s knitwear for them. “That’s when this great relationship started off. They were the most important supporters that we should do a total look, instead of just sweaters,” said Cucinelli through an interpreter.

“There have been some very fun moments over the 25 years,” said Cucinelli, citing meetings filled with jokes and pranks with former Saks executives Ron Frasch and Joe Boitano.

The North American market accounts for 35 percent of Cucinelli’s total revenues, he said.

The women’s assortment consists of versatile garments that easily mix and match, including intricately crafted knitwear, everyday dresses, structured tailoring and denim and leather jackets. Geared to fall and winter weather, there are cashmeres, soft shearlings and iridescent suedes with Cucinelli’s signature monili embroidery and fluid fabrics with ’90s-inspired boxy silhouettes and sartorial motifs.

The men’s assortment is built around different moments and needs of the day. There are blazers and suits combined with knitwear for what Saks calls “sophisticated nonchalance in true Brunello Cucinelli style,” along with joggers for downtime, and classic shawl-collar cardigans and leather jackets for the weekend. Fabrics and natural yarns add texture to the garments, including cashmere, corduroy and cavalry twill.

The collection is available exclusively on saks.com and at 15 Saks Fifth Avenue stores across the country, starting Tuesday.

To celebrate the partnership, Cucinelli will take over Saks’ New York flagship with a special Fifth Avenue window display in the six main Fifth Avenue windows and immersive visual installations throughout the store from Tuesday through Oct. 30.

The window display on Fifth Avenue aims to reflect the fascination and value of slow travel. The train that travels through Saks’ storefront, The Solemeo Express, conveys an ideal train journey between two continents, between two countries, and between two cities as different as New York and Solomeo, the medieval Umbrian hamlet where Cucinelli is based, linked by a relationship based on the constant search for innovation, excellence and beauty, according to the companies.

The journey continues inside the store through five outposts, each located on a different floor of the building: a train compartment with retro flair on the main floor and phone booths are positioned on both sides of the women’s shoe floor. A bar cart is featured on the fourth floor housing womenswear, and a waiting room overflowing with luggage can be found on the men’s sixth floor. Both rtw floors are also home to Brunello Cucinelli’s renovated women’s and men’s shops, which feature vintage wood design elements meant to reflect the vibe of a typical Italian living room. Space will also be dedicated to the new fragrance collection on the beauty floor, bringing the scents and sensations of the Umbrian countryside to New York City.

The colors and finishes that have become the hallmark of the Solomeo brand characterize the displays, designed to immediately convey the feeling of a relaxing and luxurious journey. The cashmere suitcases that adorn the windows and outposts serve as symbols of the cultural journey that crosses and connects the two cities.

Discussing the travel theme, Cucinelli explained, “We are somehow on our way toward a new time and need to move toward this new time where we need to find a balance with the surroundings, with creation and with our lives. That’s why we picked ideas of traveling. It shows the love we have for travel and also traveling toward a new time.”

“Travel has always epitomized luxury. When you travel, you want to be in your best clothes and have your luxury suitcases with you. It epitomizes beauty in a way,” he added.

Asked what New York and Solomeo have in common, Cucinelli laughed. “This is really a great question. The managers would always come to Solomeo to learn about the brand and be immersed in the brand. That’s why we developed such a great relationship. Also, in terms of visual merchandising, we have always highlighted that the brand in their stores represents our culture, the culture of the hamlet, the culture of quality, or a specific lifestyle, in order to have the exchange of these two cities.”

Cucinelli said he’s hoping for “many bestsellers,” at Saks.

“We like the overall taste and having a chic, clean, sober, high-quality collection in muted colors. It needs to match perfectly our taste and Saks’ clients’ tastes,” he said. As for how it differs from his regular fall collection, he said these are styles that were designed exclusively and specifically for Saks.

Cucinelli stressed that exclusivity is vital to the overall business. “For our company, exclusively has always been one of the founding pillars. We’ve always wanted to manufacture a product that has top-notch quality, is exclusive and rare. Exclusivity and rarity should be important features of our product and hopefully this product will last for years,” he said.

Saks and Cucinelli is celebrating the initiative and their long-standing partnership with a private event in New York on Tuesday featuring an appearance by Cucinelli.

The fragrance launch at Saks includes two eau de parfums: one for women, and one for men. The fragrances are inspired by the Italian countryside, with scents meant to evoke landscapes, medieval artwork and a strong sense of spirituality.

Brunello Cucinelli Pour Femme, created by perfumer Daphne Bugey, captures the lightness of cashmere through vetiver and cedar, along with warm hints of chestnut, pink pepper and the zing of orange blossom. Brunello Cucinelli Pour Homme, created by master perfumer Olivier Cresp, features cypress and juniper forming a zesty-woody base, brightened by Italian begamot and lemon, with a touch of spicy ginger.

Brunello Cucinelli Parfums will be available at Saks three months in advance of other wholesale partners.

Digital content showcasing the capsule collection, the flagship takeover and the fragrance launch will appear on saks.com and across both brands’ social media channels, including an exclusive interview with Cucinelli on The Edit, Saks editorial hub for fashion news and style inspiration. Saks will also feature the capsule collection on both its women’s and men’s homepages on saks.com.

WWD : LVMH to Open Dedicated Space for Craftsmanship in Paris

LVMH to Open Dedicated Space for Craftsmanship in Paris
The Maison des Métiers d’Excellence will offer training programs for amateurs and professionals.
PARIS — LVMH Moët Hennessy Louis Vuitton is launching a new house in Paris.

In a move calculated to give it a competitive edge amid a shortage of skilled workers, the world’s largest luxury group said on Tuesday it would open a dedicated space for craftsmanship in the eighth arrondissement, a stone’s throw from the Dior ateliers and Avenue Montaigne, home to the French capital’s most exclusive boutiques.

During a preview visit to the construction site, Chantal Gaemperle, group executive vice president of human resources and synergies at LVMH, said the Maison des Métiers d’Excellence would allow visitors to touch and feel the breadth of the 280 skilled trades represented across its 75 brands, which range from Louis Vuitton to Dom Pérignon, Tiffany & Co. and Sephora.

“You can do Zoom meetings, you can do videos. But having direct contact with makers and apprentices is inspiring,” she said. “The pandemic has fueled people’s need to find meaning and make something that they can understand and touch. There’s a desire to have a concrete impact and be together.”

Spanning 21,500 square feet, the location on Rue Bayard will be open to the public as well as provide a physical home for LVMH’s Institut des Métiers d’Excellence, the vocational training program aimed at promoting, enhancing and ensuring the transmission of know-how in partnership with leading schools.

Since it was founded in 2014, the scheme has trained more than 2,700 people in seven countries, and this year saw a record intake of 700 apprentices, up from 450 in 2022.

While LVMH declined to reveal how much it is investing in the project, the group said it spent 215 million euros on training in 2022. It plans to hire 22,000 specialized craftspeople worldwide by the end of 2025, including 8,000 in France, according to Alexandre Boquel, head of development for LVMH’s Métiers d’Excellence division.

To meet those targets, LVMH has intensified its outreach efforts to counter a dearth of personnel in fields including retail and leather goods.

It hopes that having a physical showcase will help fuel interest in professions that have been handed down from generation to generation, but are not always well known or understood. “We need to find the people and we need to make these jobs attractive, and we believe that this house will contribute to that,” Gaemperle said.

The group is constantly registering new job categories as it acquires brands and identifies niche skills. It recently added to its list the métier of glyptician, or gem sculptor, but lesser-known professions also include shoemaking and eyewear manufacturing, both sectors that need to attract fresh talents, Boquel said.

“This place is a tower of transmission,” he said. “It will be open to all and the promise is that the moment you walk in here, you will learn a physical gesture, whether you’re a novice, a member of the public or a researcher in craftsmanship.”

The main building, dating from 1880, will act as a learning center, with hands-on workshops where visitors, in groups of 10 to 12 people, will don white blouses and learn from LVMH employees some of the techniques used in fashion and leather goods, perfumes and cosmetics, and watches and jewelry.

The academy will also welcome external craftspeople such as feather-makers or straw marquetry experts. Courses can be booked online and will last between one and three hours, Boquel said.

In addition, the building will house a training academy for apprentices and employees, as well as a research library. An annex will be home to a café, store and exhibition space, all themed around craftsmanship.

Construction work is due to begin next year and the center is expected to open at the end of 2025, LVMH announced during the third edition of Show Me Paris, its annual event spotlighting the group’s efforts to attract future generations to careers in the creative, craftsmanship and client-experience fields.

As part of the showcase at Salle Pleyel, which drew 1,400 people, it unveiled a scale model of the project by paper artist Hannah Levesque.

“In terms of the look and feel of this space, we will try not to make it too imposing or majestic, but rather welcoming, because we also want to attract the kind of people who don’t feel comfortable walking into luxury stores, and in particular Gen Z, who love luxury brands but can feel very intimidated,” Boquel said.

The center will also highlight the ways that houses are using technology to spur innovation.

“It’s extremely important to talk about that, because when we talk to young people, they’re always afraid that these are jobs from 200 years ago and they won’t be able to relate. Letting them know that these professions also use digital technology reassures them,” he explained.

Gaemperle said the group is open to applicants of all origins and abilities. For instance, Guerlain has hired five youths with autism at its cosmetics factory in Chartres. “Not only have they met their targets, but they have evolved towards other roles,” she reported.

Meanwhile, the Institut des Métiers d’Excellence is launching a new course called Access Retail to train people with disabilities to become sales advisers, Boquel said.

LVMH had announced in 2017 plans for a center dedicated to artists, live performances and the applied arts, to be located inside the former Musée des Arts et Traditions Populaires in the Bois de Boulogne. Originally set to open in late 2018, it was due to include an academy of fine arts and craftsmanship.

Gaemperle said that project was still moving ahead. “There is a large renovation underway, but we didn’t want to wait,” she said. “We also realized that compared to other institutions who have done this outside of Paris, there is an added attraction [to being in a central location].”

Chanel last year inaugurated Le19M, its hub for its specialty workshops, on the border between Paris and its northern suburb of Aubervilliers. Meanwhile, Hermès in 2013 opened a sprawling facility for craftspeople, creative teams, service personnel and communications staff in the suburb of Pantin.

Boquel expects the Maison des Métiers d’Excellence to benefit from being close to La Galerie de Dior, the French fashion house’s permanent exhibition space, and other major attractions. “Being in central Paris is absolutely key,” he said, adding that he expects between 300 and 350 visitors a day on average.

“I know that the majority of visitors won’t become craftspeople, to be honest. It might be 30 percent, or 20 percent or 15 percent, but it doesn’t matter because first of all, we’ll be happy to have those 15 percent if it can solve our recruitment problems. And secondly, it’s extremely important to help people understand what we do,” Boquel said.

“People want to know what is behind our products, and what are our concerns in terms of the environment, society and human resources. Revealing this to the general public will help to better understand the value chain of high-quality products,” he added.

>>> Procter & Gamble beats by $0.11, beats on revs; reaffirms FY24 EPS guidance,

Procter & Gamble beats by $0.11, beats on revs; reaffirms FY24 EPS guidance, guides FY24 revs in-line
  • Reports Q1 (Sep) earnings of $1.83 per share, $0.11 better than the FactSet Consensus of $1.72; revenues rose 6.1% year/year to $21.87 bln vs the $21.58 bln FactSet Consensus.
  • Co issues guidance for FY24, sees EPS of +6-9% yr/yr to $6.25-6.43 vs. $6.39 FactSet Consensus; sees FY24 revs of +2-4% yr/yr $83.65-85.29 bln vs. $84.88 bln FactSet Consensus.

The Information : OpenAI Dropped Work on New ‘Arrakis’ AI Model in Rare Setback

OpenAI Dropped Work on New ‘Arrakis’ AI Model in Rare Setback

Late last year, around the time ChatGPT became a global sensation, the engineers at OpenAI began working on a new artificial intelligence model, codenamed Arrakis.

Although OpenAI was preparing to boost ChatGPT with a different model, now known as GPT-4, which it had completed earlier in the year, the upcoming Arrakis model would allow the company to run the chatbot less expensively. Success with Arrakis would also help OpenAI show Microsoft how fast it could create successive large language models, which would be valuable as the two firms finished negotiating a $10 billion investment and product deal.

But by the middle of 2023, OpenAI had scrapped the Arrakis launch after the model didn’t run as efficiently as the company expected, according to people with knowledge of the situation.

THE TAKEAWAY
• OpenAI’s Arrakis model underperformed the startup’s expectations
• Arrakis would have allowed the startup to run its AI software more cheaply
• Microsoft had hoped to integrate Arrakis into some of its products

The stumble meant OpenAI had lost precious time and would need to shift its resources toward developing a different model. The failure also disappointed some executives at Microsoft, which paid for the right to use the startup’s technology in its products, according to a Microsoft employee with knowledge of the matter.

The Arrakis setback could pierce OpenAI’s aura of invincibility after it humbled AI pioneer Google and built one of the fastest-growing software businesses in history. It shows how the frontier of AI is riddled with pitfalls that can be hard to predict.

Although the Arrakis problems didn’t slow OpenAI’s business this year, the startup could feel the effects in the coming year as the race to launch new LLMs intensifies. Google, for instance, is nearing the launch of Gemini, a set of AI models it hopes will beat GPT-4 in terms of coding and other capabilities, and the accuracy of responses. OpenAI, for its part, continues to release improvements to its industry-leading model, including the ability to decipher images, and plans to announce a slew of new features in November. LLMs underpin products such as ChatGPT, and some at OpenAI also view them as having the potential to be a kind of operating system, including for personal devices, because of their ability to write code, make sense of images and retrieve files.

Based on the strength of GPT-4, OpenAI’s business has ballooned. The company is generating $1.3 billion in annualized revenue, up from $28 million in revenue for all of last year, on the back of GPT-4, which powers the paid version of ChatGPT. OpenAI is worth around $30 billion on paper after an employee share sale in the second quarter of this year, but the company is trying to boost that valuation considerably as it works on another tender offer for employees.

Sparse AI
OpenAI started working on Arrakis last fall in the hopes of developing a model that would be on par with GPT-4 but could run more efficiently, in part by leveraging a machine-learning concept known as sparsity, the people said. Other AI developers such as Google have also publicly discussed their use of sparsity, which OpenAI successfully incorporated in earlier software. Arrakis would have allowed OpenAI to roll out its technology more widely, as the company had access to a limited number of specialized server chips to power its software, they said.

Around this spring, OpenAI’s researchers began training the model, which involves using advanced computing hardware to help the model process massive amounts of data so that it can learn patterns. The company expected it to be significantly cheaper than the process of training GPT-4, the people said. Early on, however, employees realized that the model was not performing well enough to reap the expected benefits. After staff spent roughly a month trying to fix the issues, OpenAI’s senior leadership decided to pull the plug on training it, the people said.

Despite the setback, OpenAI could still incorporate its work on Arrakis into other models. That includes Gobi, an upcoming model that can generate or analyze text as well as visuals, also known as multimodal.

Arrakis underperformed OpenAI’s expectations after the company attempted to increase the model’s sparsity, meaning it would use only part of the model to generate responses and thus make it cheaper to run, two people said. The reasons why the model worked in early tests but didn’t perform well afterwards couldn’t be learned.

Arrakis—named after a desert planet in the “Dune” series—is a nod to the use of sparsity in the model’s design, one person said. Other OpenAI model codenames, including Gobi and Sahara, which was publicly called GPT-3.5 Turbo, use a similar desert theme to reflect the company’s effort to make them sparse.

“Sparse computation is going to be an important trend in the future,” Google executive Jeff Dean said.

Since the failure of Arrakis, OpenAI researchers pivoted to developing a version of GPT-4 designed specifically to generate responses more quickly, the two people with knowledge said. OpenAI has discussed referring to that updated model as GPT-4 Turbo, which was also the public name OpenAI considered for Arrakis before it failed, one of the people said.

For OpenAI, making its models cheaper and more efficient is a top priority as concerns grow about the technology’s costs and as open-source alternatives proliferate. An OpenAI spokesperson didn’t have a comment.

Microsoft, which uses OpenAI’s GPT models to power AI features in Office 365 apps and other services, had expected Arrakis to boost the performance and lower the cost of those features, said the employee with knowledge of the situation. Bing, the Microsoft search engine that relies on GPT-4 and other models to power a ChatGPT-like chatbot, was hoping to implement the Arrakis model in early 2023, before the model was completely derailed, this person said.

Since then, Microsoft has worked on other LLMs that could be cheaper to run compared to OpenAI’s, The Information has reported.

Bringing Down Costs
Many industry practitioners expect sparse models to bring down AI development costs. At a conference in August, Jeff Dean, Google’s chief scientist and a key contributor to its Gemini AI models, said the industry will move toward sparse models in the coming years. Unlike “denser” models like Llama 2 that power some generative AI apps, sparse models only call upon certain computations within the model, known as parameters, that are needed to complete a task, making the process more cost-efficient.

“Sparse computation is going to be an important trend in the future,” Dean said.

Some AI practitioners say one way to increase sparsity is through a technique known as “mixture of expert models,” in which specific parts of a large model are trained to handle certain tasks—in other words, those sub-models become an expert in those tasks—so that the full model doesn’t need to be triggered. OpenAI incorporated this technique into GPT-4, and Arrakis would have also done so, the people said.

“In general, the larger the number of expert [models] is, the sparser and the more efficient the model is,” said Ion Stoica, a computer science professor at University of California, Berkeley, in an email. The result, however, can lead to less accurate results, he said.