Mary Long (3:20)

So for any company, when big news hits or when a stock dips into the red, of course there's like this little devil on somebody's shoulder who can be whispering, is it time to sell? Is it time to sell? Is it time to sell? We talk a lot here at the fool about only selling if you see what appears to be a genuine change to your original thesis. It's one thing to theorize about that, but in actuality, how do you spot a genuine thesis changing event?

Anthony Chavone (3:44)

Yeah, so I think you have to know why you own the stock in the first place. So when you have new information come along, you're able to see that new information is in conflict with your original thesis. And I think it's important to remember that there's always going to be a completely valid reason to sell, either to sell the market or to sell a stock. But a lot of the time that reason doesn't impact the two or three variables that drive long term returns. So with that in mind, I like, I like to be very slow to react to new information. Especially an environment like we're in today where, you know, policy can change, you know, overnight. So I think just important to, to react slow and if I can make a plug for dividends for a second, that the nice thing about dividends is you don't necessarily have, if you're not, if your conviction isn't as high on a specific stock, you can just take that dividend, take it in cash and reallocate it to a higher conviction idea. So that's the way I like to run my own portfolio. But, but in general, just know why you own a stock and be slow to react to to new news. That that's the way I like to spot thesis changing events.

Mary Long (4:57)

You Ask if you could make a plug for dividends. Of course you can make a plug for dividends. And that gives us a perfect segue into the next story I want to hit with you because if I'm talking to Anthony Chavon, I got to use the opportunity to talk about REITs. And one of your favorite REITs, Prologis, reported its first quarter earnings this morning. This, for those that don't know, is a logistics real estate company. So they own, manage and develop logistics facilities around the world and they play a key role in helping get stuff get where it needs to go. So they play into E commerce trends and just larger supply chains. Highlights from the quarter that I'll call out before kicking it to you ant total revenue up about 9% year over year for Prologis. They saw a 35% increase in new leases, though occupancy was down ever so slightly for the quarter, I think hovering around just under 95%. You've got core FFO per share that beat analyst estimates and it increased by 14 cents compared to a year ago. Okay. All that and perhaps other highlights as well. What are you, Anthony, paying attention to in this report?

Anthony Chavone (5:58)

Yes, so the operating fundamentals of this report were pretty much on par with what I think analysts expected. But what I was really interested in was the guidance. And I think that's going to be the big theme this earnings season is not just for Prologis or REITs but, but just the market in general. And I think if a company reaffirms its guidance in this type of environment we're currently in, I think that's a pretty good sign. And if the market's going to reward companies for doing that, and that's exactly what we saw. Prologis, their guidance pretty much didn't change at all, except they expect to deploy less capital into new development projects. And I think that's related to a lot of the uncertainty we're currently seeing. So I mean, overall, just a pretty strong solid report. Nothing too unexpected from prologis.

Mary Long (6:45)

That guidance almost comes as surprising to me because again, understanding that this is a player in the E commerce and in this global supply chain, I would think that, okay, if we're in the mid, in the midst of a trade war that's got to affect a company like prologis. Do you see the current policy and macro environment as affecting them perhaps more than they anticipate or no. Do you. Do you think that that guidance is pretty in line?

Anthony Chavone (7:08)

Yeah. So I think a tariff uncertainty could definitely impact leasing over the short Run, I think maybe we'll, maybe we could see that impact, you know, second quarter results maybe. But I think that's more of a short term worry. If you think about, over the long term, you think about new supply, right? It's going to be harder to build these warehouses if you have tariffs coming in, tariffs on building supplies, that sort of thing. Interest rates have also ticked up a little bit last couple of weeks. That's going to get harder to build new warehouses. So that benefits existing warehouse owners like prologis. And you know, there's also, if you look at prologis balance sheet, their, their debt to total market cap is something like 25% and their average interest rate is like 3%. So they have the financial, you know, power to, to navigate a lot of this uncertainty. And so I think that just, you know, kind of separates them from some of the lower quality industrial players in an environment like this. I think it ultimately benefits them over the long, long run and can make them, you know, more aggressive when it comes to acquisitions and things like that.

Mary Long (8:16)

In February, prologis gave a heads up that its co founder and CEO Hamid Mogadam would be retiring at the end of the year. Mokadam's been at the helm of Prologis for more than 40 years. You know, we talk about how the, the uncertain macro environment might affect this company in the near term. A CEO change might, might affect the company as well. But, but before maybe we get to what you would expect or hope for from whoever is coming, coming in to replace Mogadam, what kind of, what, what lessons, wisdom practices would you like to see a new leader take from this past CEO who's really leaving the company with, as you mentioned, strong balance sheet, strong business fundamentals, et cetera.

Anthony Chavone (8:56)

Yeah, I mean, honestly, this leadership transition that they're currently in could not have gone any smoother so far. I mean, the new guy who's stepping in is Dan Letter and he's been with the company for a long time. And there's actually a really good piece in Fortune magazine talking about sort of the leadership transition that's taking place. And one of the things that I found interesting was that Dan Letter and Habib Bagadam's, their, their offices have been right next to each other for, for two years now. So this has been in the works for a very long time. He's, he's stepping at the end of the year. So there's, there's a really long transition phase in here. And you know, with Dan Letter stepping in, I just, I Just want to see prologis continue to be the leader not only in the industrial warehouse space, but just a leader in the REIT space. I mean, they're always, I believe, the first rate to come out and, and you know, issue guidance, report earnings every single quarter. So I think that's an important part. They're always out there leading. They're always running the company in the right way, respecting their equity, respecting shareholders, respecting their tenants and their partners. So I would just like to see that continue.

Mary Long (10:05)

An interesting point on leading. Prologis used to be the world's largest REIT by market cap, and now it's second in line. Its crown has been snatched by American Tower, which now holds that distinction. Do you think that that distinction of world's largest REIT by market cap actually has weight to it?

Anthony Chavone (10:23)

So for reit, bigger is usually better, but I'm not sure there's much of a difference between an 80 billion market cap and a $100 billion market cap. So I don't think the distinction really matters too much. The reason why bigger is usually better is that REITs can borrow more debt. They could borrow it at were advantageous terms. But you know, I really don't think there's. There's too much of a difference there besides. Besides bragging rights.

Mary Long (10:50)

Well, speaking of bragging rights, our breakfast news newsletter asked readers they closed out with this question. Breakfast News is a newsletter that goes out to subscribers. It's free every day, and it kind of summarizes stock market and business news. And we close out with a question that we dubbed the foolish fun question. So today's foolish fun question highlighted this. This switch up between American Tower taking prologis title as world's largest reap by market cap and pose the question of whether or not readers think prologis will eventually reclaim its status as world's largest street or if American Tower will continue to reign supreme. Ant we'll close out by giving the crystal ball over to you. What do you think? You making any predictions on this one?

Anthony Chavone (11:31)

Well, since there's no timeline on this, I'm going to go with prologis because at the end of the day, they're essentially selling land, they're selling space, and they own a lot of the best locations. So eventually I think their market cap will catch up.

Mary Long (11:45)

Here we go. Anthony Chavon, always a pleasure talking to you. Thanks for joining us this morning on Motley Fool Money.

Anthony Chavone (11:50)

Thanks for having me.

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Mary Long (13:10)

For all the excitement about artificial intelligence, there's also a lot to worry about. One of those worries, enhanced cyber attacks. Trend Micro is trying to get ahead of those threats. They're a cybersecurity company that's working with Nvidia to build autonomous cybersecurity agents. Up next, Ricky Mulvey talks with Kevin Simser, Trend Micro's chief operating officer, about how AI is changing the fraud and security industries.

Ricky Mulvey (13:42)

Kevin, I want to start broad because your your company sees a lot of cybersecurity threats for organizations all over the globe. What are just the biggest cybersecurity threats your customers are facing right now?

Kevin Simser (13:55)

Yeah, Ricky, we do have an interesting point of view here at Trend Micro because we've got a large number of our customers actually right across the globe. So we're a multibillion dollar company, over 500,000 enterprise customers of which the majority of them are outside the US So it gives us quite a unique global perspective. It's the ever evolving threat landscape. We've been seeing it for a long time continues to be ransomware is the number one threat vector that we continue to see. All kinds of different techniques definitely. The emergence of generative AI has made a lot of the email spear phishing attacks much, much more sophisticated. So email security, it might seem pretty boring and mundane, but actually that's a very big threat vector that we continue to see.

Ricky Mulvey (14:50)

Generative AI is makes things more personal. You can think of it from a marketing context where people are able to or advertisers are able to personalize messages given someone's demographic and exactly who they are. Spear phishing is is also a lot like that because you could personalize a message to get someone to click on a malware link. How much more advanced are these email threats now than they were maybe just like two or three years ago?

Kevin Simser (15:16)

Yeah, they're much more advanced. That's a given. With all the technology that's out there. If you think about the business model of a threat actor, they have been also adopting a lot of the disruptive technology that's been coming out. Right. They've adopted the cloud. They have software as a service. They pick up various techniques that are evolving through our own businesses as well. They are also adopting them. But their fundamental business model, they were okay with a high failure rate. They could throw a thousand emails or a thousand different attempts, and they only needed one to be successful. Now what it seems is they're getting much more sophisticated, much more polished, much more organized, and that means that actually their success rate is becoming higher. You're not getting the emails with the spelling errors, and it's very obvious that it's a spear phishing attack, Much, much more polished and complete.

Ricky Mulvey (16:20)

And you mentioned ransomware is a big threat. How does the cloud migration affect that? Because I'm unfamiliar with this space. On the one hand, you could see now that data is stored everywhere, it would be significantly more difficult for a bad actor to lock down. The other side of that is more people are working from home. There's more entry points for someone to get in to lock down an organization's data and then demand millions and millions of dollars to continue to run your business as normal. How are you seeing it from your perspective?

Kevin Simser (16:50)

Fundamentally, what has been changing is the attack surface of an organization has been ever expanding. It started with remote work, it evolved into public cloud, and now with AI, the attack surface is even bigger. But of course, as businesses, we want to encourage the use of these technologies. So as a cybersecurity professional, we feel it's our obligation to provide the platform that's needed in order to help businesses protect themselves against that broader attack surface.

Ricky Mulvey (17:26)

So data sovereignty is this idea that where your data lives determines what rules apply to it. There's an example on your site and example in the uae. Organizations must obtain explicit consent from individuals before processing their personal data. Honestly, not a bad idea. Maybe we should be doing more of that. However, the way you're describing it is since the US has taken a more sort of isolationist stance, you're seeing responses from large, large organizations to basically pull their data from the US and move it closer to home. The good thing about this for the US is the biggest technology companies tend to live here. But how are you seeing this play out? Is it companies are leaving, like basically leaving US data centers to go to their home country or you know this space better than me. How's it going down?

Kevin Simser (18:16)

Yeah, no, and I think you were touching on the key elements. You know, at the end of the day, businesses really do want to be adopting public cloud, but the hyperscalers don't exist. The big hyperscalers, the largest of the hyperscalers, they just don't have a point of presence in all 200 plus countries around the world. So they're starting to figure out, okay, well maybe I need to move some of my data into my own private data centers. So we're seeing sort of a resurgence in and around this thing called the AI data center. You know, it's really pushed heavily by Nvidia. And we're seeing some companies want to adopt their own physical AI data center so that their AI data is locally resident. But we're also seeing some of the public cloud hyperscalers like Google adopt a model where they can actually run a specific point of presence in a country. They call it Distributed Public Cloud Infrastructure. So they will run it locally within a country for you. So there's lots of different options available for customers. But the point, the headline is that customers are thinking about it now. Customers outside the US are definitely thinking about it.

Ricky Mulvey (19:35)

And Nvidia talks a lot about sovereign AI and how basically every nation is a part of their national security. Defense needs to develop their own AI infrastructure. You said companies are thinking about moving their data. Cloud migrations are really difficult. Thinking is one thing. Are you seeing, are you seeing them take action on it right now or do you think a lot of them are waiting for this uncertainty within the tariff situation to play out? A little bit.

Kevin Simser (20:00)

I'm seeing some of the more progressive companies actually be out in front and they're actually making the decision now. So we're definitely doing deals specifically with data sovereignty in mind. We happen to have a platform which is a bit unique. So here at Trend Micro, it's a bit unique in that we can run in a public cloud environment or we can run in an on premise environment. So. So customers tend to be talking to us whenever they are actually choosing maybe to actually bring their cybersecurity data closer to home.

Ricky Mulvey (20:37)

And we talked about Nvidia a little bit. You're also working with them to build AI agents. AI agents versus ChatGPT. When you go into ChatGPT, you have to press the button for ChatGPT to take action, to give you an answer, AI agents are allowed to take action on your behalf. How are AI agents changing cybersecurity? How is it like, how is it different from just traditional endpoint security from a few years ago?

Kevin Simser (21:06)

Yeah, well, it's fundamentally different and it's really expanding that attack surface even more. One of the things that people don't necessarily realize is when they are adopting AI, when a company is adopting AI, what it tends to do is it tends to break the access control silos that were built in an organization. For example, many companies had their HR data in one location, they had their CRM data, their customer data in one location, they had their finance data in one location. And now as you bring that all together with AI, all of a sudden some of those access control mechanisms no longer exist. So it's really important, as you think about that type of a move, to be thinking about the broader attack surface. If you think about over the last couple of years, generative AI was the big topic this year, and next year it will be about agentic AI and building out those agents and seeing how the power of this autonomous, these actions can be taken. I was at Google Next last week and they introduced their framework called Agent Space and it's going to allow AI agents to communicate with other AI agents. So AI communicating with AI. So it's an exciting time with all of this disruptive technology and we want to make sure as a cybersecurity company that we're putting the guardrails in place to help companies not get themselves in trouble.

Ricky Mulvey (22:48)

Well, I can also imagine that changes a lot of the spear phishing attacks we were talking about earlier, where if you have a bad actor AI agent trying to phish your other AI agent in your email inbox. That's a completely different attack surface than even today.

Kevin Simser (23:04)

It seems like it does make it much more complicated.

Ricky Mulvey (23:08)

One of the decisions you made is that your AI model, your AI agent trend, Cybertron, I believe that's open source.

Kevin Simser (23:16)

It is.

Ricky Mulvey (23:17)

So I know your company does hackathons, that kind of thing. What's the reasoning to do that? It seems like that could also give bad actors an end to figure out how to, how to hack your agent.

Kevin Simser (23:29)

We fundamentally do believe in an open source methodology. It's great to have everything published so you know exactly what's going on. But the big reason we did it is we wanted to be the first to offer up in Nvidia's marketplace an LLM specifically trained for cybersecurity we took all of our knowledge that we have and we packaged it up in this thing called Cybertron and we made it available. And our hope is that people will expand it because the power of this is if people start to contribute to to it and get it linked into as many AI agents as possible, then all of a sudden really the power of it tends to grow. And that's what we're looking forward to seeing happen.

Ricky Mulvey (24:19)

One of the big storylines I've seen as well is with the rise of generative AI, that's changed the demands of software developers. And one of the fears for I think a lot of college graduates is that this is going to take the job of a lot of junior software developers. You're the chief operating officer of a large cybersecurity company. How are you seeing this trend play out and how are you thinking about hiring software developers with the rise of generative AI?

Kevin Simser (24:45)

Yeah, for us AI is not about cost reduction, it's about actually more exciting productivity improvements so that we can actually drive more innovation and drive our top line business. And when I talk to CEO of Workday or the CEO of ServiceNow, they're thinking about it exactly the same way. It's not about reducing humans in tech, it's actually about expanding. So we're still hiring engineers, even though a large percentage of our code is automatically generated by AI, but we're still hiring software engineers and so too are others.

Ricky Mulvey (25:27)

And then as we wrap up, what are the biggest storylines or metrics you want Trend Micros investors to follow for the next two, three, five years ahead?

Kevin Simser (25:37)

Yeah, we're really focused in on. We have a chairman who's the founder of the company. We've been in business for 35 years and he subscribes to the philosophy of sustainable, superior performance ssp. And to him what that means is we've been around for 35 plus years. We want to be around for another 35 plus years. And in order to do that you need top line growth, but you also need net margins to be created. So you're going to see us continue to drive. We have our road to 2027, which is our North Star business model. You're going to see us continue to drive top line performance but also improve bottom line performance. Investors should be appreciative of the fact that you're actually generating those profits so that you can reinvest them back into the business.

Ricky Mulvey (26:29)

Kevin Simser, Chief Operating Officer of Trend Micro, appreciate your time and your insight and thanks for joining us on Motley Fool. Money.

Kevin Simser (26:35)

Thank you.

Mary Long (26:42)

As always, people on the program may have interest in the stocks they talk about. And the Motley Fool. We have four more recommendations, for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. For the Motley fool money team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.