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Speaker 1: analysts around the world.
Speaker 3: Big Tech earnings, Microsoft rallying three and a half percent
Speaker 3: in the aftermarket.
Speaker 2: You've got Meta under pressure.
Speaker 3: Ed Ludlow is host of Bloomberg Tech on Bloomberg Television
Speaker 3: eleven am, Wall Street Time Monday through Friday.
Speaker 2: Ed, pick where you want to start.
Speaker 4: True Start on Microsoft. I feel like it's probably the
Speaker 4: most tangible, right, So everything is in the cloud growth
Speaker 4: better than expectations. And you know, the math was really
Speaker 4: simple going into this. They've just closed the book on
Speaker 4: their fiscal financial year, and the question still remains when
Speaker 4: we get to the call, what does Microsoft tell us
Speaker 4: about the capital expenditure growth into next year? Because the
Speaker 4: street sees CAPEX growing beyond fifty percent. Top line growth
Speaker 4: on Azure is forty three percent, give or take XTAC.
Speaker 4: All the street really wants to see is that pace
Speaker 4: of growth being near to CAPEX growth. Right, It's a
Speaker 4: really simple equation. But going back to alphabet, which is
Speaker 4: highly analogous, there's so much commentary here from Microsoft about
Speaker 4: traction with copilot, like more data points that are just easy,
Speaker 4: tangible to understand about how Microsoft's AI efforts are going, right,
Speaker 4: And then it's that's the stock reflecting that and after ours.
Speaker 1: Is the thirty million paid seats a big deal for
Speaker 1: three sixty five copilot for Microsoft?
Speaker 4: Yes, because it's versus twenty million at the end of March.
Speaker 4: Exactly what I'm pointing to the other one is, I
Speaker 4: think you guys mentioned this, but like Nadella was talking
Speaker 4: about Azure generating more than one hundred billion dollars in
Speaker 4: annualized revenue. You know, remember Amazon went to that figure
Speaker 4: very early, you know, in its in its kind of
Speaker 4: like growth of AWS. Then what Amazon did they report
Speaker 4: to but it was to say this is the AI
Speaker 4: specific annualized revenues. So Microsoft's just saying more, you know,
Speaker 4: giving newer data points which take us beyond the simple
Speaker 4: are the top line numbers growing beyond the capex growth.
Speaker 3: Which you kind of want to get right when a
Speaker 3: company is spending and building and doing all of this.
Speaker 3: That the more information, the more transparency, that's helpful big time.
Speaker 5: Yeah.
Speaker 4: I mean again, from the press release alone, Microsoft's not
Speaker 4: saying anything about fiscal year twenty seven capex. Yeah, so
Speaker 4: that there's this period of time where everyone's like, okay, reading,
Speaker 4: digesting the statement and the release, and then on the
Speaker 4: call everything could change. That is the jeopardy of big
Speaker 4: tech earnings. And that's what's fun.
Speaker 1: Well, let's do a little bit with meta platforms and
Speaker 1: then we'll get back to some of these other names.
Speaker 1: Here's a Meta shares a Meta down about six point
Speaker 1: three percent. Let's go ahead and say six percent. Some
Speaker 1: numbers here. Third quarter revenue sixty one to sixty four billion,
Speaker 1: the estimus for sixty three point one seven billion. Second
Speaker 1: quarter revenue came in above estimate. Second quarter EPs came
Speaker 1: in ever so shy of estimates. What is the thing
Speaker 1: that is moving the stock with Meta today?
Speaker 4: It's so hard? I mean, revenues up twenty eight percent
Speaker 4: ahead of expectations, right, ad impressions have improved, Pricing has improved.
Speaker 4: Meta's core business. It's bread and butter is still advertising.
Speaker 4: The story was how has AI made that better? More monetizable?
Speaker 1: So revenue should be higher than estimates?
Speaker 5: Right, it is?
Speaker 4: It is ahead of vespers.
Speaker 2: I think it's twenty right.
Speaker 1: Sorry for the third the outlook, I'm sorry.
Speaker 4: Yeah, for the outlook, right, Yeah, the one thing that
Speaker 4: my brain is going to is that the operating margins
Speaker 4: didn't just come in significantly below a consensus by about
Speaker 4: four percentage points, but costs are up fifty five percent,
Speaker 4: So the operating margin has fallen from forty three to
Speaker 4: thirty one. Costs are higher, and free cash flow has
Speaker 4: basically disappeared. Just im reading the statements.
Speaker 1: And is that because they're investing so much in talent?
Speaker 1: Is it because the tokens cost so much? Like this,
Speaker 1: these companies are spending a ton of money. We looked
Speaker 1: at last week what Alphabet said about going you know,
Speaker 1: cash flow negative. Meta Platforms is feeling it. Meta is
Speaker 1: feeling it when it comes to its earnings because it's
Speaker 1: spending more money.
Speaker 4: Maybe they're disclosing that there was a one time legal
Speaker 4: charge of two point four billion dollars and then severance
Speaker 4: costs super interesting one point two billion dollar charges. We
Speaker 4: knew about the story right about the waves of Meta layoffs,
Speaker 4: so that could excluding those, the underlying operating performance was
Speaker 4: kind of much nearest expectations. Maybe they're a big factor,
Speaker 4: but also goes the idea that the free cash flow
Speaker 4: is basically gone which is such a common story across
Speaker 4: the mag seven.
Speaker 3: Right right, And I want to just throw one other
Speaker 3: headline across the Bloomberg Meta saying some youth related trials
Speaker 3: may result in material loss like we have done here
Speaker 3: are Olivia Carvel, and I believe others on the team
Speaker 3: have done a lot about social media and the impact
Speaker 3: on youth, and we know Meta has certainly been one
Speaker 3: of the targets, so just interesting to get some of
Speaker 3: that clarity again. Just a quick headline Meta boosting the
Speaker 3: low end of its annual capital spending outlook. And I'm
Speaker 3: looking at the live blog too, and I think at
Speaker 3: this is something that you were.
Speaker 2: Going to and this is our Lindawan, our tech editor.
Speaker 3: One thing traders might be reacting to second quarter operating
Speaker 3: margin thirty one percent versus forty three percent a year earlier.
Speaker 3: The companies expecting that total expenses of one hundred and
Speaker 3: sixty five billion one hundred and sixty nine billion, raising
Speaker 3: the low end from one hundred and sixty two billion previously.
Speaker 3: I want to bring into the conversation to our man
Speaker 3: deep seeing Bloomberg Intelligence Global ahead of Technology Research making
Speaker 3: his way from TV into our radio studio we're talking
Speaker 3: about Meta, what investors don't like it.
Speaker 5: I mean, look, there wasn't much of an upside when
Speaker 5: it comes to the top line both this quarter and
Speaker 5: the guide, and when it comes to Capex, even though
Speaker 5: they didn't raise capex. The one line that caught my
Speaker 5: attention was that first line from Mark Zuckerberg that he
Speaker 5: expects things to improve across enterprises. And that's new because
Speaker 5: all of Meta's generated revenue is generated from the consumer side.
Speaker 5: So the fact that he has that in the first
Speaker 5: line shows that they are leaning towards.
Speaker 2: Enterprise usage, the cloud builder, cloud.
Speaker 5: Built API usage by enterprises, and that's what they are
Speaker 5: betting on when it comes to this kind.
Speaker 1: I mean silly question, but does Meta actually have an
Speaker 1: LM that can be licensed by some of these enterprises
Speaker 1: in a way that would be different than an enterprise
Speaker 1: using a platform from Microsoft or from open Ai or
Speaker 1: from Anthropic.
Speaker 5: So it's getting more competitive when it comes to royal
Speaker 5: LM usage. And the reason I say that is because
Speaker 5: of Kimmy K three and all these open source models
Speaker 5: that have really taken off and are being used for
Speaker 5: use cases besides the frontier where Anthropic is being used.
Speaker 5: So I think if Meta has to compete with open source,
Speaker 5: it's going to be interesting how they position themselves, whether
Speaker 5: it's in terms of lower token pricing, or they have
Speaker 5: another strategy because they're building a business from scratch and
Speaker 5: it's not easy. They're late to that cloud game. They
Speaker 5: are late to that API game. So how they go
Speaker 5: about it. Who those anchor customers are going to be
Speaker 5: that's a million dollar question. Who are they going to
Speaker 5: partner with in terms of that enterprise usage. Is it
Speaker 5: going to be Microsoft or Anthropic? We don't know that,
Speaker 5: well Ed, Come on back in here. What do you
Speaker 5: think you're going through all of these releases right now?
Speaker 5: You point out that Mark Zuckerberg what mandep was referring
Speaker 5: to Mark Zuckerberg writing quote, AI is accelerating our core
Speaker 5: business today, powering our next generation of products, and opening
Speaker 5: the door to entirely new enterprise opportunities.
Speaker 1: What are those opportunities?
Speaker 2: Yeah?
Speaker 4: So Bloomberg's reported that Meta has explored a literal cloud
Speaker 4: computing business. Charlie called Meta a hyperscaler. It operates data
Speaker 4: centers at Hyperscale for its own business, for its internal workloads.
Speaker 4: That's very different to renting out compute capacity to third parties,
Speaker 4: but Bloomberg's reported metas looking at that more recently. Kurt
Speaker 4: Wagner got on the phone with Mark Zuckerberg, right and
Speaker 4: he said, yeah, you know, that is something an idea
Speaker 4: of something we might do. That quote around enterprise opportunities
Speaker 4: is pretty much the sort of clearest example we've had,
Speaker 4: and I think going into this, i'd wager that for
Speaker 4: the call, that is something that analysts will focus questions on.
Speaker 4: It's not about it's not about ROI on the AI investment.
Speaker 4: It's about ROI on the infrastructure they're building. How can
Speaker 4: you basically make new revenue streams and more money on
Speaker 4: all the infrastructure you've built? And so interesting. I think
Speaker 4: Mandib's very smart to get to that so quick. And interesting,
Speaker 4: by the way, because how many quarters on the show
Speaker 4: do we say, well, here's the quote from the CEO
Speaker 4: at the top of the reason, and we kind of
Speaker 4: move on, and how much work is this one doing?
Speaker 4: I find that fascinating.
Speaker 3: I want to ask both of you because here we
Speaker 3: have Meta under pressure. You've got Microsoft, though rallying in
Speaker 3: the aftermarket, not up as much as it was earlier,
Speaker 3: but still up about one point four percent.
Speaker 2: Mindev let me bring you back in here.
Speaker 3: What does a better tell on the AI spend the
Speaker 3: AI narrative, like, is it Microsoft in terms of the
Speaker 3: enthusiasm and the expected momentum to continue?
Speaker 5: I mean, just look at the margin degradation for Meta
Speaker 5: here they went from forty three percent to thirty one
Speaker 5: percent operating margin.
Speaker 2: Massive drop.
Speaker 5: It is a massive and that's where a Microsoft with
Speaker 5: its cloud business is able to cushion, you know, some
Speaker 5: of the headwinds it is facing from all these l
Speaker 5: lamps and still do very well in terms of the
Speaker 5: holding up the margin side of the equation.
Speaker 1: Far from capex, where's that money going? Why are margins
Speaker 1: under pressure?
Speaker 5: I mean in the case so with all these companies, now,
Speaker 5: once you raise your capex, you have to show the
Speaker 5: capex in the depreciation line, so your cost.
Speaker 2: Of revenue will keep going up.
Speaker 5: So in the case of Meta, it's not as if
Speaker 5: they're hiring a lot more people. They did hire a
Speaker 5: lot of people and paid millions of dollars, But I
Speaker 5: don't think that.
Speaker 1: You don't think that's what it is.
Speaker 5: No, it's that cost of revenue line going up because
Speaker 5: now those depreciation expenses wouldkick.
Speaker 2: In, so it's just capex.
Speaker 5: You think it will be capeck.
Speaker 1: But can't they make up for that with the investments
Speaker 1: that they've made in making advertising more targeted and getting
Speaker 1: us to click or at least getting marketers in front
Speaker 1: of eyeballs and even more efficient.
Speaker 5: What the ad pricing growth was it was around fourteen percent,
Speaker 5: and you.
Speaker 1: Know that's pretty solid.
Speaker 5: That's been the case for the last few quarters. So
Speaker 5: the problem now they have is all those levers, which
Speaker 5: once there to protect the margins, are not good enough
Speaker 5: when your capex is growing up like this and you
Speaker 5: know your cost of revenue will keep growing. So that's
Speaker 5: that's a hard part in managing margins here for Meta.
Speaker 3: So Microsoft's like, sorry, Mata, but we're having a pretty
Speaker 3: good day. Microsoft share is still up in the aftermarket. So,
Speaker 3: Ed Ludlow, you've been going through and reading more from
Speaker 3: the company.
Speaker 2: What's jumping out at you?
Speaker 4: Well, going into this, I think we knew that it
Speaker 4: was the case. Maybe man Deep can clear it up.
Speaker 4: I think there is some kind of accounting or disclosure
Speaker 4: change for Microsoft where the CAPEX number and they're accounting
Speaker 4: for leases specifically makes the CAPEX number look smaller. But
Speaker 4: again like We're in this period now where the call
Speaker 4: comes very important because we know what the Azure growth
Speaker 4: number is for the quarter gone and the period this
Speaker 4: closed the door on the financial year twenty six, financial
Speaker 4: year twenty seven starts. And you know, the very simple
Speaker 4: math is, in an environment where everyone thinks CAPEX goes up,
Speaker 4: what is the percentage growth in CAPEX that is foreseen
Speaker 4: relative to the growth in Azure. And that's why they're
Speaker 4: putting so much emphasis on all these other metrics, the
Speaker 4: like maybe non financial nature to get some evidence that
Speaker 4: their AI investments are getting traction.
Speaker 2: What I don't know.
Speaker 1: I mean, I think, go go ahead.
Speaker 5: I mean, the one thing I had in mind before
Speaker 5: coming into earnings is if a company doesn't raise their
Speaker 5: capex in an environment where memory prices are up twenty
Speaker 5: thirty percent, to me, they are cutting back somewhere else.
Speaker 5: And that would be my interpretation for META is because
Speaker 5: they didn't raise capex, they certainly are offsetting it with
Speaker 5: something else. We just don't know what.
Speaker 1: So where are they doing that?
Speaker 5: I mean, they don't want to raise capex because the
Speaker 5: stock would have been down even more. Yeah, they raised
Speaker 5: the capex, so they didn't have a choice. I mean
Speaker 5: they're being forced to be disciplined here in terms of
Speaker 5: CAPEX because the market doesn't have a tolerance for higher
Speaker 5: metas capex for this year and possibly for twenty twenty seven.
Speaker 1: Some context to the word discipline now, Carol, discipline for
Speaker 1: Meta platforms means one hundredion to one hundred and forty
Speaker 1: five billion dollars in CAPEX this year.
Speaker 3: Well Ed, come on back in here though, for Meta
Speaker 3: moving into cloud though this business and maybe we'll get
Speaker 3: more on the call about their intentions and their plans.
Speaker 2: I mean, is it still the right move for Meta?
Speaker 4: I mean, I feel like, just going off past action
Speaker 4: and precedent that we're going to get to the call.
Speaker 4: And you know, like the way I think about it is,
Speaker 4: if you're listening or watching BusinessWeek right now, you're asking
Speaker 4: yourself what's still to come. We've gone through the numbers,
Speaker 4: we've gone through the headlines. Everyone with Meta knows about
Speaker 4: Mark Zuckerberg, Susan Lee. The CFO is very important and
Speaker 4: often does the heavy lifting of communicating the financial strategy.
Speaker 4: And I'll just see a world in which we get
Speaker 4: to the call and she's like, yeah, here's our commentary
Speaker 4: on CAPEX I've Mandya's point is so important because it's
Speaker 4: not new, and I mean that with massive respect. The
Speaker 4: capex doesn't just go up because you need to spend
Speaker 4: more to build more to meet demand. Capex can also
Speaker 4: go up because the cost of building those things is higher.
Speaker 4: You know, you have labor and construction inflation, materials inflation.
Speaker 4: Memory is a massive macro factor. You know. IBM basically
Speaker 4: tried to blame ten days ago the lack of spending
Speaker 4: on their technology mainframes, in particular because their customers faced
Speaker 4: higher capex largely relating to higher memory prices. So you know,
Speaker 4: all of these factors are common to all of these
Speaker 4: capital expenditure deployers who want to build AI infrastructure.
Speaker 3: All right, So we're tracking Meta and Microsoft here in
Speaker 3: the after hours. Microsoft up about two percent, a little
Speaker 3: bit more.
Speaker 2: So just following earnings.
Speaker 3: If I go on over to Meta, it is still
Speaker 3: down about five point six percent. Let's just also throw
Speaker 3: into the mix. We've got Qualcom. That one also came
Speaker 3: out with its results, and the stock right now in
Speaker 3: the aftermark as they bring it up on my Bloomberg
Speaker 3: it is down about three point five percent.
Speaker 2: And then we have Armholding.
Speaker 1: We have arm Holding says, well, I want to go
Speaker 1: to Qualcom real quick to Ed because Ed is interviewing
Speaker 1: Christiano Amman tomorrow on Bloomberg Tech. Be sure to tune
Speaker 1: in for that. The CEO of Qualcom ed the company
Speaker 1: give a week forecast for the current quarter. It's cited
Speaker 1: component shortages and rising costs. That's not a new story,
Speaker 1: but by any means, I mean, you've known this about.
Speaker 4: So it's not new. I would say. In the smartphone market,
Speaker 4: it seems worse for Qualcomm than we thought. You know,
Speaker 4: they are the main processor makeup for smartphones. They are
Speaker 4: getting hit on all sides because of m market demand,
Speaker 4: being hit by memory for example. They've tried to diversify
Speaker 4: the business away from that reliance on smartphone, but within
Speaker 4: smartphone they're also kind of it seems like losing business
Speaker 4: from Apple faster than was modeled for. And then like
Speaker 4: they are super super entrenched or exposed to Android in China, right,
Speaker 4: and so like in aggregate all of the forecasts for
Speaker 4: that that handset market, they aren't. They want Rosie to
Speaker 4: begin with the thing that I will ask Christiano is
Speaker 4: for him to give me his latest assessment of the
Speaker 4: smartphone market. For this year and whether it is better
Speaker 4: or worse than he had told me last quarter. So simple,
Speaker 4: but it is possible that the things deteriorate, you know,
Speaker 4: quarters a quarter, and reading in King's report on the
Speaker 4: earnings that that seems to be the case.
Speaker 3: Hey, So Quaal come down about four point three percent
Speaker 3: here in the aftermarket, ARM holdings just down by eight
Speaker 3: tents of a person. ARM delivering a sales forecast of
Speaker 3: about one point thirty eight billion in the fiscal second quarter,
Speaker 3: and we did see the stock under some pressure here,
Speaker 3: Mandy've come on back in anything in terms of ARM
Speaker 3: or Qualcom, that's that's a note for you.
Speaker 5: I mean just exposures. I think Armed, because of the
Speaker 5: data center exposure, continues to do better, even though ARM
Speaker 5: does have smartphone exposure. But because their data center exposure
Speaker 5: has been much higher in the past few quarters, they
Speaker 5: seem to be beating numbers, whereas in the case of Qualcomm,
Speaker 5: I mean they are talking about a twenty twenty nine
Speaker 5: guide and how the business would be more diversified by then.
Speaker 5: But in the near term this business is declining. The
Speaker 5: handset business is still under pressure. Yeah, because of the
Speaker 5: consumer smartphone and the memory pricing.
Speaker 3: Impact all right through on ARM noting royalties from those
Speaker 3: products data centers specifically more than doubling from a year earlier,
Speaker 3: and the appetite our new chip lineup is greater than anticipated.
Speaker 3: This is coming from the company's CEO Armholdings