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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Bloomberg BusinessWeek

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Speaker 1: inside from the reporters and editors who bring you America's

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Speaker 1: most trusted business magazine, plus global business, finance and tech

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Speaker 1: news as it happens. Bloomberg Business Week with Carol Messer

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Speaker 1: and Tim Steneveek on Bloomberg Radio.

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Speaker 2: Okay, the call has not started yet, Carol. Investors are

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Speaker 2: still taking note of the numbers that we got from Microsoft.

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Speaker 2: Shares down six point eight percent in the after hours.

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Speaker 2: The company reported Microsoft Cloud revenue for the fourth quarter

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Speaker 2: that met the average analyst estimate capex though coming into

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Speaker 2: at thirteen point eighty seven billion, that was higher than

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Speaker 2: analysts wanted to see at thirteen point twenty seven billion dollars.

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Speaker 3: Yeah, kind of interesting, So let's get to it. Dan

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Speaker 3: Morgan is with a senior portfolio manager at Sonvs Trust

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Speaker 3: Company about twenty billion in acids under management, joining us

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Speaker 3: once again from Atlanta. Hey, Dan, so good to have

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Speaker 3: you back with us. Having said that, yeah, Hey, it

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Speaker 3: feels like all of the numbers are kind of right

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Speaker 3: where the street was expecting. We were talking ahead of

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Speaker 3: it that we needed to see some outperformance in order

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Speaker 3: for investors to be impressed. Are you impressed with these

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Speaker 3: results from Microsoft?

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Speaker 4: Well, you're right, Carol. You know, the two numbers that

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Speaker 4: really stay out stand out to me. You've already mentioned

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Speaker 4: these as terms of ASER growth only up twenty nine percent.

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Speaker 4: They had guided on the previous third quarter that they

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Speaker 4: would hit growth between thirty and thirty two. The street

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Speaker 4: was actually looking for something north of that. And then Tim,

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Speaker 4: you mentioned that Campex number coming in a little bit

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Speaker 4: higher than expected. Of course, there's some rollover going on

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Speaker 4: right now from the Alphabet report that we came out earlier,

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Speaker 4: when it really raised concerns about, you know, how much

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Speaker 4: gain are you getting in regards to your AI initiatives

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Speaker 4: versus the amount of CAPEX that you're spending. And I

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Speaker 4: was kind of hoping, Carol and Tim that this Microsoft

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Speaker 4: report might kind of dampen those worries and just kind

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Speaker 4: of blow numbers out, you know, ASER up thirty four

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Speaker 4: percent and so forth, But unfortunately it was a little

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Speaker 4: bit shy. So I think that conversation is going to

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Speaker 4: have to come back in in these concerns that we

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Speaker 4: saw after the Alphabet report are going to reignite again.

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Speaker 2: Yeah, Shares down six point six percent. Right now, help

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Speaker 2: us help us understand exactly, Dan, where we should be

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Speaker 2: seeing the results of Microsoft's investments in AI and in

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Speaker 2: open AI. Where should we be looking in this earnings

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Speaker 2: report to see benefits from AI.

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Speaker 4: Well, foremost is in the data center, right, Tim and Carroll,

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Speaker 4: That's been the area where we've seen the biggest amount

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Speaker 4: of spending. That's going to be out of their ASER group,

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Speaker 4: which is encompassed in the umbrella of Commercial Cloud and

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Speaker 4: Intelligent Cloud. Those are the two segments that report. Of course,

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Speaker 4: we don't get the hard numbers. We just get a

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Speaker 4: growth rate from Microsoft. That's what they disclose to us.

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Speaker 4: But if you look at intelligent Cloud and Commercial Cloud,

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Speaker 4: they both looks like they both kind of keen in line.

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Speaker 4: I noticed the cloud segment was a little bit shy

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Speaker 4: three point eight to zero versus eight four, which I

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Speaker 4: think was the estimate. The other area that we'd like

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Speaker 4: to get a little more clarity on, Tim M and

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Speaker 4: Carroll is what's going on with copilot. That's kind of

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Speaker 4: buried in a lot of different areas, but it's hard

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Speaker 4: to distinguish it. But we're always hoping that Microsoft, maybe

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Speaker 4: on the conference call, will come out and basically release

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Speaker 4: how many seats they've been able to license on that product,

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Speaker 4: because that's another one of their core AI products. We

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Speaker 4: all know that they ink that deal back a year

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Speaker 4: and a half ago with chat GPT, But that's kind

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Speaker 4: of hard to really figure where that comes into the

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Speaker 4: earnings reports. But you know, the key areas is ASER growth,

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Speaker 4: commercial cloud, intelligent cloud, and then any additional information that

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Speaker 4: we can get on copilot in terms of additional disclosure.

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Speaker 4: So again, guys, Tim and Carroll, it's very difficult, right

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Speaker 4: to really distinguish, you know, we look at these segment

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Speaker 4: data points that came in on this, you know, headlines

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Speaker 4: coming through. It is very hard to distinguish exactly where

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Speaker 4: all this capex is impacting in regards to AI initiatives.

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Speaker 3: So what do you Okay, So wait, you just threw

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Speaker 3: a lot at us. So what is the question to

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Speaker 3: Microsoft in the aftermarket or on the analyst call Dan

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Speaker 3: to kind of get more clarity to try and figure

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Speaker 3: out if the AI spend is maybe not living up

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Speaker 3: to expectations or it is slowing down.

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Speaker 4: Right, So if we look back, for example, Carol and

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Speaker 4: Tim and we look at the last quarter they came

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Speaker 4: out and specifically said that ASER was positively benefited about

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Speaker 4: seven hundred basis points compared to six center basis points

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Speaker 4: in the second quarter in terms of increased growth coming

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Speaker 4: out of the data centered unit, which is huge for them.

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Speaker 4: That's huge recipe for their overall growth. So obviously, Carroll Tim,

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Speaker 4: that's a number that everyone's going to be looking at

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Speaker 4: when they publicly disclose of the twenty nine percent growth

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Speaker 4: they did in ASER. What percentage of that or what

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Speaker 4: boost did you get from AI and the past they've

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Speaker 4: disclosed that, So that's a really key number that everyone's

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Speaker 4: going to be queuing in on the conference call.

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Speaker 2: What's the question that you have for Satinadella?

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Speaker 4: Well, I think you know, again, you know, just trying

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Speaker 4: to weigh out CAPEX expense. You know, where is it going?

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Speaker 4: I mean, let's be let's be honest, Carroll Tim. I mean,

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Speaker 4: you're looking at a company it's going to probably spend

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Speaker 4: about fifty billion dollars in campex, So everybody wants to

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Speaker 4: know what kind of ROI are you getting from that?

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Speaker 4: And at this point we really haven't seen a lot

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Speaker 4: of ROI from anybody, So again it's just them laying

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Speaker 4: out that roadmap in and again going into what they're

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Speaker 4: doing and their hopes in terms of how this will

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Speaker 4: come to fruition and pay off for them. Yes, I

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Speaker 4: think that's what everyone's going to be really focusing on

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Speaker 4: Tim and Carroll after that Alphabet report.

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Speaker 2: I mean, how, how does this response from investors explain

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Speaker 2: how investors are pricing companies right now? Because Microsoft reported

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Speaker 2: a slight four tenths of one percent beat on EPs

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Speaker 2: and then a small one tenth of one percent miss

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Speaker 2: on cloud revenue, and Microsoft shares are just getting punished

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Speaker 2: after hours.

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Speaker 4: Yeah, you know, Tim, the stock really traded up anticipation

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Speaker 4: of the reporter. Is actually trading at forty four times earnings,

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Speaker 4: about thirty eight thirty nine times Physical year twenty twenty

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Speaker 4: four estimates the average pe on Microsoft over the last

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Speaker 4: five years is about thirty two times earning. So these stocks,

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Speaker 4: including Alphabet, Meta is going to report here in the

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Speaker 4: next day or two. We've got Apple and Amazon all

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Speaker 4: are trading at the very high bandwidth of their multiples

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Speaker 4: because of excitement surrounding AI. So it doesn't surprise me

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Speaker 4: Tim and Carroll that unless this report is perfect, it's

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Speaker 4: going to sell off. And there was enough in here.

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Speaker 4: As you mentioned Tim, beyond just the top line and

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Speaker 4: bottom line beat, you mentioned the commercial cloud unit. Kind

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Speaker 4: of a miss on aser that's going to lead to

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Speaker 4: a selloff on the stock.

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Speaker 3: Hey, I do want to mention too, AMD just crossing

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Speaker 3: the Bloomberg terminal. Second quarter adjusted EPs sixty nine cents

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Speaker 3: is share that's a penny better than what the street

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Speaker 3: was expecting. Second quarter revenue five point eight billion. The

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Speaker 3: estimate on the street is five point seventy three billion.

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Speaker 3: Second quarter capex one hundred and fifty four million versus

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Speaker 3: an estimate of one hundred and twenty seven point one million,

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Speaker 3: So that is coming in higher than forecast second quarter

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Speaker 3: just an operating margin twenty two percent, that's better than

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Speaker 3: the street estimate of twenty one point eight percent and

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Speaker 3: giving some guidance in terms of the outlook. Third quarter

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Speaker 3: revenue six point four to seven billion dollars, and that

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Speaker 3: compares with an estimate TIM of six point sixty two billion.

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Speaker 2: Yeah, we're seeing shares move higher sharply now in the

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Speaker 2: after hours as traders look at what's going on. Up

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Speaker 2: four point six percent carroll for AMD right now in

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Speaker 2: the green ceas third quarter adjusted gross margin about fifty

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Speaker 2: three point five percent. That came in below estimates of

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Speaker 2: fifty three point eight percent. Dan, I know you're just

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Speaker 2: getting these numbers as soon as we get them, but

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Speaker 2: do you have any thoughts on what we're hearing from AMD?

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Speaker 4: You know, Tim and Carroll, the big number that we're

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Speaker 4: waiting for AMD was their data center segment. The expectations

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Speaker 4: for that group was to grow over one hundred percent.

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Speaker 4: Everybody was worried Tim and Carroll coming in his report that

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Speaker 4: we might get some sort of color from Microsoft that

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Speaker 4: they might have been backing off in terms of purchasing

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Speaker 4: AMD's AI chips, which are the MI I three hundred

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Speaker 4: x I three hundred A. That's what the big concerns

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Speaker 4: were coming into this report. But at least based on

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Speaker 4: what you've told me so far, it appears that there's

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Speaker 4: been no aberration in terms of demand for those products. Yeah,

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Speaker 4: they said extremely welcome record.

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Speaker 2: They beat so record. Data center up one hundred and

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Speaker 2: fifteen percent year over year, So that number coming in high.

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Speaker 3: Two point eight three billion versus one point three two

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Speaker 3: billion year over year. So all right, step to watch,

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Speaker 3: Dan Morgan, thank you so much. AMD A different story.

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Speaker 2: Yeah, I AMD's up by two point six percent right now.

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Speaker 2: The company reported revenue of six point four to seven

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Speaker 2: billion dollars versus estimates of six point six two billion dollars.

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Speaker 2: Adjusted earnings per share came in just above estimates at

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Speaker 2: sixty nine cents, and then data center revenue coming in

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Speaker 2: at two point eight three billion versus estimates of two

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Speaker 2: point seven five billion dollars. With us now to break

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Speaker 2: down these numbers and more, we got Ed Ludlow, co

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Speaker 2: host of Bloomberg Technology on Bloomberg TV. He joins us

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Speaker 2: here in the Bloomberg Interactive Broker studio. We were just

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Speaker 2: talking to Dan Morgan over at Sonovas he said data

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Speaker 2: center revenue, they wanted to see growth over one hundred percent.

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Speaker 2: It came in at one hundred and fifteen percent. Is

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Speaker 2: that what has investors so excited?

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Speaker 5: Yes, And to put it in Layman's terms, it more

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Speaker 5: than doubled year on year, and it shows sort of

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Speaker 5: the evolution of AMD from a standing start to taking

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Speaker 5: a tiny little bite out of the market share that

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Speaker 5: Nvidia has for AI accelerators. We actually didn't learn that

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Speaker 5: much in that release.

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Speaker 1: You know.

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Speaker 5: The expectation was that data center revenue would grow more

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Speaker 5: than one hundred percent. You're in year. You're going to

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Speaker 5: have to wait for the call because the number we

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Speaker 5: want is the full year forecast for their AI accelerator family,

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Speaker 5: the mi I three hundred and with that will know

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Speaker 5: if things are going better than expected in their efforts

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Speaker 5: against in video or just as we thought they were.

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Speaker 3: Any questions that you've got besides that for AMD.

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Speaker 5: Yeah, Look, the market for high performance GPUs or AI

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Speaker 5: accelerators that we train large language models on looks as

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Speaker 5: follows in. Nvidia will probably do one hundred billion dollars

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Speaker 5: of sales in that market this year to AMD four billion,

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Speaker 5: maybe a little more. We'll find out Intel five hundred million.

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Speaker 5: So the real question for me is what's different between

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Speaker 5: the three of them. You know, they all talk about

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Speaker 5: how they benchmark against one another in terms of energy

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Speaker 5: performance and their ability to process data. But the real

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Speaker 5: question for investors is, like, if we're going to believe

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Speaker 5: that you can grow in this market against Nvidia, in

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Speaker 5: which cases are you? Why would a big enterprise company

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Speaker 5: or a META, for example, choose your A accelerator over another.

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Speaker 5: Meta's very very solidly behind in video, right, it's buying

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Speaker 5: hundreds of thousands of GPUs from them, And I think

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Speaker 5: that's really interesting that you know, what do all these

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Speaker 5: things get used for? Because right now it seems like

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Speaker 5: in video seems the de facto choice for large language

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Speaker 5: model training.

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Speaker 2: What do all these things get used for? Because the

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Speaker 2: reason I'm asking this question is because last week we

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Speaker 2: saw alphabet cap x come in above estimates. We saw

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Speaker 2: it come above estimates today with Microsoft. A lot of

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Speaker 2: that has to do with the buildout of infrastructure around AI.

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Speaker 2: What is this getting used for and when our investor

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Speaker 2: is going to start to see it show up in

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Speaker 2: the bottom line.

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Speaker 5: This is a really worthwhile conversation to have, even in

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Speaker 5: the context of earnings where you kind of focus on

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Speaker 5: the numbers. When we talk about chips used for AI,

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Speaker 5: we're not talking about sort of a bagg of chips

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Speaker 5: you throw over your shoulder and look, I've got some.

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Speaker 5: The reality is they go into many, many racks of servers,

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Speaker 5: and those servers get lined up into massive data centers.

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Speaker 5: And while we don't have a sense yet of how

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Speaker 5: much money has been made through services or software and AI,

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Speaker 5: not really. I mean, look at Microsoft's earnings as an example.

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Speaker 5: We'll get to it. I think people need to understand

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Speaker 5: that the workloads have increased massively. The training of the

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Speaker 5: models requires an enormous amount of compute, and so Microsoft Aws, Amazon,

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Speaker 5: Google Cloud Platform have no choice but to buy these

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Speaker 5: chips because they work for that purpose and build more

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Speaker 5: data centers and the nervousnesses will hold on. Whereas all

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Speaker 5: the money going on the other side of the big moneyment.

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Speaker 3: Sages, it's kind of like, build it and they will come, Well,

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Speaker 3: will you know, are they coming? Will they continue to

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Speaker 3: come and will payoff? Be there? So I mean, I

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Speaker 3: feel like that's still the big million, tillion dollar crush.

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Speaker 5: So let's jump into Microsoft, right. They very narrowly missed

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Speaker 5: on their cloud services revenue or growth in cloud services revenue.

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Speaker 5: I'm doing the math, but basically they had fifteen percent

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Speaker 5: overall top line growth from just below thirty percent growth

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Speaker 5: in the Azure unit. And the headline on the Bloomberg

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Speaker 5: terminal eight points of contribution to as your revenue growth

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Speaker 5: came from artificial intelligence. We readheaded it, so it must

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Speaker 5: be important.

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Speaker 3: Eight hundred basis point. Dan Morgan said, what was seven

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Speaker 3: hundred bass points as your increased growth for the data

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Speaker 3: center group? So he was looking for, I think a

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Speaker 3: number that was comparable or above that. So that seems impressive.

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Speaker 5: And sequentially it's an improvement from the prior quarter, but

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Speaker 5: it doesn't really tell us anything. And this is what

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Speaker 5: I mean by the money machine. So capex is the

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Speaker 5: money going in. It's the number of dollars Microsoft spends, right,

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Speaker 5: But what we don't have a good clear Layman's explanation

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Speaker 5: is how many dollars are coming out the other side.

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Speaker 5: You'd hope it was several more dollars for every dollar

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Speaker 5: you put in. Cloud growth is important, but AI contribution

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Speaker 5: can mean many things. It can mean running workloads, or

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Speaker 5: storing data or doing all kinds of things. It's not

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Speaker 5: evidence of sales of a generative AI tool.

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Speaker 2: Can it be better placed advertisements against Instagram reels ed too?

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Speaker 5: So this is why I think a lot of people

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Speaker 5: are very interested in meta because we've talked a lot

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Speaker 5: about how in the first half of this year the

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Speaker 5: majority of the game on the SMP five hundred is

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Speaker 5: attributable to those mag seven games. The idea that we

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Speaker 5: believe the infrastructure will pay off in top line growth,

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Speaker 5: in the EPs growth, even if they have stretched valuations.

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Speaker 5: A lot of investors I speak to see a point

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Speaker 5: of difference in meta. They're making all the same infrastructure investments.

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Speaker 5: They're a developer of large language models with open source,

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Speaker 5: but they have social platforms where you can believe more

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Speaker 5: near term that you drive growth in your existing advertising

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Speaker 5: based business because you're using smart artificial intelligence technology. There

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Speaker 5: are many investors I speak to that believe that Microsoft

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Speaker 5: doesn't have that. I mean, with respect, you guys probably

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Speaker 5: have a longer standing relationship with Microsoft than I do.

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Speaker 5: You know, in the early nineties when I started using computer,

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Speaker 5: that's what was there. They've always been good at selling software.

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Speaker 5: They still do that. It's just it's not clear to

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Speaker 5: us which the AI part is. What they've really done

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Speaker 5: is just make their existing software offering is a little

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Speaker 5: bit better.

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Speaker 2: I've heard good things about copilotes in the sense of

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Speaker 2: on Microsoft teams. I mean, I think Carroly, you did

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Speaker 2: this during one of your prep calls for some of

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Speaker 2: the conferences that you've gone to, you know, instead of

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Speaker 2: taking notes during that, yeah, you know, copilot will actually

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Speaker 2: spit out some pretty solid notes. Take the notes with

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Speaker 2: And I've heard from some folks in financial firms who

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Speaker 2: use it ad for getting actionable items return to them

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Speaker 2: after a car.

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Speaker 5: Yeah, it's a good way of boosting one's efficiency or

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Speaker 5: aggregating information very quickly. But at the same how much

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Speaker 5: does that move a financial thinking yeah, And what we're

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Speaker 5: talking about here, I think the show me the money conversation.

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Speaker 5: It's not a consumer like me at my PC thinking wow,

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Speaker 5: AI is wonderful. These are enterprise customers and you want

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Speaker 5: to see they're committing big contracts to deck out their

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Speaker 5: ten thousand person company with Microsoft Copilot. That's where the

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Speaker 5: money is to be made.

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Speaker 3: I'm just thinking about the conversation we had was at

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Speaker 3: last week about workers saying, Okay, all the bosses said AI,

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Speaker 3: our generative AI was going to help me be more productive,

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Speaker 3: And in fact, it's stressing people out. It's stressing people out,

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Speaker 3: and they're not necessarily finding those productivity gains. Are we ed?

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Speaker 3: You know, when I think about technological cycles, is it

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Speaker 3: just going to take some time for this to kind

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Speaker 3: of work its way through in terms of jen AI

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Speaker 3: really making an impact on how we work and creating

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Speaker 3: those productivity gains.

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Speaker 5: I mean in the near term. That's why Microsoft's down

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Speaker 5: seven percent and after hours because investors had hoped it

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Speaker 5: would be now and it's not. It is probably it's.

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Speaker 3: Still many months or years ago wish, right.

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Speaker 5: But you also have to say that thirty percent top

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Speaker 5: line growth year on year for the second quarter in

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Speaker 5: a row of azure is pretty good, you know, in

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Speaker 5: any other sector industry you go, Wow, what an impressive

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Speaker 5: set of earnings, right, even if you slightly miss estimates.

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Speaker 5: There's something. I'm trying to tie all of this together

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Speaker 5: like it's one quarter print in a big newsweek, but

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Speaker 5: I think that it's very telling the comments of Mark

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Speaker 5: Zuckerberg and Jensen One yesterday on stage in Denver that

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Speaker 5: right now, AI is for the knowledge worker. It's for

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Speaker 5: a computer scientist who has to do it for their

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Speaker 5: job every day. And the vast majority of businesses, even

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Speaker 5: if they know they have to invest in it, haven't

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Speaker 5: quite worked out what they're supposed to.

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Speaker 1: Do with it.

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Speaker 2: But that's not what the promise of AI is going

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Speaker 2: to be.

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Speaker 4: Now.

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Speaker 2: Promise of AI is, you know, for lack of a

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Speaker 2: better term, getting rid of customer support agents who you

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Speaker 2: call because it's so expensive for a company to pay

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Speaker 2: them that you know, the idea is they'll create programs

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Speaker 2: that will do their work for them.

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Speaker 4: Yes.

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Speaker 5: So like one example is a startup called in the Van.

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Speaker 5: I just pluck it out of my head because I

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Speaker 5: saw a billboard I drove past it the other day.

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Speaker 5: Think about like if you have some travel disruption, or

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Speaker 5: you are providing technology to a like package holiday website,

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Speaker 5: and you go, my flight's cancel. Get me on another.

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Speaker 5: The vision is that the agent has enough intelligence to

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Speaker 5: say there's a flight at four, I'll move you on

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Speaker 5: to it our refund. I'm doing this of my own

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Speaker 5: volition based on the data available to me, and it's

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Speaker 5: getting there.

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Speaker 3: Yeah.

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Speaker 5: But also the consuming's willingness to use that is important.

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Speaker 5: Like I'm not using AI to write my scripts for

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Speaker 5: Bloomberg Technology every morning because I still feel that please

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Speaker 5: please keep me in my job as a journalist. I'm

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Speaker 5: better suited.

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Speaker 2: We've tried it. It's track right, So maybe I'm a

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Speaker 2: bad prompt engineer. Maybe that's the problem, but we have

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Speaker 2: not been able to pull it off yet.

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Speaker 4: Ed.

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Speaker 3: Yeah, although we talk about it. If there is a

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Speaker 3: point where it is actually really good in terms of

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Speaker 3: writing introductions, how great it would be to free us

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Speaker 3: up to do things like booking guests and doing things

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Speaker 3: like that or researcher what have you, kind of move

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Speaker 3: it to a higher level. All right, so alphabet, yeah, Microsoft,

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Speaker 3: So now we move on to what Meta. We're going

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Speaker 3: to move on to Amazon. What are you thinking about

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Speaker 3: the rest of the space.

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Speaker 5: So the thing about alphabet is it goes first and

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Speaker 5: you learn a lot about the week that's to come.

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Speaker 5: But the big takeaway from that earnings. Even though we

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Speaker 5: focused on Capex, which you've been talking your guests about

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Speaker 5: for forty eight hours, and we focused on cloud growth,

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Speaker 5: the most important takeaway was it was their search business

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Speaker 5: that was the biggest contributors to growth. And they didn't

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Speaker 5: expressly say that it was AI that did that. They

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Speaker 5: just said it was our search business. They old fashioned

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Speaker 5: bread and butter search business. And so when you look

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Speaker 5: ahead to a Meta or an Amazon, you're going to

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Speaker 5: get AWS cloud growth from Amazon, You're going to get

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Speaker 5: Meta talking up at Capex and it's AI agents. But

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Speaker 5: it's very likely that they'll also say growth came from

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Speaker 5: one of our many other businesses. That's why they have

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Speaker 5: some differentiation. But that might also be a cause for disappointment.

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Speaker 2: Do the increasing visibility of AI agents within what's Happened

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Speaker 2: within Instagram? Does that do anything for the bottom line?

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Speaker 5: They hope?

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Speaker 4: So.

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Speaker 5: I mean, I don't know how many of Meta's platforms

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Speaker 5: you guys are on. On most of them, yeah, I

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Speaker 5: like Instagram What's Happened? I use the Meta AI quite

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Speaker 5: a lot in the search function. Right, it's basically another

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Speaker 5: chat GPT for want of a better comparison Lama, Yes, exactly,

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Speaker 5: it's better AI built on Lama. But the probably most

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Speaker 5: interesting example is Facebook Marketplace, where people are buying and

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Speaker 5: selling their own secondhand goods, right or dealing is a

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Speaker 5: small business as an advertiser on the platform. I think

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Speaker 5: that's where Meta really sees AI agents adding value. It

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Speaker 5: just automates and makes more efficient that business transaction.

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Speaker 3: All right, everybody, that's a wrap. Ed Lo Love, of course,

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Speaker 3: co host of Bloomberg Tech on Bloomberg TV.