Earnings Roundup: Meta, Microsoft & Qualcomm

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1:41Wall Street time, Monday through Friday. Ed, pick where you want to start. Should we start on Microsoft? I feel like it's probably the most tangible, right? So everything is in the cloud growth, better than expectations. And, you know, the math was really simple going into this. They've just closed the book on their fiscal financial year. And the question still remains, when we get to the call, what does Microsoft tell us about the capital expenditure growth into next year? Because the street sees CapEx growing beyond 50%. Top line growth on Azure is 43%, give or take. XTAC, all the street really wants to see is that pace of growth being near to capex growth, right?

2:23It's a really simple equation. But going back to Alphabet, which is highly analogous, there's so much commentary here from Microsoft about traction with co-pilot, like more data points that are just easy, tangible to understand about how Microsoft's AI efforts are going, right? And that's the stock reflecting that in After Hours. Is the 30 million paid seats a big deal for 365 Copilot for Microsoft? Yes, because it's versus 20 million at the end of March. Exactly what I'm pointing to. The other one is, I think you guys mentioned this, but like Nadella was talking about Azure generating more than$100 billion in annualized revenue.

3:03You know, remember Amazon went to that figure very early, you know, in its kind of like growth of AWS. Then what Amazon did, they report to Mario, was to say this is the AI-specific annualized revenues. So, Microsoft's just saying more, giving newer data points, which take us beyond the simple, are the top-line numbers growing beyond the CapEx growth. Which you kind of want to get, right? When a company is spending and building and doing all of this, the more information, the more transparency, that's helpful, big time. Yeah, I mean, again, from the press release alone, Microsoft's not saying anything about fiscal year 27 capex.

3:40So there's this period of time where everyone's like, okay, reading, digesting the statement and the release. And then on the call, everything could change. And that is the jeopardy of big tech earnings. And that's what's fun. Well, let's do a little bit with meta platforms. And then we'll get back to some of these other names. Shares of meta down about 6.3%. Let's go ahead and say 6%. Some numbers here. Third quarter revenue, 61 to 64 billion. The estimate was for 63.17 billion. Second quarter revenue came in above estimates. Second quarter EPS came in. Ever so shy of estimates. What is the thing that is moving the stock with Meta today?

4:17It's so hard. I mean, revenues up 28 % ahead of expectations, right? Ad impressions have improved. Pricing has improved. Meta's core business, its bread and butter is still advertising. The story was how has AI made that? better, more monetizable. So revenue should be higher than estimates, right? It is ahead of estimates, I think at 28%. Sorry, for the third quarter, the outlook, I'm sorry. Yeah. For the outlook, right. The one thing that my brain is going to is that the operating margins didn't just come in significantly below consensus by about four percentage points, but costs are up 55%. So the operating margin has fallen from 43 to 31.

5:00Costs are higher and free cashflow has basically disappeared. I'm just, I'm reading the statement. Ed, is that because they're investing so much in talent? Is it because the tokens cost so much? Like these companies are spending a ton of money. We looked at last week what Alphabet said about going cashflow negative. Meta platforms is feeling it, Meta is feeling it when it comes to its earnings because it's spending more money. Maybe. They're disclosing that there was a one-time legal charge of$2.4 billion, and then severance costs, super interesting, $1.2 billion charges. We knew about the story, right, about the waves of Meta layoffs.

5:43So that could, excluding those, the underlying operating performance was kind of much nearest expectations. Maybe they're a big factor. But it also goes to the idea that the free cash flow is basically gone, which is such a common story across the MAG-7. Right, right. And I want to just throw one other headline across the Bloomberg meta saying some youth-related trials may result in material loss. Like we have done here, Olivia Carville and I believe others on the team have done a lot about social media and the impact on youth. And we know meta has certainly been one of the targets. So just interesting to get some of that clarity.

6:18Again, just a quick headline, meta boosting the low end of its annual capital spending outlook. And I'm looking at the live blog, too, and I think this is something that you were going to, and this was our Linda Wan, our tech editor. One thing traders might be reacting to, second quarter operating margin, 31 % versus 43 % a year earlier. The company's expecting that total expenses of$165 billion to$169 billion, raising the low end from$162 billion previously. I want to bring into the conversation to our Mandeep Singh, Bloomberg Intelligence, Global Head of Technology Research, making his way from TV into our radio studio.

6:56We're talking about meta. Investors don't like it. I mean, look, there wasn't much of an upside when it comes to the top line, both this quarter and the guide. And when it comes to CapEx, even though they didn't raise CapEx, the one line that caught my attention was that first line from Mark Zuckerberg that he expects things to improve across enterprises. And that's new because all of Meta's revenue is generated from the consumer side. So the fact that he has that in the first line shows that they are leaning towards enterprise usage. The cloud build? Cloud build, API usage by enterprises, and that's what they are betting on when it comes to this.

7:43I mean, silly question, but does Meta actually have an LLM that can be licensed by some of these enterprises in a way that would be different than an enterprise using a platform from Microsoft or from OpenAI or from Anthropic? So it's getting more competitive when it comes to raw LLM usage. And the reason I say that is because of Kimi K3 and all these open source models that have really taken off and are being used for use cases besides the frontier where Anthropic is being used. So I think if Meta has to compete with open source, it's going to be interesting how they position themselves, whether it's in terms of lower token pricing or they have another strategy because they're building a business from scratch.

8:36And it's not easy. They're late to that cloud game. They're late to that API game. So how they go about it, who those anchor customers are going to be. That's a million dollar question. Who are they going to partner with in terms of that enterprise usage? Is it going to be Microsoft or Anthropic? We don't know that. Well, Ed, come on back in here. What do you think? You're going through all of these releases right now. You point out that Mark Zuckerberg, what Mandeep was referring to, Mark Zuckerberg writing, quote, AI is accelerating our core business today, powering our next generation of products and opening the door to entirely new enterprise opportunities.

9:10What are those opportunities? Yeah, so Bloomberg's reported that Meta has explored a literal cloud computing business. I heard Charlie call Meta a hyperscaler. It operates data centers at hyperscale for its own business, for its internal workloads. That's very different to renting out compute capacity to third parties. But Bloomberg's reported Meta's looking at that. More recently, Kurt Wagner got on the phone with Mark Zuckerberg, right? And he said, yeah, you know, that is something, an idea of something we might do. That quote around enterprise opportunities is pretty much the sort of clearest example we've had.

9:48And I think going into this, I'd wager that for the call, that is something that analysts will focus questions on. It's not about ROI on the AI investment. It's about ROI on the infrastructure they're building. How can you basically make new revenue streams and more money on all the infrastructure you've built? It's so interesting. I think Mandeep's very smart to get to that so quick. And interesting, by the way, because how many quarters on the show do we say, well, here's the quote from the CEO at the top of the recent, and we kind of move on. And how much work is this one doing? I find that fascinating.

10:23I want to ask both of you, because here we have Meta under pressure. You've got Microsoft, though, rallying in the aftermarket, not up as much as it was earlier, but still up about 1.4%. Mandeep, let me bring you back in here. What is a better tell on the AI spend, the AI narrative? Like, is it Microsoft in terms of the enthusiasm and the expected momentum to continue? I mean, just look at the margin degradation for Meta here. They went from 43 % to 31 % operating margin. It's a massive drop. It is a massive. And that's where Microsoft, with its cloud business, is able to cushion, you know, some of the headwinds it is facing from all these LLMs and still do very well in terms of the holding up the margin side of the equation.

11:12Apart from CapEx, where's that money going? Why are margins under pressure? I mean, in the case, so with all these companies now, once you raise your CapEx, you have to show the CapEx in the depreciation line. So your cost of revenue will keep going up. So in the case of Meta, it's not as if they are hiring a lot more people. They did hire a lot of people and paid millions of dollars, but I don't think that - You don't think that's what it is? No, it's that cost of revenue line going up because now those depreciation expenses would kick in. So it's just CapEx, you think? It will be CapEx. But can't they make up for that with the investments that they've made in making advertising more targeted and getting us to click or at least getting marketers in front of eyeballs in an even more efficient way.

11:59Well, we know what the ad pricing growth was. It was around 14%. And, you know, that's been the case for the last few quarters. So the problem now they have is all those levers, which once were there to protect the margins, are not good enough when your CapEx is growing up like this. And, you know, your cost of revenue will keep growing. So that's a hard part in managing margins here for Meta. So, Microsoft's like, sorry, Meta, but we're having a pretty good day. Microsoft share is still up in the aftermarket. So, Ed Ludlow, you've been going through and reading more from the company. What's jumping out at you?

12:35Well, going into this, I think we knew that it was the case. Maybe Mandeep can clear it up. I think there is some kind of accounting or disclosure change for Microsoft where the CapEx number and their accounting for leases specifically makes the CapEx number look smaller. But again, we're in this period now where the call becomes very important because we know what the Azure growth number is for the quarter gone and the period. This closed the door on the financial year 26, financial year 27 starts. And the very simple math is in an environment where everyone thinks CapEx goes up, what is the percentage growth in CapEx that is foreseen relative to the growth in Azure?

13:16and that's why they're putting so much emphasis on all these other metrics, the like, maybe non-financial in nature, to get some evidence that their AI investments are getting traction. What? I don't know. I don't know. I mean, I think, go ahead. I mean, the one thing I had in mind before coming into earnings is if a company doesn't raise their capex in an environment where memory prices are up 20%, 30%, to me, they are cutting back somewhere else. And that would be my interpretation for Meta is because they didn't raise CapEx, they certainly are offsetting it with something else. We just don't know what.

13:54So where are they doing that? I mean, they don't want to raise CapEx because the stock would have been down even more if they raised the CapEx. So they didn't have a choice. I mean, they are being forced to be disciplined here in terms of CapEx because the market doesn't have a tolerance for higher Meta's CapEx for this year and possibly for 2027. Some context to the word discipline now, Carol. Discipline for Meta platforms means$130 billion to$145 billion in CapEx this year. Well, Ed, come on back in here, though. For Meta, moving into cloud, though, this business, and maybe we'll get more on the call about their intentions and their plans.

14:31I mean, is it still the right move for Meta? I mean, I feel like just going off past action and precedent that we're going to get to the call. And, you know, like the way I think about it is if you're listening or watching Business Week right now, you're asking yourself, what's still to come? We've gone through the numbers. We've gone through the headlines. Everyone with Meta knows about Mark Zuckerberg. Susan Lee, the CFO, is very important and often does the heavy lifting of communicating the financial strategy. and I just see a world in which we get to the call and she's like, yeah, here's our commentary on CapEx.

15:06Mandeep's point is so important because it's not new and I mean that with massive respect. CapEx doesn't just go up because you need to spend more to build more to meet demand. CapEx can also go up because the cost of building those things is higher. You have labor and construction inflation, materials inflation. Memory is a massive macro factor. You know, IBM basically tried to blame 10 days ago the lack of spending on their technology, mainframes in particular, because their customers faced higher capex, largely relating to higher memory prices. So, you know, all of these factors are common to all of these capital expenditure deployers who want to build AI infrastructure.

15:50All right. So, we're tracking Meta and Microsoft here in the after hours. Microsoft up about 2%, a little bit more so, just following earnings. If I go on over to Meta, it is still down about 5.6%. Let's just also throw into the mix. We've got Qualcomm. That one also came out with its results. And the stock right now in the aftermarket, as I bring it up on my Bloomberg, it is down about 3.5%. And then we have Arm Holdings. We have Arm Holdings as well. I want to go to Qualcomm real quick to Ed because Ed is interviewing Cristiano Amon tomorrow on Bloomberg Tech. Be sure to tune in for that, the CEO of Qualcomm.

16:25Ed, the company gave a weak forecast for the current quarter. It cited component shortages and rising costs. That's not a new story by any means. I mean, we've known this about Qualcomm for years. So it's not new. I would say in the smartphone market, it seems worse for Qualcomm than we thought. You know, they are the main processor maker for smartphones. They are getting hit on all sides because of end market demand being hit by memory, for example. They have tried to diversify the business away from that reliance on smartphone. but within smartphone they're also kind of it seems like losing business from apple faster than then was modeled for and then like they are super super uh entrenched or exposed to android in china right and so like in aggregate all of the the forecasts for that that handset market they they aren't they weren't rosy to begin with the thing that i will ask cristiano is for him to give me his latest assessment of the smartphone market for this year and whether it is better or worse than he had told me last quarter.

17:26So simple. But it is possible that things deteriorate, you know, quarter to quarter. And reading Ian King's report on the earnings, that seems to be the case. Hey, so Qualcomm down about 4.3 % here in the aftermarket. Arm Holdings just down about eight-tenths of a percent. Arm delivering a sales forecast of about$1.38 billion in the fiscal second quarter. And we did see the stock under some pressure here. Mandeep, come on back in. Anything in terms of ARM or Qualcomm that's of note for you? I mean, just exposures. I think ARM, because of the data center exposure, continues to do better, even though ARM does have smartphone exposure.

18:05But because their data center exposure has been much higher in the past few quarters, they seem to be beating numbers. Whereas in the case of Qualcomm, I mean, they are talking about a 2029 guide and how the business would be more diversified by then. But in the near term, this business is declining. The handset business is still under pressure because of the consumer smartphone and the memory pricing impact. Our right through on Arm noting royalties from those products, data centers specifically more than doubling from a year earlier and the appetite for a new chip lineup is greater than anticipated.

18:42This is coming from the company's CEO, Arm Holdings.

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