AI Spending, Mobileye's CEO Exit & IBM CEO on Results

22:18Ed Ludlow:you'll stay in post until a success is found how uh active will you be in the process and on a finding your your replacement well the board has a search committee i'll of course be be very contributing to it and and also the our management team we want to cast a very wide net We want to bring the best CEO. I'm looking many years into the future. And at this point in time, if you find an excellent CEO, the growth potential of Mobilize is huge. It's really huge. The stock is down significantly, right? 15 % biggest drop since August of 2024. And the sell side acknowledges that your decision to drop, to step down, is overshadowing a pretty strong set of results.

23:15Ed Ludlow:Has that surprised you, the reaction to this? Well, actually, I thought the stock would go up. But I think that the markets, they don't like uncertainty. And, you know, once it will be internalized that time, I'm here to stay. I'm not going anywhere. Just, you know, releasing myself from the day-to-day management and focusing on what really matters, which is the future, technology of the future, science of the future. You know, Mobileye is one of the few, really very few companies in the physical AI space that does both autonomous cars and humanoid robotics. This is really huge. And there are lots of technological ideas going forward.

24:00Ed Ludlow:And this is what I want to focus on. So this is also a fundamental question for the company, right? whoever comes in as the next leader of Mobileye, what is your expectation that they just completely shift the company's focus to Robotaxi as a domain, as opposed to being a supplier of SOC for ADAS, just going deeper into that segment? No. Look, ADAS is contributing today about$2 billion of revenue per year, $400 million of profit. there is at least a single digit growth in year on year on ADAS. It is really a cash cow. Nobody wants to remove the focus from ADAS. The challenge is to increase, not instead, but increase focus on Robotaxi and the humanoid world.

24:54First Robotaxi, this is really around the corner. we have cooperation with Volkswagen with Moya our first city Orlando and Lake Nona just last week there was a very big demonstration of end to end including teleoperation the KPIs are on track commercialization commercial deployment by the end of the year everything looks really good and now the challenge is operational. Go to market, building the operations, and it's really orthogonal to ADAS.

25:36Ed Ludlow:So I suppose you envisage the next leader being more operational rather than from a science and sort of entrepreneur background like you have, right? I think just to end this, Amnon, to be clear, this was your idea. This was you wanting to move to something new as opposed to the board or anyone else saying, you know what, we should make a change? Well, it's my idea. And also the board has offered me the chairman position. So it shows confidence. It shows confidence in me and shows confidence in my future contribution. And it's my idea because I think it is the right time not to wait too long because it's an inflection point.

26:20and now is really the right time to bring someone that can help with the growth.

26:24Ed Ludlow:Just very quick, we have 15 seconds for which I apologize, but do you have a target timeline, date? No, no, I'm here to stay. It'll take as much time it'll take to find a successor CEO. And as I said, we're casting a wide net to find the best CEO possible. Right. Mobileye founder and CEO, Amnon Shashua, thank you very much. Coming up, IBM cuts its full-year sales outlook after weakness in its mainframe demand. We speak with IBM CEO Arvind Krishna. It's halftime. We'll be right back. This is what the markets look like. Alphabet and its raising of CapEx is weighing down quite a lot of the tech sector.

27:07Ed Ludlow:Tesla too. This is Bloomberg Tech.

27:19Ed Ludlow:Welcome back to Bloomberg Tech. Shares of IBM trading near their lowest level since November 24, September of 2024. The company dialed back its full year sales forecast after a pretty steep drop in mainframe sales, which weighed on results. Joining us from New York is the co-host of Bloomberg's The Close, Ramain Bostic, alongside IBM CEO Arvind Krishna. Ramain. Arvind, you've seen the reaction amongst investors here. There are some concerns here about that lowered sales forecast overall, as well as softness in software. You've characterized this as basically a shortfall for one quarter that is limited to CapEx-sensitive areas of the portfolio.

27:58But that's still a meaningful area of your portfolio. Were sales coming into that quarter? Was that pipeline overstated? I don't believe so. Because when we look at all the deals that didn't close, I think we have done enough verification, including with the clients, to know that they were very real. And it was a reprioritization of the capex spend at the end of the quarter. This was pretty confined to, I'll call it the Fortune 100, the deals that were within a subset of those. Now, one third of what didn't happen has already come back. So that tells us that this was a reprioritization and those deals were very real, as opposed to us being optimistic in our projections.

28:42And Romain, I would also add, I think that maintaining our free cash flow tells us that we have levers around productivity and conviction and confidence in the business. And that is also, I think, going to serve our investors well. But the next few months will tell us that. Well, on that cash flow figure, yes, and that certainly pleased a lot of analysts and investors out there. that billion-dollar number of projected free cash flow growth. You're maintaining the dividend as well. But you've largely done that so far by cutting costs. So that raises the question that if we are anticipating slower growth on the revenue side, does that mean more cost cuts are in store?

29:20So the bulk of our cash flow growth over the last four years has actually been on adjusted EBITDA. So that tells you that this is mostly through revenue growth. And our model has always been that the last dollar is more productive and more profitable than the first dollar. So we've been growing revenue 4-5%, and we've been growing cash flow up in the 7-8-9%. So that's kind of our model, and we intend to keep maintaining that. Now, right now, if we drop revenue by one point, because we said 4-5 instead of 5 +, we can absolutely make it through productivity. Cost cuts is an interesting question.

30:00Cost-cost doesn't always come down to people reduction in headcount. Our headcount has been more or less flat over the last many years. I think there's a lot of third-party spend where we are going to get a lot more efficient with that third-party spend than we have been always.

30:18Ed Ludlow:Bloomberg Tech is live on Bloomberg Television and Bloomberg Radio, and we're speaking with the IBM CEO, Arvind Krishna. Arvind, good morning. you want to focus on accelerating revenue growth and accelerating profitability. And just really simply, I'd love to hear what you're asking the team to do differently now in response to all of the factors that you outlined. So, Ed, really, so if I look at our software business, 80 % of it is already an annuity consumption OPEX-based business. 20 % of it is a CAPEX business. If we think that the CapEx headwinds are going to continue, but 80 % is already growing at about 8%, we want to put a lot more focus.

31:01So we are going to direct a lot of the team with forward deployed engineers, with people who are focused on deploying the software at clients, much more technical help, and make that 80 % grow even faster. Products like Red Hat, Confluent, Hashi, all fit that model. On the CapEx side, We have to make sure that while we can continue to do it, don't depend upon outsized growth on that side to go there. Then on the supply chain, can we leverage all of our capability and supply chain to make sure we have enough distributed infrastructure in storage, in Unix systems, that people can fulfill all of the demand?

31:40Because we came out of the second quarter with half a billion dollars of backlog in that part of the portfolio. So those give you an idea of the kind of changes that we're making already, not just for the rest of the half.

31:52Ed Ludlow:You summarized the state of the world beautifully. You said that customers shifted spending towards servers, storage and memory in late June. And when I posted on social media, you're coming on the show, the question from the audience is really simple. Did that trend continue from June into July? And for how long do you expect it to last? we have not seen it in july but i would tell you look the semiconductor pricing memory is up what three to four times over the last 18 months uh networking infrastructure is up uh 60 to 80 percent uh fiber is up connectors are up i do think that some of these trends on the underlying components are going to carry on for some more time that works its way up into those things so people are going to have those prices.

32:43Now the question is, is that going to maintain a reprioritization of the capex spend? If I take the signal that a third of our deals closed, then that says no, people are going to get more careful about how to spend their capex. If that goes into September, because a lot of capex does get committed at the end of a quarter, not always through, then it means that that carries on for some more time. And that is why we gave a guide of 4 % to 5%, depending upon if that carries on, we'll be at the low end of the range. But if some of it comes back, then we'll be at the high end of the range. So, Arvind, I know there's a big focus right now on sort of the clients that sort of did not necessarily materialize in the quarter.

33:24With regards to the existing clients that you have, and I'm primarily referring to your mainframe business, I mean, can you share like sort of what percentage of those clients are actually increasing their spending? Is that going up still? Absolutely. So the current machine is called the Z17. The Z17 has been from the beginning, which was May of 2025 to today, at 130 % in terms of the capacity growth compared to the prior machine. That's one very strong signal, and that's an aggregate. Then you can say, hey, is everybody in there or only a few? 85 % of the clients are increasing their capacity as opposed to the 15 who are not.

34:05That optimization goes on all the time. And I would tell you this is probably the best that we have seen in a long time of what is going on there. The software is going to lag. Yeah, software is going to lag. I mean, look, we know the hardware capacity is there. Software is lagging. And I understand why it's lagging in the moment. And I'm going to ask you a question. And forgive me if it's a bit unfair. But I look back to the 1990s and whether there are some parallels to some of the mainframe issues that IBM went through back then under a predecessor two or three times removed from you, John Akers.

34:36And this idea that at that time we were going through this paradigm shift in computing and how companies spent and allocated their money. And there was a lot of talk by the CEO then that the issues were temporary, that they were economic, and that they were rights themselves. We know in hindsight that it was much more structural. Why should we now look at this major shift going on with AI and the computation involved in that and think that this time is different? Well, we have to look at what the clients are doing. I always start there. Our opinion is an opinion. What clients do is what matters.

35:10So when I check with my clients, those who do credit card authorizations, are you going to maintain the mainframe? And they go to, well, the resilience, the amount of capacity, the unit cost of it being 5 to 15 times cheaper is important. The big difference from that time, early 1990s to today, Romain, is the cost issue. You could not argue that the mainframe was cheaper on a unit cost basis for the workloads that are moving off than at that time the mid-range computers. I'll call it the whole Unix. It wasn't really client-server. it was Unix taking the workloads off in the early 1990s. That issue you have to look at.

35:53If there is a cheaper alternate for that workload, I'll sort of look at you and say, that means in five to 15 years, it will move off. But that's not the case. Right now, for the workloads that are on, we can show the client that it's five to 15 times cheaper to keep it on the mainframe than not. But that's not all workloads. That is workloads that need protection, that need resilience, that need the burst capacity that comes. And so for those kinds of workloads, the mainframe is the architecturally superior platform. That was not the case 30 years ago for the workloads that did go off.

36:28Ed Ludlow:Live on Bloomberg Television and on Bloomberg Radio, this is Bloomberg Tech speaking with IBM CEO Arvind Krishna. I've been listening to you a lot recently on long-form podcasts, some clips on the social media about your view of the world, what it's like to be a CEO in the domains that IBM operates in. And it's interesting how quickly it comes back to the macroeconomic backdrop. A lot of people looked at the guidance for the balance of this year and would say, and they do say, Arvind, on this show, memory prices are not changing. They continue to push higher. They look at the outlook for growth.

37:05Ed Ludlow:Could you just explain the data points you rely on that give you the confidence on the new guidance that you've given and whether it is actually achievable or it will be difficult to meet. Yeah. So, Ed, I'll come back to, for ourselves, we have to look at our demand pipelines and our yields and how we get things going. But I think for your audience, let's look at it this way. Number one, most important is what is GDP growth going to be? We think that that's between 2 % and 3 % for the year if I look at the globe. and it is going to be consistent even in the Middle East, even in Asia, where there is a lot more energy and disruption, we actually see a lot of growth.

37:47Tech is going to be, I think, two to three to four points above that. So that puts tech, in terms of what the market is, somewhere in the 5%, 6%, 7%. Then that comes back to what parts of our portfolio can play against that demand and what parts cannot. And so I look at the parts of the software portfolio. That's why I talked about the 8 % growth in the 80 % of it. That can play right into that. Then I look at our distributed infrastructure. That can play right into that. I think consulting will be in that 1%, 2%, 3%. It is not going to be in the double-digit growers. But we see the demand and we see the signings and we see the clients leaning in to say they want transformational work done.

38:28That's how we kind of know, beginning with the macro and then coming down. I'll make a prediction for you. I think technology spend is going to become a larger and larger part of every enterprise's budget. It used to be 3 % since Romain raised 30 years ago. It's probably up at 5%, 6 % on average. I will not be surprised if by 2035, it's 10 % of everyone's budget.

38:55Ed Ludlow:Give you a quick micro case study. Bloomberg reported that Starbucks is replacing some IBM tools on the software side with in-house. talk to that. So Starbucks is about a little over$2 million a year client for IBM. The portion they're replacing is a product called TriRiga that does real estate lease management. The version of it that Starbucks has is almost 10 years old. I'm not surprised that they're replacing it because I've actually been describing publicly software which is largely interaction based and is based on ease of use as opposed to anything else can be easily replaced by AI and AI agents.

39:36And that is what is going on there. However, if I see other parts of Starbucks and maybe the ability for our Hashi portfolio or security portfolio, how about if I phrase it this way? I would not be surprised if Starbucks is a larger client next year than it was last year. With regards to how this world is evolving, Arvind, I am curious just internally about your plans to hire, particularly when it comes to the technological side. Have you been able to keep pace with some of the other companies out there also trying to do what you do and pay some of the salaries that you have to pay? Well, we hired three times as many college hires this year than we did last year.

40:21And I think that given others seem to be backing off college hiring, it gives us an incredible ability to bring in great talent and to then grow them inside our company and to offer them great careers. I think if I looked at it last, we had, I think, 20 million resumes in our applicant database. So that gives us a huge field to go look at. So, I mean, I don't worry about bringing in talent. I actually worry much more about can we give them a great career and a great pathway? Because not everybody is cut out to do work that is going to be demanded. Because I don't think there's a lack of employment.

41:00But the nature of the work, if you can't use AI tools, if you can't use the productivity tools, then it's going to be really hard for you to be competitive with your peers. We already know sort of the potential impact of what AI means for the economy and for your business. There are a lot of people looking around the corner, including yourself, to quantum. Is that a viable business on the horizon or is that just a moonshot that you're hoping actually sticks? Well, when things are two years away, I wouldn't call them a moonshot. I think quantum is now in the engineering realm as opposed to the science realm for the next five years.

41:37And I believe that by 2029, we will deliver a machine that does 100 million computations of large-scale, fault-tolerant quantum computer in the next two years. I think that's an incredible opportunity. I'll quantify it. And this is not just our work, a lot of third parties. By the end of 2030s, we think it's about a trillion dollar total market opportunity in terms of value that quantum will create. That is why we also doubled down this morning and announced that we bought HRL from GM and Boeing. And that is going to help us bring people with a lot of talent around materials, spintronics, quantum sensing, and other sensor technologies to add to our own effort so we are even more well positioned to go win in this market.

42:30Ed Ludlow:Arvind Krishna, IBM CEO, of course, alongside Bloomberg's Remain Bostic. Thank you both. very much. I would note that IBM shares now modestly higher, three-tenths of 1%, having opened lower. But of course, IBM pre-released some of its financials July 14th, and the stock fell 22%, 25%. We're going to get back to earnings and back to Alphabet's big capex number, while Intel's up next on The Chopping Block. Later today, this is Bloomberg Tech.

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45:46Ed Ludlow:Coaster Ventures, one of OpenAI's early investors, is in talks to raise$5.5 billion in a new set of venture investment funds. It would make it the largest fundraising event in the firm's history, all according to sources. Bloomberg's Natasha Mascarenas broke the story. No surprise there. I find this so interesting. Vinod Coaster, a regular on the show. but I think that people may lose sight of like how big a firm it was already. And this raise is very much in line with what's happening in industry right now. I mean, if you were an early open AI or an anthropic backer, you probably have one of the best stories in venture fundraising right now.

46:23I mean, last month we talked about Menlo Ventures raising its largest fund of all time. Now I'm back talking about Kosa, an early open AI backer, the first outside investor in open AI.

46:33Ed Ludlow:This is 5.5 billion split across multiple funds, we think. Yeah, yeah. So in this case, they're going to keep doing and try and replicate that open AI early success. So they're going to be putting majority of the capital into early stage bets. And$2.5 billion is reserved for an opportunity fund, which is pretty much for the later stage investments as round sizes get bigger and concentration becomes a more invoked strategy for venture capitalists. You know, we do know the firm's namesake, Vinod Kostler, but there are lots of interesting people at that firm investing at different stages. Tell us a bit more about the team.

47:04Yeah, I mean, this is a team that has basically chosen to stick with an early stage focus when a lot of people are getting into a uniquely broad set of side quests as venture firms. I'm thinking of the team that has backed Sakana AI, which is building a Japanese LLM, companies that are looking at robotics and climate. So, yes, they're definitely going after the AI application layer. But when I think of Coastal Adventures, I actually think of a much more biotech focus, hard tech focus, deep tech focus.

47:36Ed Ludlow:Those are areas of interest for Vinod, I point out as well. Yes, absolutely. Just real quick, I would point out that a spokesperson at the firm declined to comment on our reporting. But there's another theme here, which is Coastal raised$4 billion last year. Yeah. Other firms have done that. Big funds last year, quick follow on this year. What do we need to know? I mean, these people are going through their funds at a faster than ever cadence. I mean, we think that this is almost like you're proactively raising ahead of needing to even touch the capital. So my understanding is that last year's fund is still being actively deployed.

48:08This fund we broke is being kicked off and the fundraising calls and conversations are happening right now. But it does show you how competitive and how expensive being a venture capitalist is today.

48:19Ed Ludlow:Bloomberg, Santasha, Mascarinas with another big story in the world of venture capital. Thank you. Alphabet's increasing CapEx figures are raising concerns on the cost of AI. Google's parent raised its CapEx projections to$205 billion at the top end for this year. But the company's cash flow went negative for the first time in its history as a public company, which goes back over 20 years. Bloomberg Intelligence senior analyst Mandeep Singh joins us, and Mandeep leads our entire team on the tech coverage side at BI. I mean, you were in the camp of people that saw CapEx going even higher than$205 billion.

48:51Ed Ludlow:But the milestone is that swing to negative free cash flow. Are you in the camp of people that are worried about that? Not for Alphabet. And yes, I am in the camp that CapEx is going to go much higher for 2027. And they did say there will be a significant increase next year. So look, I mean, this is a full stack company where they've already shown their CapEx spend is far more efficient than anyone else out there. and that's why they're going big in terms of getting as much capacity because so far, if you have the compute, you have the power, that's translating into cloud revenues. And we saw that in Alphabet's cloud segment growth 82%, and that's why I think they're going with that TPU stack as well where they want to sell that independently of the cloud, and that could be a big line of business over the next two years as well.

49:48Ed Ludlow:It's balancing it, right? Google is on the hook for$811 billion of spending. And in your React, you kind of make the point that it's that versus the very strong cloud gains that they're seeing. Yeah. I mean, and look, I think they didn't quantify the margins of those TPU systems. But once you start, you know, basically selling your designs externally, which so far TPUs were used mostly for Google Cloud. Now they're talking about setting up anthropic data centers with their own design and generating revenue out of that. That's huge. And, you know, it could be a big line of business on its own. So from that perspective, Google has got it all in terms of large language models, TPU systems, and then the cloud business.

50:36And that's why they are really going big in terms of their CapEx increase.

50:39Ed Ludlow:So the thing about the TPU business, let's call it, is they have these sales packs. And I think what Alphabet's CFO said was The company won't even realize revenues from that until I think they said 27, but they didn't say which part of 27. But you're basically saying that's going to be an important business line for them. Yes. And I look at what NVIDIA has done with their system sales and how big NVIDIA has gotten over the past three years. I mean, clearly, this is a rising tide that's lifting all boats and we are in a supply constrained environment. So essentially, you know, for Alphabet, they are the only ones who have the ability to do that.

51:17Everyone else is still in their earlier versions of their chip design. I think Amazon is a third as well. But it's really about how many versions you have had and how external customers can trust your design for their workloads. And in this case, Alphabet has the ability to do that for external workloads.

51:37Ed Ludlow:I would point out that if you just look at the stock reaction, the stock is down the most since May of 2025. And we're showing this astonishing chart that for the first time in this company's public history, it has swung to negative free cash flow. That's an astonishing chart. Mandeep Singh of Bloomberg Intelligence, thank you very much. Next up on deck, Intel. The chipmaker will report its second quarter results today after the closing bell. And investors will be keeping a close eye as Intel's owners could speak to the strength and breadth of the semiconductor industry right now. Bloomberg, Ian King, joins us for a preview.

52:09Ed Ludlow:Intel, what to make of Intel? What to look for with Intel? This year, the stock is up 172%. Clearly, investors have said, OK, you're actually back in the game. But then if you look under the hood at the actual numbers, it really isn't. It's showing double-digit growth. It's showing some demand for its Xeon products. But compared to growth, compared to what other companies are putting up and have been putting up for the last couple of years, not quite there yet. So what Intel has really got to show is that it's really, really a fundamental part of this AI race. There's the CPU story, which has been interesting more recently, and then there's its business as a third-party contract manufacturer and the latest technology process.

52:51Ed Ludlow:I always feel like we want to get answers on that, and we don't. Yeah, I mean, that would blow the story wide open and would make people consider Intel different, that this turnaround would be vindicated. Haven't seen that yet. The company have said, look, we can't talk about it. It's up to our customers. You'll know we're doing it, though. You'll know it's real when we start to spend big money on CapEx to build those factories out. So we'll be looking for that today. I know this is a pretty simple question, but what is the financial metric that you learn the most about Intel from? Yeah, obviously growth is very important, but this is a company that's been losing money, and its gross margin is 20 points south of where it was in the good days, right?

53:30So we need that margin. historically above 65 percent above 60 percent above 60 percent and yeah nowhere near that right

53:37Ed Ludlow:now uh another busy afternoon for you and for me bloomberg's ian king thank you very much um heavy focus on technology earnings that does it for this edition of bloomberg tech but go back and recap across alphabet tesla ibm and then in 24 hours time we'll do it again with intel listen on the pod i would say that some of the moves um directly tied to earnings are big right Alphabet is also, by association, dragging down quite a number of the other hyperscalers. Amazon, for example, has a pretty deep decline. For Tesla, this is a big drop, down 14%. And really, it's still a spending story across the board.

54:16Ed Ludlow:Stay with us throughout the week. This is Bloomberg Tech.

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