AI Winners and Losers Emerge

21:37They thought it was going to stay at the bottom end of the market. That's actually starting to drift up, affecting mid and high end phones. That's going to be a topic tonight with Apple as well. And so there's some licensing revenue offset that helped kind of patch the quarter and is holding the fiscal 27 estimates, I think for consensus broadly unchanged, but there wasn't really anything to get excited about in the print, whether it's royalties or the AGI CPU outlook.

22:07Ed Ludlow:Well, quite. Tim, the thing that Rene Hassan want us to get excited about is the push into data center. CPU is a story common to many at the moment. There's momentum there. Did Arm show real penetration, real momentum in the segment? So the one word answer is probably yes. The challenge for investors is that it's hidden. It's hidden inside their royalty revenue disclosures, which are generally pretty opaque. And the data center part of that business is actually still, even though it's doubling year on year, still relatively small. And so it struggles to move the needle. And that's really the problem in a data center and an AI world where, you know, we're talking about hundreds of billions of dollars of spend.

22:56If you're ARM and you're earning 50 cents or a dollar per core, and maybe you're earning somewhere in the region of 80 to 100 bucks a chip, it's really hard to

23:07Ed Ludlow:generate meaningful revenue that's really going to move the dial. Tim, TS up for Apple tonight. You know, the big watch for you beyond Tim Cook's farewell call. Right. Look, it's going to be super interesting. One of the peculiarities of the last quarter has been that price rises and cost inflation at others has actually helped Apple's relative performance. So they've actually had a really good June quarter. All eyes on what they do into the September quarter. The step into foldables. How do they refresh the Apple intelligence? As you say, Tim Cook's kind of farewell quarter and the maiden quarter guidance, which John Ternus is going to be reporting on in October.

23:49I think for us, the momentum in the business is good relative to the peer group. But that doesn't change the fact that rising input cost inflation makes for a pretty tricky trading environment for everyone.

24:00Ed Ludlow:As a clear reminder, Tim Cook's not going far. He becomes executive chair September 1st. But it is his final earnings as CEO. Tim Schulze-Malanda, head of technology hardware and semiconductor research at Rothschild & Co. Redburn. Thank you.

24:19It's time now for Talking Tech. I'm Yahaira Ana. And first up, Blue Owl's data center firm Stack Infrastructure is seeking a$5.9 billion syndicated loan to fund its latest project in Melbourne, that's according to sources. This could be one of the largest such financing in the sector in Australia. Plus, three former NASA researchers and experts say the heat shield that protects SpaceX's Starship vehicle may be a major roadblock to designing a rapidly reusable rocket. The protective tiles suffered a significant damage during a recent test flight, which could lead to lengthy downtime between flights and curb Elon Musk's ambitions for rapid reusability.

25:01And Disney's new CEO, Josh DiMauro, has instructed his leadership team to think of Disney as Disney Plus is the front door for the company's worldwide fans. As it plans to add new features, the better competes with Netflix and YouTube. It's also bringing Hulu and ESPN content onto the platform while investing in local programming in international markets. Ed?

25:25Ed Ludlow:The AI buyers are back. And you look at the NASDAQ 100 up about 3%, 2.5 % in the session. The Philadelphia Semiconductor Index, or SOX, which is the chip index, is up a lot, 7.4%. But remember, it had been down for the last five days prior to today, a drop of like 16%. So maybe there's a bit of evening out. Microsoft and its earnings are a big factor in this market. Right now, Microsoft's up like 14%, have been higher still than that and on track for its biggest jump since 2008. All of that is earnings digest and there are more earnings to come. Let's talk about it. Bloomberg Equities reporter Ryan Veselica joins us now.

26:04Ed Ludlow:I mean, you and I were chatting this morning. There's a lot going on in this morning's market. Earnings are a factor, but the recent downward pressure on technology stocks, clearly that's at play too. Yeah, exactly. I would say that's very much the case right now. I have a couple of people describing this really as sort of an elastic band market where it's really stretched in one direction. And when you get a snapback, it can be extremely volatile going back on the other side. That said, there were a lot of positives, especially in Microsoft's results last night. Very strong cloud growth, very strong adoption of Copilot.

26:38And it had some positive comments on CapEx, which really, I think, threaded the needle because they continue to spend, which is positive for the chip space. But it really felt like they did a good job of helping to justify all the spending they're doing. They talked about how a lot of its data center buildings would be useful for 10 years or so. So eventually we are going to see this maybe taper off a little bit. But I think today, at least it's positive for the chip space. It was also positive for Microsoft justifying its own strategy.

27:06Ed Ludlow:AI-linked stocks rallying on big tech results and CapEx plans. And then there's tonight where Amazon will talk about all of those themes. Apple's there as well. I know you've been thinking about Apple. How does that fit into the market this week? What we're going to get after the bell? Very curious to see what Amazon has to say about CapEx and how the market receives that. Amazon is another company where I'd say there's a lot of optimism that all of this spending is going to pay off, especially as they talk about using AI in its warehouses and for logistics and things like that. It's a very clear way of seeing how all the spending can translate to improved efficiency, improved profits.

27:43And because you have AWS, which remains the leader in cloud, I think people are expecting a pretty good read there. So that could be another sort of read more in the vein of Microsoft as opposed to Meta, which had a disappointing revenue forecast, making it harder to sort of justify all this spending. It's also continuing to spend a lot. That's why you're seeing that stock really pull back today.

28:03Ed Ludlow:I borrowed a line from your Apple report this morning on Bloomberg surveillance, and one of the analysts reacted to it straight away saying, can't believe we're calling Apple the AI safety play or the safety trade. But it's kind of like how the markets treated it. Yeah, exactly. I think if you look at a lot of the major themes that have been in the market this year, at least as it pertains to tech, Apple is really separate from all of them. So if you are concerned about the level of AI spending, Apple's not doing that AI spending. If you're concerned about AI disrupting software, it's not disrupting.

28:32Apple doesn't really fall into that category either. Now, there are some concerns that people have about Apple, notably the impact of higher memory prices. But I think Apple is so dominant in the hardware space that it's probably better able to weather some of this than some of the peers in the hardware space that are maybe geared towards lower income consumers. And then we have the foldable iPhone later on this year, which is expected to be coming at a high price point that might allow Apple to sort of pass on the impact of higher component costs to the consumer without it being sort of the sticker shock that you might see elsewhere.

29:06Ed Ludlow:That's what's happening in technology stocks. Bloomberg's Ryan Valestetica, thank you very much. Let's switch over to private markets where interest in backing space firms, particularly following the SpaceX IPO, remains very high. The latest example, K2 Space, just closed a$500 million Series D round. The firm builds large satellites for data heavy communications, defense missions, etc. The valuation also very big, almost$7 billion. CEO Karam Kondur joins us for more. Let's start with what is a big backing of your company, a big round. Iconic is in there. Kleiner Perkins, Lightspeed, Capital G, Altimeter.

29:44Ed Ludlow:The list is long, but those are our top tier investors. What is it that they think they see in K2? Yeah, space is becoming an infrastructure play, right? And you're seeing applications like communications and compute going from the ground and the air to space. And so we started K2 to go build the highest power, most capable satellites that have ever been launched. And I think these investors saw that what we had built was something super different, really differentiated, massive moats from a technical perspective and a really solid book of revenue to build off of. And so, yeah, we're really excited to announce this round.

30:18It's a big round for us and we're excited to bring a bunch of those names onto our cap table.

30:22Ed Ludlow:So K2 can do quite a lot with$500 million because the whole point of the design you have is that you can produce very fast at low cost. Low cost being$15 million per satellite. Is that kind of the play here to get funding to move quick? Exactly. Yeah. The capability that we're delivering historically was done by a billion dollar satellite made by one of the primes. It cost, you know, a billion dollars and took seven to 10 years to produce. Our whole play was how do we figure out how to take on all of these hard engineering challenges, giant solar rays, giant batteries, giant reaction wheels, figure out how to do that in an industrial way, turn it from something that used to be a science project to something that's mass producible.

31:03And if we can do that, we could reset how we roll out infrastructure layers in space.

31:10Ed Ludlow:if you're the domain expert in very big satellites with high power requirement does spacex or someone else give you a call quran and say look at our design for orbital data center help us you know i think um that people saw the 20 kilowatt satellite that's now flying on orbit today and they're starting to hear about our plans for what we call the 100 kilowatt class satellite. It's actually a bit more than 100 kilowatts, but we'll save that for another day. But it's one of the largest, highest power satellites that has ever existed. And it's what makes orbital data centers possible. So while it's not SpaceX, almost everybody else has been reaching out to us asking to work with us on that capability because, you know, going high power allows you to put up a lot of compute.

31:56Being able to put a lot of compute on orbit fundamentally changes the economics, the scalability of compute, especially at a time where we're pretty constrained from a supply perspective on compute. And so we're excited to be in the middle of that. We're going to be working with a number of different players as we roll out that differentiated capability.

32:14Ed Ludlow:It's been nearly four months since you deployed your first satellite. What has the learnings been in that time? Yeah, I think at this point, we're like 120 days in, and it's been amazing. We've learned a ton. The entire tech stack was all brand new, right? About 85 % of the satellite was built in-house. We had to design it because these subsystems didn't exist with this capability. And so this was a major de-risking moment for the company. We've collected a tremendous amount of data on the performance of the platform across different thermal situations, across different power situations with a bunch of different payloads.

32:48All of that has now been fed back into what we call our Block 2 design, which is going to be rolling out next year and launching across two different launches next year as we scale the company.

32:58Ed Ludlow:You know, you have some contractual obligations to the government around Golden Dome, for example. What's the pressure of that to meet deadlines, to be able to pull it off? Yeah, at this point, we've sold about a billion dollars in contracts. We crossed the billion dollar mark a few months ago, and a lot of it was on the back of this successful first mission. We have a number of national security customers that are incredibly excited about this capability and what it could do for future infrastructure and architecture plays that they're thinking about. And so, you know, hitting schedule is incredibly important.

33:31We did that with this first mission. We've now got a tremendous amount of demand. A lot of what we're using the fundraising for is to go make sure that we can de-risk the supply chain, de-risk the subsystems, mass production, increase the footprint, and make sure that we're continuing to execute to satisfy the massive demand that we're seeing.

33:51Ed Ludlow:Karam, real quick, your launch provider and what does launch capacity look like for you guys going forward? Yeah, so the first satellite, the 20 kilowatt satellite, is made for any five meter faring class launch vehicle. To date, we've launched on Falcon 9 and we'll continue to launch on a number of other launches with SpaceX in the future. Beyond that, you know, we'll use other players that are building five meter faring class launch vehicles. And in the future, the 100 kilowatt class satellite is designed for, you know, much larger, super heavy launch vehicles like New Glenn and Starship. So we're pretty excited about the new launch vehicles that are coming online.

34:24We're excited about what SpaceX is doing. And we just want to be able to take advantage of the launch options that are going to be out there over the next 10 years.

34:32Ed Ludlow:K2 Space CEO, Jaran Kujur on Bloomberg Tech. Thank you very much. Now, coming up, Qualcomm warned of component shortages and rising costs in its quarterly earnings report. We're going to discuss all of that and actually a lot more with Qualcomm CEO, Cristiano Amon. That's next. This is Bloomberg Tech.

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37:25Ed Ludlow:Back to earnings. Qualcomm giving a weak profit forecast for the current quarter, citing component shortages, rising costs. That's a focus on the smartphone market. Shares down almost 3%. percent. Qualcomm president and CEO Cristiano Amon joins us now. The way that I think about Qualcomm, Cristiano, is it's one of the most interesting transition stories in semiconductors, probably since NVIDIA, right? The business right now, smartphone, is under pressure. The market is focused on that. Let's get it out the way. You know, how long does that pressure rise? What is the mainstay of the pressure? Is it in production?

38:00Ed Ludlow:Is it on the pricing side? Tell me what you see. Yes. So, look, let's step back a little bit. What's happening with the Henson market, and there's a Henson market and there's a unique Qualcomm thing. What happened to the Henson market is there are unprecedented memory prices and shortage. I think the price increases are very dramatic, as everybody knows. I think you've seen not only Qualcomm talking, you see some other companies talking about it. You see Apple talking about it. Therefore, I think what happened in the market, the market is down. Actually, projects, and just when we think about from 26 to 27, the market's going to be down by about 20%.

38:35This is not because of demand for phones. This is because of there is not enough memory. The prices are so high, so the units are much lower. Consumers are going to react to the lower price. The middle and the low part of the market, it's significantly contracted. The premium tier has some resilience, but even in the premium tier, what we see is a mixed change. Consumers are preferring with the new prices that are higher to buy last year phone, they buy the entry premium. And I think that's actually causing this change in the market. There's a unique thing about Qualcomm, which is well understood, which is Apple's coming off the model, and is actually coming out faster because of the supply situation.

39:15So that is the situation in the short term that is what's causing this issue. And it came out in the earnings reflected in two things. I think a weakness on Hensets. We actually did the following disclosure. We talked about it. There's about$1.50,$1.50 in earnings power that it's now will come back to Qualcomm when Hensets normalized. And it is the overall market is down. It's not a demand issue. It's memory prices and supply. So that's the Hensets story. And it reflected in earnings in two pieces, right? You saw, I think, the weakness on the guide, which is a market weakness, a mixed change. And then there's gross margin.

39:57The gross margin is very simple. We're slightly below the operating model of the company because input costs are up in a shortage. And we've seen this during the pandemic. The entire semiconductor industry right now is at full capacity. So costs go up. We're just in pricing. But you have contracts. You have new design cycles. So there's a mismatch in quarters between the price adjustment and the cost that creates this temporary, I think, issue on the slightly decline on the gross margin. And we're going to go back as prices flow to the model in the handsets. We're going to go back to the operating model.

40:36The exciting thing about the company is the new business and how we're actually transforming the company. Let's talk about it.

40:43Ed Ludlow:In the past, we've called it diversifying. I called it transition, but I read the earnings presentation slides. So you're saying in full year 27, non-handset is just under 50%. And by full year 29, that handset business, which is the majority today, is only one third. Of data center, automotive, and IoT, what pushes that most? Yes. So this is a great question. So if you actually look what is happening with the company, everybody knows about this. This Apple transition on a handset and then all of the growth that we've been doing with everything we did to transform the company A couple things that are actually driving this change We actually talk about from this year fiscal 26 to next year Growth is going to be 60 % and no handset and the driver is automotive We actually in the earnings call said we're exit rate now What about a billion higher for 27 that we actually thought it's continued to accelerate because of our position automotive is getting stronger We have now more assisted driving and autonomy, silicon, and evolving over stack.

41:52The second thing is the beginning of the data center ramp. We still restated$5 billion in data center revenue in fiscal 27. And the IoT is starting to grow. On industrial, you know, there's all this conversation about open weight models, about AI on the edge. on industrial. In this fiscal year alone, we have about$3.5 billion of design wind pipelines. So all of those things are going to go to the projection that we made of$40 billion of non-handsets by fiscal 29. And you're going to see a 60 % year-over-year increase on all of those new business, durable revenue, durable earnings, doesn't have to sickle things on handsets.

42:38And I think that's really the future story of Qualcomm.

42:41Ed Ludlow:This is Bloomberg Tech live on Bloomberg Television and Bloomberg Radio. And we're speaking to Qualcomm president and CEO Cristiano Amon. It wasn't that long ago we were talking at Invest Today where you laid out a$15 billion plus data center opportunity through to 29. How is that going? I know it's been just a few weeks or months, but what progress have you made? Yes, it's going very well. The most important milestone for us right now, I think, look, we outlined that we build a roadmap that has brought us coming over a couple of years. We've been very clear how the roadmap is evolving. So the first set of revenues, which actually is the majority of the$5 billion that is happening right next year, is a custom ASIC with two hyperscalers.

43:31Everybody asks us about who they are. The only thing I can say at this point is one in the United States, one in China. But the most important thing is when you think about the composition, the 15 billion, it has customizant, but it has our accelerator, has our new high bandwidth compute, which is new memory architecture, and it has our CPU. So the exciting thing is we're going to have in a couple quarters, we have progressing with the development. In a couple quarters, we'll have silicon on the HBC that we're going to make people be able to evaluate, I think, the performance claims. And I think I expect that is actually going to create even more interest than what we have today within the 15 billion.

44:17Ed Ludlow:Cristiano, the way that I look at Qualcomm as well, like on the smartphone side, Android in China, and then when I'm thinking about the data center, I'm trying to understand where the biggest opportunity is. So geographically, China or U.S., and then there's ASICs or your own products. Try and put them in order for me of priority. Yes. When we provided the$15 billion number for fiscal 29, it's kind of well balanced. across custom ASIC with hyperscalers. It's, especially for new enters, you should expect a lot of bespoke development. It's very well balanced on the CPU, which will start ramping in 2028, and the accelerator and HPC.

45:07But when we talk about HPC and the accelerator, HBC is actually part of some of custom ASICs deployments as well. As far as China, you should expect that our exposure to China, the data center, will be very similar as a percentage of data center revenue to all of the other semiconductor providers that are in the data center business today. You know, China is a big market. It's just a function of GDP. And when you look at some of the data centers, especially the providers of custom ASIC, they have exposure to China. Ours is going to be about the same percentage. Understood.

45:49Ed Ludlow:Software. You close the acquisition of Modular. You have some ownership in the software stack. People don't talk about that as much, maybe, but where does that fit in your strategy, Cristiano? Yes, I am super happy about this. And one of the reasons I'm very happy about this is not everybody understand it. So I'll be able to brag about it a few years in the future. But the exciting thing about this is a great team. I think they have an incredible track record. The founder and CEO and his co-founder have a track record about what they have done in the Apple Swift programming language. The inventor LLVM, I think the developing the Tesla autopilot.

46:32And they put on a mission to create an open platform for AI that scale from edge to cloud. It's a modern stack development. And we're very excited about what we'll do for Qualcomm and actually for the whole industry. I think we're really committed to provide that open platform for the whole industry. The interest has been incredible, including from other semiconductor companies. And we're just going to be executing. The good thing about all of this ad, nobody asks me anymore about, I'm worried about your software capabilities in the data center. I think this is an incredible acquisition. Just super quick, the second half of this year, very quick, smartphone deteriorates or you see signs that it improves over what timeline?

47:19Yes. The important thing, what we stated before, the Q3 quarter is the bottom for China Android. That's still the case. We will see sequential growth on Android in China. We will see it. Having said that, the market is down. I think it's not a demand issue. Consumers actually want, there's demand to buy phones. It's just this memory prices and supply. So you should expect the market to continue to be suppressed, even though I think we call the bottom on Q3, and that is still the case.

47:53Ed Ludlow:Qualcomm president and CEO, Cristiano Amon, back on Bloomberg Tech. Thank you very much indeed. Apple reports after the bell, and it's the end of an era. This will be Tim Cook's final earnings call as CEO, with investors watching iPhone sales, AI, and what's coming next under incoming CEO John Ternus. Bloomberg is consumer tech and Apple managing editor Mark Gurman is with us now. Where would you like to start? I think let's start with the Tim Cook of it all. And it is a big moment in the history of this company and in the transition to its future. Yeah, this third quarter, this is Tim Cook's final full quarter in charge as CEO of Apple.

48:33He will remain CEO till September 1st, which means he'll be in charge until two thirds of the way through the fourth quarter. And that is all to say that this will be his final earnings call. So you'll probably hear John Ternus on the call today. You'll hear them talk about the transition. Tim Cook is going to want to reassure Wall Street that things are going to remain steady under Ternus, telling the transition has gone unbelievably better than expected. Any way to describe this in a positive way, they'll use today as a forum for that. The product pipeline is extremely strong, and we'll see Ternus announce the foldable iPhone, new Apple Watches, and a few other big things in September.

49:15Tim Cook here is handing Ternus a layup. I believe we're floating around a$5 trillion valuation here. The numbers today are probably going to beat Wall Street expectations. They're looking for about$109 billion. I'd be surprised if it came in below that. So today's word is going to be transition. And the other one is probably going to be continuity.

49:37Ed Ludlow:The environment is tough, right? Principally, we talk about memory. Where will that show up, Mark? This is a company that handles the bottom line well. Well, they raised prices at the exact time they needed to raise prices in order to offset things. So even if the memory shortage is going to continue to create headwinds for them, the price increases are going to erase that when it comes to their margin. And given the demand for the new products in the fall, the price increases may even lead to higher revenues. So margins likely stay steady. Revenue is likely to go up. they're going to have their cake and eat it too.

50:14Ed Ludlow:What's the one product that's going to be most important in the John Ternus era? The one product that's going to be most important in the John Ternus era is going to be the iPhone. And I say that because I strongly believe the iPhone is going to remain the center of the Apple universe. And Ternus will need to evolve the iPhone under new form factors, under AI over the next 15 years, because I believe people will always carry something in their pocket. You probably thought I would say glasses is the most important. Yeah. I do believe that is going to remain secondary to the phone. Maybe it's 1A, 1B, but definitely the phone is the cash cow.

50:52This is where they make 200 billion a year. They're going to need to continue doing that.

50:57Ed Ludlow:Of the$109 billion of revenue, the iPhone will be about$54 billion. Bloomberg's Mark Gurman, busy day for you. Thank you very much. That does it for this edition of Bloomberg Tech. More tech earnings are coming. And this is what the calendar looks like. Apple, Amazon, Rivian after the bell. Interesting conversations to come. Recap the conversations of today's show on the podcast. You know where to find it. On the terminal, as well as online on Apple, Spotify, and iHeart. Just one more day in a big week for tech. Have a great day. This is Bloomberg Tech.

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