Markets Brace for Microsoft and Meta Earnings

21:50Ed Ludlow:Right. Let's talk about the Fed. Why not? It's Fed Day. No one wants to talk to the tech guy on Fed Day, Anthony, to be honest with you. And I just want to partake in it like everyone else. So you explained it. Your assumption reflects one to two hikes rather than cuts. You know, put the sort of the numbers and monetary policy jargon to one side. How does that change how you think about the world, about how the economy grows, about the consumer in the back half of this year? Yeah, I mean, if the Fed is raising rates, that means we have a strong economy and we're trying to maintain stable inflation.

22:26In an environment in which rates going up 1 % to 2 % will perform very well on the revenue line, which is why we're still forecasting strong revenue. And I think ultimately, we'll perform really well on the bottom line. We're already in our guidance in providing guidance of a net income margin on an incremental basis of 30%, which is our long-term profile where we can get to. So, it doesn't really change that much. It just eliminates some of the upside that one may have called today compared to a different environment. I think a stable economy with unemployment below 5%, inflation around 2 % to 3 % is a great backdrop for our business.

23:05An even better backdrop for our business is if rates were declining.

23:10Ed Ludlow:Final question on the economic side. What does the health of your customer look like? And not just the health, but what are the behaviors of your customers in this environment? We've gone over in the past, you and I, the demographics and who you're serving. So how are they behaving? The customer's behavior is very strong. We see very strong levels of spending. We annualize at about$30 billion of debit spending a year. We're seeing very strong trends in credit, which we reported continuing. We're seeing good inflows into our invest business assets under management standpoint. And we're seeing people take out more products.

23:46There definitely is a desire to reduce the cost of debt, and we saw record levels of origination across our unsecured personal loans, our student loan refinancing, and our home equity lines of credit and home equity loans. And that's a secured loan that has a lower interest rate. And we recently launched small-medium business, and we see a lot of demand for small-medium business loans as well. So from our vantage point, the economy looks very strong. Inflation isn't causing consumers to hold back. We're not seeing an uptick in unemployment.

24:17Ed Ludlow:We're not seeing any deviation on the credit side. Let's talk about AI. When we went through the big bank earnings, there's debate, right, on how much AI is really reshaping financial services and the investment that's required. For SoFi today, where is AI having an impact, you know, across underwriting, customer service, fraud detection, something that's real right now? Yeah, the first thing where it's having an impact is actually on code production. We have a unit of work within our engineering group called a squad. And historically, a squad consists of seven people. Today, a squad is going to consist of four people that can produce the same amount of code as seven people.

24:58So that's a huge productivity savings from AI capabilities. It also helps with testing. On the cost side of the equation, we're using it to automate fraud investigations. We're using it to automate dispute resolutions. We're using it to help with customer service. On the underwriting side, we're not really using it to predict the ability for people to pay because we underwrite to their actual cash flow based on their actual income and their expenses. I do think that AI is helpful in verifying some potential outliers or finding them that could be fraudulent activity, first-party fraud, where an individual has no intent to repay their obligations.

25:36And then on the overall value prop of SoFi side of the equation, we've launched something called SoFi Coach, which is a chat bot that's driven all by AI. You can ask any question about your financial life and it will help you get your money right. You can ask if you refinance your mortgage, where you should invest, how do you lower your costs and your expenses, should you be investing more. And it's a super powerful engine based on the data that we uniquely have. Because we're a one-stop shop, we have data across checking and savings accounts, across loans, across mortgages, across investing, across credit cards, and across insurance.

26:09So we have not just a great engine of information that can drive great AI solutions, but the data is a huge differentiator, and we're seeing really positive effects of that.

26:20Ed Ludlow:SoFi CEO, Anthony Noto, a great picture on digital finance in the real world. Appreciate that a lot. Thank you very much. coming up. Oracle's Larry Ellison could possibly shell out almost$10 billion in fees if the Paramount Warner Brothers merger falls through completely. Got more on that next. This is what markets look like, right? We're kind of treading water to Microsoft and Meta after the bell. There is a Fed decision this afternoon, but there is downward pressure. Now's that 100 down for a sixth day. This is Bloomberg Tech.

26:54Ed Ludlow:Welcome back to Bloomberg Tech. Microsoft and Meta have earnings after the bell. There's a Fed decision this afternoon where most economists expect them to hold rates. Those are all factors. So is SK Hynix's raising capital expenditures for this year and its sixfold profit. The Nasdaq 100 is down for a sixth straight session, the longest streak of declines since October of 2022. The Sox is down 3.7%, down for a fifth day, matching the losing streak that it saw in December. There's pressure under this market, but the earnings story after the bell today, it's a big focus. The market's bracing for a host of information.

27:34Ed Ludlow:Let's discuss what to expect. Bloomberg Equities reporter Ryan Flostelica. I'm trying my best. There are so many catalysts in the market, Ryan. We're looking at them now. Fed Decision today, Microsoft today, Meta today. I think we focus on Microsoft and Meta and capital expenditures. Is that what you're hearing is the focus of this market? Yeah, I'd say that is very much the focus of this market. I think especially after Alphabet reported last week and really underlined how much skepticism there is out there, how much growing skepticism there is towards all of the spending that's going on with AI.

28:09It's a real question mark for people right now. What is the spending outlook? What is it doing to cash flows? What kind of growth are they seeing because of this spending? What is the ROI? Are these stocks finally getting cheap enough that people are feeling more optimistic about jumping in? These are all going to be very important questions. And these are two of the biggest and most influential companies. So I don't know, maybe I'm a bit biased, but I do feel like that's going to be the real takeaway from today, more so than the Fed.

28:36Ed Ludlow:I said to Antinodo, the SoFi CEO, a moment ago, you know, on Fed days, typically people don't want to speak to me, the Bloomberg tech guy. But it's a factor. You know, just as an illustrative example with Microsoft, right, Azure growth 40%. But if you look at expectations for CapEx into the next fiscal year, CapEx is going to grow more than 50%. Like that's the kind of tradeoff. This morning when you got to your desk, what was the impact of SK Hynix's commentary on CapEx? What else were you looking at on the equities desk that might be a factor in this market? Well, I would go back to Alphabet last week.

29:12Alphabet's report was very strong on a lot of metrics. Cloud growth there grew more than 80%. And Alphabet is really seen as the leader in AI right now between Gemini, between its chips, between cloud, Waymo, YouTube, so on and so forth. Microsoft and Meta don't really have those same kind of leadership qualities. So if Alphabet wasn't able to convince investors that all of the spending it's doing is really paying off, it's going to be a harder hurdle for Microsoft and Meta. Now, we are seeing, like you said, ongoing chip weakness. We are seeing open source models coming out. Maybe that's a cheaper way of doing AI.

29:48What kind of influence that's going to have on CapEx Outlooks really remains to be seen. So that's certainly playing a factor in here. But I do really think there is a high bar for these companies to convince investors that the spending strategy remains the right one, at least for the stocks.

30:05Ed Ludlow:Bloomberg's Ryan Vestelica, busy week for you. Thank you very much indeed. U.S. listed shares of Logitech were down post earnings. The Swiss computer peripheral maker warned a serious incident and one of its suppliers will impact its ability to meet future demand. Logitech CEO Hanneke Faber spoke with Bloomberg earlier. We're pleased with the quarter we just delivered, and we can talk about that. But let me talk a little bit about the incident at one of our semiconductor suppliers. That happened at the end of June. A lot is still unclear. We do believe it's absolutely temporary and ring-fenced to Q2 and Q3, but it is an important supplier.

30:44They remain closed, and we don't have a definitive reopening date. We obviously have a crack team working on mitigation plans at the moment, leveraging existing inventory, leveraging secondary suppliers, which we do have. But as you will well know, the general supply situation for semiconductors at the moment is unusually tight, and we need a lot of them, and we need them right now, hence the uncertainty and the outlook. But all that said, we're super pleased with our results, our 10th quarter of growth, also growing market shares and really great operating income growth, up 44 % in the quarter versus last year, and even without the tariff refund, up 14%.

31:30So this is a company that has taken a lot of blows between tariffs, geopolitics, component shortages. And yet we continue to deliver quarter after quarter, growing the top line, growing the bottom line, growing gross margins. Yeah, it's maybe one of the most, shall we call it, interesting times to be a CEO at a company like yours, Hanukkah. So it's always so interesting to talk to you. And I know that you had mentioned earlier, kind of when all of this was brewing, the concerns over chip supply, that you had stockpiled chips. What was that case? Did you end up stockpiling chips? And do you have any left in the reserve that you can kind of tap on when you have these types of disruptions?

32:07Absolutely. So that's the beauty of a great balance sheet. So we have more than a billion and a half in cash, no debt. So we have been I wouldn't call it stockpiling, but we have really healthy levels of inventory. And therefore, again, in Q2, despite the closure, temporary closure of the supplier, we think the impact in Q2 will not be very large, about 20 million.

32:29Ed Ludlow:So is Logitech CEO Hanneke Faber there. Let's turn to entertainment. The highly anticipated Warner Bros and Paramount merger was put on pause. But if the deal falls through completely, it would have Oracle's co-founder Larry Ellison on the hook for cuffing up$9.8 billion in fees. Joining us is Bloomberg's Chris Palmieri, the entertainment editor that had the inenviable task of doing the math. I mean, this was a part of the structure of that bid, right? You know, it's no joke,$10 billion, even to Larry Ellison. Just explain the reporting on this one. Yeah, I had to really dig and redefine print.

33:07I mean, we all knew these fees were out there,$7 billion breakup fee to Warner Brothers if this deal falls apart, and$2.8 billion that Paramount already paid to Netflix to go away, essentially. But we want to know who was really on the hook for this. Paramount doesn't have a lot of money. It's got a lot of debt, and one of the reasons it's trying to merge is so it could get bigger. And, of course, there are these sovereign wealth funds of Saudi Arabia that are involved. But they're not actually the ones. It's really Larry Ellison and his family trust that are going to have to pay this money if this deal collapses.

33:41And here's the really wild part is they're going to do this by paying essentially$10 billion to Paramount to buy new shares of Paramount at$16 a share, stocks about$8 now. So if they have to cough up that kind of money, it's going to be a painful check to write.

33:59Ed Ludlow:And Chris, just quickly explain where we're at with this, right? You know, the deal is on pause because of the intervention of a U.S. judge. There were also lawsuits. Just where do we stand? Yeah, I mean, for quite a few weeks now, we've all thought that this deal was going to go through, particularly after the Department of Justice gave it the blessing, and we saw the EU regulators as well. But the lawsuit this month from 12 state attorney generals, also from the Writers Guild, really puts that into question. It forced Paramount to put the deal on hold as they worked through this litigation. It could be as late as June.

34:40It could be never if the cases are successful in thwarting this. So it's much a bigger risk now of this deal going through than it was just a couple of weeks ago.

34:53Ed Ludlow:Boomers, Chris Palmieri, screen time editor. Really appreciate it. Thank you very much. Okay, coming up, Karen McCormick, Chief Investment Officer at Berengia, joins us to discuss the impact Moonshots Kimmy K3 could have on venture capital, on the ecosystem of other AI startups, on open weight. We'll discuss it all. This is Bloomberg Tech.

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38:06Ed Ludlow:Moonshot's Kimmy K3 model has sent ripples through Silicon Valley and Washington, but the significance, according to our next guest, isn't about Chinese versus USAI supremacy. It's about credible, cheaper alternatives that drive AI adoption. Karen McCormick is the chief investment officer at Beringia, a firm investing in early to growth stages across the US and Europe. Very interesting perspective. Just bring me your ideas on this. You know, the impact of Kimmy K3 being open weight, how the economics of it add up. It's been constantly discussed for a week now? Yeah, I guess it's worth framing a little bit of what we do.

38:49And thank you for the introduction. But as you said, we do early growth capital. So we aren't necessarily looking for shoot the lights out,$10 billion type return businesses. We're looking for growth businesses that get to real profitability. And that's what we focus on. So for us, the capital efficiency of the businesses matter quite a bit. And that feeds into our European and U.S. thesis, which can come on to. But I guess the net result for us is that as frontier models become more commoditized or more widely available and cheaper to use, it's very helpful to our portfolio companies in whole because it means that it's more capital efficient to be able to launch those businesses.

39:25And to be blunt, it also puts pressure on keeping the cost of the U.S. frontier models down.

39:30Ed Ludlow:So this ties together your strategy with everything in the news cycle. The conclusion when Kemi K3 hit is that it was the frontier labs that were at risk. But net net, this was good for AI. Now in Europe, the capital environment is completely different. And those founders run leaner businesses, respond to all of that, you know, why we're seeing a Chinese startup like Moonshot make some progress. It gets backing, of course, from national funds. But that has been the sort of debate. It is an interesting one. And in part, it does feed into kind of our European thesis because we do see often European businesses or even U.S.

40:10businesses that aren't specifically valley-based have to start to grow and thrive on less available capital. So if you don't have the huge amounts of capital rounds that a lot of the valley companies are raising, you have to do more with less. And so the thesis in total is that the more these frontier businesses are becoming commoditized or cheaper or more widely available or open sourced, the better it is for the businesses. And it helps a lot, especially with our European portfolio, where capital isn't as freely available as it might be in the US. And we've genuinely seen higher growth, lower costs as a result of using models, and different models are right for different types of activities.

40:46So we might still be looking at using a Claude or a Fable 5, where it's really important deep tech work that we need to be doing, whereas DeepSeek or Moonshot might do more than a perfectly adequate job for some of the day-to-day tasks. So we have really seen the cost of launching these businesses start to decline. And even where the businesses are already established. So we have one business called Edited, which is in the traditionally the SaaS space. They've rebuilt their entire software using AI. And the development cost has been so much lower. And the launch has been so much faster with the reception from the market being so much better.

41:20Ed Ludlow:Karen, you're in the camp that agrees AI will be transformational. You just gave the SaaS example. but you say that we're in the messy middle. Yeah. What do you mean by that? So, I mean, we've been through so many different market cycles, and Beringia as an entity has been around for 30 years. I've been doing this for 20 years, and in the corporate world for 30. We see technology cycles. This isn't new for us. I mean, mobile revolution moved to cloud. Now we're in AI. We're still trying to figure out how things are going to work. So there are going to be pain points, and I feel, I mean, my own children, for example, are going to find the job market may be difficult.

41:56There are going to be pain points as we figure out how this works, but I do think it's a net positive all around. And I also would say I feel like the whole idea of like SaaSpocalypse, like SaaS businesses are all going to suffer and not be in existence anymore. It really doesn't hold water because what we're seeing is a lot of SaaS businesses are just becoming. They're really just software businesses. And whatever they're using, whether it's cloud computing or AI tools, they will continue to thrive as long as they move with the market. If you're standing still, then you probably have a problem.

42:24But I think most of the software businesses are adopting AI very quickly. One of the things I think we are seeing is that AI is moving so fast that what was revolutionary two or three years ago is actually now a bit dated. So you might have had a moat, so to speak, two or three years ago based on your use of AI. But for the CEOs and for the small companies, they're having to move so fast to make sure that that moat is sustainable. And we even see that in the large public markets. I mean, if we think about the constitution of the top 10 holdings in the public markets, in the last couple of weeks, those have been churning.

42:55And they've been churning because we're looking at businesses on a reactionary basis where we thought they had a solid moat. And then something happens over here and we question whether that moat is really there. And then something happens over here and the guy who took the top 10 spot is now moving down again. So I think a lot of it is this market is moving so fast. Trying to determine what your moat is and how long that's sustainable for is tricky.

43:18Ed Ludlow:Karen McCormick, Chief Investment Officer at Berengia. We will have you back. And I think next time there's a conversation to be had about European defense tech as well. Absolutely. Making first appearance on the show. Thank you so much. Now, coming up, Big Tech Faces is next AI test. We're going to break down what to watch from Meta and Microsoft and the chip makers. That's next. This is Bloomberg Tech.

43:54Ed Ludlow:It's a blockbuster day for big tech earnings. Meta, Microsoft, Qualcomm and Arm all report after the closing bell. Let's start with Meta. Bloomberg's Riley Griffin here. Let's start with the basics. You know, this is going to be about capital expenditures versus growth. Absolutely. If you remember last quarter, we saw Meta raise guidance to$145 billion, up to that amount. And the market didn't react well to that. Meta is struggling to explain to the street how it's going to get a return on its massive AI spending. And so we're looking for steer today on that very question. I've been reading your reporting and the team's reporting.

44:29Ed Ludlow:And one other question is like, return on investment or return on the infrastructure? Absolutely. The idea that Meta becomes a cloud computing company. Any chance Zuckerberg says something about that? I think that's what we're all waiting to see today. Earlier this month, we had reported that Meta was already developing plans to create a cloud infrastructure business. sell some of that computing capacity to other AI companies and so forth. We also have reported that Anthropic is in early talks with Meta for some of that capacity. So if Mark Zuckerberg during the call later today confirms some of those details or expands on them, we could see the stock react quickly.

45:05Ed Ludlow:That would move the needle. Bloomberg's Riley Griffin, thank you very much indeed. Now to the other tech heavyweight reporting after the bell, Microsoft, Bloomberg's Brody Ford, on deck. Azure growth, more than 40%. Capital expenditure is probably going to go up as well. Do the math for me on that one. The big difference with Microsoft is it's around what are they doing with the compute, right? Microsoft has defended an approach of we need the compute to shore up our internal products, which are better in the long run. In many cases, the street kind of wants them just to see them juicing Azure revenue, right?

45:39Allocating compute to customers, getting more near-term revenue. I expect that to be a topic that's hit quite a bit on tonight's call.

45:48Ed Ludlow:You know, I find that so interesting. If you compare to last week with Alphabet, there was so much emphasis on Gemini, the different forms of Gemini and the traction they're getting. With Microsoft, is it as simple as Copilot? Like, how's Copilot doing? I think you're underlining what the anxiety is and that maybe Copilot actually isn't doing that well. They keep releasing seat numbers that sound impressive, 15, 20 million, but then you're a member of the Microsoft install base that's not that big. And so as long as the co-pilot adoption and monetization figures don't look that impressive, you're going to hear analysts ask them to just sell the compute to customers directly.

46:26Ed Ludlow:Microsoft's down 18 % year-to-date, one of the laggards in the Mag7. What else? What else will they say? What else do we look to? It's all about that spending, right? It's all about the return on capital, and a lot of it too is the SaaSpocalypse fears, right? Microsoft's traditional businesses, are they under threat from AI replacing it, whether that's companies building their own alternatives or startups? We reported that Starbucks wants to replace some of its Microsoft software. Maybe we see that theme asked about tonight. Flimbers, Brody Ford, bring in his bingo card with the SaaSpocalypse.

47:01Ed Ludlow:Love it. Thank you. Busy day for you. It's not just software. Chipmaker is also in the spotlight. Like we have Arm, we have Qualcomm reporting after the bell. Bluebeg Intelligence is semiconductor analyst. Kunjan Savani with us. Let's start with Arm. You know, the Arm story has shifted for me so rapidly and so differently. You know, it used to be about design and blueprint. Now, fabulous chip maker. What's the watch for you on Arm? Well, unfortunately, look, there's majority of the revenue, royalty revenue still is coming from smartphones. And we know those markets are not doing that well. Most of the downside is priced in, but we have channel checks such as that intra-quarter Androids have been doing worsening.

47:40However, the good news for them is because their chips are going through versioning up, they're not going to see a lot of impact. And as you rightly said, the focus for ARM is all about data center now. So as long as the licensing numbers look good and the data center numbers keep looking up and right,

47:56Ed Ludlow:I think they'll be mostly immune from the negativity from the handsets. Data center is the story that Qualcomm wants to talk about as well. To be fair, there's been evidence across ASICs and the products that they make themselves. They have had some traction. Cristiano Amon wants to diversify that business. But for you, does it still come down to smartphone? Well, it's now a mix of near-term, long-term. Investors are believing the story about data center and that is showing in the sentiment of the stock. However, there's nothing data center can do for this quarter and next quarter, right? They will be highly, highly exposed to that Android weakness I just talked about.

48:33Remember, September quarter, which is the next quarter guide, is usually high, strong because of Apple. Apple is going away mostly this coming quarter. And if Android is not able to pick up that slack, it's not looking very good for the near term, for the handset perspective.

48:48Ed Ludlow:Could we go back to basics here? So, you know, for Qualcomm, the Android market, particularly in China, is so important. The CEO, Christian Amon, wanted to sort of diversify. So they pushed into automotive. They've had some success there and data center. But looking at the data, the smartphone market, particularly Android and particularly China, you know, it's not a good year, basically. Not at all. As I said, every single month, those indicators keep on worsening. We have seen a lower sell through not just in the mid-tier, but now bleeding into the high-tier. This is where Qualcomm really makes its business out of that.

49:24So, again, the guide doesn't look like there's not a lot of catalyst for upside there.

49:30Ed Ludlow:Final bit, Qualcomm, the automotive business. Does that interest us at Bloomberg Intelligence? Look, it's a great business. It's running ahead of its peers. The growth, they keep on getting ahead of the targets that they have been laying out. But again, the question comes to it's still a small size of the total revenue, right? when the majority of the revenue today is still handset, which is going to decline in near term, those pains will exist. Kunjan Sabani, who leads our semiconductor coverage at Bloomberg Intelligence. Thank you very much. That does it for this edition of Bloomberg Tech. This is what we have on deck today and tomorrow.

50:05Ed Ludlow:It's busy, to put it mildly. The Fed decision today. Most economists expect the Fed to hold rates. Microsoft and Meta after the bell tomorrow, Thursday. Apple and Amazon. there's a lot in the world of technology that's happening right now and this is what markets are doing in advance of that the nasdaq 100 down for a six straight session its longest losing streak since october 2022 the pressure's really in the chips recap on the pod we're having fun there's a lot to discuss have a great day this is bloomberg tech whatever your goal trade show giveaways client gifts or team gear four imprint has the promo products to match With thousands of options, from apparel and drinkware to tech and totes, it's easy to find the right fit for your brand and budget with standout choices at every price point.

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