Tech Earnings: Google’s Spending, Arm’s AI Data Center Push

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

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1:11Bloomberg Tech is live from coast to coast with Caroline Hyde in New York and Ed Lovellow in San Francisco. This is Bloomberg Tech. Coming up, Qualcomm and Arm out with their earnings. We'll break them down with the two CEOs, Cristiano Amon and Rene Haas. Plus Alphabet's CapEx mic drop. Record spending plans hit the stock despite strong earnings. And Bitcoin falls below 70 ,000 US dollars for the first time since late 2024. We'll break down the negative momentum impacting crypto markets. And that negative momentum is affecting markets more broadly at the moment. Check out the Nasdaq. Off by 1.4%.

1:51We are trading the lowest since November right now at the moment, Ed. We are seeing pain across the board and that's why we've got to go to our Bloomberg's cross-asset reporter. I'm pleased to say we can dig into all of these moves across asset classes with Alexandra Zemanova, who's with us now. I don't know where to look at the moment. Everything is in the red. It has been a really ugly week, Caroline. We have obviously seen corrections in tech over the last three years since the launch of ChatGPT, but nothing has rivaled the sheer magnitude of this sell-off that we're seeing in the sector across various assets hitting both stock and credit markets.

2:24Software stocks, of course, have been at the forefront of this. They are down about 15 % this week and 29 % from their all-time highs in September. It's also important to note that this sell-off has triggered a number of extreme levels from a technical perspective. The share of software stocks at oversold levels eclipsed 70 % yesterday. That is an all-time high in the broader tech sector. That share is about 45%, also a record. And another barometer of how painful it has been, the iShares expanded tech software, ETV, that is ticker IGV, compared to the S &P 500 is the most oversold that it has ever been.

3:01And of course, that risk-off sentiment is spreading today. What we've seen so far is that it has really been focused on tech. So up until today, it's really been a rotation out of tech and into other pockets of the market. And now we're really seeing the sell-off broaden out. Looking at the S &P 500, it is down 1.2 % right now. The Dow Jones Industrial Average, which up until today has been kind of shielded from this is now down 1.2%. Also, the S &P equal weight yesterday, for example, was up 0.9 % even as the broader market sold off. It is down again today. So really risk off across the board.

3:34And we have to talk, of course, about Bitcoin. It fell below 68 ,000 today, which is the lowest since November 2024, down about 45 % from its October high. Also big news today that crypto exchange Gemini plans to cut about 25 % of its workforce. So really seeing the pain of that. Bloomberg's Alexandra Seminova with the macro picture at the index level. This is what matters when it comes to technology earnings. Caroline called it the mic drop moment. Alphabet parent of Google with a CapEx forecast for the fiscal year of$185 billion. The street had forecast just shy of$120 billion. That's a bit of a delta.

4:14The stock down almost 5 % on track for its biggest drop since May of last year. A big number to digest. Yes, earnings also in the chip sector, Qualcomm down almost 8%. It gave a forecast for the current period,$11 billion in sales at the top end. How much better would that have been were it not for the impact of what's happening in memory chips right now in the memory market? Arm similarly, but actually it is up five percentage points and it's accelerated throughout the session. Sales in fiscal fourth quarter will be about$1.47 billion just ahead of consensus. How are they managing what's happening in the memory shortage?

4:50And when is they going to transition from the handset story to the data center story? Let's talk through it. Arm CEO Rene Haas joins us now. Rene, good morning. Thank you for joining us. There is a lot going on. Let's get the sort of handset smartphone and memory situation out of the way, if that's okay. You know, clearly this is impacting outlook for the smartphone market across this calendar year. How do you think it showed up in the earnings that you posted? And would it have been slightly better if the situation were different? Yeah, good morning. Good morning, Ed. So first off, the quarter was amazing for us.

5:28We had not only record revenue, but record royalties. 1.24 billion in revenue, nearly$740 million in royalties. And if you just stack that up, that's 27 % year on year. our data center business is exploding. We were up 100 % year on year, probably north of 100 % year on year. So to your question, no, the memory situation isn't really impacting ARMS so directly. And you might ask, well, why is that? Well, number one, we are spread across a lot of different businesses. As I said, the data center business is increasingly growing for us. And we think in a few years, it'll be our largest business. Secondly, our products are used across the board.

6:11So what we tend to see in memory shortages is the bottom end of the stack starts to get impacted. And that's actually lower royalty rates for us. So as a result, we don't get impacted very much. So no, short answer is no impact this quarter. And we raised our guidance for the next quarter because, as I said, we're just not seeing that kind of impact. But I'm not denying that it's there. But for the ARM business, the impact is quite minimal. Rene, thank you for that. Data center royalty revenue grown 100 % year on year, as you outlined. I get the same question for you from everyone, sell side through the buy side, which is give me a specific year.

6:51Mark it on the calendar when ARM goes from being handset to data center and it accounts for more of your business. Is that inflection point clear on your calendar, at least? It's very clear. And that's why in the earnings call, I said in a few years. As you know, we don't typically provide forward guidance on an annual basis, but we have a line of sight that says we see it coming. And it's probably coming sooner than we had thought. And the reason for that is the data center growth. But if you click below that, why is data center growing so rapidly? It is the, A, presence of ARM CPUs in the data center.

7:31We're now over 50 % market share with the hyperscalers. Secondly, the CPUs that are being used are using more ARM CPUs inside the chip. 192 cores, for example, inside a Graviton chip going from 96. Vera, NVIDIA Vera, going from 72 cores on Grace now to 88. So what does that mean? That means more cores means more royalties and high growth rate. Well, why are there more cores? When you think about agentic AI and everything associated with agents moving workloads across systems, managing workflows, etc., etc., that's the kind of work only CPUs can do. So, to your question, while we're not giving a date, we can see it, and it's coming sooner than we had thought, even probably six to nine months ago.

8:17And probably on the back of when you look at an alphabet increasing its capital expenditure by another, well, potentially$185 billion, Rene. Is the AI bubble, this worry about AI infrastructure build out a thing of the past to you? Or are there still some bottleneck issues that you're concerned about? Yeah, so it's a great observation, Caroline. And yes, there's huge growth in Google's CapEx. Not all of that$180 billion is coming to us, of course. But what does that say? We continue to see investments in the data center, whether it's what MetaHead announced or Microsoft announced, and now Google Alphabet, that exceed what people had originally thought was even possible, even a couple years ago.

8:58If you go back to when we announced the Stargate initiative in January of 2024,$500 billion over a number of years, people looked at those numbers and said, how is that even possible? Now, 18 months later, it looks quite, quite credible. So bottom line is we are seeing such an investment because the AI opportunity, the way I like to think about it is kind of the final frontier relative to technology. When you think about what could be beyond AI, it's really hard to imagine. So also the fact that AI has really had very little penetration, let's say into large enterprise or into our health systems or things around drug discovery.

9:40So there's a long, long runway. I think people are a little nervous about it, as decidedly so, because we've not seen it before, right? We've not seen the order of magnitude we're talking about. So it's somewhat natural for people to look at it and say, well, gravity's got to hit it sometime. But then if you intellectually look at it and say, my gosh, is AI going to be something that will change and transform how everything is done? Well, of course. And then there's going to be investment to support that. And that's what we're saying. Investment to support that. We mentioned Stargate. That immediately makes me think of Massa.

10:13And you were clear on the call yesterday that you've spoken to him. You don't think SoftBank is in any way going to sell down its stake in Arm. But how much is that an overhang in the longer term? And how much actually do you want to see more free float of your stock? Well, I have one very large shareholder who I talk to quite frequently who loves Arm and he's very long on Arm. So he has no intention to sell at all. And I shouldn't even say anytime soon. I don't know when that would be, quite frankly. We do talk about it. He said he's got no interest in selling, how that impacts the float, etc.

10:46You know, that's not something, candidly, I spend a whole lot of bandwidth thinking about. But he's very, very long on arm because he sees the enormous opportunity that we have. And if you think about what we've done since we've gone public, Caroline, in the fall of 2023, we told the world we'd be growing at 25 % year on year for two, three years, and people didn't believe it was possible. Here we are now a couple of years later, and we're beyond what we told investors during our roadshow. And things are even stronger than they were at that time. So as a result, he sees it. He sees probably more of the data than anyone does.

11:21And that's why he's not selling. Rene, I want to go back to CPU. January 26th, Bloomberg speaks to NVIDIA CEO Jensen Wang. And he speaks for the first time about selling to the market via a CPU as a standalone. And that seems critically important because if you think about the pipeline for Blackwell and Rubin, right, those are GPUs coded in ARM-based architecture. And those building, they don't want to sort of have to cross-pollinate x86-based platforms with their ARM-based GPUs. It seemed to be really substantive. Could you explain how much of a boost that was for ARM and whether this idea that the Vera CPU goes into the market as a standalone product changes the trajectory at all?

12:12Because at the same time, NVIDIA talks up about how much content it owns proportionally in the overall system. Just take it and run with it, please. Yeah. So first off, thrilled to see Jensen say that. They're a great partner and Vera is a great product. And as I mentioned earlier, Vera has gone from now 88 CPUs inside it, CPU cores from 72. So why is that a really good thing for us going forward? Primarily because when you think about the data centers and how they're evolving to from what is general purpose compute, moving to AI compute, a mix of training and inference, and those inference workloads are agentic, that's right down the center of the plate for what the CPU not only is good at but can only do can only do so what that means is inside the data center you're going to start to see movement towards a homogeneous type of structure where people would love to have the arm stack running almost everything it's just easier from a maintenance standpoint it's easier from an upgrade standpoint it's easier from a cost standpoint so and also the flexibility it can affords, you can build a tremendously efficient custom system based on ARM.

13:24The Vera Rubin platform, compared to Grace Blackwell, uses 6x the number of CPUs. And that's when you look at the storage, the DPU, the offload. That's a huge increase. So yes, selling loose Veras, that's a great thing. We're super happy to see that. Briefly, Rene, you have such a bird's eye perspective because you're working with NVIDIA, but also you're working with OpenAI, it was reported potentially was looking with you at your technology to be working with its own custom chip with Broadcom. You've got Meta looking at custom chips, of course. How do you see this evolving? Yeah, I have a lucky job.

14:02I get to work with just about everybody in the industry across the planet, whether it's in the fab foundry area, whether it is a chip company, whether it's an OEM, whether it's a software provider. We work and talk to everyone because Arm is just so pervasive. The common theme we see is continued investment in AI and not just at the data center. It's trying to figure out how do you run those AI workloads everywhere? How do you run them in wearables? How do you continue to make them more efficient in a smartphone or a PC or in physical AI, whether it's autonomous driving and or robotics? So we're involved in all the conversations and the common theme is heavy, heavy investment.

14:44And one of the challenges that we see in the chip world around this is, as you know, it takes a couple years to build a chip. The IP that we develop that goes into the chips, maybe a couple years in before it, trying to predict what the architectures look like four years after the chip has been designed, where the AI models are going, is really very tricky. That lends itself also, though, very well to ARM because we are programmable, we are flexible, and we are low power. meaning that wherever the chips drop, no pun intended, we should be in a very good position to be able to drive those workloads.

15:20I'm CEO René Haas. With the broader perspective, we thank you for it. Now coming up, we've got more earnings to talk about. Alphabet's results. Expectations for Amazon. It's coming thinking fast, folks. This is Bloomberg Tech.

15:36Record spending by cloud providers. Well, it's raining on the parade of big tech earnings following Alphabet's results last night. Let's talk it through with Ioko Yoshioka, who's here with Wealth Enhancement Group. Ioko, it looked at one point after the announcement yesterday that we were going the way of meta, that even though CapEx was going up, we were celebrating the AI rewards and the revenue boost. And then we went more the way of Microsoft, and we were worrying about the extent of the CapEx. Are you selling on this? No, Caroline, we're not selling on this. You know, these companies are still high-quality companies, and they're still growing very quickly.

16:12I think it's just an adjustment from a valuation standpoint in terms of what are these companies worth over the long term? How much longer are they going to be spending at these levels? Because the issue for investors is really just the sort of collapse in free cash flow that we, you know, have been just grown accustomed to. These companies used to return so much of that free cash flow to shareholders. And now it's being spent for investment for good reason. And over the long term, this should help them grow. However, it just means that the investor kind of gets put to the side for a little bit.

16:49Are you worried in any way about the free cash flow that Alphabet is perhaps taking a hit on? Because from what we can understand from the numbers, in fact, they're becoming ever more efficient. The margin is being supported because they're so vertically integrated. They're able to cash in on growing cloud and focus on compute much more than rivals per se. Absolutely. I mean, with the cloud business growing 48%, well beyond what investors were expecting at around 30%, if that continues, the investment that they're doing is justified. And I think investors will eventually reward them for that. It's just in the meantime, just recalibrating really what you want to pay.

17:30And the momentum had been so strong for Alphabet going into earnings that there's just a little bit of a take profit attitude going on in markets. Okay, let's bring back the capital expenditures chart. Wait for some TV magic. It's going to appear any second. And then you look at that and you go, my goodness. You know, it is, Caro called it a mic drop moment. It is shocking. But what you said a moment ago, Google Cloud growing at 48%. Like the whole Microsoft anxiety was that Azure was off by a percentage point. Why is Alphabet not getting the credit for the Google Cloud growth and everyone's just staring at that chart?

18:15It's a great question. I mean, Microsoft missed by 0.4%. You know, they posted 39 % instead of 39.4. And, you know, yet Google really sort of blew it out of the water. And, you know, I really feel like it's that focus on that CapEx spend in 2026 more so than anything else. It's great that we're seeing that growth on the cloud for both Microsoft and for Alphabet. But really, it's that spend in order to get those growth numbers, I think, is what is giving investors a little pause. Amazon's down 4%. How much is that just anxiety about what they will or won't need to say tonight? Absolutely. I think a lot of it has to do with the anxiety about what they'll say tonight and how much investors might be off or the street might be off in terms of the estimate for 2026 CapEx for Amazon.

19:11I think investors are anticipating about$125 billion in spend, which is up 22 % or so from 2025. And so we'll have to see if Amazon decides to spend a little bit more. Oyoka Yoshiocha, Wealth Enhancement Group, really good summary of what's going on in the Mag7. Thank you so much. Coming up, AI tools keep coming for the enterprise software market. But will they be the existential threat that investors fear? We've got more on that next. This is Bloomberg Tech. This is Caroline Hyde. And I'm Ed Ludlow, inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business.

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20:28I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts.

20:42Well, it's introducing a new platform to help companies deploy AI agents more easily and pave the way for broader adoption among corporate customers. The new product called Frontier allows organizations to build and manage those AI tools so that each agent has appropriate guardrails and data access. Ed, what have you got? Speaking of the enterprise shakeup caused by AI, Anthropik's legal plugin for its clawed co-work may not be as devastating a blow to legal solutions providers. That's according to research from John Davies at Bloomberg Intelligence, who joins us now. John, as someone that suffered through years of law school and was born to two attorneys, I enjoyed reading it.

21:21Your conclusion is that Claude Legal is insufficiently expert to mount a challenge. Just dig a bit deeper into your thesis. this absolutely and hello um i think the key thing is that the all these um generic tools don't have access to the vast pools of data which the very specialized tools which the established companies have access to um which they've built up really over many decades even centuries in some cases and they're not easily replicable um sets of data it's a lot of shoe rather involved, you've got to visit vast numbers of courthouses. And it's not simply a question of digitizing the information.

22:03You've also got to put it in context. So, the companies we're talking about here, Westlaw and LexisNexis, each employ many hundreds of legal professionals and have done for a very long time. And all that information is caught up inside their products. And that's the thing which I think the generic tools won't have access to, don't have access to. And therefore, they're more likely to make mistakes, to hallucinate, and to lead people astray. And you can't really work this stuff out from first principles, because sometimes the law defies logic. It's not really like a science problem. Hear, hear.

22:40Defies logic. It's interesting, John, that in many ways, look, Claude Cowork had said that in a statement. They said, look, you still need a human in the loop. We're not suggesting this should just run wildly free. And in particular, we had an investor on yesterday, Uday Chiruvu, who's from Harding-Lofner, who is saying the thing with Alexis Nexus, though, is that it's a point solution. It's not a platform solution. And that's why people have the anxiety that it might be knocked out in such a way. What more could we see from these AI developments that might give you pause about Alexis Nexus or whoever's being competed against?

23:14I think if they do somehow manage to gain access to data, and clearly, you know, while it's expensive to replicate, these companies have a vast amount of money. so that could be could be one angle and i guess i guess the other one is if in some way it's a bit like proving a negative but if they can somehow prove that they're no longer hallucinating um then and they can they can point to where they don't have the knowledge and say okay beyond this point you need as a lawyer to go and do the work yourself but here is the kind of basic tool set that could become quite a useful product which could be sold perhaps at a much lower cost um than the incumbent providers have at the moment.

23:54But it really seems like quite a stretch. And there's an enormous amount of experience built into the use of the existing products. People have been using them for decades, much like they have various tools in financial markets. And your notes point out they've also been enthusiastic adopters of AI themselves. So they've been majorly innovating too. John Davies of Bloomberg Intelligence is a great note. Thanks for bringing it to us. Meanwhile, coming up, we've got to talk about crypto increasingly under pressure. We'll break down what's behind these moves next. This is Bloomberg Tech.

24:35Welcome back to Bloomberg Tech. In the last 30 minutes or so, actually, markets have come off session lows. And Asdaq 100 is down 0.9%, had been down about 1.8 % and trading at its lowest level since November. but we'll keep an eye out on the Bloomberg terminal. I'm not really sure what the news flow is. Maybe this is just a kind of market sentiment thing that's going on. Earnings, though, of course, are a big factor in it. We talked about Alphabet, which itself is on track for its worst day since May. After the bell, we get Amazon. And Amazon's down 4%, right? You don't usually see a name that's going to report earnings after the bell decline with that conviction.

25:12Usually you're treading water. But because Alphabet, the parent of Google, posted such a monster capital expenditures forecast for this year,$185 billion, maybe there's some read through there, Karen. Maybe the market's like, oh, wow, what's Amazon going to say? Like, what do we think is coming here? And of course, we're bracing. Yeah, we're bracing. Meanwhile, well, if you were bracing for crypto to be falling further, you got that delivered. We're off by 6 % today. We're below the important$70 ,000 level. and that negative momentum is just accelerating across cryptocurrencies writ large. Look, it's driven maybe in part by vanishing marginal demand amid this week's volatility in other areas, tech equities, precious metals.