Transcripts For BLOOMBERG Bloomberg Technology 20170222

The cluster of planets is less than 40 up 40 lightyears away. Parenti. This is bloomberg. Cory im cory johnson, and this is bloomberg technology. Tesla pops the hood, reporting fourthquarter loss amidst falling vehicle sales. Plus, a company beating intel at its own Semi Conductor game. Our exclusive interview with the ceo. The latest stop in the snap ipo roadshow. First to our lead. Tesla shares climbing afterhours as the company reassures investors its hyped products remain on schedule. Elon musk says the production of the solar roof is on track for the first half of 2017. They are sticking to their guns, planning to deliver 50,000 vehicles before then. How will the acquisition of solarcity impact this company . Joining us, chief Investment Officer of tigris financial partners, and our guest host, michael wolff. Let me start with you. The first thing i looked at after the quarter, i was surprised to see that cash was in a reasonably strong position, but the cash flow burn of nearly 1 billion is the worst tesla has ever suffered. I really dont think it is so much of a concern, because they are in the Capital Investment mode, because they are still ramping up the production of the model three, are going to be building more giga factories, and ramping up the production of the solar single. If you believe in the story, you want to see them invest capital into the country. Not goodht, but im at math, but if theyve got 3 billion and they earned 1. 25 billion, this is a big story. They are probably going to go back to the Capital Markets again sometime between the spring and summer, as they have years, becauseo manufacturing cars is capitalintensive, and this is a company that is ramping up the production of the next model, the model three. They are still building up their dealer network, even though that is not all that capitalintensive, and they are ramping up the production of the new solar shingles. Talk about what you have seen in this quarter for tesla. Questions are going to be how integrated is the solarcity, and what are the benefits from the integration . Are they going to be able to sell more of the shingles . Thesecond thing is, some of other services they are talking about, whether it is right sharing or autopilot, how quickly are those going to roll out . That is part of what people are looking for, not just the equipment of moving the metal, but also other services that will be internetbased and technologybased. What is the biggest risk in the stock . You look at the price in the last year, it is not as exciting as the last six months, or even three months. What do you think the preeminent risk is for this business . That there would be a softness in sales for the model three and an overall softness in all the vehicles. The risk is the public stops theng teslas, but so far demand has been extremely strong and the delivery mounts have been hampered production and not by demand. Cory let me push back on that. In the last seven quarters, four of them have seen substantial decline in revenue from vehicles sold. It seems the model s is still selling, but they sold fewer in the Fourth Quarter than they did in the third, for example. I think production and demand is still strong, and there is still anticipation for the model 3. The model 3 will be a game checker but a game changer. 3snumber of model projected will exceed the sales of the s and x together. The question is whether they can sell enough model 3s to be profitable. The question is whether or not they can enter into the mass market, especially now that the deal makers in the longer term are going to be in this business big time also. Cory they have lost money on every sale. If they have the same net margins for the model 3 and for the model s, i suggest that they make more than one car. Making a lot of cars will be bad news, not good news. That math is not correct. They do not lose money on every car. If you look at it, its not like the cars sell for 80,000 and cost 84,000 to make. There are other costs, rmg, as dna. G a. D, s ford and gm are trying to get to 10 . The gross margin on retailers like autonation is also about 10 . Tesla is actually exceeding that because they are both the manufacturer and the retailer. They have a growth margin on the sale of the car of 22 . The losses are coming from the Capital Investment that they are investing in the buildout of each model line and now the model 3, and the buildout of the solarcity shingles. The as you mentioned, model is very different in terms of who owns the dealers, and the gross margin is affected eye that, but the operating margins, whether it is rmb, whether it is srketing costs, whether it is a we will take these accounting discussions to another day. Michael, when you look at this company, are you inspired by what the company makes, or are you discouraged by their Free Cash Flow losses and operating profit losses . The big concerned that anybody should have around this company is whether or not they will be able to longterm charge a premium for their vehicles, and whether or not, as they spin production, they are going to have enough margin in each vehicle when they make money to make money, once they take account their Capital Investments as well as their selling costs. There is so much to chew on this thing. As i am saying, if they are losing money on the actual sale of the car, where the cost of goods to produce the car was greater than the sale price, that would be bad, but i think it is positive that they are investing in r d, marketing, the ,actory, and the giga factory because the biggest constraint of the electric car is battery technology, and they have invested in a number of technologies such as battery technology, aluminum welding technology. If you look at this wrapup, it is not unusual for a company to invest money, especially a capitalintensive business like auto manufacturing, and not make money for a number of years, but the demand there is still strong for the car. I think there is not going to be competition for other between other electric cars. I think the competition will be between electric cars and gas cars. Tesla is not really an electric car. It is a highperformance luxury car that happens to have electric drivetrain. I think people looking at the performance and luxury and Technology Features is whats driving the purchase. Stay with us, because we got lots more to cover. Michael, glad you are here. Hp reported sales past the estimates, suggesting analysts were wrong again. Demand for printers and computers helped drive the company a little bit. Trading revenues of just 3 on a yearbyyear basis. Profit for the Current Quarter again in line with analyst estimates. Coming up, an exclusive interview with the arm holding ceo, a company beating intel in the Semi Conductor market. Cory in 2011, steve jobs presented a plan for a new ringshaped campus, the last plan before he died. The giant facility is 2. 9 million square feet. Look at that thing. The opening date had been set for 2015, but apple faced that it overruns and delays. It costs about 5 billion. Thats just an estimate, apple has never given us a dollar amount. There will be a 1000 seat auditorium in the building which will be named after steve jobs himself. Apple is developing their own ships for mac laptops, no longer intel, but arm holdings. The Company License their chip architecture to many companies, apple and samsung among them. Now is the ceot of arm holdings, simon segars. Thanks for coming by. Is it different under softbank . in many ways, it is not different at all. We are developing technology for all sorts of devices, from smartphones to washing machines. In a lot of ways, it is business as usual. Cory you said in some ways, what about the other ways, what is different . Of a public part company, we are able to think in a much longer term about investments that we make in new, emerging trends for technology, how they are being used, and spend more time thinking about longterm strategy than we did before. It is business as usual in terms of execution, but in parallel with that, we are thinking decades out in terms of how people will use technology and what that will mean. Cory softbank has announced the vision fund, which got a lot of attention from president trump. I wonder what that means for arm. Does arm and up working with others; to firms . Conductor firms . There are a whole number of silos they have, and typically those investments are things that have grown the business as a whole. My expectation is that money will be put to work in a fund that will return value for its investors in it. There will be technology around the kinds of things we do. Cory you guys have really captured the tiger by the tail when it comes to smartphones. That business has really grown. What do you see happening to the smartphone business right now . A volumeom perspective, growth rates have tailed off, but there is still a lot of innovation going on with handsets. Computer performance is going up year after year. We are a few years away from technology. G 5g cory what is your expectation of timing there . 2021. Probably 2020 or i think that will ignite new ways in which people are using zones, new applications, and that will keep the whole industry innovative. , do as the business grows you expect to see intel, for example, made so much of their business around the internet of things, and i wonder if you see that is a necessary thing to start the cycle again. We are seeing declining tablet sales, longer periods of time between the refresh of the smartphone. I wonder if there is a new driver on the horizon, from your perspective. When i talk to the ceos of Semi Conductor companies we work with, many are looking at the growth of the Semi Conductor content in cars. At any moment in time, there are industries maturing, other things taking off. Right now, those sectors stand out as the ones driving innovation and potential for new revenue growth. Moving on, talk about the relationship with apple and what it is like to work with a company like that. Successful any company, your licensees are very demanding on the technology, want you to keep executing, want to keep investing in their roadmap. We have many customers like that. Cory when you look at the plans for intel and i keep mentioning them because i am so focused on the company but ,hen i look at their plans going down to unimaginably thin wafer sizes and so on, do you imagine that is your competition . Simon intel is a significant customer of ours, and we are working with them on employing some of that advanced manufacturing technology. We have been working with them for some time on that. The overall Semi Conductor industry is pushing forward on various advanced geometries. That will enable more performance, Better Energy efficiency so we can have more powerful devices. Thosewhen we look at drivers and things, the other company is looms alarm. It is amazing that you have grown to where you are. Qualcomm is such a big company, but it seems to me that although for so many years they have taught off antitrust concerns. They are facing antitrust challenges across all geographies. Do you think qualcomm has been a fair player when it comes to the way they have licensed their technology and worked with their customers . Cann i dont think i comment on whether they have done that fairly or not. I know they have invested a lot in technology r d, invested a lot to bring these Wireless Technologies to the market. You cant fault them for the amount of r d spending. Cory simon segars, thank you very much. Coming up, Net Neutrality rollbacks continue to attract attention. What could it mean for tech titans . Cory verizon is thinking about 5g. The carrier will Start Testing 5g service in 11 markets in the first half of this year. It will help verizon offer interest these competitive with cable tv. Qualcomm, intel, and arm are all looking into that business, expected to invest 20 billion in the business. The new republican majority in the u. S. Could make big changes in Net Neutrality laws. The rules block Internet Service providers from slowing traffic. The Net Neutrality rule was opposed by the fccs new i. Airman, ajit pa the implications are massive. Ichael wolff is still with us michael, every time we report on this and try to learn more, i get inundated with people on twitter and so on saying, you guys dont know anything about this. It is confusing, i think, what this means. Give me your metaphor for idiots like me. Michael i think the way to think about this, typically when you have deregulation, it leads to innovation. The irony here is that deregulation could squelch innovation. Heres why. Isps could throttle back on traffic or charge some of the companies that are coming onto the web, so you would see new Companies Like there is a dr, werealled next some of that he sports providers, or Companies Like snap. They would not have made it in an environment where they had to pay to be carried on the pipes of the isps. Netflix, google, others can afford to pay for their position. This does put a challenge on innovation in the technology business. The rich call for regulations, the people call for protections, right . Different sides of the same coin. When you look at these, are these rules . You might as well stick with the highway metaphor, the width of. He road does help innovation it sounds like you are saying the same thing is true in terms pipes. Access to the but doesnt that put a burden there for the provider of the pipes, of the isps, of the verizons and at ts of the world . Cory have thethe pipes ability to sell other services, they have been able to increase their pricing. They have been able to provide more bandwidth. The challenge is going to be, can they keep up with expanding bandwidth, and can they do so in a way that maintains a free and open internet. The Largest Technology companies who dont have anything to worry about are also for that neutrality. They are against any changes, because they want to see innovation. Thing thene legislation will say, which is you can charge everybody. The other side of it is what the isps are going to do. I believe the isps are not traffic try to throttle or charge companies, because they have a vested interest, and they are also having a lot of innovation. And dont want to just bet on the most Important Companies of the internet today. They want to bet on the new wave of companies. Cory is this conversation academic because we will have republican control over the fcc, whether we like it or not . Michael i dont think it is academic, because it does not come down to what is mission will say, but what the Smallest Companies will be able to do. We are Just Moments Away from the start of teslas latest earnings call. What is elon musk going to say . We will tell you in a little bit. Also, we have a command on the bloomberg terminal called tv. And alsoatch us live go back and see previous interviews. You can even become part of the conversation by sending us instant messages during the show. Distract me if youve got a bloomberg terminal. Police have started arresting protesters around the Dakota Access pipeline are not for not leaving by a government deadline, after the last remnants of the camp and up in flames as campers set fire to makeshift wooden housing. France, Marine Le Pen has been charged with handling misappropriated funds. The arrest came after police interrogated needs of the french president ial candidate. Le pen called the case a political plot and said the Justice System should not alter the election rate. Meanwhile, Emmanuel Macron agreed to an alliance with his rival. Macron says he accepted an offer for a deal to avoid splitting the moderate vote in aprils firstround ballot. Malaysian police say the woman suspected of killing the halfbrother of kim jongun were trained to code their hands with toxic chemicals and then wipe. Hem on his face north Koreas Embassy has ridiculed the claims and says the women are innocent. Londons metropolitan police has appointed its first female commissioner. She will be the first woman to lead Scotland Yard and its 188year history. The commission or the security operation for the 2012 london olympics the commissioner led the security operation for the 2012 london olympics. Im alisa parenti, and this is bloomberg. It is just after 5 30 p. M. Wednesday in new york. I am joined by Haslinda Amin with a look at the markets. Good morning to you. Haslinda good morning, alisa. The dow closing at a record high. Air newlso tracking zealand after disappointing results. Profit dropped 24 , but its shares among the biggest gainers this morning, partially because concerned travel companies to government agencies. Minerals with results today. In the rest of asia, the r. B. I. Wont release minutes from will release minutes from its latest Monetary Policy later today. It surprised the markets when it kept rates steady. And south korea, a rate decision. Im Haslinda Amin in singapore. Bloomberg technology is next. This is bloomberg technology. Tesla shares trading up in afterhours. Ceo elon musk is promising that the muchhyped massmarket model 3 is on track not just for initial production in july, but for volume production in september, q3. Thatis the first report focuses on the solarcity acquisition. Michael wolff is still with us, mark joins us. , what is thety impact that these companies, both cash burners, are together . Market it seems like they are focused on trying to get solarcity cash flow positive. Cory solarcity said that before, and the burn got worse. What they are saying now is solarcity contributed 77 million to teslas bottom line for the quarter. Cory in terms of operating profit . Know, just in cash. I think what they want to do is get the cost down significantly, because they see a lot of headwinds in the solar installation business. Utilities are pushing back in terms of offering incentives. The texans and it is going to roll off in a couple years the tax incentive is going to roll off in a couple years. Solarcity is preparing for that loss. Have michael, when you seen every company left, right, and center face plant, it is surprising to see an acquisition, especially when the ceo of the acquiring company is the largest shareholder of the acquired company. Michael it was a shotgun marriage in a lot of ways. The fundamental question about solarcity is one of price versus performance. Can the solarcity solar they performdo better than other solar panels, and can the same type of single be produced somewhere else, like china . We have already seen china take the lead on producing inexpensive solar panels. From my perspective, the existential question is whether or not this Company Continues to have a superior product that people will pay for. Cory when someone is willing to sell you a dollar for . 50, it is good to be the buyer, not always the seller. Do you have solar at your home back east . Michael i dont. On my house inar the bay area because it was so cheap and there were fantastic subsidies available. To that point, mark, the subsidies may not be available under the trump administration. That is unclear. Some think the subsidies of the federal level will stay there, but at the state level youre seeing a lot of pushback and utilities offering subsidies to folks who want rooftop solar on their homes. That, canthat top th tesla change its Business Model . Focused onthere are going from a model where they leased Solar Systems to where they sell the systems for cash, and that gives them a lot more revenue upfront. They talked a bit about that in their Earnings Release this afternoon, that they are transitioning to that sort of model. Percentagewise the number of Solar Systems they sold for cash. Cory i should point out some breaking news on tesla, the cfo of tesla appear and we is leaving. This is a critical time for the company. Tesla. On wheeler leaving the former cfo will come back, we dont know how long, but that is a big change. Michael, when a cfo leaves a company, it is going from a critical position where it is making 50,000 cars to where it is expected to make 10 times that over the next couple of years. That is a big change. What is your reaction . Michael i dont know the specifics, but a lot of times it means tightening up operating performance and focusing on. Argin usually, that is one of the reasons why people make this change, especially when you are going back to the previous cfo. This is what the earlier conversations were about today, margins. Are these guys going to lose money on every car they sell, or is this going to be a business where they truly are able to charge a premium and or money . Cory obviously they have not made a dime yet, but we wish them luck. Mark, thank you for walking all the way across the newsroom over here to the tv set. Hard work indeed. Also, fitbit. Revenue was down 19 yearoveryear. Shares trading up i dont know what that means, but in afterhours they turned down. Tell me about the quarter, what does it say . Reporter the shares are a little changed because fitbit already dropped the bomb earlier last month when they preannounced they were going to miss earnings, would be cutting 6 of the workforce. Revenue dropped almost 20 . They already had the bar set very low, but they barely met those low expectations and missed on some metrics as well, and their outlook was not pretty. They still seem to command a lot of market share. Michael, when you see a company like this where sales are down, but margins are still very leadingcompetitors are the space, maybe leaving them more runway, i wonder what you make of that when you look at this business with declining revenues that sustainable declining revenues but sustainable margins. Michael guest michael the product is superior because it is simple, and people want to use it because it is simple. Like other companies, they need innovation. When i come out with a new product, they give consumers a signal that it is time to buy. As the more expensive revenues are not as interesting to consumers, i think this company is going to continue to grow and go back to a growth trajectory. , are you sensing that optimism . James park is as optimistic as ever. As michael mentioned, they need to come out with new products. Consumersshowed that are looking for something more sophisticated, and that is why they are focusing on acquisitions of vector smart watch so they can come out with a new product to generate more demand. Another interesting art, james park again emphasized his push for Digital Health strategy. They want to continue to integrate into the health care community. They gave an example of their data being fed into glucose monitors. He definitely wants to get more revenue from those types of partnerships. Cory we cannot be more sophisticated. We got michael wolff, selina wang, pretty sophisticated. Thank you. Square out with earnings after the bell. The Company Topped estimates after the Fourth Quarter. We will be sitting down with squares sarah frier, not our sarah frier, on thursday. Catch it right here. 30 billion in Gaming Acquisitions last year alone. What can we expect in 2017 . Cory the gaming industry is gearing up for next weeks developers conference, a big deal for the business, a big business. 30 billion last year in mergers, acquisitions, and investments, and investors looking for more this time around. Can you explain to me how this business works on the app side . I dont really understand the Business Model. Its my understanding that apps are a crummy Business Model, but your company worked on this game that my kids love, and i wonder, how does that business work . You sell this to whom and for what . Command, we have been looking at shifts at the platform level. The platform level is a shift like facebook did that will drive massive amounts of downloads and app installs. Kabam, the key we unlocked was going around and getting these licenses for ip like we did with marble, and likely will be doing with transformers in the springtime. That is going to be the draw that pulls in app installs. From there, it is all about a good game. Cory in the same way that tetris is not about a license, its got to be a good game. Guest right. It is about building a good game, but it is not just enough. Thats why you have seen a lot of Game Companies fail. They have not had that reason why people would download. At the same time, its a good game that has longevity to it. There are multiple levels within the game that keep people coming back and coming back and coming back. It is about the install and the longevity. Wolverine,love the they love the whole, hulk, and they download the game. But i wonder, back to unit costs, where does the revenue come from, how does repeat revenue happen . Maha that is the key to building a great game. In their case, it is about the virtual goods. In most cases, it is about virtual goods. That is why you see game is by far being the largest revenue driver within the app store for apple. Cory is it also a business where you have 5 of the revenues paying 90 of the revenues . Maha yes. There are few Consumer Media companies that dont generate their business from that top 10 , 20 . We focus on that at kabam. Most companies do that. You will see that in virtual reality. Cory i want to meet the person who is spending 50,000 a year playing the Kim Kardashian game. That person exists somewhere. But to that point, what is the special sauce . If thats all it is, its not very special. Maha it is very special because some of these licenses are extremely valuable. In the marvel case, obviously. Kabam has locked that down across certain ip within marble and transformers. On the other hand, there are fantastic games that have been developed that dont have third party ip and can be incredibly valuable. It is just that right now there is cory candy crushed . Maha exactly. There is a huge concentration within the gaming community, and they have locked that down in the app store. It is difficult to penetrate that now, because games are such. Competitive ad sales market it is highly expensive to buy those installs now. Cory from your role as a venture capitalist, you find these guys, you make investments with them, you help them grow the company. How do you tried to find other investments of this sort . Maha gaming is an incredibly difficult market. The kabam story was one that was not short. It was a story inside a story inside a story inside a p ivot. The relationship with the entrepreneur was important. The level of trust was, frankly, a key part in continuing on with the company until they reached that success point, which they did. It ising generally, difficult from the get go to project a success, which is predict a success, which is why in most cases companies only get venture financed once they have reached a success metric. Unlike the movie business, it is not one that dies off after a weekend of success. It can continue for years, like kabam. Cory do you need an interim business to spray and pray, lots of releases because you dont know which ones will take, or do you have to stick with a couple make sureo really they are good, because they need to be better than the average game . Maha that is what has trained should has changed in the market. The app store has become congested. You need those big franchises, marvel, candy crush. Cory kardashians . Aha whatever they had stayed in the top 10 for years now. It is about building the megahit, not assuming you can build 10 ok hits, because you cant afford anymore. Cory because Development Costs have gotten high . Maha because Development Costs and install costs have gotten high. That is why the leverage of a thirdparty ip can come into play. It can bump you up in terms of app installs, because that marvel property, that transformers property is so exciting for users. Cory great stuff, maha. Always a pleasure. Coming up, snap continues its roadshow, making the case to investors that the stocks are a good bet despite the valuation. Cory teslas earning call is ongoing. Elon musk announcing the surprise that cfo Jason Wheeler is leaving the company. Heres what he says. Would like to announce that our cfo, Jason Wheeler, has decided to leave tesla in april to pursue opportunities in Public Policy. Jason will be replaced by a teslas first cfo who worked for the company for more than seven years before, stepping away in 2015. Cory wheeler is stepping out to pursue Public Policy projects. Snapchat spirit company, snap, in new york, the investment tomorrow. Ontinuing investors asking questions about growth amid the rivalry with facebook and facebooks instagram. Michael wolff knows the Media Business quite well, the former beau member of yahoo and president of mtv networks. Michael, this is a negative gross margin business use Customer Growth is slowing dramatically, and yet they are going at an extraordinarily high valuation compared to the s p 500. It looks like these guys are going out with no profits inside. Michael there are three Big Questions about snap. First of all, are they going to expand their user base beyond millennials, because it is very much a millennial thing right now. Its second of all, how will they defend against their competitors, specifically facebook, cloning or copying some of their features . Third of all, are they going to be able to find revenue that goes beyond advertising on discover . Upbeat about what they could do. Expanding beyond millennials, all these Companies Facebook began with a small core of college students. I think snapchat will be able to dramatically expand beyond those core millennials. Its not just 18yearolds that will use it, but lots of other people. Facebook, instagram, they are copying whatsapp, a lot of the same things, but nobody is going to use those companies filters. They are unique to what you can do on snapchat three at third of all, revenue, they are showing they have revenue what you can do on snapchat. Third of all, revenue, they are showing may have revenue. Jeff lucas is incredibly talented. We worked together at mtv. I have a lot of confidence that this is a business and franchise that will continue to grow. Cory 30 seconds left, michael, but how important is youth advertising with todays youth, if you will, does not attach to a brand the way they did in earlier generations . Michael you still need to reach them. You need to get them to make decisions about everything from what video games they would download to what movies they will say. They may not be as brand focused, but they are focused around what they are going to do, and they are extremely valuable to advertisers because the question is not just what they are worth to you today, but what they are worth to you 1500 days from now when they are going to be making other purchases, like buying a car. There are very few places where you can reach millennials like this, and snapchat is in the unique position to do so. Cory matthew wolf, thank you very much. One last thing, sticking with social media, instagram announcing another update. At photosharing social network lets users put photo and video on a single post. It is a slideshow, or just a bunch of pictures they go in a single post, kind of like stories, a little different from stories. Kind of like snapchat, a little different from snapchat. Check me out on the ground. To check youve got out sarah frier, the square cfo. From our studios in new york city, this is charlie rose. Good evening i am anthony mason, filling in for charlie rose. To theld trumps path white house was energized by a popular message, popularized by getting jobs for lower income families. We now have to take action through a series of initiatives, lowering tax rates and connecting a major Infrastructure Spending plan. Donald trump already pulled the United States back from international trade. Here is