Apple Settlement Validates Qualcomm's IP: Srinivasan

dropped after a settlement came into place. Apple paid some undisclosed amount to Qualcom. Qualcom shares absolutely surging here to explain the whole situation to us, it's a non screen of Austin. He's senior semi conductor and hardware analyst for Bloomberg Intelligence. So now let's just set this up with

what was at the heart of this legal dispute. So, uh, if you step back and look at the technologies that Qualcom has invented in Paul pularized commercialized over the last decade plus, this is basically the engine of the phone that allows it to communicate very effectively over cellular networks. They invented this technology, the commercialize this technology both on the device side as well as the infrastructure side. They monetize it predominantly through a chip in the device and

through hands at royalties. They believe that they have the best chip in the business, but that their technologies are encompassed in more than just the chip. So how do they monetize that? They say to every handset maker, while you're using my technology, whether you use my chip or not, so you've got to pay me a piece of that action. So for every smartphone sold in the world, they get a piece of that pie. And in addition to that, if the smartphone so happens to use their cellular chip,

they monetize that as well. So enter several handset makers over the past decade have sued Qualcom to try and reduce the rate, to make sure to minimize the the sort of the expanding nature of their IP technology so that they can pay the least amount possible to Qualcomm. Right. Apple has had a problem with that and expanded it to a philosophical problem, saying, well, guess what, I'm not going to use your chips anymore. I'm going to go to Intel, and I do not believe your intellectual property

is that valuable. I'm not going to pay you for your intellectual property. So since late seventeen, they stopped or reduced their dependence on Qualcom chips and stopped paying the UM royalties for their intellectual property. UM. So this settlement says many many things. Number one, that Qualcom's intellectual property is valid and that it is applicable to more than just the chip and the and the most important handset

maker has now said that. Number Two, it clearly controls the calendar for five G development, puts it back in Apple's control, doesn't sort of make them depend on a second tier providers such as Intel which is lagging in cellular development, and gives them back control so they can launch the five G iPhone when they're ready. So it's interesting. So I get you know, Qualcom start. This is great for Qualcom that stocks up thirty five including today over

the past to todays. Just amazing. I'm actually a little surprised that Apple hasn't risen more on this news, maybe by just simply saying now Apple has a clearer path to develop their I you know, their five G iPhone. What's going on the Apple side of so, So that's a great point, right, ones is the handset business is becoming rather blase. Right, so the question is are you now willing to pay a thousand dollars phone phone? The

Qualcom impact of that might be dominimus. So, but now are you going to go from two hundred and seventeen million units that you shipped in Fisco eighteen to fifty to just because there's a new five G technology? Um and the likelihood of that is low. The hands at market is slowing, so and pose Bread is more buttered on the services side where it's trying to expand its revenue footprint. Right. Uh, Intel, Intel is a big surprise

to me. So Intel would be a loser on the face of it, right because Apple had been turning to Intel for this wireless capacity, the cellular connectivity and hardware. Now they're going to go back to Qualcom. And you would think that would be a negative for Intel, right, But no, the shares are up by more than three percent.

What gives Yeah? So yeah, Sammy's Sammy's working double Derivative's. Look, this has been a bad business for Intel, right, So the fact that they wanted to get into this business, UM, that they want to expand their silicon footprint from more than just processors to memory, to connectivity to other technologies and other devices. That's been Intel soly girl, it's not

been good at that, right. They've been good at microprocesses across PCs, across servers, and they're slowly expanding their footprint of the data centers in UM, in storage and in networking, but when it comes to low power devices, consumer devices UM, on the connectivity side, on the processing side, their presence is diminimous and their product portfolio is to be quite

honest week right. So, and this Apple was their only major customer, if not only their only customer, and they were barely breaking them in in this business applying to Apple. So the fact that they've gotten out of this business allows them to improve their profits and redirect. We wrote that the re engineering was imminent, we just didn't think it was two hours imminent. Uh so, um, and they've

shut down the business. They're going to keep their infrastructure side of their their development, but they're losing their punting on the handset side, which I think is a very very smart move. Lisa We are so lucky we have Entrene of us in here, because you know this, all the stuff that's on tech is just that. The chips, the phones, the all the litigation is just extraordinary and

it's huge business. And honestly, I love this idea that Intel lost and yet they want because their shareholders were like, you, guys, why were you in that business to begin with? It was a money loser second time around? Yeah, exactly. On a Shrine Boston, Senior Semiconductor and Harder annalyst for Bloomberg Intelligence. Well Spring is here, which means it is home buying season.

Taking an update on the residential real estate market. Return to Doug Duncan, Senior Vice president chief economist for Fannie May, based in Washington, d C. But joining us live here in our Bloomberg Interactive Broker studio. Doug welcome. So again, interest rates are down. Does that mean that it is a hot real estate market? Good morning? Not hot. In fact, we think in our theme for this year, we say the economy is slowing, the FED slowed, and housing plateaued.

So what that means is we think two thousand nineteen total sales will look very much like two thousand eighteen total sales. So the peak this cycle will have been two thousand seventeen. But we're getting a little comeback because rates have come back down, so it's going to be stronger later in the year than it's been at the beginning of the year. So the peak will be two thousand seventeen. So can you fast forward for us? What

will the trough look like? Well, one of the salvations of supply being constrained at the entry level is, let's suppose we go into a recession. We're building two thousand less units than we should be today. So if on the side on the starter side, that's right, and boomers are not moving, So the existing home supply adjusted for population is that thirty year lows. That's your supply problem.

In a recession, rates are gonna come down. House prices are going to slow if unemployment doesn't go beyond seven seven and a half percent in a mile, just as housing is the cushion for that and comes out the other side looking good. So, duncan you said that the builders aren't building as many starter homes maybe as the market demands. Is that because millennials aren't buying homes and

are renting longer there's living in their parents basements. Well, there's still a lot of them living in their parents basement. That's housing to come. But for the last three years they've been the driver of the demand curve. The problem is their entry level borrowers. And since the boomers are not moving, those existing homes aren't available on the supply, and builders are having a hard time building profitably at the entry level because of the adjustments regulatorially in the

in the market. So builders have not had a hard time building for the upper ends of the market. And so what's the trough going to look like? Uh? For the middle to upper segment. That's that's a great question we would expect already we're seeing the upper end slow all across the country. And we tend to look at the market by dividing each market into thirds. If no matter what market you look at, the top third is either flat or falling, the middle third is increasing but

not rapidly. What are we talking about in terms of price points for these Okay, let's talk about Atlanta for example. In the in the bottom third, you're probably talking to fifty and below middle third. Maybe I'm guessing I don't have the numbers in front of me, uh to fifty to five fifty or six hundred, something like that. And then above that top piece only appreciated about four percent last year, the middle piece about six and a half,

the bottom twelve percent. That's the same story all across the country. How about certain certain regions. I remember coming, you know, going into the financial crisis when the housing bubble burst. Boy, there were some markets that were just ugly, whether it's you know, Phoenix or Vegas or the sound started and think things like that. Do we have any regional pockets of bubbles that you're seeing out there in the marketplace. Well, it's difficult to call something a bubble

when you have strong demand and no supply. That was the opposite for the crisis. We had overbuilding. There were speculators were flipping houses. There wasn't the sustainable demand are not there's in some markets there are investors who are a piece of that market, but it's over sold in terms of the share of those investors. Although there has been there have been pockets of overbuilding. No there, Yeah, we would we would agree that, um that the markets

are saturated in a few places, but not overbuilt. Probably Midwest where you're not seeing as strong a growth on the on the employment side as you're seeing some of the coastal spaces. Just to give you an example how you you need to differentiate between markets. I was here about a month ago and UH spoke with a young lady. I was sitting having a bite to eat. She sat down. I asked, are you in town for business? She said yes. I said where from? She said San Jose. I said, okay,

I'm in housing. I want to hear about San Jose. So I said, do my I'll be get real personal. I said, can I ask how much money you make? She said, wow, I'm impressed. She said, said I make two and fifty I said, are you married? She said no, but I'm engaged. I said, how much does your fancy makes the strategy work? I'm an economist. People expect this kind of stuff to you can make that excuse. Go up to someone house. Do you make I'm an economist? Go on, So he also makes two and fifty thousand.

They work for salesforce. That's five In San Jose. A starter home is one and a quarter to one and a half million. The rule of thumb and housing is you can afford house three times your annual income. That hundred and fifty million and a half house is three times their annual income in San Jose. That makes sense from a supply demand perspective. That would not make sense in Indianapolis. So that's why we look at prices in a hundred and ten different markets, because it's a diverse country.

Doug Duncan one of the bravest men I've ever met in my entire life. We could go up to a woman that he just sees sitting there having her lunch and say, how much money do you make? Are you married? Do you plan to buy a home? How's your how's your how's your medical history? Don Duncan, chief economist at Fannie May, joining us here in our bluebrig interactive at

Broker's Studios. Netflix shares are little changed after reporting earnings after the bell yesterday, and I gotta say, Paul, I am left wondering was this a good earnings report or a bad earnings report? To answer that question, we have to note movie he has CFR, a researches media and entertainment analysts joining us by phone. So give us a sense is your take on this? Was it good? Was this good or bad? For Netflix. Well, I said, the the Q one numbers are actually better than expected, both

on the revenue growth and the EPs headline number. Uh. The one thing that we were taken aback, as was most investors, is actually the Q two guidance, which came in latter than expected about five million subscribers. Um. But I would point out that Q two is the seasonally slow quarter, and um the end of the year, we still expecting Netflix subscriber addition to h to be a record number. So Ton, clearly the big issue for Netflix, you know, has been competition and the rising level of competition.

And and as I know you well know, Disney unveiled its streaming plus, the Disney Plus streaming service last week. What is your view of the competitive landscape for Netflix given the uh, you know, entrance of Disney and some of the other big media players. Thanks for the question, Paul, So I mean, I think this year probably will be the most um kind of you know what I'd say,

intensely competitive year. Yet for the streaming landscape, you know, just a large part of what it is due to the on veiling of the details of the of the Disney Plus offering. What's pretty clear is that with Apple and water Media and Comcast also rating their own offerings. We do expect that um, there is going to be UM you know, you know, it's kind of a ratcheted level of competition, also considering Disney's um aggressive pricing for

its product at six UM. But I think, UM, what warries is is a little bit uh the likelihood of price competition as the space gets more and more crowded. UM. On the positive note, we think we're still in the relatively early innings, so there should be several uh potential winners. Let's go over the good points and the bad points point by points. So's some of the good points. They did post improving margins and they are spending a little

bit less on content. Can you put those particular aspects into perspective for us as far as how important those positive attributes of the herding statement were? Right? So they came in at ten point percent operating margins, which was, you know, nevertheless above expectations. They have real firm their outlook for about thirteen percent operating margins this year, which

would be three hundred business points expansion. But what's happening is that you know, this year they should actually ratchet up their content spending, the dialing back a little bit on the marketing side, but we do expect that, um, you know, the margin expection is going to be driven by UH you know, subscriber growth, a large part of

which is coming from international markets. So as long as they can continue to grow their top line over and above their content and marketing expenses, that's what's gonna drive the underlying margin expansion projected for this year. Now, in the cash basis, I think we know that they're going to be another is burned north of three point five billion this year, which over the next few years should

improve successively. We're looking for about three year inflection point when they should be self funding to be able to generate positive free cash flow, at which point I think Street is going to take a much more traditional approach to evaluation. Yeah so too. I'm glad you you brought up the negative free cash flow of UH. I guess more than three point five billion this year. And I guess if you look on a Bloomberg terminal, the streets kind of looking for a free casual positive maybe by

twenty two something like that. But in a rising competitive world, one could argue, I guess a bear case would be whatever you guys are penciling in for programming investments. Netflix has got to spend more because look, who's coming. How do you view that. That's a great point, Paul, and and there's really no way out of you know, spending a lot more. In a case of Netflix, I think they've made the point that, you know, they've got to ramp up their original slate even more, not just on

the television series but also on the feature side. And that's why you see them, you know, kind of getting ready for UM you know, Disney and others pulling off their content as more and more of these UM providers kind of launched their own offerings. But um, you know, I do believe that there's a tremendous appetite out there, uh for quality content, and that's why you see a lot of these companies rotchetting up, you know, the levels

of their spending. An in the kids of Netflix, they've been able to pretty much justify that their spending the context of growth in viewing hours also a retire investment. We're speaking with two NOTEMBI cfr A researchers, media and entertainment analysts to not I don't know how many people you know who share Netflix accounts, But I know a lot of people one Netflix accounts you run with. I

run with a pretty road group. I mean, honestly, I just I hear about it all the time from people who are not in my very very assiduous group of people friends into their address or have they addressed this at all, the fact that one subscription supplies maybe fifteen

people in some cases with Netflix content. Yeah, I mean, you know, I think they've come to live with the fact that passwords sharing is is somehow inevitable, and um, you know, I think what they've done it's kind of to somewhat kind of building some price uh increase in the model UM partly to mitigate some of that. I

think we just saw that this quarter. UM. But to the extent that um, you know, passwords sharing, I don't think it's frankly an overwriting concern for them at this point, because, UM, when you look at the subscriber trends and and UM and the revenue growth that they're just still north of and remember, UM, you know, we're talking about UM rising

operating leverage. So all indicators point towards that this isn't an overwriting concern, So so Tune, I know you also cover the Walt Disney Company and have a strong by on that stock. What is your take on Disney Plus. Do you think that's a product that can really compete against Netflix and some of the other players in the market. I do believe Disney Plus is going to give Netflix a very good run for its money. Um. We we're kind of watching the presentation like everyone else, and Kima

were quite impressed. I think the company had accomplished a mission which is pretty much to uh position, you know, kind of convey uh you know, Disney Plus. That's a very formidable platform, and the pricing was certainly aggressive. So I do believe that, Um, you know, as we kind of look out in terms of the ramp up of the slate in Disney Plus, UM, I think you have another viable and potentially groundbreaking, um you know, a player here. We've never seen a major studio like Disney decided to

go that route. So this is something that it's going to be pretty closely watched. And but having said that, I think, as I alluded to earlier, it's stially growing pie. I don't see that being a major near term concern for Netflix. Red Hitch is also alluded to on the call, Great Tuna Mobile, thank you so much for your thoughts on Netflix and Disney and your whole streaming business. Tuna is a media and entertainment analysts for c f R, a research based in New York City, joining us on

the phone. Uh, it's interesting you take a look at those Netflix numbers and again the stock is kind of unchanged. Today's investors try to balance um kind of some of the subscriber growth that came in a little bit lighter than expected for the second quarter, but really try to think about where the streaming business is going long term as it gets more crowded. It's not just Netflix now, we've got some of the big Hollywood studios coming into the business. Well, it looks like the next hot tech

I p O is about to hit the market. Pinterest is going to be priced after the close tonight. It's being reported in The Walsh Journal is also reporting that the company is likely to price it shares above the proposed range of fifteen the seventeen dollars per share. To get the latest on this new tech I p O, we turned to the tender Warral. He is a senior analysts covering internet and consumer products companies for Bloomberg Intelligence. He's joining us from the Bloomberg nine sixties studio in

San Francisco. Age Tender, Thanks for joining us. So you know, we've got Facebook, We've got Snap, we've got Twitter. Where does Pinterest fit into the scheme here of social media companies? Yeah, Interestingly, they're not pitching themselves as the next Facebook or or the next big social media platform. They're sort of pivoting to,

you know, their strengths, which is a good thing. So you know, the way Pinterest is really positioned, Paul here is it is a product discovery platform for the undecided buyer. So if you look at the users off the platforms, more than seventy of them actually have some sort of purchase interests and purchase intent. And if you look at the searches that they doing, most of these searches are unbranded, so they don't know what they're what they want to buy,

what brand they want to go after. So when you sort of marry the demand that we are seeing in e commerce advertising, in direct consumer brands trying to get their products in front of consumers, this audience really jells well with that So if you look at the average revenue per user right now, you know it's about three dollars,

Twitters at eight dollars, Facebook's at twenty four. The international revenue is minimal, So there's a lot of opportunities for this company if they can execute on them, uh for revenue growth. So use a growth will slow in the US because it's it's a niche, But as as as if it remains a niche and keeps like focusing on its strength and not be Facebook, not be any other social media platform, then this could be a good revenue

growth story long term. Gendra, I have to wonder. You said that it was a good thing that it's not trying to define itself as a social media company or search engine, and yet I'm not hearing a message as to what they are, you know, And I have to wonder whether that will eventually work against them, because people are inevitably going to compare them against social media giants and search engines because people naturally look for something to

compare them to. The revenue growth aspect of things that would be compared as far as the user growth aspect of things is concerned, I mean, it's best that they don't pitch the user growth story much because it will slow uh and it cannot scale to that level any which ways. But as far as they can show that, look, we can match the profitability of what social media companies do. We can match that, you know, long term double digit revenue growth playing into our segment with what the other

social media companies do. If they if they stick to that, then they would deserve that evaluation longer term. But the next six months are very risky for this company, and there there are three reasons behind that. The number one reason being how they make money right now. So basically you you're seeing that they are strong. Revenue growth in eighteen came with strong growth and spending uh in man marketing, so basically you know they are not. The self served

platform is very nascent. They have to hire people to sort of like sell advertising to fuel large advertisers. Unlike you know what Google and Facebook are doing with the self self platform. Snap is trying to do with the self self platform. So because of that scaling issue, you know, there could be some disappointment in terms of how fast they can grow because then it's a function of how fast they can hire, right, so it'll take a year or so for the self served platform to come up.

The second thing is Google the indexing uh pinterest landing pages. So if you can't be part of Google Search, then it sort of hurts the user growth. So this happened in one Q eighteen they saw some deceleration user growth because of that. The story continues, but because the monetization level of the current customer basis so low, uh even if the user group slows down a bit, it won't

it should not impact revenue growth. And lastly, the last risk for them is if you look at I P O s as as you mentioned, with any most big Internet I he os and and Keenan and IPS for the last decade, we've seen a lot of volatility in the first six months. And that's happening because you know, there's a delta between what the private market things the value of the companies with the public market things about

the value of the companies. And there's also this show me phase if you may that, hey, this is a growth that I'm valuing at and can you really deliver? And because of the Skillington I've talked about, you know, those misses and it's could happen. So because of those those risks need to be kept in mind with interest, right, so you know, one of the things that I think is holding the lift stock back and again lifts about the fifty seven dollars to share right now below it's

seventy two doll i p O prices. That you know, the lack of visibility to profitability is that something that pinterest also has as a risk, And should investors be concerned about a path to profitability? Less concerned because the path to profitability is visible over here, uh and the other two scenarios. It's it's not visible, and it's visible because you know, the end market here is advertising. They are making progress in terms of you know, cutting the law us is and we expect them to be on

adjusted a bit basis profitable this year. On a gap basis, it will take multiple years based on how the stock based compensation expense and other growth stories plays out with international expansion and things like that, but on adjust basis, just a basis, they should be profitable this year. So longer term they will try to line up with other

social media companies in terms of profitability. But at least there's a path too profitable with here that is visible And one more thing that's sort of different about interests in terms of cost is the usage. So if you look at daily users of any other platform, Pinterest has the lowest frequency of use because people are coming there only when they need to, you know, find a new product or service. And because of that, the cloud costs

are lower. Right, So, when when daily users on Snapchat are posting, sharing, using the platform a lot more for for the activities, the cloud costs would be higher for them, But because of the frequency of use and the purpose of using different and and lower uh, the cloud cost would also be lower. So that helps them, um, you know, from profitability to tender or all. Thank you so much

for being with us. General Wall, senior NALYS covering the Internet and consumer products sectors for Bloomberg Intelligence, joining us UH to talk about that Pinterest ip O. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter at Lisa A. Bram wits one. Before the podcast, you can

always catch us worldwide. I'm Bloomberg Radio