Apple’s Shrinking Profits: Bloomberg West (10/28)

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Oct. 28 (Bloomberg) -- Full episode of "Bloomberg West." Guests: Baidu Co-Founder, Chairman and CEO Robin Li, Piper Jaffray Sr. Research Analyst Gene Munster, Common Sense Media CEO and Founder Jim Steyer, Planet Forward’s Frank Sesno and Bloomberg’s Ari Levy. (Source: Bloomberg)

Live from pier 3 in san francisco, welcome to the late edition of "bloomberg west" where we cover all the global technology and media companies that are reshaping our world.

I'm emily chang.

Our focus is on innovation, technology, and the future of business.

Let's get straight to the rundown.

Apple sells a record number of iphone in the fourth quarter's. why are their profits shrinking?

Twitter officially kicks off its roadshow to meet with thanks and potential investors.

Today if they hit philadelphia.

What tough questions they could face.

An exclusive interview with a baidu founder robin li to talk about the company's journey from start up to the fifth most visited website.

A rare sitdown.

First, to the lead.

Apple post a record september quarter.

Overall revenue $37 billion up four percent year over year.

Profit was a nine percent decline.

The new iphones, the five -- 5s and 5c that help.

They sold re 3.8 million.

-- 33.8 million.

A note of concern is there gross margin actually shrunk in the quarter.

Jon erlichman had been digging through the numbers.

How serious is the gross margin and profit shrinking situation?

It is a concern to investors.

Let's talk about it in more detail before we talk about the bigger picture.

These are once again some pretty big numbers from apple.

The fact this company for example and you highlighted a profit and sales story generated 3.7 billion dollars in revenue.

I was well ahead of what the analysts were looking for.

Office the that comes in part because the number of iphones and ipads that people are buying is just under 70% of the revenue was tied to iphones and ipads, the iphone number easily i had of what wall street was looking for.

The ipad number over 14 million sold.

Tim cook just said on the conference call he expects it to be basically an ipad holiday.

Hopes for the new lineup of products.

All of these sales results and huge titles of cash for the company.

The cash from operation roughly $9.9 billion.

You basically are talking about a company that generated something like 63 billion dollars cash from operations over the course of the fiscal 2013 year.

What about gross margins?

Gross margins for the holiday quarter, what is going on there?

People seem to be getting concerned about the fact the company is estimated gross margin could be as high as 37 .5% when wall street thought it will be higher.

There are three parts.

Pricing devices, new ipads and macbook pros and more competitive prices.

They cut my foreign-exchange like the yen.

Here is the biggie.

Deferred revenue tied to the software part of these devices whether it is ios devices or in the case of the mac.

The reality is and gets into tricky accounting.

Selling a piece of hardware as part of the story.

In apple's case, traditionally what you see in the accounting is you account for the revenue over the life of the product.

A couple of years with the device.

Apple is moving toward that kind of model.

Software subscription model.

Because of that, it is going to take a hit on the profit margin.

That is how they explained on their call.

The stock story started to change after they provided that light.

What about the cash piele?

They talked about how much cash they had given back.

Something that was think about.

A company that is sitting on a cash kyle -- pile of over $100 billion.

F committed a huge amount of cash.

The bulk of its domestic cash to shareholder friendly activity.

The question because -- with comes do they do something overseas cash that it has got?

Carl icon would like to see them take out a loan against that and the question is whether they want to do that.

Thank you.

For more takeaways from the iphone maker fourth-quarter earnings, i want to bring in one of the leading authorities a gene munster who has an overweight rating.

What stood out to you from the call today?

First, it was the reversal.

You talk about the december guy.

A reversal of what would've seen in the past six quarters which is apple lowering expectations.

This can they raise them.

I want to emphasize a point jon made.

He went the gross margin calculations.

If you boil it down, it would be around 38% gross margin.

They did the seven percent.

That is a sequential increase.

-- they did 37%. if you look at the big picture, we have had a long time of difficult.

And now things seem to be getting more on track.

That's a big take away.

What about iphones?

How good are the sales and how good our next medications for the holiday quarter?

If you look at the september quarter and the iphone growth, you have to make adjustments.

They are basically growing at around 70% per unit.

The overall high-end market is growing at five percent.

A are growing faster than the overall market.

There implied guidance they do not get specific categories, it looks like it is somewhere between 13%-15% growth.

The other theme here is an they are expecting to grow faster than what the overall market is in a december.

Ipad might you mentioned, some of cook pots comments -- cook's comments, it is a bit of a wild card.

In terms of the 5s versus 5c, cook made a point of saying it is not a entry into the emerging markets.

What did you make of his explanation?

What is confused analyst at investors in the iphone 5c is not a new phone.

It is the old phone.

It is what tim cook was basically saying that is their entry level to four as -- 4s. there has been talk about production cuts around 5c, it is not that important if you put in the context when it is the iphone 5 and repackaged.

The five -- 5s is doing well.

They have sold out.

It is really hard to get to them.

What we make of it is the 5c is doing what the mid-level product should be doing and the 5s seems to be doing well.

In terms of product category, cook was asked to clarify about the new product categories.

I have the statement he made.

It was earlier this year.

He said we plan to augment services and expand distribution and the potential of exciting, new product categories.

I do not want to be more specific.

I said we have really good stuff, and across all of 2014. some people at the time thought we would see new categories of this fall and web not seen it yet.

What do you make of his answer if or when we are going to see new product categories?

On ivf side, he really they will see new products and we have not.

The changes to the iphone are not new product categories.

Though -- the when piece is a will be the year of the upgrades and 2015 will be the new categories.

He reiterated.

That is not really change what you are getting to is the absence of what needs to happen to make the stock go higher.

Investors, a lot of them why the stock has been in depression does not believe apple can grow.

Ultimately, new product categories are needed to get there.

While it is great with is going on with margins and the demand of the phone and the guidance around december and dolby trends reversing, what is more important in my opinion as what happened in 2014 around the new product categories.

He is reiterating they are coming out, the tv which was talked about forever and separately the watch appears to be the two most logical categories.

Everybody will be watching.

The gene munster, thank you for joining us today.

He helped build a baidu into the if most visitor world site.

How did he do it?

I asked the robin li in my exclusive interview coming up.

? i am emily chang.

This is "bloomberg west." twitter is in philadelphia for the state of its roadshow when they will try to win over investor.

Advertising has been a state of success.

Revenue may not be growing fast enough to keep up with spending.

Twitter's operating costs skyrocketed as they have shunned outside developers.

Forced to depend on his own talent.

Have dumped 170% from last year.

Sales of all grown 105% booked up will in the, a problem for twitter -- 105%. -- willoughby, a problem for twitter -- will it become a problem for twitter?

We do not know very much.

We know it was in philadelphia and the ceo dick costolo and cfo were talking to investors and analysts.

We believe it is the ritz- carlton.

That is about the extent of what we know.

A love the subject matter is on the online roadshow where they talk about -- a lot of the subject matter is on the online roadshow where they talk about making the company profitable.

That is what investors will be talking about.

Let's talk about spending on r&d. how does that compare to other technology companies?

The way to think about it is it is 51% of revenue.

I was unable to find any tech company.

I was not able to find anywhere the numbers were really anywhere near that.

You have some software companies that are building the cloud where maybe in the 30%-40%. linkedin is 25%. when you look at consumer comparable, a split is in the mid teens.

-- facebook is in the mid-teams.

-- teens.

Not a lot of transparency where the r&d is going.

They talk about it very broadly.

It is hard to pinpoint where the money is going.

It is not clear.

Did apple tom of google, and facebook ago from.

In time for they spend more on -- periods of time where they spend more on r&d? i was not able to find anything they got is near that the marker.

We are still tough but the mid- 20's. this has to be a period of time, it cannot last.

You cannot spend more and operating costs then you are generating revenue because you're never going to be profitable.

You have to show investors the potential for profit.

As i've been saying, they are at a point where they need to basically -- any competitor who wants to get into the stage and compete with twitter on their main features have to look at their spending as saying we cannot keep up with the level of their investment.

There's no point in trying.

That is where you are right now.

Certainly a question we will be hearing.

Ari levy.

The company's success with younger users could be an advantage.

75% of children a have access to a mobile device at home.

That's according to a new study done by common sense media.

It focuses on the way children consumer digital media.

What impact if the technology having on kids quest mark i want to bring in the ceo.

You know i have a little baby.

How to best introduce him to digital media.

You are seeing a dramatic shift in the home.

What stands out to you?

A huge change.

This like the digital generation.

It is clear now.

We did a study two years ago about kids eight and under.

There was a fivefold increase in the number of families with children eight and under who have a mobile device at home that they let their kids use.

This across all income lines.

Right now they are building strollers and highchairs and instead of having cupholders have a ipad holders.

A big deal.

This is an impact on your child and all kids out there.

It affects their brain development and the way they learn.

What is interesting is you found the use of mobile devices have trouble.

Total screen time decreased.

That was sort of surprising.

It is surprised.

The big loser is television.

What we are really seeing is that television is now for the first time demonstrably going down in terms of the youngest kids.

All those viewers down there they used to watch barney videos or sesame street now we see disney announced today they're going to debut some of their earlier disney junior shows on the ipad rather than tv.

This a fundamental shift in the way that kids consume and interact with the media.

I think is a fundamental shift in childhood.

Is a good or bad?

Screen time is such a big term.

A coming watching cartoons or educational apps will stop -- apps.

It is not just good or bad, it is both.

You as a parent and we as a society react.

On the one hand, pediatrics came out with the new guidelines.

They stress all of the issues, the downside of too much screen time.

Everything from brain development to addiction to obesity.

These are very important public health concerns.

The doctor spoke out today as set you need to be aware as parents.

We are going to include this and well school -- well children checkup.

And they said no screen time for children under two.

I will say use wisely.

There's amazing new stuff.

These forms of media you can get on an ipad or phone can be educational.

It is all about making good choices.

That is why we see a bit common sense.

-- why do -- why we created common sense.

You have four kids.

I delayed.

One of the biggest messages and just because your kids ask for a cell phone at 88 does not mean you should give them a cell phone.

We do not let them have a cell phone into they were in high school.

You have to delay it.

You have to set clear limits.

The second thing is now that there's a lot of good content for ipad and other tablets, turn screen time into learning time.

Choose wisely.

There is really good stuff out there.

Remember, you are in control.

Look at this.

It is changing the nature childhood.

Was interesting stuff.

Always great to have you here.

Thank you so much.

We'll be right back.

? welcome back.

Errors are time-consuming.

There are a whole host of companies using technology.

-- errands are time-consuming.

It is not just high-tech companies cashing in.

We introduce you to taskrabbit, a marketplace for odd jobs.

Quick helmet on.

Just another day at the office.

In an average day, i might to do between six and 12 deliveries.

And he is not your average a bike messenger.

He is a professional errand runner.

He does chores for people using a website called taskrabbit.

It works like an online marketplace.

Every thing from furniture assembly to sushi delivery.

Sizes range from a few dollars up to hundreds.

Taskrabbit takes a cut.

When i started the company back in 2008, things like collaborative consumption thomas it did not exist yet.

Technology has ushered in a sharing.

Startups like relay ride where you rent out to your car.

Air b&b lets you rent out a room.

How big do you think a can get?

Where connecting people to share.

What worker means to them.

It's a different take on the labor market.

Taskrabbit is operating and 15 u.s. cities and plan to expand abroad.

It launched a new program targeting businesses that need a temporary workers.

They can hire on a temporary ongoing basis.

Taskrabbit can come in a by the week or the month.

Only about 10% of taskrabbit to enough to make money.

The rest are part timers.

That in traffic, justin has been pedaling hard.

In a typical day he earns a few hundred dollars.

Today, picking up fancy juices.

Delivering cookies and even buying a diaper bag for expectant mother.

I can basically do whatever i want as long as they professional.

I am free.

Stay tuned all week long for our sharepoint -- four hours sharing economy services.

-- fourr our sharing economy services.

? you are watching "bloomberg west" where we focus on technology and the future of business.

I am emily chang.

It has been fixed.

The website is back off.

The glitch happened at a site that was operated by verizon.

Amc network is buying chellomedia from liberty global for over $1 billion.

It is the international content division.

It distributes television channels to over 130 countries.

Amc said it would have a more outlets.

There is video of another -- on fire.

The electric carmaker said the driver was not hurt.

It caught fire in mexico.

A few weeks at a tesla caught fire outside of seattle was a federal investigator said there is no evidence the rate any defects.

We turn now to baidu.

The world's 5th most visited website.

How much does the rest of the world actually know about the google of china?

China is home to one of the fastest-growing economies in 170 3 billion dollar tech industry.

Some 600 million users are online and what of the most popular websites is by doing.

Known to the rest of the world as the google of china.

Founded in 2000 five -- 2005, it is the number one search engine and china.

It went public on the shares jumped on opening day.

It is now worth $50 billion.

It has takeover offers from yahoo!

And google.

Baidu has been a great growth story.

It is really well-positioned to benefit from the chinese internet market.

Baidu as following its users are from desktop to mobile.

In july, they strengthened to smartphones and tablets with a deal to buy the chinese app store.

The most expensive acquisition ever announced by a chinese tech company.

One of the few websites bigger than baidu is facebook.

Over the years, robin li has become friends with mark zuckerberg.

Was recommended first trip to china in 20 10, 1 of its first thought was baidu headquarters.

Facebook remains blocked.

There are reports that the social network could enter the country with a joint venture with baidu.

The social networks have grown so big in the meantime that robin li said it is too late.

For more on baidu, i sat down with the ceo and founder robin li in a rare and exclusive interview.

And part one, we talk about the company's early days.

I asked how hard it was to turn down billion dollar acquisition offers from google and microsoft and yahoo!. it was not easy.

Because of the early days before we went public, we had investors.

They were basic -- they were based in the u.s. investors.

They admired the large tech giants here.

When there's a possibility to cash out at a price higher than they had expected, i would ask them to think about it.

For me, i really knew that we had a much brighter future than most people had thought about.

I tried very hard to convince my investors.

I will make a better returns for you.

It is not just about my ego.

Not just the future of the company.

I had to tell them in a way that can be beneficial to them and the best way to be beneficial is to make more money for you.

You came up with the idea of search and silicon valley in the 1990's at the same time that the google founders were, go with google separately.

Eyecolor link analysis.

-- i call it a link analysis.

The idea before i came to silicon valley.

I work in new jersey.

Later on in this kind of technology became the gold standard for all the search engines.

You where educated partially in the united states.

After you graduate you bought a biography about bill gates.

Is there a person or company that really inspired you along the way, somebody you look most up to?

I would say bill gates is probably the only person who stop at that time thomas i was an engineer.

I studied computer science.

Microsoft was the most powerful technology company, software company at the time.

His story was widely reported back in china.

When i came to this country for the first couple of years, i tried really hard to become familiar and getting good grades.

After graduation, i realized it was time for me to get to know more about a resource -- entrepreneurs to know more about the opportunities that america can provide for software engineers like me without bill gates was obviously a role model for that.

Why not stay in the united states, why move back to china?

I doubt about it.

-- i thought about it.

If there were good opportunities here, i would've stayed here.

For the first two years after graduation, i live in new jersey.

At that time, i thought started my own company.

To be safe i wanted to work for a company for a few years and make money so that if i start my own company without any income for a few years, i can still live.

An insurance policy?


I wanted to get a green card so i could legally work here for a very long time.

I worked for a company for quite a few years.

Then i realized that in the east coast does not approach technology that much.

No, they think the most valuable people are the reporters and financial experts.

Those kind of people.

I really had a passion on technology.

I tried to convince my boss to do search engine at that time.

They pout and is not our business.

We cannot do that.

-- they thought that is not our business.

It was also not that easy to find capital on the east coast in new jersey.

In the summer of 1997, i decided to move to silicon valley.

At that time, that was the good search engine.

I really loved the feeling that i could contribute to search technology and the moment you knew something could be beneficial to tens of millions of people.

In the early days, your wife was instrumental to giving you the nudge to go for it.


During the late 1990s internet bubble, i was an engineer.

My wife knew i had very good technology and i could do things a lot better.

She asked me if i go find a company that is better than -- you will find the next ebay.

I thought about it and maybe a better way to do that is to find a company by myself instead of finding the netanyahu or ebay -- the next yahoo!

Or ebay.

I said i am going to start my own company.

I look for all kinds of opportunities.

That was baidu ceo robin li.

The short to watch bloomberg west -- be sure to watch bloomberg west all week.

Tomorrow we will talk by apple strategy and china and white market share there is slipping and whether the iphone has lost its core.

To lebron james and rapper jay- z. another big partnership deal.

Details next.

? i am emily chang.

This is "bloomberg west." apple, google, and other tech giants have a developer conference.

Why not a samsung?

They began their first in san francisco.

They said at 1300 developers are there for the first day of the three day conference.

So far high buys include five new software developers for devices ranging from smartphones to smart tvs.

Samsung has inked a multiyear deal to supply the national basketball association with mobile devices and televisions without referees will use tablets to review key plate.

Jon erlichman has the story from l.a. how much is the deal worth?

Reportedly 100 million dollars.

The leak is not talking about it.

To see some sub doing some -- outspending apple when it comes to marketing.

The relationship between samsung and the nba was a strong one.

It was very common to see samsung advertisement when watching a game.

It takes it to the next step.

As an official partner, you can have your name when there are specific games or activities going on.

On top of that, you highlight the fact that referees can be reviewing all caps is.

What we have learned in this cycle of device sellers is just because you slap your brand on a halftime report or whatever does not necessarily mean that people are going to buy your devices.

About the troubles blackberry have gone through.

There were spending a lot of money tied to sports.

Some sangha looking to get people using its products at the same time that you are seeing the signage.

That seems to be the end goal for them.

Earlier this year, they signed to jay-z to an endorsement deal.

As a part of their cool factor plan?

We are the next big thing?


It feels that way.

Certainly, when people think about the nba they think about younger.

You want to be able to get there early devices.

You get the idea here.

On top of just having some high level celebrities who have their cool factor whether lebron james or jay-z or seth rogen.

It is about content.

This deal includes share certain highlights, additional analysis.

Maybe it will not be unique enough.

You see samsung cutting new content deals.

It is very important as a selling feature for any hardware manufacturer these days something used loosely find it through our devices.

Jon erlichman foot up thank you.

When you inc.

Of a space satellite, you usually think of a large object orbiting through space.

That will soon change thanks to one company.

Phonestat is looking to turning cell phones into makeshift satellites.

Ashley traveled to the nasa research center in mountain view to get a closer look.

Most people would think of a satellite as enormous.

As electronics are getting better and cheaper, and the facilities and we have a team of guys in this lab working on the satellites.

Extremely simple satellites.

They are very easy to infiltrate.

Our people have been basically doing satellites a getting them up into space.

Maybe since 2009, it was a pretty sketchy idea.

You can do something and make a statement.

Really saying, we have done something -- [indiscernible] we have commercial companies going into space.

You have -- we hitchhike.

We have technology demonstrations.

The definition is 10 centimeters.

We have a body case.

It connects to one font.

Wire and cables and a radio.

It basically turns on and off.

It keeps alive for how long, 10 days?

We have a mainframe computer -- we are essentially what would have been a mainframe computer 40 years ago.

We are leveraging millions of dollars that companies are investing into tiny fonts will stop we can use them in space.

-- tiny fonts -- phones.

Inside the grocery store that grows its own produce.

You can watch as are your tablet and

? welcome back.

This is "bloomberg west." using cash or early edition -- you can catch our early edition at 10:00 a.m. eastern beating the planet.

Explored how innovation and sustainability can produce enough food for a growing population.

Today's innovation is a twist on locally sourced stores.

We love our food.

Can we say we have a connection to it?

That is worthy farmery comes.

He uploaded his id.

To planet forward.

I see have the land is for agriculture.

It makes me think of the complex journey that food has to take from the skills to the retail store shelves.

Green out of the way to cut out the journey by growing food inside of the store.

The opportunity for us is huge because supermarkets sell this incredibly intimate private in a stale, boring environment.

It came together when tyler joined the team.

I was living and working in hawaii growing endangered species for the united states army.

But he found a green's work online.

The original idea is a little out there to use hydroponic tubes.

The future of full-sized retail space with a cafe and interactive grocery experience.

They can pick different salad greens, strawberries fresh.

He is in the process of scaling up and start up to a full-service store 70 times a bit.

He will either raise fish.

They cannot grow themselves, they will get from local growers.

The core of the business plan is connect customers to their food.

And to the people who grow it.

We are flipping the grocery model on its head.

A set of being a place that supplies it, to celebrate the identity by selling this food.

Of bringing the farm to the customer.

A fun way to feed the planet.

Joining me now is frank sesno.

How is this company setting up for the future?

We know, is like amazon are claiming to make it easier than ever to get groceries delivered to your door.

This a little different.

They want to take you to where the stuff is growing in the store.

They wanted revenue to come from the food they are growing in the store.

They hope to open next year.

They are talking to four cities.

They already have a component online.

You can buy the living wall.

You can have in your house.

You can grab the lead is right there in your living room.

-- you can grow the let is a writer there your living room.

It will be boutique and stuff.

This is going to be the stuff that goes for a niche audience in the united states in the developed world.

This was will be having at feeding the plants summit.

Going to the website and see it.

Web watch parties.

People can stream it.

-- we will have watch parties.

It is innovative.

One of many ideas.

This food thing is hot.

We have about two percent of the population in this country involved in agriculture.

Everybody is a foodie.

A lot of potential out there.

Was i do like my food.

Thank you so much.

If you have an idea you would like to submit, visit plante

It is time for bwest byte.

Jon has the bite.

99 million.

The number of people visiting the apple store in the fourth quarter, the three-month stretch . 4.5 billion dollars in revenue for the company.

The average store generated $10 billion.

They do not sell food there or let us -- lettuce but they could.

Obviously arming themselves for a busy holiday season.

That's their secret weapon.

Tim cook did say he thinks this christmas is on -- is going to be the ipad christmas.

Thank you for watching.

We'll see you back here tomorrow.


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