Transcript: Monday, October 20, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and
Susie Gharib, brought to you in part by —


Apples? Apple (NASDAQ:AAPL) beats the street with strong demand for its
iPhone and says next quarter will be even better than it expected.


GINNI ROMETTY, IBM CEO: Third quarter earnings were disappointing.
They weren`t what we expected. We saw some slowdowns.


latest earnings were not what the CEO expected. She also ditched the
company`s profit road map, dumped its chip unit and by the end of the day,
the stock had its lowest close in three years.

MATHISEN: But should you own it? Should you buy it now? One of our
market monitor guests who recently recommended IBM shares is back to answer
that question again tonight.

All that and more on NIGHTLY BUSINESS REPORT for Monday, October 20th.

GHARIB: Good evening.

A lot of buzz on Wall Street today about the disappointing earnings
from tech bellwether IBM, sending shares of big blue tumbling and nearly
wiping out the modest gains made in the Dow today.

But we begin tonight with the after-the-bell earnings from another
tech giant, Apple (NASDAQ:AAPL). It was like night and day. Apple
(NASDAQ:AAPL) trounced Wall Street forecasts, thanks to blowout sales of
the new iPhone 6, more than 39 million units and the best quarter ever for
sales of its Mac personal computer.

Apple (NASDAQ:AAPL) earned $1.42 a share in its fourth quarter, easily
beating estimates of $1.30 a share. Revenue of more than $42 billion was
12 percent higher than a year ago, it also topped forecasts. Apple
(NASDAQ:AAPL) also raised its guidance for the full year and its shares
rose in after-hours trading. In the regular session, Apple (NASDAQ:AAPL)
was up 2 percent to $99.76.

Josh Lipton spoke with CEO Tim Cook earlier today. And Josh joins us
now from outside of Apple`s headquarters.

So, Josh, now that you`ve looked over the numbers, what`s the big
takeaway from these amazing results?

big number certainly analysts and investors are going to concentrate on
would be the iPhones. Of course, the iPhone still does account for about
50 percent of the company`s revenue.

And Apple (NASDAQ:AAPL) telling us they shipped 39.3 million iPhones
this quarter. That was up 16 percent year over year and beat Wall Street`s

I did have a chance to sit down with CEO Tim Cook and I did ask him
specific by about the iPhone 6 and 6 plus. Remember, this quarterly
includes nine days of sales for 10 countries for those new iPhones. Cook
telling me he saw demand there off the charts. And he was very excited
about the initial rollout of those new iPhones in China.

On the other hand, though, the iPad, remember, that accounts for about
20 percent of revenue. Their shipments were down about 13 percent year
over year.

Back to you.

GHARIB: All right. Josh, that`s really amazing. Nine days and those
great results.

Josh Lipton in Cupertino, California. And Josh will be back later in
the program with a look at the launch of the Apple (NASDAQ:AAPL) new mobile
payment service. Apple (NASDAQ:AAPL) pay, how it works and the challenges
it faces.

MATHISEN: It was a good day on Wall Street and a quiet day for a
change with the price of oil holding steady. Fears about Ebola`s spread
subsiding. As we mentioned at the top of the program, the one thing,
though, that did unsettle the market today was IBM specifically. Its soggy
earnings report.

Because of its high price, IBM is one of the most heavily weighted
components of the Dow Industrials. And today, its slide — IBM`s that is –
– kept the Dow in the red for most of the session. Then at the close
sandbag gains that would have, could have, should have been higher.

Here`s how things look at the closing bell. The Dow did manage to
finish up by 19 points. The NASDAQ by a heftier 57, a jump of 1 1/3
percent, and the S&P 500 added 17. It closed back above 1,900.

After all that market turmoil last week, this marks the third straight
day of gains for NASDAQ and the S&P 500.

GHARIB: More now on that big miss for IBM on both earnings and
revenue. Shares fell 7 percent today, as Tyler said easily making it the
biggest decliner in the Dow.

Morgan Brennan takes a closer look now at the troubles at IBM, what`s
driving the slowdown, and how it`s getting rid of one of its struggling


struggling to reinvent itself, as it shifts away from hardware to newer
higher growth industries like Cloud computing. But today`s quarterly
earnings did little to assure investors the massive year`s long transition
is going according to plan.

Big Blue`s profit and revenue sharply missed analysts` expectations.
Thanks to slowing sales in hardware and services. The company also
announced it`s scrapping its five-year plan to grow profit, an ambitious
goal that was supposed to be realized next year.

ART HOGAN, WUNDERLICH SECURITIES: IBM, unfortunately, is saddled with
two-thirds of their business that`s incumbent. It`s very difficult to make
that pace of change at a pace that investors are going to be happy with.

So, this is going to be a story we`ll probably be talking about for a

BRENNAN: The report marks the tenth straight quarterly drop in
revenue for IBM. But the company also announced it`s shedding another
hardware business, micro electronics or its semiconductor manufacturing
operations, in an unusual deal that will pay chipmaker Globalfoundries $1.5
billion to take that business on.

Analysts say that plan rids IBM of the lower margin long struggling
segment but that the company still has a very long way to go. Especially
since profitability is falling in IBM`s other ongoing businesses as well.

JOSEPH FORESI, JANNEY CAPITAL MARKETS: The software business didn`t
grow as fast as expected. And hardware continues to be hurt by
commoditization. Those businesses are moving more towards an even steady
state. The comps are getting a little bit better in some of those
businesses, but they`re still challenged.

BRENNAN (on camera): CEO Ginni Rometty said she`s, quote,
“disappointed” in the company`s performance, blaming a slowdown in client
buying behavior and, quote, “unprecedented pace of change in the industry”.
The company now plans to offer a new profit forecast in January.



GHARIB: And one big shareholder in Big Blue today, billionaire
investor Warren Buffett. He`s one of IBM`s largest shareholders. With
today`s sell-off, it`s estimated that Buffett may have lost more than $1
billion — Tyler.

MATHISEN: Our David Faber sat down with IBM CEO Ginni Rometty today
at company headquarters in Armonk, New York. And despite those earnings
and the sharp drop in share price today, Rometty sounded upbeat about where
the company is focusing its efforts right now.


ROMETTY: We`re reshaping this company around analytics, around Cloud,
and — the term I use — engagement, social, mobile, security, but all for
the enterprise. Collectively, almost 20 percent growth, improved every
single quarter and even individually each of those areas. Analytics which
ended last year at $16 billion, up in total 8 percent, a very large number.
You take a look at Cloud, greater than 50 percent again. And then social,
mobile, security, every one of them.


MATHISEN: David Faber is here with us now with more on his exclusive
conversation with Ms. Rometty.

David, welcome. Good to have you with us.

How big a test is this for Ginni Rometty? Is this her first big one?
Is her job at stake here if she can`t turn it around? What?

think her job is at stake at this point, certainly, Tyler, but I will say
that there`s no doubt that this is Ginni Rometty`s IBM. In fact, you could
argue that the disavowing, if you will, of the road map that was put in
place, that five-year road map that they tied themselves to for many years
which was originally put into place by her predecessor, Sam Palmisano, that
in a sense says, finally, we`re done, with the previous administration in
any way, shape or form.

The divestitures, of course, that she has focused on, the low end
server business, the one announced today, of course, where they`re actually
paying to get rid of the micro electronics unit, and all of the things you
heard in that interview that she just mentioned, those are her decisions.
And time will tell whether they are successful.

GHARIB: You know, David, we`ve seen a number of tech companies like
Hewlett-Packard (NYSE:HPQ), like eBay (NASDAQ:EBAY), that are splitting
themselves up. Do you think that that`s ultimately down the road something
that Ginni Rometty would do or that some activist investor are going to
force her to do?

FABER: I think boards these days, as you will know, Susie, are always
thinking about activism at least in some way. The case to be made by IBM
for why we should not do that is because we already have. And I asked Ms.
Rometty about it.

I mean, they`ve already gotten rid of their PC business. They`ve
gotten rid of, with today`s sale, the chip business. They`ve gotten rid of
their low end server business.

So, they would argue what we really are is simply an enterprise
technology company. We provide technology services to big businesses, and
they want all the things that we have, so why would you separate them?
That said, this is a behemoth, 430,000 employees. And so moving it quickly
in what everybody argues is a faster moving environment can be difficult.

MATHISEN: That was going to be my question here. This is a big, big
company. Can it be nimble enough in today`s world of Cloud computing, a
game, by the way, that we`re — I think most people would say they`re
already playing catch-up?

FABER: Yes. I mean, we think Amazon (NASDAQ:AMZN) web services, we
think of other names when it comes to that, although they have $4.4 billion
in revenue. But out of a $100 billion revenue base for the company, or a
little less than that at this point, even when you`re growing more quickly,
Tyler, it takes a time to really turn that around.

Today`s problems had to do with what software to a certain extent and
the services business. She said they didn`t execute as well as they could
have in sales and software. That gets to the point of are you not agile
enough? Rometty would say no. In fact, she did in our interview, that is
not the issue. But many would argue — well, you`ve got a lot of smaller
more agile competitors.

GHARIB: I know you talked to her about Warren Buffett. We just
reported that he lost a billion dollars today alone from this big sell-off.
What does she have to say about Warren?

FABER: She wouldn`t specifically answer, Susie, in terms of whether
she spoke to him or not. One would have to assume she did as she might
have talked to many of her large shareholders, certainly did today. Before
the news, unclear how many you really do talk to.

But Mr. Buffett was quiet, when CNBC reached out to him, he did not
offer us I believe any comment as far as I`m aware. He`s still a large
shareholder there. There`s no reason to believe that is not going to still
be the case and that he is not supportive, but I will be curious to see the
next time he speaks publicly about IBM.

MATHISEN: All right. David, thanks very much. Appreciate it. David
Faber reporting.

Later in the program, one of our market monitor guests who recently
recommended IBM is back to defend his call and explains why he still thinks
it`s a buy.

Well, nine months into his role as Microsoft`s CEO, only the third one
in company history, Satya Nadella spoke exclusively with our Jon Fortt.
Nadella talked about how well-positioned the company is in the $100 billion
cloud computing market which has become a battle between a handful of tech


SATYA NADELLA, MICROSOFT CEO: I think that if you don`t already
spending a lot of capital on the order of $4 billion or $5 billion each
year to just grow your cloud, probably it`s a little too late to enter the
market. I mean, that`s the entry barriers. And there are a few of us who
are in that mega scale of Cloud.

of entry, if you`re not prepared to spend $4 billion or 5 billion a year,
forget it?

NADELLA: I mean, that`s the (INAUDIBLE). I mean, it`s the same
thing. You know, if you`re a network operator today, you have to be in
that business and if you`re a mega scale Cloud provider, you`re already
committing a lot of capital. In our case, we`ve been committing it for

And we`re not alone. There are at least two other players like us,
Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) in particular, but we are one
of the three in that category.


MATHISEN: Nadella also waved off investor calls for Microsoft
(NASDAQ:MSFT) to split up, separating its consumer software business from
its Enterprise and Cloud division, saying its customers use the same
products at home and at work.

GHARIB: Another tech giant making news tonight, Yahoo (NASDAQ:YHOO).
“The Wall Street Journal” reveals that Yahoo (NASDAQ:YHOO) will unveil some
cost-cutting moves, likely including job cuts, as early as tomorrow.
That`s when it reports its quarterly results after the market close. The
company is expected to lay out plans for acquiring some tech start-ups
using part of the nearly $6 billion it made from selling shares it owned in
Chinese e-commerce giant, Alibaba.

And coming up on the program, why the head of the FBI thinks companies
like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) are putting privacy
protections ahead of public safety. That`s next.


MATHISEN: Well, despite posting or besides posting some caramel-
covered earnings after the bell, it was a huge day for Apple (NASDAQ:AAPL),
which launched it`s Apple (NASDAQ:AAPL) Pay mobile payment system today,
hoping to replace your wallet with your iPhone.

Josh Lipton shows us how Apple (NASDAQ:AAPL) Pay works and how the
rollout went.


LIPTON (voice-over): The next time you`re shopping for groceries, you
can leave your wallet and credit cards at home. That`s Apple`s hope as it
officially launches Apple (NASDAQ:AAPL) Pay, its new mobile payment service
that allows users to buy goods with their smartphones.

Users walk up to the front of the checkout line and hold up their
iPhone 6 or iPhone 6 plus to a special reader. Then by simply pressing the
fingerprint sensor, that transaction is completed.

credit card and swiping is pretty easy. And we wanted to make something
that`s even easier than that.

LIPTON: With this new service, Apple (NASDAQ:AAPL) is trying to
capitalize on the mobile payments market, which will quadruple to $90
billion by 2017, according to Forrester Research (NASDAQ:FORR). The fast
growing market is attracting a lot of attention from tech giants including
eBay`s PayPal, Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG). Apple
(NASDAQ:AAPL) hasn`t disclosed how it intends to monetize its new service,
but it already boasts an extensive network of partners at 220,000
locations, including Whole Foods, McDonald`s (NYSE:MCD) and Macy`s

(on camera): Apple (NASDAQ:AAPL) Pay does face some challenges like
convincing more merchants to adopt the technology and some industry
analysts are cautious about its mass appeal.

BRYAN YEAGER, EMARKETER ANALYST: It`s very easy to conduct
transactions with credit cards, debit cards, with cash, you don`t need a
battery to be able to do those types of things. And so, just some of those
characteristics are, you know, kind of what Apple (NASDAQ:AAPL) Pay has to
contend with out there, has to contend with kind of ingrained consumer

LIPTON: Apple`s Eddy Cue disagrees with that analysis, arguing that
Apple (NASDAQ:AAPL) pay will prove popular because it`s much faster than
traditional payment methods and it`s also more secure.

Here`s why. A unique 16-digit security code is created each time a
consumer authorizes a new purchase. That one-time code, if intercepted by
hackers, can`t be used for another transaction.

(on camera): Apple`s executives are clearly excited about Apple
(NASDAQ:AAPL) Pay, as are financial analysts who see it as a potential new
source of revenue for the company. Now, we wait and see whether consumers
are equally enthusiastic.

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton in Cupertino, California.


GHARIB: But Apple (NASDAQ:AAPL), along with Google (NASDAQ:GOOG),
have now found themselves in the crosshairs of the FBI. It`s all about new
encryption technology that may make it harder for investigators to do their

Eamon Javers has the story.


April, Brian Horn was sentenced to death for the 2010 killing of a 12-year-
old boy he had kidnapped. It`s a conviction the FBI says was won in part
because law enforcement was able to read text messages on Horn`s phone.

Now, FBI Director James Comey says Apple (NASDAQ:AAPL) and Google`s
just-announced default encryption could keep the police from capturing
criminals like Horn. The companies say the new system will mean Apple
(NASDAQ:AAPL) or Google (NASDAQ:GOOG) might not be able to fulfill a legal
warrant for access to a suspect`s phone.

The director of the FBI says that is dangerous.

JAMES COMEY, FBI DIRECTOR: We need assistance and cooperation from
companies to comply with lawful court orders, so the criminals around the
world cannot seek safe haven. We need to find common ground. We care
about the same things.

JAVERS: And the FBI director said Congress may just have to force
American companies to accept lower profits in the name of security.

COMEY: What we may get is to a place where the U.S., through its
Congress, says, you know what? We need to force this on American companies
and maybe they`ll take a hint. Someone in some other country says we sell
a phone that even with lawful authority people can get into but that we as
a society are willing to have American companies take that hit.

JAVERS: One former federal prosecutor underscored Comey`s point
saying criminals can be incredibly boastful online leading to a treasure
trove of evidence.

their co-conspirators or with bricks of cocaine or with piles of money. So
that can be useful. The contacts of this guy works with and for will be on
his phone. IMs, instant message, where he`s maybe working out with another
co-conspirator where they`re going to do a pickup or where they`re going to

JAVERS: But civil libertarians argue the FBI is asking for too much.

don`t think that his argument was particularly convincing. What he`s
talking about are a few outlier criminal cases and it doesn`t really
justify the vast invasion of privacy to the general public and the
potential security implications of what he`s saying. What we`ve seen come
out over the past few years with these revelations from Snowden and others
is that law enforcement has really been abusing its capabilities.

JAVERS (on camera): Comey said he doesn`t know exactly what the
technical fix here ought to be, but he did say that he thinks that the
post-Snowden pendulum had swung too far in the direction of privacy and
needs to swing back toward law enforcement.

For NIGHTLY BUSINESS REPORT, I`m Eamon Javers in Washington.


MATHISEN: A warning from Chipotle put a damper on its earnings
report, and that is where we begin tonight`s “Market Focus”.

The Mexican fast-casual chain saw sales soar its latest quarter, with
results topping estimates. But the company warned its sales growth may
slow down next year. And that sent shares down initially after hours.
During regular trading, the stock was almost 2 percent higher to $653.03.
But you see the slide afterhours.

NCR (NYSE:NCR) saw its shares tumble after its outlook disappointed
investors. The company, which makes point of sales devices and ATMs, cut
its guidance for the year citing weakness in the retail industry and dear
over customer security data. And shares off 21 percent to $23.54.

Toymaker Hasbro (NYSE:HAS) said strong sales growth in its boy`s
division, which includes Transformer and Marvel toys helped its quarterly
results. Earnings topped estimates while revenue was in line with
consensus. Shares popped about 5 percent to $56.51.

And VF Corp, the parent of North Face and other clothing brands,
reported results that missed slightly on the top and bottom lines. Despite
that, the company raised its profit forecast for the year and hiked its
quarterly dividend by 22 percent. Shares up by 20 cents. They finished at

GHARIB: Sears (NASDAQ:SHLD) has a new plan to raise cash. The
struggling retailer said it will sell $625 million in debt to stock owners.
This is the third time in about two months that CEO Eddie Lampert, whose
interests will participate in the offering, has agreed to pump funds into
the company. Shares surged 23 percent to $34.96.

Shares of Trinity went to other way after the company was found guilty
of making false claims to the government. A jury found that the guardrail
maker deliberately withheld information about cost-saving changes in its
highway guardrail systems that made them more dangerous and defrauded the
government out of $175 million. Shares fell 12 percent to $31.63.

And Russia has broadened its crackdown on McDonald`s. The fast food
chain says that almost half of its locations in Russia are now under
government investigation and a regulator has already closed nine
restaurants in recent weeks. We`re going to find out more about all of
that when the company reports earnings tomorrow morning. Ahead of that,
though, shares rose 55 cents to $91.59.

MATHISEN: Coming up: if you own shares of IBM, what should you do
with them? Our market monitor guest who recently recommended the stock is
back to answer that question and more.


MATHISEN: Abbvie and Shire (NASDAQ:SHPGY) have called off their $54
billion deal because of new rules put in place by the Obama administration
to curb so-called inversion deals. As a result, Abbvie will pay Shire
(NASDAQ:SHPGY) a breakup of more than $1.5 billion.

GHARIB: More people are getting hired but they`re not getting more
money. A new survey by the National Association for Business Economics
found that only about a quarter of companies surveyed raised employee wages
during this summer`s third quarter. That`s down from 43 percent from the
spring quarter. The survey also found that just one-third of those
companies say they plan on boosting wages in the current quarter.

Well, there`s still many believers in Big Blue despite the big sell-
off in IBM stocks today. One of them is our market monitor, Charlie
Bobrinskoy, who came on our program four weeks ago and recommended IBM when
it was trading at $194. Today, he still stands by that call and is here to
tell us why. He`s vice chairman and portfolio manager with Ariel

Hi, Charlie. Nice to have you with us.

MANAGER: Thanks for having me on.

GHARIB: OK. Don`t want to put you on the spot but there may be many
viewers watching the program and based on your recommendation bought IBM at
$194. What would you tell them today of what to do with their shares?

BOBRINSKOY: Well, it`s a humbling day. Warren Buffett and I,
unfortunately, are both big investors in this stock. He much bigger than
me. But clearly it`s been a wonderful stock for us since we bought it in
2005. It`s $77, more than doubled since then. And people have always
hated IBM.

But clearly the last couple of quarters they missed expectations
including my own. So, I did not see this hiccup coming, a very soft
quarter. In fact, I think even management didn`t see this coming. The
month of September was weak and disappointed all of us.

GHARIB: But what are you supposed to do if you bought it at $194? Do
you sell it today?

BOBRINSKOY: Yes, unfortunately, this is a hard part of this business.
It`s always fun to have stocks that are going up. Lots of people like to
buy stocks that are going up. In fact, the opposite is the best thing to
do. It`s the best thing to do is to buy low and sell high, to buy what
others are selling.

The stock is cheaper today, on an absolute value basis. It`s trading
at about 10 times forward earnings, very cheap valuation in a market
trading at $15. So, we would say it`s not a good time to sell.

The company`s still a leader. Their U.S. business is actually doing
fine. Most of the problems they had today were in China and emerging
markets and those markets have slowed.

MATHISEN: So, not a good time to sell. I know that you really can`t
tell us what, if anything, you have done with your particular shares. It`s
been a longtime holding of yours.

But after an earnings report like this, what kind of post game
analysis do you go through with an eye towards deciding what you`re going
to do with this holding and whether you have gotten all of the profit out
of it that you can reasonably expect for the time being?

BOBRINSKOY: That`s the right question, Tyler. And what you have to
do is take a step back and look fresh and make sure you`re not using your
old valuation analysis, that you`re not locked into the past. Ask yourself
a question, if I didn`t own it today, would I buy it today. And the answer
to that is absolutely yes.

At this valuation, this is a company that`s a leader in the whole
field of big data, the Watson computer that`s so famous, that wins
“Jeopardy!”, puts them at the forefront of analytics. Their software is
embedded at many of the largest, most of the largest companies around the

There is a change going on that people are leasing software instead of
just buying it, and that puts pressure on earnings, but it`s something I
would buy today if I didn`t own it.

GHARIB: All right. That`s a very interesting perspective on it.
Thank you so much, Charlie.

BOBRINSKOY: Thanks for having me.

GHARIB: Charlie Bobrinskoy with Ariel Investments.

MATHISEN: And finally tonight, it was 27 years ago yesterday, October
19th, 1987, Black Monday, worst day ever for the Dow. It lost 22 percent
of its value. One session set off the panic on Wall Street. The
equivalent drop would be 3,700 points in one day. Remember it well.

GHARIB: I looked it up. The Dow closed at 1,738, lower than what the
S&P is today.

MATHISEN: All right.

GHARIB: All right. That`s NIGHTLY BUSINESS REPORT for tonight.
Thanks so much for watching. I`m Susie Gharib.

MATHISEN: I`m Tyler Mathisen. Thanks for me as well. Have a great
evening. We`ll be here tomorrow night, and hope you will be.


Nightly Business Report transcripts and video are available on-line post
broadcast at The program is transcribed by CQRC
Transcriptions, LLC. Updates may be posted at a later date. The views of
our guests and commentators are their own and do not necessarily represent
the views of Nightly Business Report, or CNBC, Inc. Information presented
on Nightly Business Report is not and should not be considered as
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