Q2’22 Trending Earnings Topics Recap – Week of July 25th, 2022

Q2'22 Trending Earnings Topics Recap - Week of July 11th, 2022

Welcome to the latest edition of the Q2 2022 earnings season weekly update on trending topics, macro trends and key management commentary. With a busy week of earnings that saw Microsoft, Alphabet, Meta, Amazon and Apple report , here are some key trending topics that emerged during earnings updates over this period:


The ongoing geopolitical instability paired with worldwide economic slowdowns have led to significant foreign currency fluctuations that are negatively impacting revenue growth. Numerous companies are reporting on notable FX headwinds that nullified business profitability and how they’re planning to account for that in the coming months.

Apple – Prepared Remarks

iPad revenue was $7.2 billion, down 2% year-over-year due to supply constraints and negative foreign exchange. Customer response to our iPad lineup continued to be strong across consumer, education and enterprise markets around the world, and the iPad installed base reached a new all-time high with over half of the customers during the quarter being new to the product.

Wearables, Home and Accessories revenue was $8.1 billion down 8% year-over-year as we faced foreign exchange headwinds, different launch timing for Home and Accessories products, and supply constraint, as well as the overall macroeconomic environment. Despite this, our installed base of devices in the category hit a new all-time record thanks to very strong customer loyalty and high new tool rates. For example, Apple Watch continues to expand its reach with over two-thirds of customers purchasing an Apple Watch during the quarter being new to the product.

Services had a June quarter revenue record of $19.6 billion, up 12% despite almost 500 basis points of FX headwinds as well as impact from our business in Russia and the macroeconomic environment.

  • Luca Maestri – Apple, Inc., Senior Vice President and Chief Financial Officer

PTC – Prepared Remarks

We’re executing well against our strategy and we’re continuing to improve upon strong market position. Our SaaS businesses across our Digital Thread and Velocity groups saw continued solid ARR growth in Q3. On an as reported basis, we delivered 9% ARR growth, 8% organic due to the impact of FX headwinds, which were approximately $81 million, substantially higher than the $32 million of FX headwinds we estimated a quarter ago using Q2 ending exchange rates.

Despite the FX headwinds, our cash flow results were strong, coming in ahead of our guidance. Increased ARR solid collections performance, slower hiring and above-plan perpetual license revenue from Kepware helped to offset the incremental headwinds that materialized in Q3. 

  • Kristian P. Talvitie – PTC, Inc., Chief Financial Officer & Executive Vice President

Automatic Data Processing – Prepared Remarks

Back to the ES revenue outlook. One more factor to consider is FX headwinds. Clearly with the euro near parity to the dollar with a weaker pound and with about 20% of our ES segment revenue being generated outside the US, we’re factoring in a fair amount of FX headwind for fiscal 2023 of well over 1%.

For our ES margin, we expect an increase of 175 basis points to 200 basis points. This coming year, our expense base will be increasing more than it does in a typical year in part due to inflationary pressure on our overall wages and in part due to head count growth, some of which we did late in fiscal 2022 and some of which we’re planning for fiscal 2023.

  • Don McGuire – Automatic Data Processing, Inc., Chief Financial Officer

Digital Realty Trust – Prepared Remarks

In terms of earnings growth, second quarter core FFO per share of $1.72 was 12% higher on a year-over-year basis and 3% higher sequentially, despite increased FX headwinds.

The outperformance versus our prior expectations for the quarter was principally a function of lower than expected OpEx spend and a short delay in the closing of the Teraco transaction. Looking forward, we expect core FFO per share to remain under pressure from stiffer than expected FX headwinds, given the appreciation of the US dollar.

As you can see from the bridge chart on page 13, we expect FFO will dip down a couple of pennies in the third quarter, principally due to FX, but also as a result of the delayed normalization of OpEx spend, near near-term dilution from closing the Teraco transaction and higher interest rates.

  • Andrew P. Power – Digital Realty Trust, Inc., President & Chief Financial Officer

ServiceNow – Prepared Remarks

Turning to profitability, operating margin was 23%, 1 point above our guidance, driven by operating efficiencies partially offset by FX headwinds. Our free cash flow margin was 16%. We ended the quarter with a healthy balance sheet including $5.4 billion in cash and investments. Together, these results continue to demonstrate our ability to drive a strong balance of growth and profitability.

Before I move to guidance, let me give you some context as to how we’re thinking about the months ahead. While our business remains resilient, we do expect the elongated deal cycles that we experienced in the last couple of weeks of June to persist for the remainder of the year. We have factored that into our updated guidance.

Additionally, which I know is no surprise to any of you, we’ve continued to see an incremental strengthening of the US dollar resulting in further FX headwinds for the second half of the year. We expect the total FX impact to be a $220 million headwind for 2022 subscription revenue and a $180 million headwind for Q3 cRPO.

  • Gina M. Mastantuono – ServiceNow, Inc., Chief Financial Officer

Cognizant Technology Solutions – Prepared Remarks

In Q2, digital revenue, as reported, grew 13% year-over-year and included FX headwinds of approximately 250 basis points, consistent with the total company.

At quarter-end, digital represented approximately 50% of total revenue, up 3 points from the prior year period. In addition to the FX headwinds, slowing of digital growth reflected lower inorganic contribution and elevated attrition, in particular, in North America. Despite these headwinds, we were pleased with the growth across our digital battlegrounds, which outpaced the total digital growth.

  • Jan Siegmund – Cognizant Technology Solutions Corp., Chief Financial Officer

While many organizations are focused on moving customers over to a SaaS business model for product optimization, they are reporting on the progress pertaining to cloud migration initiatives.

Microsoft – Prepared Remarks

We are seeing more customers move their mission critical workloads to Azure. American Airlines, for example, chose our cloud to run its key operational workloads, including its data warehouse. And Telstra will move its internal IT workloads to Azure.

And we are the platform of choice for SAP apps on the cloud. Leaders in every industry, including Kraft Heinz, Fujitsu and Unilever have migrated ERP workloads to Azure. Just last week, we announced a new service to accelerate adoption of Oracle workloads on Azure. We are the only public cloud with simplified direct access to Oracle databases running in the Oracle Cloud.

  • Satya Nadella – Microsoft Corp., Chairman & Chief Executive Officer

CME Group Q&A

Question – Owen Lau: Good morning and thank you for taking my question. Could you please add more color on some of the initiatives for your market data in this rising rate and volatile environment? I think CME benefited on the trading side. But on the data side, is there any product or geographic area that CME can penetrate and expand further into? And then along that line, can you please give us an update on your cloud migration? Thank you.

Answer: Thank you, Terry. So, on the cloud migration, we are on track to deliver foundational services towards the end of this year. The three services we have talked about, first one is margin calculation services. We call it the Margin Calculator.

The other is a product dictionary that gives clients the ability to actually trade our products, look up and trade our products very easily. And then the third aspect of it is market data on the cloud, on a GCP platform. We are on track to deliver all the 3 of these services towards the end of this year as well

  • Sunil Cutinho – CME Group, Inc., Chief Information Officer

Fortive – Prepared Remarks

Some other highlights in the quarter include, Censis had another quarter of very strong performance from its CensiTrac SaaS offering, which was more than offset by a difficult prior comp in marking hardware. On a two-year stack basis, Censis revenues grew 17.5%. Provation’s GI business grew revenues and orders double digits. They had several competitive wins, including a 16-site standardization order from Essentia Health, where half the sites are SaaS migrations and the other half are new Apex wins…Provation is utilizing Obeya Rooms to significantly accelerate SaaS migration bookings. And daily visual management implementation at Accruent is driving a significant improvement in net working capital.

  • James A. Lico – Fortive Corp., President, Chief Executive Officer & Director

Tyler Technologies – Prepared Remarks

While we have term and convertible debt associated with the NIC acquisition and have been impacted by rising interest rates, we are modestly leveraged at approximately 2 times adjusted EBITDA, and we expect to continue to de-lever. Accordingly, in the near term we are prioritizing using our cash flow to reduce debt, while retaining the flexibility to pursue strategic acquisitions and investments that provide long term value.

Finally, I’m happy to report that we remain on track with our major strategic initiatives including projects related to optimizing our products for efficient deployment in the cloud, moving from our proprietary data centers to AWS, and ultimately accelerating the migration of our on-premises clients to the cloud and driving long term margin expansion.

  • H. Lynn Moore Jr. – Tyler Technologies, Inc., President, Chief Executive Officer & Inside Director

Moody’s – Prepared Remarks

Question – Andrew C. Steinerman: Hi. I wanted to ask about Decision Solutions. Rob, you mentioned some seasonality of a specific product in that area, right? I guess you were talking about it here in the second quarter because Decision Solutions’ organic revenue growth year-over-year substantially decelerated to 8%. So, if you could just tell us about the banking product that kind of drove that growth deceleration in the second quarter. And of course, you can imagine the other side of that question is, will that seasonality of that banking product benefit third quarter organic revenue growth for Decision Solutions?

Answer: So, we had very good growth across the entire subsegment of Decision Solutions, particularly KYC. And I think the best thing to do is to look at ARR here because there’s been a little bit of revenue lumpiness in the first half of the year. When I refer to seasonality, that’s really what I was referring to. So let me just kind of take some of the key numbers.…So where does the lumpiness come from? Both our insurance and banking businesses have a mix, still, of on-prem and SaaS solutions. And you’ve heard us talk about we’re working to migrate more of the portfolio to SaaS. That’s true, but we still have a suite of on-prem products that introduce an element of lumpiness given some aspects of revenue recognition. And that was the case for the first half of this year. But we accounted for that as we thought about our full-year guide.

  • Robert Scott Fauber – Moody’s Corp., President, Chief Executive Officer & Director

According to the US Department of Labor, applications for unemployment benefits for the week ending July 23 declined by 5,000 to 256,000 from the previous week’s 261,000. While labor scarcity still remains prevalent, a promising trend is reflected through accelerated hiring plans being put in place by several companies, while others discuss the headwinds and reduced hiring associated with a tight labor market.

Amazon Q&A

Question – Stephen Ju: Okay. Thank you. So, Brian, I think you just reported a quarter-on-quarter decline in head count, which was by design after what happened last quarter. But it won’t be too long before you are gearing up for the holidays, so how do you think the environment is going to fare for you, to be adding head count? And also, the stock-based compensation came in below where you had guided for the second quarter, so is this a matter of not hitting the hiring goals you were hoping for? Or do you think the environment for the hiring of technical and engineering talent is loosening up a little bit? Thanks.

Answer: Sure, Stephen. Thank you. On the head count, yes, I think it was more, as we mentioned last quarter – last year, excuse me, in Q1 we added, to give you a flavor for it, we added 14,000 workers in Q1. Prior year, we had reduced our net head count by 27,000. So we were pretty transparent about the fact that we had hired a lot of people in Q1 for the coverage of the Omicron variant. Luckily, that variant subsided, and we were left with a higher head count position. That has come down through adjusting our hiring levels and normal attrition and was pretty much resolved by the end of April or early part of May. So that is dominating the quarter-over-quarter reduction in head count.

I would note that we’re still up 188,000 year-over-year and nearly double the head count of what we had heading into the pandemic in early 2020. So you’re right, there will be adjustments to that as we move forward into more holiday-level demand. Right now, we see a stabilization in the workforce, and we see good hiring rates. And so, I think, remember, there was a very difficult labor period the second half of last year, and it arrived kind of quickly out of nowhere. So we’re certainly diligent on that and making sure we could have a good workplace and an environment that will attract employees.

  • Brian T. Olsavsky – Amazon.com, Inc., Chief Financial Officer & Senior Vice President

Apple Q&A

Question – Samik Chatterjee: Okay. And for my follow up, I know you said you don’t want to predict the macro here or be an economist, but if I go back and look at sort of OpEx for the last few years, you’ve been increasing that by a double-digit percentage. And just given the uncertainty that you’ve talked about in the macro on this call a lot, how are you thinking about sort of that investment piece going forward? Are you trying to look at areas that where you can sort of pull back? Just in terms of how you’re preparing for the uncertainty is, I guess, the question.

Answer: We believe in investing through the downturn, and so we’ll continue to hire people and invest in areas. But we are being more deliberate in doing so in recognition of the realities of the environment.

  • Timothy Donald Cook – Apple, Inc., Chief Executive Officer & Director

Marsh & McLennan – Prepared Remarks

While you’ve heard me mention our list of key priorities for 2022 many times, I’d like to share our midyear progress on each of them. First, getting properly staffed and focusing on our people. I’m really proud to report that we reached pre-pandemic staffing levels in May 2022, which is just a huge milestone. We continue hiring in specific areas, particularly for pilots, and we expect to add over 10,000 employees this year out of attrition. We’re pleased to be seeing the impact of our hiring in airports, especially given the busy travel season that we’re in, now that thousands of new employees have been through training and are contributing on the front line.

  • Robert E. Jordan – Southwest Airlines Co., Chief Executive Officer & Director

Raytheon Technologies – Prepared Remarks

And lastly and perhaps just most importantly, the availability of skilled labor is a real challenge across multiple industries right now. And we’re seeing it in both at our suppliers and within our own shops. It takes time to hire and train new employees. It doesn’t just happen overnight, especially in certain areas, such as much of our classified work. Despite these near term challenges, what differentiates us is our balanced A&D portfolio and our world-class technologies that gives us the ability to deliver on our commitments.

  • Gregory J. Hayes – Raytheon Technologies Corp., Chairman & Chief Executive Officer

Norfolk Southern – Prepared Remarks

I’m going to speak over the next few slides about the plan for accomplishing this. Turning to slide 8, which is an update on our T&E staffing progress. We’re maintaining a very strong pipeline of conductor trainees. And even more encouraging, as you can see that in July, we’re really making progress on getting those employees qualified more than offsetting ongoing attrition. And the impact on our network is being felt.

We are continuing to start classes weekly and expect this momentum to continue. I will note that the labor market is still very challenging, particularly in certain locations. We’re taking advantage of every option to get folks where we need them, including go teams, transfers, sign-on and attendance bonuses, retirement deferral and referral incentives and more.

  • Cynthia M. Sanborn – Norfolk Southern Corp., Executive Vice President & Chief Operating Officer

Northrop Grumman – Prepared Remarks

In the quarter, we did experience certain challenges from the broader macroeconomic environment, including a tight labor market and supply chain delays, which impacted sales timing. However, we’re pleased with the progress our team continues to make in addressing these challenges, and hiring trends improved as we progressed through the second quarter, laying the foundation for sales growth in the second half of the year.

  • Kathy J. Warden – Northrop Grumman Corp., Chair, Chief Executive Officer and President

Chipotle Mexican Grill – Prepared Remarks

I do want to take a moment to discuss our people. Despite a challenging labor market, I am proud to say our staffing levels remain above 2019 levels. Our purpose of cultivating a better world with Food With Integrity has created a brand that people are proud to represent and be part of. We continue to offer our world-class employee value proposition that includes industry-leading benefits, attractive wages, specialized training and development, access to education, and a transparent pathway to significant career advancement opportunities. We believe these efforts along with our growth and purpose are helping to attract and retain great employees.

  • Brian R. Niccol – Chipotle Mexican Grill, Inc., Chairman & Chief Executive Officer

Thanks for reading this issue of the Earnings Recap blog for the Q2’22 Earnings season. Stay tuned for our trending topics recap next week. Feel free to review the prior iterations of our weekly blog for this quarter below:

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