Q1’23 Trending Earnings Topics Week of April 24, 2023

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Welcome back to the weekly edition of our Q1’23 trending earnings topics week of April 24, 2023 season update on trending topics, macro trends and key management commentary. Many noteworthy organizations in the tech sector reported last week, including Meta Platforms, Microsoft, Tyler Technologies, Appfolio, Pinterest, Knowles, and Juniper Networks

Here are some key trending topics that emerged during earnings updates over the last week:

Since the introduction of OpenAI’s ChatGPT and its successor GPT-4 in 2023, the potential for AI technologies to streamline and automate workflows across organizations in numerous sectors has been increasing rapidly. Companies are steadily reporting on future opportunities to utilize AI capabilities in their service offerings to take advantage of this surge in technological advancement, while others are discussing how they are already utilizing AI to a certain extent in current business operations

Microsoft – Prepared Remarks

Azure took share as customers continue to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered. We have the most powerful AI infrastructure, and it’s being used by our partner, OpenAI, as well as NVIDIA, and leading AI start-ups like Adept and Inflection to train large models.

Our Azure OpenAI Service brings together advanced models, including ChatGPT and GPT-4, with the enterprise capabilities of Azure. From Coursera and Grammarly, to Mercedes-Benz and Shell, we now have more than 2,500 Azure OpenAI service customers, up 10x quarter-over-quarter. Just last week, Epic Systems shared that it was using Azure OpenAI Service to integrate this next generation of AI with its industry-leading EHR software. Azure also powers OpenAI APIs, and we are pleased to see brands like Shopify and Snap use the API to integrate OpenAI’s models. We are also bringing next-generation AI to Power Platform, so anyone can automate workflows, create apps or web pages, build virtual agents and analyze data using only natural language. More than 36,000 organizations have already used existing AI-powered capabilities in Power Platform and with our new Copilot in Power Apps, we’re extending these capabilities to end users who can interact with any apps through conversation instead of clicks. All-up, we now have nearly 33 million monthly active users of Power Platform, up nearly 50% year-over-year.

Now on to business applications. From customers’ experience and service to finance and supply chain, we continue to take share across all categories we serve as organizations like Asahi, C.H. Robinson, E.ON, Franklin Templeton choose our AI-powered business applications to automate, simulate and predict every business process and function. And we are going further with Dynamics 365 Copilot, which works across CRM and ERP systems to bring the next generation of AI to employees in every job function, reducing burdensome tasks like manual data entry, content generation and notetaking.

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

Cadence Design Systems – Prepared Remarks

Generative AI design tools are revolutionizing chip and system development by delivering unprecedented optimization and productivity benefits. Customers have already been benefiting from our groundbreaking Generative AI solutions in the digital, verification and system areas. And with the recent introductions of Virtuoso Studio and Allegro X AI, we now have an unmatched chip to package to board to systems Generative AI portfolio. Leveraging 30 years of industry leadership, Virtuoso Studio accelerates heterogeneous system design and through AI-powered layout, automation and optimization, provides an average 3x productivity boost for design in the notably complex analog domain.

Several customers, including MediaTek, Renesas, Analog Devices and TSMC, provided testimonials for the launch. Allegro X AI technology utilizes the latest innovations in Generative AI to accelerate PCB design with more than a 10x reduction in turnaround time. And at a recent launch, it was endorsed by Schneider Electric and (00:04:15). All of these powerful engines are fueled by our unique, differentiated, big data analytics JedAI platform that unifies massive amount of design and verification data to carry forward learnings and insights to future designs. Our rapidly proliferated Generative AI solutions are enabling customers to reach significant power performance and area benefits through better-optimized designs while greatly improving engineering productivity and accelerating design closure.

  • Anirudh Devgan – Cadence Design Systems, Inc., President, Chief Executive Officer & Director

Meta Platforms – Prepared Remarks

Now, a key theme that I want to discuss today is AI. I’ve emphasized for a number of these calls now that there are two major technological waves driving our roadmap. A huge AI wave today and a building Metaverse wave for the future. And our AI work comes in two main areas. First, the massive recommendations and ranking infrastructure that powers all of our products from Feed to Reels to our ad system to our integrity systems that we’ve been working on for many, many years; and second, the new generative foundation models that are enabling entirely new classes of products and experiences.

Our investment in recommendations and ranking systems has driven a lot of the results that we’re seeing today across our Discovery engine, Reels and ads. Along with servicing content from friends and family, now more than 20% of content in your Facebook and Instagram Feeds are recommended by AI from people groups or accounts that you don’t follow. Across all of Instagram, that’s about 40% of the content that you see.

Since we launched Reels, AI recommendations have driven a more than 24% increase in time spent on Instagram. Our AI work is also improving monetization. Reels monetization efficiency is up over 30% on Instagram and over 40% on Facebook quarter-over-quarter. Daily revenue from Advantage+ shopping campaigns is up 7x in the last six months.

  • Mark Elliot Zuckerberg – Meta Platforms, Inc., Founder, Chairman and Chief Executive Officer

W.W. Grainger – Q&A

Question – Ryan Merkel: And then, D.G., I wanted to ask your opinion on AI. How do you think that might help Grainger? And what could the impact be to the industry?

Answer: Yeah. I mean I won’t go into too much detail. Obviously, AI has been a raging topic. If you think about artificial intelligence, artificial intelligence, there’s machine learning, which is a subset of artificial intelligence, and there’s deep learning. A lot of what’s been talked about lately is deep learning generative AI, which you can write your favorite song. We have been using machine learning for a long time in things like helping us get the search right.

And effectively, I think the challenge here is to figure out where you can drive improvements through AI from customer interactions from operations for back office. And we have efforts going in all of those areas, and it’s like any other technology (00:24:35) point it at the right problem. And I think that’s probably going to be the most important thing for us to think about as we learn more.

  • Donald G. Macpherson – W.W. Grainger, Inc., Chairman & Chief Executive Officer

Visa – Prepared Remarks

Finally, our Risk-as-a-Service offerings also continue to be utilized powered by network-level data, AI capabilities and our risk experts. For example, our AI and machine learning-enabled monitoring service identify suspicious decline activity. For one client we were able to identify a scheme where fraudsters were testing for valid accounts and then using the accounts to make fraudulent purchases. Visa blocked over $7 million in attempted fraud in just one month on behalf of this client. This is just one example, but you can see how these risk services enable us to both help our clients and generate revenue for Visa. Since launching six months ago, we’ve added nearly a dozen direct clients across three regions with a very active pipeline.

  • Ryan McInerney – Visa, Inc., Chief Executive Officer & Director

eBay – Prepared Remarks

Our work to improve the site-wide experience on eBay continued to build momentum in the first quarter. While eBay has operated a core AI platform for years, an upgrade to this platform last year has meaningfully accelerated our AI development philosophy across multiple areas of our organization.

In search, we continue to improve retrieval and ranking using state-of-the-art deep learning models and better leveraging the vast amount of structured listing data on our marketplace, which delivers more relevant choices to our buyers. A series of search deployments we made during Q1 led to a measurable uplift in conversion that we estimate would amount to roughly $1 billion in incremental GMV on an annualized basis. This demonstrates the value that a relatively small number of AI-powered enhancements can generate for a marketplace of our scale.

Another key area of foundational improvement is our proprietary computer vision technology. With 1.8 billion live listings and billions more images from historical sales, eBay is one of the few companies in the world training deep neural networks using tens of billions of images directly linked to commercially relevant data elements.

  • Jamie Iannone – eBay, Inc., President, Chief Executive Officer & Director

While some companies are noting alleviation of supply chain pressures compared to peak COVID periods, others are reporting on recent experiences of supply chain tightness and how they are actively working on corrective action plans to mitigate its impact on their respective businesses over the course of 2023

Carrier Global – Q&A

Question – Deane Dray: And then maybe just give us a perspective on Viessmann, how they fared during the whole supply chain pressures? How did they do in price/cost? And any sense about their backlog and past due.

Answer: Well, I would say they’re very similar to what us and many other companies experienced. I think the good news is that they’ll be coming in with backlogs because they experienced some of the same supply chain issues that we all experienced. They navigated it as well, if not better than anyone. But look, we all ran into some of the same constraints.

They’re price/cost positive. One of the very, I think, exciting – many exciting things is that they clearly can charge a premium. They have, they will continue to be able to do so. So, pricing’s not an issue for them. And I think that one of the exciting things on the combination is, I think, we’ll bring a lot of value on the cost side with our supply chain.

And then keep in mind that if you look at the last few years, despite all the supply chain, they’ve been growing 15% sales and EBIT CAGR between 2020 and 2023 and their margins have improved during this time. And in fact, Max just told me two nights ago that their margins were – exceeded their expectations for March. So, they continue to under-promise and over-deliver, and I expect that they will continue to do so.

  • David L. Gitlin – Carrier Global Corp., Chairman & Chief Executive Officer

The Coca-Cola Co. – Prepared Remarks

In the first quarter, pandemic restrictions in parts of the world relaxed and many supply chain pressures abated. At the same time, inflation and geopolitical tensions persisted and new concerns emerged around the stability in the banking sector and the magnitude of the potential squeeze on consumers. In the face of these factors, we continue to generate momentum as investments in our brands got the year off to a positive start. We remain focused on creating value by meeting the needs of our customers and consumers.

  • James Quincey – The Coca-Cola Co., Chairman & Chief Executive Officer

O’Reilly Automotive – Prepared Remarks

In addition to the anticipated pressure from the first quarter in Pro pricing and LIFO, we also saw continued gross margin pressure from a higher mix of Professional business some of which was planned and some resulting from our outperformance versus our expectations as that side of the business continues to grow faster but also carries a lower gross margin. However, product margin on both sides of our business has been slightly better than expected resulting from positive acquisition cost benefits, offsetting some of the pressure from the higher-than-planned mix of Professional sales.

While we are pleased with our results so far this year, we remain cautious regarding the cost outlook for the remainder of 2023 including the prospect for incremental reductions to acquisition costs. Our supply chain partners continue to face anticipated broad inflationary pressures and we expect to see a relatively stable cost environment with potential for puts and takes in both directions.

  • Brent G. Kirby – O’Reilly Automotive, Inc., Co-President

The Boeing Co – Prepared Remarks

Next and importantly, over 60% of revenues in the quarter collectively delivered double-digit margins. We have many important programs that are performing to historical performance levels. The balance of the 1Q revenue is made up of a small number of established programs that are experiencing negative margins on certain contracts due to specific near-term supply chain and factory stability pressures that we’ve highlighted previously. It’ll take time to work through these issues and we fully expect that these programs will improve through the course of this year and return normal margin levels over time.

  • Brian J. West – The Boeing Co., Chief Financial Officer & Executive Vice President-Finance

Northrop Grumman – Prepared Remarks

With respect to the supply chain, we saw signs of modest progress in Q1. We continue to believe that our supply base will experience areas of pressure for some time. And inflation levels have begun to moderate. We continue to have a higher base effect on our costs over time, especially on longer-term programs.

As we’ve discussed on prior earnings calls, we’ve been experiencing impacts from inflation-related cost increases over the past year. We continue to drive efficiencies in our business and partner with our customers in an effort to reduce those impacts going forward.

  • David F. Keffer – Northrop Grumman Corp., Corporate Vice President & Chief Financial Officer

General Dynamics – Prepared Remarks

Operating earnings of $229 million, or $14 million behind last year’s first quarter as a result of a 70 basis point degradation in operating margin. Operating margin in the quarter was under pressure as a result of fewer new airplane deliveries, a less attractive mix, severe supply chain issues, some modest cost increases from suppliers, and the prebuild of G700s.

Let’s take a look at some of these elements in greater detail. The shortage of parts to schedule from the supply chain, especially from Honeywell, has created significant out-of-station work, which is inherently less efficient. We have a young, well-trained and capable workforce. They have, however, never previously been exposed to out-of-station work. They are doing well, I am pleased to report, but it had an impact.

The other impact of late-to-schedule parts deliveries, apart from cost growth, is that we cannot increase our build rate until the supply of parts is more predictable. The good news is that there is light at the end of the tunnel. We see the vast majority of this problem resolving early in the third quarter, but for two large suppliers, it will take a little longer to resolve.

  • Phebe N. Novakovic – General Dynamics Corp., Chairman & Chief Executive Officer

Thanks for reading this issue of the Earnings Recap blog for the Q1’23 Earnings season. Stay tuned for our trending topics recap next week! Feel free to check out the previous iterations of this quarter’s recap blogs Week of April 17.

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