Welcome to the weekly edition of our Q4’22 earnings season update on trending earnings topics of Q4 2022, macro trends, and key management commentary. With another busy week of earnings, Meta Platforms, Apple, Boston Scientific, AMD, Juniper Networks, Match Group, Cognizant Technology, and AMETEK were some of the notable names that reported.
Here are some key trending topics that emerged during earnings updates over the last week:
- Backlog Guide: Significant supply chain constraints have affected numerous industries as China hopes to normalize its output following COVID disruptions. Among a variety of global macroeconomic factors, the geopolitical tension due to the ongoing Russia-Ukraine conflict has also created obstacles for companies striving to match their supply demands. Organizations are frequently reporting on their outlook for the backlog in 2023 and how they hope to minimize it from historic levels and promote business growth
- AI For The Future: While platforms like ChatGPT and other relevant AI tools continue to garner global attention due to displaying unprecedented leaps in technology that are being honed and implemented for real-world utility, many software companies are sharing their plans to optimize their own AI products and services through accelerated R&D efforts and subsequently monetize on this ever-growing opportunity
- M&A And Divestitures: Tougher macroeconomic conditions have led some companies to plan and execute divestitures or spin-offs of existing areas of business to generate long-term profitability. Many organizations are also reporting on their M&A appetite and any actions that have been taken so far in that regard to enhance their business offerings
Q4’22 Trending Earnings Topics: Significant supply chain constraints have affected numerous industries as China hopes to normalize its output following COVID disruptions. Among a variety of global macroeconomic factors, the geopolitical tension due to the ongoing Russia-Ukraine conflict has also created obstacles for companies striving to match their supply demands. Organizations are frequently reporting on their outlook for the backlog in 2023 and how they hope to minimize it from historic levels and promote business growth
Trane Technologies – Prepared Remarks
Customer demand, absolute bookings, and absolute backlog have never been higher. We disclose absolute bookings and revenues each quarter by segment in our earnings release. 2022 bookings of $17.5 billion exceeded 2022 revenues by $1.5 billion for a book-to-bill of 109%. Backlog entering 2023 is $7 billion, well over two times historical norms. Further, we expect backlog to remain elevated throughout 2023, and anticipate entering 2024 with backlog in excess of $6 billion…
For backlog to return to more normal levels of approximately $3 billion bookings would need to decline by over $4 billion or more than $1 billion per quarter. While we recognize that we have difficult comps in 2023, we have a high degree of confidence that bookings will remain robust and that we will enter 2024 with backlog of $6 billion or more.
- Dave S. Regnery – Trane Technologies Plc, Chairman & Chief Executive Officer
Juniper Networks – Prepared Remarks
Finally, we exited 2022 with an exceptional backlog of more than $2 billion, which is up approximately $200 million from where we entered the year and remains well above historical levels. This backlog is providing us with exceptional revenue visibility and should enable us to deliver another year of healthy growth.
Based on our current backlog, customer demand and our assumptions regarding supply, we currently expect to deliver at least 8% revenue growth and at least a point of non-GAAP operating margin expansion in 2023. Our expectations for 2023 assumes the availability of supply only modestly improves and that the end market environment remains uncertain.
- Rami Rahim – Juniper Networks, Inc., Chief Executive Officer & Director
Honeywell International – Prepared Remarks
Building Technologies delivered another outstanding quarter with 15% organic sales growth year-over-year. Modest improvement in supply chain enabled us to reduce our past dues backlog sequentially and delivered more fire products and building management systems, resulting in 21% organic growth in building products. However, supply chain still had not fully unlocked. We exited 2022 with higher past due backlogs than we entered the year and considerably highly levels than our pre-COVID-19 norms.
Building solutions sales also increased organically with double-digit organic growth in project sales for the third consecutive quarter. We finished the year with higher project backlog levels than the start of the year, providing a solid runway for 2023.
- Vimal M. Kapur – Honeywell International, Inc., President & Chief Operating Officer
Microchip Technology – Prepared Remarks
As a result of the uncertain macro environment and the multiple quarters worth of backlog in our books, most of which is non-cancelable, our bookings have slowed down as we expected. Given the circumstances, we view the booking slowdown as a positive, which will serve to preserve the quality of new backlog that gets placed.
Our unsupported backlog, which represents backlog customers wanted shipped to them in the December quarter but which we could not deliver in the December quarter remained well in excess of the actual net sales we achieved. Unsupported backlog did decline slightly for the first time in nine quarters, and we are continuing to work hard to further reduce our unsupported backlog as well as our lead times to more manageable levels.
While we have seen an increase in request to push out or cancel backlog, these requests remain a small fraction of the very large backlog we have over multiple quarters and hence, they have not had a material effect on our business. Despite supply gradually improving, we expect to have supply constraint through much of 2023.
- Ganesh Moorthy – Microchip Technology, Inc., President, Chief Executive Officer & Director
AMETEK – Q&A
Question – Allison Poliniak-Cusic: Great. And then, a lot of concerns are certainly out there about potentially some weakness showing up in H2. Just any thoughts on your end, what you’re seeing in terms of that? Is there anything concerning or sort of popping out that kind of has you a bit worried as we enter sort of the back half of 2023 and into 2024?
Answer – David A. Zapico: Not really. I mean, obviously, our growth is slowing, but record backlogs and we’re executing very well, we’re getting the price. And it still feels good to us. It feels strong and good. And when you get out to the second half of 2023, I mean, there’s less visibility because you’re further out. But our backlog is at a record level. It’s usually about 30% of annual sales. And right now, it’s running at about 50% of annual sales. So we feel really good and we don’t see a slowdown yet.
- David A. Zapico – AMETEK, Inc., Chairman & Chief Executive Officer
Q4’22 Trending Earnings Topics: While platforms like ChatGPT and other relevant AI tools continue to garner global attention due to displaying unprecedented leaps in technology that are being honed and implemented for real-world utility, many software companies are sharing their plans to optimize their own AI products and services through accelerated R&D efforts and subsequently monetize on this ever-growing opportunity
Meta Platforms- Prepared Remarks
The two major technological waves driving our roadmap are AI today and over the longer term, the metaverse. So, first, let’s talk about our AI discovery engine. Facebook and Instagram are shifting from being organized solely around people and accounts you follow to increasingly showing more relevant content recommended by our AI systems. And this covers every content format which is something that makes our services unique. But we’re especially focused on short-form video since Reels is growing so quickly. And I’m really proud of our progress here. Reels plays across Facebook and Instagram have more than doubled over the last year, while the social component of people resharing Reels has grown even faster and has more than doubled on both apps in just the last six months…
AI, it’s the foundation of our discovery engine and our ads business, and we also think that it’s going to enable many new products and additional transformations in our apps. Generative AI is an extremely exciting new area with so many different applications, and one of my goals for Meta is to build on our research to become a leader in generative AI in addition to our leading work in recommendation AI.
- Mark Elliot Zuckerberg – Meta Platforms, Inc., Founder, Chairman and Chief Executive Officer
Advanced Micro Devices – Prepared Remarks
In January, we previewed our next generation MI300 Accelerator that will be used for large-model AI applications in cloud data centers and has been selected to power the 2-plus exaflop El Capitan exascale supercomputer at Lawrence Livermore National Laboratories.
MI300 will be the industry’s first data center chip that combines a CPU, GPU and memory into a single integrated design, delivering eight times more performance and five times better efficiency for HPC and AI workloads compared to our MI250 Accelerator currently powering the world’s fastest supercomputer…We launched our latest generation Ryzen 7000 Series notebook processors earlier in January, including our Ryzen 7040 CPU Series that deliver leadership performance in battery life and are our first processors to feature Ryzen AI, the industry’s only dedicated on-chip AI inference engine in an x86 processor. Ryzen AI is powered by the highly scalable XDNA architecture which is the first integration of AMD and Xilinx IP less than a year after closing the acquisition.
- Lisa T. Su – Advanced Micro Devices, Inc., Chair & Chief Executive Officer
Aon Plc – Prepared Remarks
During 2022, we continued to make progress on Aon Business Services and driving efficiencies and enhanced services, particularly through process improvements, automation, and the use of artificial intelligence. For instance, our captive business helps clients with hundreds of legal entities, who each require multiple policies. Previously, the process of checking policies was manual and inefficient. We’ve now moved to a digital solution that can identify differences quickly and accurately, and deliver these to clients much more quickly.
Similarly, the use of AI is increasingly enabling us to deliver better solutions to clients. For example, we delivered a new solution for our Human Capital clients using an AI-powered search engine that provides them with insights on technology, talent globally, including geography-based pay differentials. This is essential for finding the best technology talent and optimizing within the client’s existing workforce, a key area of growth for many firms.
- Christa Davies – Aon Plc, Chief Financial Officer & Executive Vice President-Global Finance
Match Group – Q&A
Question – Ygal Arounian: Thanks, and good morning, guys. I want to ask about Tinder, and you’ve spent a good amount of time in the investor letter talking about the Tinder product roadmap. And maybe we could just dig in a little bit deeper on that. You mentioned you’re starting to execute on that roadmap. Maybe some kind of practical examples of that and highlight where we are and how much there is left to get through this year.
Answer – Bernard Jin Kim: …A big initiative for Tinder is to cater to Gen Z through a series of initiatives around authentic content and self-expression. We have some really creative and interesting features that we’re currently concepting and we plan to integrate into Tinder. We’ll be talking more about that as the year goes on. Another place that we think Tinder can really change the game is by leveraging machine learning to enhance recommendations. We’re already using machine learning for safety and moderation and that technology is really improving, and I think it’ll be very beneficial when applied to recs. We have resources inside the group that we can leverage to build this technology out, and it’s something that we’re working on in 2023. Not only do we have these resources at Tinder, but Hyperconnect also has a significant team of machine learning talent that we think we can utilize to move faster in this area.
- Bernard Jin Kim – Match Group, Inc., Chief Executive Officer & Director
Cognizant Technology Solutions – Prepared Remarks
We see a strong push now to bring AI into business landscapes with the expectation that AI will reengineer enterprises as completely as enterprise software did three decades ago. Of course, as clients navigate a challenging macro environment now, they need to fund their investments in digital transformation by executing cost and efficiency agendas. These same clients are now asking how we can help them achieve their cost reduction ambitions and underwrite savings for their digital initiatives. Given our broad capabilities, we can help clients, whether they need to drive efficiency gains, innovation or an end-to-end transformation of the business.
- Ravi Kumar Singisetti – Cognizant Technology Solutions Corp., Chief Executive Officer & Director
Q4’22 Trending Earnings Topics: Tougher macroeconomic conditions have led some companies to plan and execute divestitures or spin-offs of existing areas of business to generate long-term profitability. Many organizations are also reporting on their M&A appetite and any actions that have been taken so far in that regard to enhance their business offerings
Boston Scientific – Prepared Remarks
On a full year basis, global growth was driven by key products such as LithoVue, Rez?m, and SpaceOAR, as well as the acquisition of Lumenis, Moses Laser technology, further complementing the Urology portfolio.
Endoscopy sales grew 7% organically in the quarter and on a full year basis grew 8% organically versus 2021. In 2022, we had global success with innovative products such as AXIOS and Single-Use-Imaging, both growing over 20% and supporting strong growth across the globe.
In fourth quarter, we announced our intent to acquire Apollo Endosurgery, which will add a complementary and innovative endoluminal surgery portfolio. We look forward to closing this acquisition as well as our previously announced majority stake in M.I. Tech, which includes the innovative Hanarostent in the first half of 2023.
- Michael F. Mahoney – Boston Scientific Corp., Chairman & Chief Executive Officer
McKesson – Prepared Remarks
We started building this business in 2006 with the acquisition of RelayHealth, which gave us connectivity to over 50,000 pharmacies. We’ve been able to integrate value-added services right into the workflow so that we can help their processes be more seamless and give the customer the experience they need and deserve. We then acquired CoverMyMeds, a long-term partner of McKesson in 2017. This expanded our network by providing connectivity with over 750,000 providers. The integration of CoverMyMeds’ automation solution alleviates some of the friction out of the workflow providers, improving overall access for the patient…
Most recently, we acquired Rx Savings Solutions, which helps employers and health plans reduce prescription drug costs by utilizing its advanced analytics capabilities. It’s more than just price transparency. It really gives members insight and actionable guidance that can drive savings and improve health outcomes for patients. So by bringing these businesses together, Relay, CoverMyMeds, RxCrossroads, Rx Savings Solutions, our McKesson Prescription Technology Solutions connect pharmacies, providers, payers and biopharma manufacturers for really next-generation patient access, affordability, and adherence solutions that are automated and integrated into provider workflows.
- Brian S. Tyler – McKesson Corp., Chief Executive Officer & Director
AMETEK – Prepared Remarks
Additionally, our businesses work closely with our corporate development team to manage our acquisition pipeline, resulting in a continued strong deployment of capital on strategic acquisitions. In 2021 and 2022 combined, we deployed over $2.4 billion in capital on eight acquisitions, and acquired over $600 million in annual sales. We expect to remain active in 2023 as our deal pipeline remains very strong and our balance sheet provides us significant financial capacity to deploy capital.
In addition to our acquisition strategy, we remain committed to investing in organic growth initiatives and are very pleased with the impact these investments are having on AMETEK’s growth. As I highlighted during our last earnings call, AMETEK’s portfolio has strategically evolved with increased exposure to higher growth market segments. This portfolio evolution has been driven by our acquisition strategy and by the organic investments we’re making in our businesses.
- David A. Zapico – AMETEK, Inc., Chairman & Chief Executive Officer
Illinois Tool Works – Prepared Remarks
As you saw in the press release, we completed two divestitures in the fourth quarter, resulting in a combined pre-tax gain on sale of $197 million recorded in non-operating income and an EPS impact of $0.61.
By utilizing capital loss carry-forwards to offset taxes on the divestiture gains, the overall tax rate for the company was 19.1%. So, overall, for Q4, excellent operational execution across the board, strong financial performance in what remains a pretty uncertain and volatile environment.
- Michael M. Larsen – Illinois Tool Works, Inc., Senior Vice President & Chief Financial Officer
Whirlpool – Q&A
Question – Michael Rehaut: First, I’d love to dive in a little bit to the assumptions you’re making in 2023 for InSinkErator. I know that sometimes, in prior acquisitions, divestitures you sometimes have been a little more hesitant to break out the impact of acquisitions. But given the $3 billion purchase price, I think it would be really helpful for investors to understand what the contribution is expected in 2023 on sales and margins and on a quarterly basis in the upcoming year to kind of give us a sense of how the acquisition is doing I think would be very, very helpful.
Answer – James W. Peters: Yeah. Mike, this is Jim and maybe I’d start with when we acquired InSinkErator, we talked about it having revenues above $600 million and we expect it to continue in that range and continue to grow it. We’ve said that the margins are above our average and very strong margins, and we expect that. On a total basis, we think net of interest and everything but with the tax benefits it gives us about $1 of additional EPS as we go into 2023, but it also gives us $100 million-plus of free cash flow and that’s the good thing about this business and part of the reason why we bought it. It’s a very consistent performer but also a very consistent generator of cash, and so that’s what we expect right now headed into 2023 based on what we’ve seen in our first two months of ownership.
- James W. Peters – Whirlpool Corp., Executive Vice President & Chief Financial Officer
Thanks for reading this issue of the Earnings Recap blog for the Q4’22 Earnings season. Stay tuned for our trending topics recap next week. Feel free to check out the previous recap blogs for this earnings cycle below: