Welcome back to the weekly edition of our Q3 2022 earnings season update on trending earnings topics October 24th, 2022 weekly recap, including macro trends and key management commentary. With a busy week of earnings that saw companies like Google, Microsoft, Apple, Intel, CTS, and Visa report, here are some key trending topics that emerged during earnings updates over this period:
- Foreign Exchange Headwinds: Companies across the board are reporting on how foreign exchange headwinds have impacted their business performance
Earnings Topics: Companies across the board are reporting on how foreign exchange headwinds have impacted their business performance
Microsoft – Prepared Remarks
FX impacted company results in line with expectations. With the stronger US dollar, FX decreased total company revenue by 5 points. And at a segment level, FX decreased Productivity and Business Processes and Intelligent Cloud revenue growth by 6 points and More Personal Computing revenue growth by 3 points. Additionally, FX decreased COGS and operating expense growth by 3 points…
Company gross margin dollars increased 9% and 16% in constant currency and gross margin percentage decreased slightly year-over-year to 69%. Excluding the impact of the latest change in accounting estimate, gross margin percentage decreased roughly 3 points driven by sales mix shift to cloud, the lower Azure margin noted earlier, and Nuance.
Operating income increased 6% and 15% in constant currency, and operating margins decreased roughly 2 points year-over-year to 43%. Excluding the impact of the change in accounting estimate, operating margins declined roughly 4 points year-over-year, driven by sales mix shift to cloud, unfavorable FX impact, Nuance, and the lower Azure margin noted earlier.
- Amy E. Hood – Microsoft Corp., Chief Financial Officer & Executive Vice President
Gilead Sciences – Prepared Remarks
As shown on slide 25, product sales, excluding Veklury, grew 11% year-over-year despite $130 million headwind from FX. If we exclude this FX impact, in addition to the impact of previous HIV LOEs, total underlying sales growth year-over-year was 15%.
Moving to slide 26, you can see that Veklury was down, as expected, year-over-year although it more than doubled on a sequential basis from the second quarter. I’ll note that with the continued strengthening of the US dollar, the total FX impact on revenue net of hedges was higher than expected at approximately $200 million compared to the third quarter of last year.
- Andrew D. Dickinson – Gilead Sciences, Inc., Chief Financial Officer
Citigroup – Prepared Remarks
Overall, we believe total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative year-over-year impact from foreign exchange. Second, on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially year-over-year during the December quarter.
Specifically on Services, we expect to grow, but to be impacted by the macroeconomic environment, increasingly affecting foreign exchange, digital advertising and gaming.
- Mark A. L. Mason – Citigroup, Inc., Chief Financial Officer
Apple – Prepared Remarks
Overall, we believe total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative year-over-year impact from foreign exchange. Second, on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially year-over-year during the December quarter.
Specifically on Services, we expect to grow, but to be impacted by the macroeconomic environment, increasingly affecting foreign exchange, digital advertising and gaming.
- Luca Maestri – Apple, Inc., Chief Financial Officer & Senior Vice President
Honeywell International – Prepared Remarks
While a number of challenges persist in the current operating environment, we’re entering the fourth quarter with a very strong demand profile. Since we provided our initial 2022 guidance in February, we have battled supply chain constraints, encountered unprecedented inflation, contended with geopolitical disruption and experienced rapidly rising interest rates. At each turn, our rigorous operating principles have enabled us to continue to deliver. As you saw from the 3Q bridge, the ongoing strengthening of the US dollar has driven materially higher foreign currency impacts and has been a significant headwind to our guidance, which we have consistently offset at the EPS level.
For our 4Q sales guidance, we expect to be in the range of $9.1 billion to $9.4 billion, up 10% to 13% on an organic basis, or up 11% to 14%, excluding the one-point impact of lost Russian sales. We now expect full year sales of $35.4 billion to $35.7 billion, which represents a decrease of $100 million on the low end and $400 million on the high end from our prior guidance, incorporating greater foreign currency impacts.
- Gregory P. Lewis – Honeywell International, Inc., Chief Financial Officer & Senior Vice President
Digital Realty Trust – Prepared Remarks
Same-capital cash NOI growth fell 7.3% in the third quarter, negatively impacted by another 480 basis point FX headwind. This is disappointing on the surface, but once the noise is removed, the improving operating picture that we have been painting starts to emerge. On a constant currency basis, data center operating revenue, rental revenue interconnection was actually up 10 basis points year-over-year and improved by 120 basis points sequentially, demonstrating the turn that has started to take hold in our core operations. The sequential step-up was supported by a 50 basis point occupancy improvement over the second quarter, along with the benefits of the positive release in spreads we’ve seen year to date.
Turning to our risk mitigation strategies on page 9, 56% of our third quarter operating revenue was denominated in US dollars with 21% in euros, 6% in Singapore dollars, 5% in British pounds and 2% in Japanese yen. The US dollar continued to strengthen over the last few months, negatively impacting same-capital revenue growth by 530 basis points and NOI growth by 480 basis points year-over-year, as shown in our constant currency analysis on page 10.
This strong headwind contrasts with typical FX impacts of 50 to 100 basis points in either direction during periods with more normal FX volatility. While the outsized depreciation of the euro this year has been a major driver of headwinds for our P&L, it also represents the lion’s share of our development pipeline.
- Andrew P. Power – Digital Realty Trust, Inc., President & Chief Financial Officer
Visa – Prepared Remarks
Revenue was up 2% in constant-dollar terms and up 4% excluding China. For half one, revenue was plus 4% and plus 7% excluding China. After accounting for a negative FX translational impact of approximately $195 million, nearly double the level seen in Q1, sales were down by 4% on a reported basis in the quarter. Globally, both our wholesale and direct-to-consumer businesses generated low-single-digit growth in Q2, and D2C returned to growth at the VF level despite a lower performance than anticipated from Vans North America.
Our adjusted EPS was $0.73, down 34% or down 27% on a constant-dollar basis. About one-third of this reduction versus last year relates to non-operating impacts. Before I unpack the P&L in more detail, I’ll give you an update on the operating environment across our primary geographies. While rolling lockdowns continued to disrupt operations in China during Q2, we are otherwise open for business from a COVID standpoint across the value chain.
- Alfred F. Kelly – Visa, Inc., Chairman & Chief Executive Officer
Aon Plc – Prepared Remarks
Turning to performance, in the third quarter, our colleagues delivered excellent results, demonstrating continued momentum and year-to-date progress against our key financial metrics. For Q3, organic revenue growth was 5%, on top of 12% in the prior year quarter; adjusted operating margin was up 100 basis points; and adjusted EPS was up 16%. And these results are consistent with our full-year ongoing financial guidance. And we would note that Q3 is our seasonally smallest quarter for revenue.
Year to date, we delivered 7% organic revenue growth, adjusted operating margin expansion of 80 basis points, adjusted EPS growth of 14%, and generated over $2 billion in free cash flow.
Turning to the solution lines, Commercial Risk delivered 5% organic revenue growth this quarter, on top of 13% in the prior year quarter. We did 7% organic revenue growth year to date. Driven by ongoing strong retention, new business generation, and renewal, highlighting the resilience of our core business, as we continue to help clients protect and grow their businesses.
- Gregory C. Case – Aon Plc, Chief Executive Officer & Executive Director
Microsoft – Prepared Remarks
As you heard from Satya, in our commercial business, we saw strong overall demand for our Microsoft Cloud offerings with growth of 31% in constant currency as well as share gains across many businesses. Commercial bookings declined 3% and increased 16% in constant currency on a flat expiry base. Excluding the FX impact, growth was driven by strong renewal execution, and we continued to see growth in the number of large long-term Azure and Microsoft 365 contracts across all deal sizes. More than half of the $10 million plus Microsoft 365 bookings came from E5.
Commercial remaining performance obligation increased 31% and 34% in constant currency to $180 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 23% year-over-year. The remaining portion, which will be recognized beyond the next 12 months, increased 38% year-over-year. And our annuity mix increased 1 point year-over-year to 96%.
- Amy E. Hood – Microsoft Corp., Chief Financial Officer & Executive Vice President
Global Payments – Prepared Remarks
Taking a closer look at our performance by segment, Merchant Solutions achieved adjusted net revenue of $1.45 billion for the third quarter, a 10% improvement on a constant currency basis and approximately 11% excluding the impact of Russia. We delivered an adjusted operating margin of 50% in this segment, an increase of 80 basis points year-on-year on a foreign-exchange-neutral basis.
Our combined US Payments and Payroll business delivered another strong quarter, led by our integrated channel which again reported mid-teens growth and we continue to see strong momentum in our POS software solutions which grew nearly 30% this quarter, on top of over 70% growth in Q3 of 2021 as well as our HCM and Payroll business, which grew mid-teens in the quarter.
Our worldwide e-commerce and omnichannel businesses also delivered growth in the teens on a constant currency basis this quarter, as we continue to see strong demand for our omnichannel solutions across our business. And our vertical market solutions again achieved double-digit growth compared to the prior-year, led by strength (00:15:19) in our school solutions business and Zego while bookings trends remain solid across the portfolio.
- Joshua Whipple – Global Payments, Inc., Senior Executive Vice President & Chief Financial Officer
Earnings Topics October 24th 2022: China continues to enforce its stringent zero-COVID policy through systematic lockdowns that have majorly impacted the country’s economy, as well as the business operations of organizations globally. Companies are reporting on how the developments in China have negatively affected their performance throughout this quarter
VF Corp – Prepared Remarks
The North Face business continues to power forward, including and importantly The North Face grew first half revenue by nearly 30% in greater China where most brands inside VF and across the broader market have been impacted by ongoing disruption. And the Dickies brand is continuing to gain momentum across the work lifestyle segment where sales excluding China were up about 20% in the first half.
We are continuing to actively manage the near-term challenges presented by our largest brand, Vans, the ongoing COVID-related disruption in China and the broader macroeconomic and geopolitical challenges, which have created an unprecedented level of uncertainty which all businesses and consumers are navigating. I remain confident in our ability to deliver on our overall revenue targets as we prepare to maximize our potential when the macroeconomic environment improves, leveraging VF’s powerful brands, unique business model and critical strategic growth platforms.
- Steven E. Rendle – VF Corp., Chairman, President and Chief Executive Officer
The Boeing Co. – Prepared Remarks
In the strong demand and yet supply-constrained world, our inventory, the fixed – the finished goods inventory that we have is an asset, not a liability, and we use it to de-risk that delivery outlook. And as for China, we continue to de-risk. That’s been our objective. We still would like to deliver airplanes to China. We continue to support our customers. We continue to support the regulator. As we all know, the COVID restrictions and policies in China have reduced demand for airplanes, in general. And we hope that is what is restricting the acceptance of our – of the airplanes that they have on our tarmacs. But we also are clear-eyed about the geopolitical risks that are out there, and we are not going to impart new risks on our investors. And we believe we can de-risk what we have.
- David L. Calhoun – The Boeing Co., President, Chief Executive Officer & Director
LyondellBasell Industries NV – Q&A
Question – Jeffrey J. Zekauskas: Thanks very much. I think I have a question for Ken Lane. China is being – China purchases oil at a discount to the Brent price from Russia. Does that purchasing, that discounted purchasing provide a cushion to Chinese petrochemical margins or does it not influence Chinese petrochemical margins? And can you sort of characterize the state of the Chinese polyethylene market business?
Answer – Kenneth T. Lane: Sure, Jeff. Thanks for the question. Good to hear from you. So, we’ve done a lot of investigation into that, as you can imagine, because what we’re seeing in the China market, we’re at historically low spreads there and a lot of that is driven by the new capacity coming on. But our view is a lot of that oil is actually going into the state-owned refiners and not being passed on to the market in terms of lower priced feedstocks for the polymers.
What’s happening in China is really more related just to the higher capacity and the lower demand that we’re seeing there. So, that is going to be the larger driver in the even midterm.
What we really want to see is the growth come back in the China market, which we’ve not seen as of yet, and you may recall, going back to the – even the first quarter earnings call, we were talking about expecting to see some recovery in demand in China already after Chinese New Year, and that just did not materialize
So, once we see that and that demand starts to absorb all of the new capacity, then I think you’re going to start to see a return to a more normal level of spreads in China..
- Kenneth T. Lane – LyondellBasell Industries NV, Executive Vice President-Olefins & Polyolefins
Fortive Corp – Prepared Remarks
Total revenue increased 3% in the third quarter with a core revenue decline of 1% as continued supply chain constraints limited growth at ASP and Fluke Health Solutions, resulting in lower-than-expected core growth in the quarter. Mid-single-digit growth in Western Europe was more than offset by low-single-digit decline in North America and a mid-single-digit decline in China. We saw a sequential improvement in core growth at ASP as their supply chain shortages constrained capital equipment growth started to ease in late September.
Elective procedures improved to the low 90% range, excluding China, while rolling lockdowns kept elective procedure rates around 70% of pre-COVID levels there.
- James A. Lico – Fortive Corp., President, Chief Executive Officer & Director
Invesco – Prepared Remarks
Our Greater China business delivered $2.1 billion of net long-term inflows this quarter. Invesco Great Wall, our China Joint Venture has fueled our growth, and we continue to successfully launch new products, most notably in fixed income. We have grown consistently in the last several quarters, despite the recent difficulties faced by the Chinese economy as a result of our strong local partner and our long standing reputation as one of the top global investment managers in China. Our leading position in China is the result of many years of investment and hard work. As China and the global economy eventually recover, we expect our growth to accelerate in the fastest growing market in our industry.
- Martin L. Flanagan – Invesco Ltd., President, Chief Executive Officer & Executive Director
Thanks for reading this issue of the Earnings Recap blog for the Q3’22 Earnings season. Stay tuned for our trending topics recap next week.
