Earnings Season Recap #13

Stay up to date during the Earnings Season by reading our curated key quotes from the most noteworthy earnings calls from last week, February 6-10. We are covering earnings calls from Fortinet, Disney, KKR, Adyen, and L'Oréal.

H2 2022 Y/Y Δ
Revenue +19%
*Professional Products +18%
*Consumer Products +15%
*L’Oréal Luxe +19%
*Active Cosmetics +31%
EBIT +21%
*margin 19.5% (19.1)
EPS +28%

-> Highest growth in more than 20 years and growth by segment: Excluding 2021, which was an exceptional year in many respects, 2022 showed the best growth in more than 20 years. On a reported basis, it was the best in almost 30 years. Looking now at the performance of the last quarter alone. You can see on the left that sales increased by 13.5% to EUR 10.3 billion, passing the EUR 10 billion mark for a quarter for the first time. Like-for-like growth came to plus 8.1%. On the right of the chart, the comparable quarterly growth since 2019. Over 3 years, annual growth was plus 23.4% on a comparable basis and growth sequentially accelerated quarter after quarter to plus 26% in the last quarter. Let's look at sales by division. Like-for-like, they all grew strongly. The Professional Product Division ended the year on a high note and posted a 10.1% increase. L'Oréal Luxe continued at a strong pace, up plus 10.2% despite the turbulence in the Chinese market. Active Cosmetics posted another year of stellar growth at plus 21.9%. The division has almost doubled in size since 2019. The most remarkable, however, was the acceleration of the Consumer Products division, which achieved its best growth in 20 years at plus 8.3%. – Christophe Babule, CFO (00:01:35)

-> Growth by region: Our business is well distributed by region. [...] In Europe, we recorded 11.6% like-for-like growth, up double digits for the second year in a row, led by the Spain, Portugal hub at mid-teens, while the German, Austria hub, the U.K. And Italy rose high single digit, a strong performance in these large countries where we sold significant share. In North America, momentum remained very strong at 10.4% like-for-like as the American consumer showed strength throughout the year. In North Asia, growth came to 6.6% over the full year as business was softer in the second half due to the challenging market conditions in China with the resurgence of COVID. In a declining market, sales in Mainland China rose 5.5%, boosted by double-digit growth in e-commerce and a strong performance on Singles' Day. Emerging Markets, up by 20.5%, punch well above their weight, contributing 1/4 of the group's overall growth. India, the Malaysia, Singapore hub, the Gulf countries and Vietnam drove a swift 22% like-for-like increase in SAPMENA-SSA, while growth of 18.6% in Latin America was quite broad-based, led by Mexico. To be noted on the right, the remarkable 3-year growth in North Asia and emerging markets. – Christophe Babule, CFO (00:02:38 )

-> Dividend increase: And the financial situation remains healthy. [...] The group's 2022 outstanding performance as well as the quality of the balance sheet led the Board of Directors to propose to the AGM a further 25% increase in the dividend to EUR 6 per share. This new increase in the dividends leads then to a payout ratio of 53.3%. This is another illustration of L'Oréal's consistent, dynamic and balanced dividend policy. With regards to L'Oréal for the future, 2022 was a year of further progress. You can see on this slide some of our achievements in the effort to fight against climate change, manage water sustainably, respect biodiversity and preserve natural resources. For example, regarding climate, the group is committed to achieving carbon neutrality for all of its sites by 2025. At the end of 2022, 110 sites, including 22 factories, had already achieved carbon neutrality that is 65% of our sites. – Christophe Babule, CFO (00:14:40)

-> “All our major brands are growing and gaining market share”: 2022 was a dynamic year for the mass beauty market, which grew at plus 6%. And it was a great year for our division, which trust the EUR 14 billion mark and grew at plus 8.3%, our best result in 20 years. This acceleration was very balanced, coming from value at a solid plus 5.7%, but without sacrificing volumes, which grew at plus 2.6%. This dynamic shows the power of our brands and of our data science of pricing capabilities. We're not only growing, but accelerating our market share gains, widening our lead over the market year after year. We achieved all this while protecting our profit despite exceptional cost of goods increases. All our major brands are growing and gaining market share. L'Oréal Paris reinforced its place as the world's leading beauty brand at plus 7%. While Garnier accelerated by plus 8%, powered by green science and innovations. The boom of Maybelline at plus 16% and NYX Professional Makeup at plus 21%, fueled a spectacular bounce back of makeup. The category is on fire for us at plus 15%. Haircare was another highlight, growing double digits twice as fast as the market, thanks to our focus on premium. And in fact, beyond makeup and haircare, the division gained share on all of its major categories. – Alexis Perakis-Valat, President of Consumer Products Division (00:16:50)

-> Four strategic growth drivers: So building on a successful '22, we are determined to keep accelerating, thanks to 4 strategic growth drivers: First, our focus on the upper half of the middle class. This group represents 2 billion people worldwide and thanks to search, makeup tutorials and TikTok skinfluencers, they are becoming more beauty savvy every day. [...] Second, we specialize in beauty categories with high potential to premiumize and inspire new consumer habits. [...] The third driver is, obviously, our highly desirable brands that are creating game-changing innovations. L'Oréal Paris, is a luxury brand. That happens to be sold at mass. It is a unique blend of femininity, feminism and superior science. [...] Fourth and last, we are pioneers of Beauty Tech and data, which actually unlocks value in many ways. Thanks to tech, we are bringing service to the self-service world of mass. Our tools, like the Skin Genius diagnosis by L'Oréal Paris is like putting a beauty adviser in the pocket of millions of consumers. We're also leveraging our data capabilities to target the right consumers with the most compelling messages. – Alexis Perakis-Valat, President of Consumer Products Division (00:18:55)

-> Winning strategy for the Products Division: Our performance, since 2019, is a result of our winning strategy, built on 2 major transformations in our business model. First, a reinvented relationship with consumers. Today, our division is truly omnichannel. To recruit new consumers at scale, we continue, of course, to capitalize on our strong salon footprint. We remain dedicated to our 400,000 salon partners, leveraging the fantastic power of stylist advocacy and professional expertise, and we go further by accelerating in e-commerce, and we are progressively extending our distribution in specialty retail. Together, e-commerce and specialty retail represent 30% of our total turnover. Our omnichannel strategy is supported by investments in media, CRM, and advocacy, financed by a strong valorization that's a tight control of our SG&A. Our second key transformation is a reinvented relationship with hairstylists. We continuously adapt to an ever-evolving market characterized by the rise of independent stylists. To reach them all, we are building the most powerful data-driven digital ecosystem. There are 7 million hairstylists in the world. – Omar Hajeri, President of the Professional Products Division (00:26:20)

-> 2022 summary from the CEO: To conclude on 2022, I would like to reflect on the past 3 years, in which the world has faced unprecedented challenges. But as they say, when the going gets tough, the tough get going. And we have emerged from this time stronger than ever. We saw that the L'Oréal engine is firing on all cylinders, and this translates into an increase in our overperformance versus the market compared to the pre-COVID period as this graph shows it. Since 2019, we have delivered an average growth of more than 5 points above market growth, significantly increasing the gap with both the markets and our competitors. However, growth is not the whole story. We have emerged from the pandemic more profitable than before, improving our profitability by 90 basis points, whilst at the same time, increasing the fuel behind our brands. A&Ps of sales is up 70 basis points from 2019, which represents over EUR 3 billion in additional A&P over the 2019-2022 periods. And SG&As have come down 190 basis points. This is the L'Oréal virtuous circle. We have also transformed our organization. – Nicolas Hieronimus, CEO (00:51:14)

-> Resilience to weak macroeconomic conditions: Now I'd like to look forward to the year ahead. Whilst remaining prudent in this world of poly crisis, I am confident in L'Oréal's ability to build on our strength and deliver another year of growth in sales and profits. At a macro level, and even if currencies should be less favorable in 2023, we see some patches of blue sky amongst the dark clouds. There are a few early signs of reduced inflation on some raw materials, recession is seen as less likely in many parts of the world, and China is reopening with a clear focus on economic growth. If we look at our markets, we know that beauty is an essential human need. And even in times of recession, there is a continued consumer demand for beauty products. The beauty market has always been resilient to economic uncertainty with an average growth of over 4% over the past 23 years, and this has proven true once again in 2022, growing a robust plus 6%. We believe it will keep growing at this rate of 4% to 5% on average in the coming years. In the current inflationary context, we saw limited volume decrease. And even though there are nuances by geography and category, our latest consumer panel show that valorization more than compensates any drop in volume. – Nicolas Hieronimus, CEO (00:55:59)

-> The secret sauce: Finally, we will succeed in this new era, thanks to our L'Oréal culture, which will only deepen. This culture full of passion, creativity and commitment, which has been living and breathing for 37 years is truly unique. It is the secret sauce to our success. To conclude, I would like to leave you this morning with 3 key takeaways. Firstly, in '22, in a world of polycrisis, we have delivered our best and most balanced growth since 1999, outperforming the market in all divisions, geographic zones and categories, and we have reached historical levels of profitability. Second, while we know that 2023 may continue to be another bumpy year, we strongly believe that the beauty market will grow yet further, and L'Oréal is ready and confident to deliver another growth of solid growth in both sales and profits. – Nicolas Hieronimus, CEO (01:04:01)

-> Positive signs in China: I'll start with China because that's probably one of the questions that's on everybody's mind. It's true that in China, for most companies, December and the beginning of January was very low consumption because people were sick and staying home. But the early signs we are getting from February, the first weeks of February are pretty positive, very positive in terms of traffic and as well in terms of purchases. So to answer your question, I think that the Chinese market will rebound from Q2, not from the second half, but it probably will be progressive as consumers need to regain trust. I think it will bounce back on all divisions, but clearly, the divisions that have a stronger brick-and-mortar footprint, like L'Oréal Lux, will probably benefit even more from this reopening, but I think every division will benefit from it. Hainan is a nice part of the Chinese market. And of course, today, Travel Retail, the air traffic has really bounced back a lot in 2022, but it's still more than 30% below that of 2019. So I guess it will be another year of acceleration in 2023. – Nicolas Hieronimus, CEO (01:07:09)

H2 2022 Y/Y Δ
Processed volume +41%
Net revenue +30%
EBITDA +4%
*margin 52% (64%)
EBIT +0%
*margin 46% (61%)
EPS +5.2%

-> Organic volume growth and churn: Looking at it by the numbers. In H2, we processed EUR 421.7 billion on our single platform, which is an increase of 41% year-on-year. In line with previous cycles, more than 80% of these volumes came from customers who were already on our platform when the period began, and we again achieved less than 1% of volume churn. Net revenue amounted to EUR 721.7 million, up 30% year-on-year. Adyen is moving with momentum. Each period, we report even broader global reach, and H2 proved to be no exception. Our point-of-sale volumes were EUR 67.6 billion, up 62% year-on-year and comprising 16% of total processed volume. This figure underlines the continued appetite for advanced multichannel experiences and to the unique ability of our single platform to meet this need. – Unknown Attendee (00:01:30)

-> The market provides great opportunities to acquire talent: I think for Adyen to reach its full potential, we need to grow a little bit larger in number of people. And during COVID, we were hiring, but we always kept the bar high. It's a very competitive market. So we knew something was going to give, and that was the number of people that we attracted because we would have liked to hire a little bit more. And now we move into a market where things are still competitive but a little bit easier, and we now see the opportunity to get those very talented people on board. And so we're benefiting from that to grow towards the plan of working at a larger scale and to onboard those people. And what's, I think, interesting is it's often assumed that we use them just for one initiative, maybe embedded financial services or just for platform. But actually, we use them to invest in all our products. – Pieter van der Does, Co-founder & CEO (00:04:20)

-> Benefiting from being back in the office: We benefit from being back in the office. Adyen is back in the office. Globally, we have a policy where we ask people to come in, and it's really working. So the offices are a very vibrant place, and that makes it easier to train people. So that's a very simple part. We have always been very good in training, I think. But even there, we stepped up. We have specific, what we call academies. And we now broaden those academies for the different specialisms within the company. So that's easier to train people. We are hiring people with a little bit more experience, and sometimes, we have leaders, which we call in flying leaders. So people have been leading in other organizations. And why is now the time good to do that? In the past, we felt it could be dilutive to our culture. We now have such a size that we feel that actually those leaders can add something and can be good for the company. So we targeted to have more senior people. – Pieter van der Does, Co-founder & CEO (00:05:53)

-> Investments in other markets: You see, churn in large merchants less than 1%, and our growth comes from more than 80% out of existing merchants. So merchants that give us more business but also merchants which we onboarded last year or the years before, which are still rolling out with us. So the underlying economics are strong. If you look historically, we invested, for example, Unified Commerce in the U.S. It takes years for that to really scale. Currently, we're making investments in other markets. I think Japan, I think Mexico, where we have both online and stores working together. We know those are powerful products, but we also know the results of that will come quite a bit later. So it's the fact that we are very long-term. And you see that there's appreciation by our merchant base that we feel it would be risky not to use the opportunity that we currently have in the market. – Pieter van der Does, Co-founder & CEO (00:09:40)

-> Focusing on the long-term: We take this long-term view, so we make the investments that are necessary to get to the next levels of growth because that's very important to us, make sure that we do the right things for our customers in the different commercial pillars. Of course, that comes at a cost. That's why you see why EBITDA levels are lower right now. But these are real investments. You could also argue that if we would stop doing this, we would get back at 65% margins very, very quickly. So these are not additional costs because we need to run our business today. So these are investments in the future. If we would stop investing in the future, we would quickly get to these higher profitability levels. So that's why we are very convinced that this is a good and valid strategy for us. It's indeed a bit opposite to what's happening in the market around us. We've always built the company in a very disciplined way, and that's what we will continue to do. So we're not hiring as fast as we can. We hire in a way that we get the right quality in with a bar high and keep the discipline. – Pieter van der Does, Co-founder & CEO (00:10:35)

-> Going beyond payments: Yes, absolutely. I think if you look at how we see these investments, it will extend our runway. So of course, we have this guidance on how we want to grow our revenues longer term. That's what we want to continue. And these investments make this possible. Longer term, we also want to go beyond payments. So we're still heavily investing in payments but also developing our first products that go beyond this. And this is because merchants ask for it. So we want to make sure that we do this to make sure that we are in line with our merchants' demand. And yes, with a single platform, that's relatively easy to do. So not in itself as an acceleration. It is a sustaining growth path that we're on. – Ingo Uytdehaage, CFO (00:15:10)

-> 2023 is not the year for margin expansion: If you look at our investments, we want to continue our investments in 2023. So in 2022, we hired around 1,200 people. That's also the number of people that we want to add to the team this year. That's sort of the maximum that we want to hire. We, of course, keep the bar high. Also with the full impact of the people that we have hired in the second half of this year or in 2022, that could lead to some further margin pressure. So 2023 is certainly not a year where margins will expand again. That's more something that we will expect to see longer term in the course of '24 when we think we are at this next level, and we will hire less people. Indeed, I think your reference to early years, I think it's very similar and not so much maybe on the margin levels but the perspective that we take. So the perspective that we take right now is fairly similar to the '15 and '16, '17 years when we invested heavily in acquiring licenses, point-of-sale development, and that really started to pay back in the years '18, '19, '20. And we want to take that same approach indeed, so have lower margins in the short term to be in a way better position in the long run. – Ingo Uytdehaage, CFO (00:17:15)
Adyen believes they are benefiting from being back in the office.

-> Not limited by TAM and constantly improving products: We have growth from existing merchants, which is like the majority, more than 80%. But we're constantly adding new merchants to that, so that, that doesn't stall but that keeps going. So that's what we're doing. And if you look at the addressable market, we are not limited by the addressable market. So yes, that's what we'll keep on doing in the U.S. with more people with more track records being recognized as an important domestic player as well. [...] So I mentioned Japan, I mentioned Mexico. So they're also that engine that starts to work. Safe to say, what's then more important, it's important to keep it flowing. We constantly grow with existing, and we constantly add new customers. And that's what we have been doing now for more than a decade, and that's what we continue to do. And then it's about outperformance of the products, investing in engineers, almost 60% of what we hired are engineers that build products, constantly improving. And that's why merchants choose first. It's not from a deviation in the past that they tied their hands. Now it's like this is the product I like and I put more volume to. And that's what we'll do for the years to come. – Pieter van der Does, Co-founder & CEO (00:33:40)

-> Building internally with patience instead of M&A: I think the comparison to be made is, for instance, like if you look at the U.S., it has taken years to get real traction in the domestic U.S. market. Of course, we're ready. We're quite successful in the early days with U.S. merchants going international. But now to have domestic traction, it took years to get there. If you translate that to other markets that are very significant, Japan, it will really take time to be in that similar situation. You need to build a team. We built a team from the ground up, so we don't do any type of acquisitions. So time is the thing that we need to overcome. It just is having that patience building it right. It's also on the product side, of course, building everything ourselves. It just takes more time. And that's why we strongly believe that the investments now will put us on a longer growth path and why we think this is the right thing to do. – Ingo Uytdehaage, CFO (00:49:04)

-> Cash and capital allocation strategy: We indeed have a significant cash position that helps us to grow the business. We're still in investment mode. It helps to have a significant cash balance. In discussions with regulators, it helps us with discussions with merchants. We have an A- rating with S&P. So it also says a lot about our financial stability. In the end, that's ultimately what we're selling. We're selling trust to our customers. And having this financial stability helps us a lot. That's why we continue with this strategy for now, and we will revisit at a later stage. – Ingo Uytdehaage, CFO (00:57:47)

Q1 2023 Y/Y Δ
Revenue +8%
*Media and Entertainment +1%
*Parks, Experiences, and Products +21%
EBIT +5%
*margin 7.5% (7.7)
Net Income +11%
*margin 5.4% (5.3)
EPS +11%
FCF -81%

Subscribers:
Disney+ (161.8m) +25%
ESPN+ (24.9m) +17%
Hulu (48m) +6%
Total subs (234.7m) +20%

-> Strategic reorganization: Our company is fueled by storytelling and creativity. And virtually every dollar we earn, every transaction, every interaction with our consumers emanates from something creative. I've always believed that the best way to spur great creativity is to make sure that people who are managing the creative processes feel empowered. Therefore, our new structure is aimed at returning greater authority to our creative leaders and making them accountable for how their content performs financially. Our former structure severed that link, and it must be restored. Moving forward, our creative teams will determine what content we're making, how it is distributed and monetized and how it gets marketed. Managing costs, maximizing revenue and driving growth from the content being produced will be their responsibility. Under our strategic reorganization, there will be 3 core business segments: Disney Entertainment, ESPN and Disney Parks, Experiences and Products. These organizational changes will be implemented immediately, and we will begin reporting under the new business structure by the end of the fiscal year. – Robert Iger, CEO & Director (00:03:29)

-> Cost savings: This reorganization will result in a more cost-effective, coordinated and streamlined approach to our operations. And we are committed to running our businesses more efficiently, especially in a challenging economic environment. In that regard, we are targeting $5.5 billion of cost savings across the company. First, reductions to our non-content costs will total roughly $2.5 billion, not adjusted for inflation. […] In general, the savings will come from reductions in SG&A and other operating costs across the company. To help achieve this, we will be reducing our workforce by approximately 7,000 jobs. While this is necessary to address the challenges we're facing today, I do not make this decision lightly. I have enormous respect and appreciation for the talent and dedication of our employees worldwide, and I'm mindful of the personal impact of these changes. On the content side, we expect to deliver approximately $3 billion in savings over the next few years, excluding sports. – Robert Iger, CEO & Director (00:05:40)

-> Disney+ goals and strategies: I'm proud of what we've been able to achieve since the launch of Disney+ just 3 years ago. [...] Like many of our peers, we will no longer be providing long-term subscriber guidance in order to move beyond an emphasis on short-term quarterly metrics, although we will provide color on relevant drivers. Instead, our priority is the enduring growth and profitability of our streaming business. Our current forecasts indicate Disney+ will hit profitability by the end of fiscal 2024, and achieving that remains our goal. Since my return, I have drilled down into every facet of the streaming business to determine how to achieve both profitability and growth. And so, with that goal in mind, we will focus even more on our core brands and franchises, which have consistently delivered higher returns. We will aggressively curate our general entertainment content. We will reassess all markets we have launched in and also determine the right balance between global and local content. We'll adjust our pricing strategy, including a full examination of our promotional strategies. – Robert Iger, CEO & Director (00:07:24)

-> Iger’s #1 priority: We will fine-tune our advertising initiatives on all streaming platforms. We will improve our marketing, better balancing platform and program marketing while also leveraging our legacy distribution platforms for marketing and programming. This may include greater use of legacy distribution opportunities to increase revenue and more effectively amortize content investment. And as I said before, our new organizational structure will reestablish the direct link between content decisions and financial performance. This is one of the most important steps we can take to improve the economics of our streaming business. There's a lot to accomplish, but let me be clear. This is my #1 priority. We are focused on the success of our streaming business and the return it generates for our shareholders long into the future. – Robert Iger, CEO & Director (00:08:45)

-> Avatar: The Way of Water and synergies: Before I turn this over to Christine, a few comments about the quarter. James Cameron's Avatar: The Way of Water, which was easily the most successful film of the quarter, has become the fourth biggest film of all time globally with close to $2.2 billion earned at the box office to date. The global popularity of this film will result in the creation of more opportunities for fans to engage with the franchise, which they've been doing at Walt Disney World's Pandora - the World of Avatar, as well as in theaters globally and on Disney+, where the first film has delivered very strong numbers. And today, I'm thrilled to announce that we will be bringing an exciting Avatar experience to Disneyland. We'll be sharing more details on that very soon. Avatar represents yet another core franchise for the company. And as you've seen time and time again, we have a unique way of leveraging creative success across multiple businesses and territories and over long periods of time. – Robert Iger, CEO & Director (00:09:30)

-> Highest quality of shows leads to the most lucrative library: The Walt Disney Company also won more Golden Globes than any other entertainment company this year, a total of 9, including for Abbott Elementary, the first broadcast show to win a Golden Globe for Best Series in nearly a decade. Without question, we have a world-class television business that fuels both our linear channels and direct-to-consumer services, especially with the assets acquired through the Fox transaction. It goes without saying that the best shows lead to the most lucrative library and have the power to endure because of their quality. The Simpsons illustrates this perfectly. Disney+ launched back in 2019 with more than 30 seasons, and it remains one of our top performers today. – Robert Iger, CEO & Director (00:12:18)

-> Capital allocation: When it comes to investing in growth and returning capital to shareholders, we will take a balanced and disciplined approach as we did throughout my previous tenure as CEO when we invested in our core businesses and acquired new ones, bought back stock and paid a dividend to our shareholders. As a result of the impact of the COVID pandemic, we made the decision to suspend the dividend in the spring of 2020. Now that the pandemic's impacts to our business are largely behind us, we intend to ask the Board to approve the reinstatement of a dividend by the end of the calendar year. Our cost-cutting initiatives will make this possible. And while initially it will be a modest dividend, we hope to build upon it over time. – Robert Iger, CEO & Director (00:14:30)

-> Disney+ subscribers growth and pricing power: There are a few factors worth mentioning that we expect will impact Disney+ core subscriber and ARPU growth in Q2. The Disney+ domestic price increase has been playing out as expected, with only modestly higher churn, which may also negatively impact the fiscal second quarter given the timing of the December price increase. That impact, in addition to slower than previously expected growth in some international markets, suggests core Disney+ subs may grow only modestly in Q2 at a similar pace to the first quarter. As we have said before, sub growth will vary quarter-to-quarter, and we expect to see higher core subscriber growth towards the end of the fiscal year. Disney+ core ARPU will continue to benefit in the second quarter from the domestic price increase. And while it's only been 2 months since the launch of the Disney+ ad tier, we are pleased with the initial response, which includes continued demand from top-tier advertisers. As I mentioned last quarter, we do not expect the launch of the Disney+ ad tier to provide a meaningful financial impact until later this fiscal year. – Christine McCarthy, CFO (00:21:25)

-> Promotion to chase subscribers has been too aggressive: First of all, we were, as a company, in a global arms race for subscribers. The number of subscribers that have become kind of the primary measurement of success not only here in the company, but among the investment community. And in our zeal to go after subscribers, I think we might have gotten a bit too aggressive in terms of our promotion, and we are going to take a look at that. I talked about pricing as well. That's another, where we really have to look at, are we pricing correctly? It's interesting, as Christine noted, we took our pricing up substantially on Disney+, and we didn't suffer any de minimis. We only suffered a de minimis loss of subs. That tells us something. It may also tell us that the promotion to chase subs that we've been fairly aggressive at globally wasn't absolutely necessary. – Robert Iger, CEO & Director (00:43:20)

-> “I’m very, very bullish about our parks”: Well, the answer is yes on the theme parks in terms of their growth. I'm very, very bullish about our parks, and not just because of the COVID recovery. But to start with, demand on the parks is extraordinary right now. Now we could lean into that demand easily by letting more people in and by more aggressively pricing. We don't think either would be smart. Because we let more people in is going to reduce guest experience. That's certainly not what we want. And in fact, if you look at our results this past holiday season, we actually reduced capacity, certainly improved guest experience, and we're able to maintain not just profitability, but a very, very successful or robust bottom line. We're going to continue to look at opportunities like that, which is essentially to simply get more creative in terms of managing the capacity that we have. I'm going to come back to that in terms of growth, but let me also address the pricing side. It's clear that some of our pricing initiatives were alienating consumers. I've always believed that accessibility is a core value of the Disney brand. – Robert Iger, CEO & Director (00:48:54)

Q4 2022 Y/Y Δ
Revenue -38%
*Asset Management -66%
*Insurance -8%
Net Income -84%
*margin 3.3% (12.5)
EPS -89%

-> Capital raise and buyback authorization: We raised $16 billion in the quarter. This was driven by fundraising across our growth and traditional PE strategies, leveraged credit, a block transaction at Global Atlantic, alongside incremental flows at GA. This brings our full year 2022 total new capital raised to $81 billion. Our assets under management increased to $504 billion as of 12/31, with fee-paying AUM coming in at $412 billion. We continue to find opportunities to invest, deploying $16 billion in the quarter. Infrastructure and traditional private equity accounted for about half of the Q4 deployment with opportunities dispersed globally. And finally, before handing it to Rob, consistent with our historical approach, we're pleased to announce our intention to increase our annual dividend policy from $0.62 to $0.66 per share. This change will go into effect for the dividend announced alongside first quarter 2023 earnings. And at the same time, we've increased our stock repurchase authorization back up to $500 million. – Craig Larson, Head of Investor Relations (00:06:02)

-> “We’ve never had a stronger team”: We got our senior team together earlier this year to review where we are as a firm, where we're going and most importantly, what we need to get right to capture the opportunity that is in front of us. Listening and participating in these discussions was incredibly energizing. We've never had a stronger team and been more aligned around where we are going as a firm. We have a number of very clear avenues for long-term and sustainable growth and more confidence than ever in our ability to achieve it. I'm going to step through some of these more material opportunities for growth in a minute, but before I do that, I first wanted to emphasize just a few points about 2022. Starting with our fundraising. We raised $81 billion of capital last year, the second most active year in our history. And of course, all against a much more complex market backdrop and without significant contributions from our flagship strategies. Over 70% of our fundraising last year came in our real assets and credit businesses, strategies that are often front-of-mind for our clients in rising interest rate as well as inflationary environments. – Robert Lewin, CFO (00:07:44)

-> Balance sheet deployment: I said the same thing last quarter as well, but there's really not a corporate that I know that doesn't wish they had more capital availability right now. The balance sheet has a clear competitive advantage in its continued ability to enable and accelerate growth in a way that is less dilutive for our public shareholders. To highlight this point, M&A, our investments in core private equity, our buildup in the insurance space and share buybacks have all accounted for roughly 90% of our net balance sheet deployment over the past 5 years. And we expect that trend to continue over the coming several years as well. This is just another tool that we have to be able to drive earnings per share over time. To summarize, we continue to feel extremely positive about our future outlook. – Robert Lewin, CFO (00:18:18)

-> Business as usual: There is no doubt that markets and the economy remain dynamic. There's also no doubt mainly remaining focused on the macro, quarterly results, short-term catalysts and the near-term outlook for our industry and business. In summary, there's a lot of noise out there. We find that noise is just that, noise. We continue to raise capital, find interesting deployment opportunities and selectively monetize our portfolio. It's business as usual at KKR. So from our seats, while the noise creates some questions, it's important to not let it become a distraction. Building KKR is a long-term effort that takes years of planning and investment to get right. Many of the businesses we are scaling now were started over 10 years ago. And many of the businesses we are starting now will be scaling for decades to come. So we are singularly focused on what we need to get right: talent, culture, performance, clients and operations. If we get those things right, we will double KKR again at a rapid pace. If we don't, our growth will be slower than it could be. Growth is the result of execution. – Scott Nuttall, Co-CEO & Director (00:19:47)

-> Keeping long-term focus: It's important to understand that the cash carry we generated last year largely came from investments we made 5-plus years ago when our AUM was a fraction of what it is today and our carry eligible invested capital was as well. To be specific, the vast majority of last year's carry came from harvesting investments made when our carry-earning invested capital was roughly $50 billion. Today, it's about $150 billion, up 3x. So don't let the near-term monetization environment divert your attention from what matters. The forward is incredibly strong as this much larger scale of invested capital matures with the returns on the slide Craig showed you. And finally, and perhaps most important, our team has never been stronger or more cohesive. In summary, over the last several years, we've made the investments for the next leg of growth at KKR and see years of opportunity ahead. And as we've done all this, the earnings power of KKR continues to increase. This is true regardless of the near-term noise in markets and is what gives us such confidence in our outlook. So don't get distracted by the noise. The signals are strong and our confidence is high. – Scott Nuttall, Co-CEO & Director (00:24:22)

What matters is the operating performance of the portfolio: It's not at all surprising, given the markets have been off, multiples have been off. They'd see some marks come down, but they're just that, marks. What matters to us is the fundamental operating performance of the portfolio, which continues to be really strong. If anything, we feel even better that we got it right in terms of investing behind the right themes in the last several years. Revenue and profitability metrics remain strong. The fundamental operating performance of our real asset book and our credit book remains strong, candidly, a bit stronger than I might have expected given what's going on with the economy and the backdrop. So overall, we're not worried about it. I would suggest you not worry about it either. My expectation is as markets rebound, you'll see the marks rebound as well. – Scott Nuttall, Co-CEO & Director (00:36:18)

-> A lot of interest in anything with inflation protection and yield: What is very consistent, though, is we're finding this year, just like last, a lot of interest in a couple of themes, anything with inflation protection and yield. So think real estate, infrastructure, credit, significant amount of interest. I'd say an increased awareness that in times like this, all things private equity tend to perform quite well. So it should be a -- some very strong vintage years coming out of this period of time. So people are kind of swinging a bit to thinking about how to take advantage of this environment. So I'd say people are more in their front foot this year overall than maybe late last year. And there's more of the conversations gearing toward how do I invest into this in a thoughtful way. And I think part of that is people look back in post-GFC and maybe post the initial stages of COVID, some of which they were maybe a little bit more aggressive in terms of deploying into the environment spend. And I think that's what's leading to some of this shift in sentiment. – Scott Nuttall, Co-CEO & Director (00:42:31)

Q4 2022 Y/Y Δ
Revenue + 33%
Billings +32%
EBIT +66%
*margin 28% (22%)
EPS +67%
FCF +131%
*margin 37% (22%)

-> Accelerating revenue growth and market share: For the full year, revenue growth accelerated to 32%. We continue to gain market share in the service security industry with customers increasingly recognizing how Fortinet integrate and a single platform approach to security delivers a low total cost of ownership and a greater return on investment than competing solutions. Product revenue growth of 42% was very strong, making Fortinet a leading product revenue company in the cybersecurity industry with total product revenue of $1.8 billion. SD-WAN and OT bookings together accounted for over 25% of total bookings. Our goal is to keep growing and achieve #1 market share in network firewall secure SD-WAN and OT security market over the next couple of years. For 20 years, Fortinet has made long-term strategies and investments around the convergence of networking and security. – Ken Xie, Founder & CEO (00:01:57)

-> Market leadership creates high barriers to entry: Yesterday, we announced our fifth-generation Forti Security processor, the FortiSP5. This new SOC base for the ASIC has secure computing power ratings for major network security functions like firewall and VPN throughputs that are 17 to 32x greater than the average of our competitive similar price model using general purpose CPUs. And doubles the ASIC chip acceleration of applications to fortune such as zero-trust, SASE, 5G and SD-Branch with much better performance and efficiency. According to the most recent IDC data on unit shipment of firewall plants, Fortinet hold the #1 unit shipped market share position of 48%, providing Fortinet with an attractive economy of scale position as well as making it difficult for competitors to develop their own ASIC technology due to the high entry barrier and significant investment that is required. – Ken Xie, Founder & CEO (00:02:27)

-> Record-breaking quarter in several ways and buybacks: Revenue totaled $4.4 billion, with growth accelerating to 32%, the fifth consecutive year of revenue growth of 20% or more.[...] Despite a challenging global supply chain environment, product revenue growth came in at 42%, our highest annual product revenue growth rate in over 10 years. Our product revenue growth was driven by the combined -- by the continued growth of our firewall use cases and the addition of over 23,000 new customers. Service revenue was up 26% to $2.6 billion, resulting in 3 consecutive years of accelerating service revenue growth rates. Gross margin was strong at 76.3% and operating margin outpaced our initial expectations, increasing 110 basis points to a new Fortinet record high of 27.3%. Our GAAP operating margin of 22% is one of the highest in the industry, and we continued our streak of being GAAP profitable every year of our 14-year history as a public company. Earnings per share increased 49% to $1.19. Free cash flow was a record at $1.45 billion. Free cash flow margin was 33% and adjusted for real estate investments, the free cash flow margin came in at 37%. And for the year, we repurchased approximately 36 million shares at a cost of $2 billion. – Keith Jensen, CFO (00:07:50)

-> On track to achieve 2025 financial targets: The service revenue guidance also implies product revenue growth of 15%. Non-GAAP gross margin of 75% to 76%, non-GAAP operating margin of 25% to 26%, non-GAAP earnings per share of $1.39 to $1.41, which assumes a share count of between 805 million and 815 million. Capital expenditures of $400 million to $450 million due to continued investments in cloud, data centers and facilities. Non-GAAP tax rate of 17%, cash taxes of $375 million split somewhat evenly between the first and second half of the year. The increase in cash taxes reflects recently effective R&D capitalization and amortization requirements. The full year estimate assumes backlog approaches historical levels by the end of the year. Cybersecurity, but not immune to economic slowdowns is expected to remain a comparatively safe harbor. And with a strong business model and history of execution, we are confident that our market share gains will continue. We remain on track to achieve our 2025 financial targets, which include billings of $10 billion, revenue of $8 billion, non-GAAP operating margin of at least 25% and adjusted free cash flow margin in the mid- to high 30% range in 2025. – Keith Jensen, CFO (00:17:01)

-> Benefits from the current macro environment: I think we're all sensitive to the overhang from the macro environment, but when we look at our internal numbers, whether it's pipeline growth and even if we compare what pipeline growth is today versus a year ago, it's even up in terms of percentage growth rates. The use cases, and I think in this environment, the savings that we offer and the ROI that we provide and some of the case studies that we provided in the call there are examples of that. I think we're continuing to benefit from that, and we do see continued opportunities for market share gain. –Keith Jensen, CFO (00:20:36)

-> Huge advantages within SD-WAN and OT: First, I totally agree with what you said that SD-WAN and the OT market growing faster than the network security average. And on the other side, we do believe our solution has huge advantages compared to competitors. Both SD-WAN and OT market are still pretty fragmented compared to our home growth integrated solution and leverage FortiASIC and power. So our advantage is huge compared to other competitors, quite some -- mostly come from acquisition. At the same time, they don't have the ASIC help to increase speed, lower the cost and the product consumption. So that's why we feel we're keeping growing above the market, so about the market growth rate. There's different research about how the market is growing. But I do agree it's a fast-growing market compared to the cybersecurity space and there will be a lot of potential going forward. – Ken Xie, Founder & CEO (00:26:12)

-> The new ASIC FortiSP5 and competitive strengths: It will probably take some time, I'd say, maybe 1 to 2 years to refresh the product. And that's why every quarter, we tend to release 1 or 2 products, whether leverage new ASIC or the new CPU of some other network chip in the industry. I don't feel it will have a significant impact on the up and down of the result, it will be a more smooth transition. Security deployment takes a long time to design, evaluate, deploy and also has a long sales cycle. At the same time, the life cycle of the product also tends to be quite long, like 7 to 10 years. So that's where each generation of ASIC definitely will help, and at the same time has a huge advantage compared to using general-purpose CPU. So that's where we're keeping gaining market share. Consider the switching costs, consider the long cycle, sale cycle and deployment cycle. And also, we also need time to put ASIC into a new product, which also taken in a few months, 3 to 6 months, thus I do see it will be like a more long-term positive impact instead of short term. – Ken Xie, Founder & CEO (00:31:31)

-> Operating leverage: We continue hiring. But at the same time, we want to keep the efficiency and not dropping the efficiency for the sales and marketing. And at the same time, there's some long-term investment, whether in R&D, the infrastructure supporting us, we will continue to need to make. So that's why we do expect that total headcount will keep increasing, but probably at the same rate just like the last few years it will be below the topline increase. – Ken Xie, Founder & CEO (00:37:03)

-> Cancellations rates, supply chain, and backlog: Cancellation rates, a few things there. We said it went from mid-single digits to high single digits. [...] But as Ken pointed out, there may be more risk with that networking equipment of cancellations as we go forward, and particularly as a backlog deal for those elements continue to age out a little bit as we move through this process. In terms of continuing supply chain challenges, I'm not quite sure on the length of that. I guess that would have an impact on the continuing build of backlog. But as we said in our comments, we really expect to get to a backlog number by the end of this year that's much more closely aligned with our historical norms. – Keith Jensen, CFO (00:46:33)

-> Price increases and pricing power: Yes, a few things we talked about on price benefits, the discounting and then some easing of the impact of the supply chain. I think the price benefit is something that will obviously stay with us in the future. And so we should still get a tailwind from that. However, discounting and supply chains, call it savings for lack of a better term, that's what we relate to our history of price increases. I think we kind of reached the high watermark in terms of having price increases covering those costs, and that will start to settle back down to a more normalized pattern going forward. Meaning that we'll still have inflationary cost increases, but we've really slowed down the price increases. So net-net, price increases continue, discounting and supply chain benefits may not. – Keith Jensen, CFO (00:50:01)