Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

Earnings season went into full swing this week, with many companies reporting their latest quarterly results. Among them: Capital One, Microsoft, General Electric, 3M, Tesla, Blackstone, Intel, Visa, Southwest Airlines. Capital One missed expectations, owing to a bigger-than-expected reserve build and growth in net charge-offs. Microsoft slightly missed on revenues ($52.7 billion versus $52.97 expected) while beating on earnings; however, they indicated a slowdown ahead, citing economic uncertainty. Tesla beat Q4 analyst estimates on their best-ever quarterly revenue. Blackstone saw a 60% year-over-year drop in net income due to reductions in their real estate investment valuations, while AUM came in below expectations of $1 trillion. Intel missed on Q4 EPS and revenue estimates due to a worse-than-expected decline in PC chip sales. Visa beat Q1 EPS and revenue estimates on increased volume and number of transactions, citing resilient consumer spending and a surge in cross-border travel. Southwest Airlines reported a $220 million loss resulting from their holiday-season flight-cancellation-fiasco.

On the job layoffs front, Spotify announced it would be cutting 6% of its workforce. 3M announced it would be cutting 2,500 manufacturing jobs. Microsoft recently announced they would be slashing 5% of their global workforce. Tire-maker Goodyear said it would be cutting 500 jobs. Hasbro Inc. said it would be eliminating 15% of its global workforce. Dow the chemicals company said it would be laying off 2,000 employees. Earlier this month Salesforce announced it would be reducing its workforce by 10%.

In economic news, the United States reported GDP growth of 2.9% in Q4 2022, exceeding expectations of 2.6%. Retail inventories increased 0.5% month-over-month, above the average estimate of 0.1%, while wholesale inventories grew 0.1%, below 0.5% expected. New home sales surprised on the upside, registering an annual figure of 616k, above the 612k expected, reflecting a flicker of strength in the heretofore-battered housing sector. Personal Consumption Expenditures (PCE) increased 5.0% year-over-year in December, in line with expectations, while PCE excluding food and energy rose 4.4%, driven by increases in its services component.

Elsewhere in the world, it was reported that Brazil and Argentina are starting preparations for a common currency, which could eventually create the world’s second-largest currency bloc.

Friday’s Close

S&P 500 4,070.56. +0.25%

Dow Jones. 33,978.08. +0.08%

Nasdaq. 11,621.71. +0.95%

Thank you Blue Room Leader OMAR GUZMAN

WELCOME

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We are thrilled to unveil the next generation of our site as well as the state of affairs across all parts of our business!

Satya Nadella, Chairman and Chief Executive Officer:

I want to start with the context I shared with our employees last week on the changing environment and our priorities.

As I meet with customers and partners, a few things are increasingly clear:

Just as we saw customers accelerate their digital spend during the pandemic, we’re now seeing them optimize that spend.

Also, organizations are exercising caution given the macroeconomic uncertainty.

And the next major wave of computing is being born, as we turn the world’s most advanced AI models into a new computing platform.

In this environment, we remain convicted on three things:

This is an important time for Microsoft to work with our customers helping them realize more value from their tech spend and building long term loyalty and share position, while internally aligning our own cost structure with our revenue growth.

This in turn sets us up to participate in the secular trend where digital spend as a percentage of GDP is only going to increase.

And lastly we’re going to lead in the AI era, knowing that maximum enterprise value gets created during platform shifts.

With that as the backdrop, the Microsoft Cloud exceeded $27 billion in quarterly revenue, up 22 percent and 29 percent in constant currency.

Now, I’ll highlight examples of our innovation, starting with Azure.

Moving to the cloud is the best way for any customer in today’s economy to mitigate demand uncertainty and energy costs, while gaining efficiencies of cloud-native development.

IN

Lance M Fritz — Chairman, President and CEO

Thank you, Rob, and good morning and welcome to Union Pacific's Fourth Quarter Earnings Conference Call.

With me today in Omaha are Kenny Rocker, Executive Vice President of Marketing and Sales; Eric Gehringer, Executive Vice President of Operations; and Jennifer Hamann, our Chief Financial Officer. The fourth quarter and 2022, overall, were challenging for Union Pacific and our employees. The lengthy labor negotiations tested our workforce while customers felt the impact of our service issues.

Two things are critically important as we turn the page to 2023. First is the trendline of improving freight car velocity since late summer, although acknowledging there were bumps along the way. And second is how we move forward establishing consistent service for our customers, day-in and day-out, and demonstrating to all stakeholders our commitment to excellence. Now, turning to our fourth quarter results.

This morning Union Pacific is reporting 2022 fourth quarter net income of $1.6 billion, or $2.67 per share. This compares to fourth quarter 2021 results of $1.7 billion, or $2.66 per share. Our fourth quarter operating ratio of 61% deteriorated 360 basis points versus 2021 driven by continued service challenges and the impact from winter weather. For the full year, reported operating ratio finished at 60.1%, deteriorating 290 basis points, driven by operational inefficiency, inflation and higher fuel prices. The entire Union Pacific team recognizes that 2022 did not need expectations.

Crew constraints and critical locations impacted by shifting demand had a real impact on our performance. As you'll hear from Eric, we are building resiliency into the network through hiring efforts, shifting critical resources and better operations to address that shortfall. And you're seeing those benefits manifested in how the network has responded since Thanksgiving through the ups and downs of extreme winter weather. These challenges aside, we achieved volume growth for the year. We demonstrated our commitment to meet customer needs with business development wins that are critical to long-term financial success. The recent on-boarding of Schneider is a great proof statement of delivering on that commitment.

IN

Overall, the company performed well in the fourth quarter without any huge surprises. For 2023 guidance, executives set reasonable expectations for the year with multiple avenues for upside and easing many concerns by investors.

Tesla set its 2023 delivery guidance at roughly 1.8 million vehicles (37% Y/Y growth), with the potential to reach 2.0 million vehicles (52% Y/Y growth) if supply chain issues ease. The company has seen its strongest orders to start the year ever, with demand currently outpacing production by nearly two times. Accounting for the price cuts announced at the beginning of the year, executives believe Tesla will still be able to achieve greater than 20% automotive gross margins (excluding regulatory credits) and a blended average selling price of more than $47,000. The Cybertruck is on track to begin production mid-year, but volume production is not expected until 2024. Tesla plans to announce next-gen vehicles at their investor day on March 1st.

In the fourth quarter, Tesla recognized $324 million in revenue from the wide-release of its Full Self-Driving (FSD) software in North America, with nearly $1 billion still expected to be recognized as software updates are delivered. The number of FSD users in North America has now reached 400,000, after finishing at 285,000 in December. Hardware version 4 is set to be released soon, likely with the Cybertruck, and will be sold at a higher price.

The company is making good progress in cost control, with cost of goods sold dropping as production ramps up in Austin, Berlin, and their 4680 cell production facility. Raw material pricing is expected to remain elevated, so the company is looking to mitigate costs in other areas in order to improve its operating margin. The 4680 cell production facility achieved production of 1,000 packs per week by the end of the fourth quarter, with only one out of four lines currently in production. The energy and service business segments are growing faster than the auto business, and leadership is working diligently to improve margins each quarter which will help offset some of the compressed margins on the auto side.

Tesla is splitting the value of regulatory credits for Panasonic-supplied cells and expects to earn $150-250 million per quarter, growing with production volume, with the potential for a substantial increase in 2024 as the energy business ramps. The company's insurance business is currently at a $300 million annual premium run rate and is growing 20% per quarter, faster than the growth in the vehicle business.

IN

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Weekend Update #111