Earnings Season Recap #15

Why GAAP earnings are 100% misleading, the power of float and share repurchase, the American Tailwind, why the CEO of Berkshire Hathaway will always be the “Chief Risk Officer”, and tons of more timeless investment knowledge.

-> Investment philosophy: Charlie and I allocate your savings at Berkshire between two related forms of ownership. First, we invest in businesses that we control, usually buying 100% of each. Berkshire directs capital allocation at these subsidiaries and selects the CEOs who make day-by-day operating decisions. When large enterprises are being managed, both trust and rules are essential. Berkshire emphasizes the former to an unusual – some would say extreme – degree. Disappointments are inevitable. We are understanding about business mistakes; our tolerance for personal misconduct is zero. In our second category of ownership, we buy publicly-traded stocks through which we passively own pieces of businesses. Holding these investments, we have no say in management. Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.

-> “It’s crucial to understand that stocks often trade at truly foolish prices”: Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.” One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect. Controlled businesses are a different breed. They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation.

-> Long-term thinking: At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.) Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire.

-> The weeds wither away in significance as the flowers bloom: In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow. American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase. These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At year end, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago. Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income. The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.

-> “GAAP earnings are 100% misleading": Berkshire had a good year in 2022. The company’s operating earnings – our term for income calculated using Generally Accepted Accounting Principles (“GAAP”), exclusive of capital gains or losses from equity holdings – set a record at $30.8 billion. Charlie and I focus on this operational figure and urge you to do so as well. The GAAP figure, absent our adjustment, fluctuates wildly and capriciously at every reporting date. [...] The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.

-> The power of float: A second positive development for Berkshire last year was our purchase of Alleghany Corporation, a property-casualty insurer captained by Joe Brandon. I’ve worked with Joe in the past, and he understands both Berkshire and insurance. Alleghany delivers special value to us because Berkshire’s unmatched financial strength allows its insurance subsidiaries to follow valuable and enduring investment strategies unavailable to virtually all competitors. Aided by Alleghany, our insurance float increased during 2022 from $147 billion to $164 billion. With disciplined underwriting, these funds have a decent chance of being cost-free over time. Since purchasing our first property-casualty insurer in 1967, Berkshire’s float has increased 8,000-fold through acquisitions, operations and innovations. Though not recognized in our financial statements, this float has been an extraordinary asset for Berkshire.

-> Share repurchases: A very minor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple and American Express, both significant investees of ours. At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us. The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases. 

-> “One of the shames of capitalism”: Finally, an important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. Beating “expectations” is heralded as a managerial triumph. That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.

-> The American Tailwind: In 1965, Berkshire was a one-trick pony, the owner of a venerable – but doomed – New England textile operation. With that business on a death march, Berkshire needed an immediate fresh start. Looking back, I was slow to recognize the severity of its problems. And then came a stroke of good luck: National Indemnity became available in 1967, and we shifted our resources toward insurance and other non-textile operations. Thus began our journey to 2023, a bumpy road involving a combination of continuous savings by our owners (that is, by their retaining earnings), the power of compounding, our avoidance of major mistakes and – most important of all – the American Tailwind. America would have done fine without Berkshire. The reverse is not true.

-> “Our CEO will always be the Chief Risk Officer”: As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money. And yes, our shareholders will continue to save and prosper by retaining earnings. At Berkshire, there will be no finish line.

-> Warren on near-term market forecasts: During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion. Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless. Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur.

One of the largest retailers of home improvement products in the U.S. The offering ranges from building materials and home improvement supplies to hardware and electrical products.

Q4 2022 Y/Y Δ
Revenue +0.3%
EBIT -1.5%
*margin 13.3% (13.5)
EPS +2.8%

-> “We observed a resilient customer”: Throughout most of fiscal 2022, we observed a resilient customer who is less price sensitive than we would have expected in the face of persistent inflation. In the third quarter, we noted some deceleration in certain products and categories, which was more pronounced in the fourth quarter. This, along with the negative impact from lumber deflation, led to fourth quarter comps that were slightly softer than anticipated. We are closely monitoring our elasticities and trends across the business and believe we have the tools, team and experience to manage in any environment. This team has been effectively navigating the unprecedented growth in the last 3 years, and I have full confidence in their ability to execute as we go forward. The investments in our associates, stores, digital platforms, supply chain, technology, and other strategic initiatives have strengthened our business and enabled us to grow share and deliver exceptional shareholder value over the long term. - Edward Decker, Chairman & CEO

-> Expects lower price moves going forward: I think the last 2 years, we've had the same guidance that we're having this year, and that is that whatever inflation is represented in our average unit retail in ticket would be offset by transaction. So we started the year thinking about a balance of ticket and transaction and that higher ticket driven by inflation would be offset with transactions. The outperformance of the prior 2 years was that we didn't see that much sensitivity. The consumer, our customer, was much more resilient, sort of purchase through that elasticity curve, if you will. What we are seeing now is some more sensitivity, and we had almost an exact one-for-one offset in Q4. That's what we're expecting for 2023 that there is still inflation. I mean we are still in an inflationary environment as we saw from CPI and PPI results last week, although it is abating and it's abating more, I would say, in our industry. Our costs on the table are much lower than they had been. Our wraparounds, and price moves going into '23 will be much lower than they had been in the prior 2 years. And so while we're still expecting an offset in transactions because the ticket won't be as high, the negative transactions won't be as low but still net to that flat guidance for 2023. - Edward Decker, Chairman & CEO

-> “We are just so incredibly bullish on the longer horizon”: We said this is a unique period and hard to gauge on the shortest horizon. But we are just so incredibly bullish on the longer horizon for this industry, just all the dynamics that we know about starting with the fundamental shortage of housing. I mean we're still -- whether it's 1 million, 2 million, 3 million units short in -- with household formation and population growth and aging housing stock, all the things that we talk about, I mean, that is all very much in place. And as the market works its way through PCE reversion or not or level of that and inflation mortgage rates, that will all settle and what you're left with is still a market that is underserved in housing units built. And over half the homes are over 40 years old. And as Richard said, they remain in place with owning the home at low mortgage rates. People are going to want to make more significant improvements on those homes. So we just couldn't be more bullish on the longer-term view of this industry. - Edward Decker, Chairman & CEO

-> Turbulence for the lumber market: It's been a very turbulent couple of years in the lumber market. To give you an example of what we faced, in the fourth quarter on the framing side, lumber was $420 per thousand on average compared to $886 on average in 2021. To put that in retail dollar sense for everyone, a 2x4 stud, which is one of our top unit movers in the business, retail on average for $3.40 in the fourth quarter of this year. Last year, it was over $5. Now we did make some ground back on units. So you could say that when you see a lumber market depressed or normalized, you see good unit productivity and you see good overall project business. As you look forward into the front half, that same 2x4 stud was over $10. It's now $3.50. So we'll see good unit productivity and certainly an opportunity to drive more project-related business. - Jeffrey Kinnaird, Executive Vice President of Merchandising

-> Thoughts on hiring and investments: We all know labor has been tighter and rates have been higher. But just last year, we were able to hire 200,000 associates. But we believe this move is going to protect our customer experience for the near, medium and long term. We'll be able to track the most qualified candidates and retain the exceptional associate base that we already have. So we not only increased our starting wages, again Ann will go into some detail, but we increased wages for every single frontline associate. And there's a term in retail, you get compression when you raise the starting rates with tenured associates. We addressed compression in a meaningful way in this $1 billion investment. So our tenured associates saw real wage increases with this move. And we hope to improve retention through this. That's why we call it an investment, and it's going to improve the customer experience through a more effective associate who's just in the building longer, understands our procedures and is much more effective engaging with the customer and selling. And we harken back to our value wheel of investing in our associates and what our founders said that if we take care of our associates, they take care of the customer and everything takes care of itself. And that's what this investment is all about. - Edward Decker, Chairman & CEO

Delivering on long-term goals, business model shift, positive outlook, and the potential benefits of AI.

Q2 2023 Y/Y Δ
Revenue +14%
*Small Business and Self-Employed +20%
*Online Ecosystem +24%
*Consumer +26%
*Credits -16%
EBIT +382%
*margin 8.9% (2.1)

-> Period highlights: We had another strong quarter, as we executed on our strategy to be the global AI-driven expert platform, powering prosperity for consumers and small businesses. Second quarter revenue grew 14%, fueled by Small Business & Self-Employed Group revenue growth of 20% and Consumer revenue growth of 26%. This year, we are celebrating Intuit's 40th anniversary. We're incredibly proud of our history of reimagining the company and reinventing ourselves, which has enabled us to thrive during various technological shifts and economic cycles. Having successfully navigated multiple platform ships over the years, including our largest transformation to artificial intelligence in the era of digitization, we continue to be confident in our ability to fuel growth, given our large TAM, low penetration, proven strategy and 5 Big Bets. We are proud to be the global financial technology platform that powers prosperity for the people and communities that we serve. - Sasan Goodarzi, CEO

-> Financial position and buybacks: We finished the quarter with approximately $2.1 billion in cash and investments and $7.1 billion in debt on our balance sheet. We repurchased $500 million of stock during the second quarter. Depending on market conditions and other factors, our aim is to be in the market each quarter. The Board approved a quarterly dividend of $0.78 per share payable April 18, 2023. This represents a 15% increase versus last year. As I shared consistently in the past several quarters, we have an operating system we use to run the company, and this includes a proven playbook for operating in both good and difficult economic times. Our first priority is to do the right thing for customers, giving them access to the tools and offerings they need most. We manage for the short and long term and control discretionary spend to deliver strong results, while investing in what is most important for future growth. The scale of our platform, along with our rich data gives us the unique ability to see leading indicators that allow us to be forward-looking and adjust quickly. We also have a strong balance sheet that enables us to play offsets. We will continue to accelerate our innovation, and our goal remains for Intuit to emerge from this period of macro uncertainty in a position of strength. - Michelle Clatterbuck, CFO

-> Delivering on long-term goals: We're seeing strength both in terms of customer acquisition, retention, we are seeing strength in our services. As we mentioned a moment ago, both the number of companies that are running payroll, and the number of employees that are getting paid is very strong. We're -- if you compare our results to what you're seeing in the marketplace, we are continuing to grow payments 25%, total payments charge volume, which is really outstanding because of the fact that our customers are continuing to benefit from digitizing on our platform. And I think just the additive piece is we're seeing strength in mid-market, which is much higher ARPC and we're quite excited about really being able to pursue non-consumption with what we talked about earlier with QuickBooks Live actually being embedded as part of our overall offering. And I would just end with one of the goals that we talked about with all of you four years ago, our bold 2025 goals. One of those goals was that we wanted the success rate of small businesses on our platform to be 10 points better than industry. And in fact, the small businesses on our platform, their performance is north of 15 points better than anyone in the industry. And what that just suggests is that, the small businesses on our platform are more successful, they're digitizing and they're leveraging this opportunity to continue to accelerate to deliver for their customers. - Sasan Goodarzi, CEO

-> Business model shift towards subscriptions: This is a business model shift that we're actually quite excited about in that. One, we've shifted the customers to subscription, so it's far more predictable. Two, in that context, we have had a very planful process of aligning prices between desktop and our online products. And the reason this is really important is we've been heavily investing in the last several years really ensuring that some of the key capabilities for our desktop customers, particularly those product-based businesses, that those capabilities are available in online. And being in the middle of this business model transition, one, we see another 1.5 years of continued strength, but we also see ahead of that, the fact that we can now migrate these customers through our online platform, because we now have the capabilities that they need. And by the way, when we do that – that actually opens up the doors to additional online services to continue to fuel the success of our small businesses. And therefore, when you step back, ultimately, the growth of this franchise will come from online. - Sasan Goodarzi, CEO

-> Positive outlook: I would say everything that we talked about across all the businesses stands. We're confident in our guidance and we're confident in what we're seeing in the businesses and where each business sits. I think the reality is, generally, we have a principle, we don't touch our guidance while we're heading into our third quarter. Our third quarter is double the revenue of any other quarter. And so, we'd like to get to the third quarter and then talk to you all about what our guidance is moving forward. - Sasan Goodarzi, CEO

-> Artificial intelligence: I'm surprised it took till the top of the hour for somebody to ask, so thank you for asking. It's actually a really important question. And I want to take you all back to – AI is core to our strategy. And now that everybody is talking about AI, I'm actually delighted because hopefully, it will expose to all of you why four years ago, when we refreshed our strategy, it was about being an AI-driven expert platform. And the investments that we've made in data and AI is really what's fueled a lot of our innovation across the company. And as you heard us talk about at Investor Day, it's why we put Marion in front of you all, we're just at the beginning of the curve as to what's possible. So first and foremost, the investments around data and AI is, what's fueling our success. And we've been looking at generative AI. In fact, there are multiple areas across our platform, where we've launch some of the capabilities of generative AI because it's all about reducing work and finding ways to put more money in your pocket with confidence, and it actually helps our experts. The key areas that we are focused on working with a couple of companies in this area is accuracy. And it will become more accurate over time, but we deal with people's money. And that matters in terms of the advice that we give. For us, this is all an accelerant, which, by the way, we've been working on for many, many, many months before this became sort of the buzz. But AI is core to our strategy. So we're delighted with the possibilities of the future. - Sasan Goodarzi, CEO

Strong international growth, vastly increased average revenue per fan, 2023 outlook, and the greatest business-related challenge.

Q4 2022 Y/Y Δ
Revenue +59%
Concerts +66%
Ticketing +34%
*Sponsorship +44% 
EBIT +4%
*margin -2.8% (4.6)

-> Strong international growth: In 2022, fans around the world continue to prioritize their spend on attending live events, particularly concerts. Our research consistently tells us that concerts are top priority for discretionary spending. And one of the last experiences fans will cut back on. And we're seeing this play out in both our 2022 results and early indicators for 2023. With the strong demand last year in the cancer business, we had 121 million fans attend our shows across 45 countries. While in ticketing, we helped connect 550 million fans with their favorite artists, teams and performers. In both cases, the majority of our growth came from international markets, further reinforcing the global nature of untapped fan demand and the opportunities we have for growth as we help artists reach more fans with their live music. - Michael Rapino, CEO

-> Average revenue per fan: In Venue Nation, we continued our focus on elevating the fan experience and providing a range of options for enhanced products and services. As a result, last year, we grew our average revenue per fan by 20% at all venue types. In ticketing, our strategy for success is simple. We focus on developing the leading software for venues to ensure we deliver the best enterprise platform, we invest tens of millions of dollars every year to continue innovating every aspect of ticketing technology products. Artists are the venue's largest clients, and we're regularly being asked to create new products to help address their ticketing needs. - Michael Rapino, CEO

-> 2023 outlook: Looking ahead to 2023, as we announce any of our 2023 shows on sale. We continue to see strong consumer demand globally with no sign of any slowdown. We have four key leading indicators at this time of the year, all pointing towards another record year and even greater success in 2023. First, our deferred revenue at the end of 2022 was $2.7 billion, up 125% from 2019 and 18% from 2021, which benefited from a high volume of rescheduled chose. Next, as of mid-February, ticket sales for our shows this year exceeded 50 million fans, up 20% from this point last year with international growth of 25%. Then our global ticketing fee-bearing GTV is up 33% to $9.8 billion through the same period. And finally, over 70% of our planned sponsorship activity for the year is confirmed, again, up double digits relative to this time last year. - Michael Rapino, CEO

-> Hidden charges: There has been a lot of discussion lately about so-called junk fees. We tend to get thrown into that conversation because the compensation to venues to help run their businesses and to Ticketmaster to distribute tickets is separately called out as a service fee instead of embedded in the price of the ticket. Very few people understand that and even fewer understand that most of the money goes to the venues. They think the service charges are just some arbitrary add-on to Ticketmaster pockets, which is not the case. We agree that real junk fees, hidden charges attached to the goods and services that obscure the true price should be illegal. As one of the reasons we're advocating for legislation mandating all-in pricing where the consumer first sees the total price he or she is going to pay, as well as the breakdown of any fees. - Joe Berchtold, CFO

-> “We have the best product out there”: In ticketing, we have the best product out there, full stop. Michael spoke to why it is, we've been effective continuing to work with a large number of venues because we have the best software platform for them, and we work with them to develop tools and products for artists who are their key constituents when figuring out where they're going to be touring. So, it's hard to answer your question with where would we be if we didn't have someone who developed such great tools for the venues and such, and serve the artists so well, I think, we would have a smaller industry. I think we have consistently grown the industry through our approaches to the business. And overall, the ecosystem is better for it. - Joe Berchtold, CFO

-> The challenge in the business: First, I want to kind of look at where the drama that gets created, if you kind of zoom out, we did 550 million tickets last year, about 540 million of those were happy customers that were seamlessly delivered. About 10 million of those are five tours historically a year, have this incredible demand with supply demand is out of whack and it creates lots of tension and unhappy customers. And that's kind of always kind of been the historic challenge in the business. At Live Nation Ticketmaster, historically we've really been a B2B business. Our Ticketmaster job is to service the venue and our concert job is to service the artist. And we've done a fabulous job building those businesses and having very, very happy customers. And part of that proposition historically has been to take a bit of the heat at the front end. When the ticket prices are high, when the service fees are high, if the demand supplies out of whack, Ticketmaster has historically been the one that's taken the punch or the ticket seller in general, if you look at all ticket companies, all their NPL scores are all kind of the same. There's only two customers as Fred Rosen famously said, the one that got the ticket is happy and all the ones that didn't are pissed off, right? - Michael Rapino, CEO

Record-breaking results across the board, market share gains, the rise of ads, the Mercado Pago ecosystem explained, and the benefits of in house logistics.

Q4 2022 Y/Y Δ
GMV +35%
Revenue +57%
*Commerce +36%
*Fintech +93%
TPV +80% 
*On Platform +44%
*Off Platform +121%
Unique Active Users +18%
Items Sold +11%
Credit Portfolio +68%
EBIT +1585%
*margin 11.6% (1.1)

-> Record-breaking results: I'm happy to share the key messages about MercadoLibre's performance during the fourth quarter of 2022 and the year as a whole. We're particularly pleased to have been able to deliver an attractive combination of growth and profitability throughout the year. Alongside strong operational KPIs and market share gains all while sustaining a high level of investment in products and technologies. We've successfully navigated a challenging environment, and we've reached new records across the business despite uncertainty around consumer spending, interest rates and inflation. With a strong fourth quarter, we end 2022 with record results in GMV, TPV, item ship and net revenue as well as EBIT. Revenues, for the first time ever, surpassed the $10 billion mark for quite a milestone for our company. EBIT also came in at a new landmark level, surpassing $1 billion while delivering margin expansion. And perhaps even more unique is the combination of record EBIT and margin expansion while still growing revenues at roughly 50% year-on-year. - Pedro Arnt, CFO

-> Market share gains for ecommerce and the rise of ads: During 2022, MercadoLibre strengthened its leadership of the e-commerce market in Latin America. As our data indicates that we achieved market share gains across the entire region with Brazil and Mexico standing out. These market share gains are grounded in our consistent investment and execution around all aspects of our commerce value prop and also an extended period of time. Our ability to offer a very broad product assortment from sellers of all sizes at competitive prices and with fast deliveries continues to be a key differentiator for the company. The profitability of our commerce business also improved substantially year-on-year during the fourth quarter, helped by the expansion of Mercado ads revenues, better management of promotional budgets, a healthier margin on 1P merchandise sales and the continued overall scaling of our business. Development of technology for Mercado Ads has been a major focus during 2022, increasing presence of ads and their monetization as well. Ads penetration, for example, grew another 10 basis points in the fourth quarter, despite strong growth of GMV, while maintaining its attractive EBIT margins. We still see plenty of opportunities for ads growth ahead of us as we continue to improve technology to better serve our advertisers. - Pedro Arnt, CFO

-> Mercado Pago is firing on all cylinders: 2022 was also a fantastic year for Mercado Pago, with TPV growth exceeding our expectations while delivering take rate expansion on a year-over-year basis. On the acquiring business, first of all, we maintained our strong growth and margin performance, driven by QR payments and our POS business in Brazil, Mexico and Chile. On the other side of Pago, the digital accounts business, both payments and cards TPV continued to grow at triple digits in 2022, highlighting the traction in becoming the digital account of choice of our users. Mercado Credito performed well in the fourth quarter once again and in the year as a whole, positively contributing to our profit growth despite tougher economic conditions. Throughout the year, we were able to manage the performance of our book closely and us to the changing realities. These effective risk controls resulted in record profits. We remain optimistic about the positive ecosystemic effects of Mercado Credito as well going forward. - Pedro Arnt, CFO

-> The Mercado Pago ecosystem and synergies explained: We're now able to offer a full stack of day-to-day financial services and products to our millions of Mercado Pago users after 18 months of intense technology deployment. We are leveraging our data in order to cross-sell new products and services to our users. Users of our digital account have access to debit and credit cards, along with QR code payments and online transfers, making Mercado Pago more useful for their day-to-day needs. This is an important step in building towards achieving principality. Mercado Pago also offers saving buckets dedicated to our users' specific objectives and they are able to choose from different risk profiles with a minimum investment of just BRL 1 in Brazil. Users can now also make investments in a quick and simple process by the Mercado Pago app. This includes banking deposit certificates from our financial institution with a fixed rate and more recently, users in Brazil have actions to three simple investment funds. Mercado Pago also offers different insurance options to suit our users' needs with life, personal accident and online transactions insurance. This offers protection against uncertainties that many of our customers may face in their daily lives. Now with a complete product stack, Mercado Pago is well positioned to become a leading financial services provider in the region, enabling us to foster financial inclusion across the region. - Richard Cathcart, IRO

-> Logistics; delivery times and shipping costs: New features have enabled sellers to promote their products in different formats. Short videos recorded by sellers to promote their products have reached millions of monthly views. And improvements in our advertising fuel have increased the presence of out in product pages. MercadoLibre continues to have the fastest delivery times in all of our key geographies. We're also investing in technology to improve the efficiency of our logistics network. And in 2022, we were able to deliver significant improvements in the productivity of our fulfillment centers, which means that even with a higher penetration of fulfillment deliveries, our overall net shipping cost as a percentage of GMV remained broadly flat year-on-year. Our MELI Places network grew to over 7,000 locations with over half of the returns already done through places. These returns have a higher NPS than other actions, such as the local postal service. For buyers that choose to pick their items up from the MELI Places network, the NPS is the same, the deliveries made to the buyer's homes. We also delivered improvements in lead times with the MELI Air operations reducing over one day in lead times as well as optimizing costs. We ended 2022 with a stronger ecosystem and great opportunities ahead of us, and we are as confident as ever that the best is yet to come. - Richard Cathcart, IRO

-> Consistency of long-term strategy: So in general, I think the area we operate in, both consumer commerce and FinTech and specifically the technology areas are low barriers of entry, high competitive markets which generate extremely dynamic market situations and structures. One of our characteristics over the last 20 years has been speed to adapt and speed to change course, while at the same time, having a very clearly defined long-term focused strategy. And that's what we consistently refer to when we talk about how dynamic this is. Our long-term vision for what we're building is very consistent. The areas we focus on are our consumers, our merchants, the quality of our products and our technology which has remained incredibly consistent over time. And tactically, we try to adapt very quickly to changing market dynamics, to changing technological dynamics and consumer habits. We think that we've served our consumers and shareholders well because of that speed of adaptation that we've built into our culture and how we operate. - Pedro Arnt, CFO

-> Slower CAPEX growth due to peak utilization in some areas: If you look at the cash profile that we delivered both in the fourth quarter and full year 2022, I think '22 was a stellar year in many aspects. Cash generation was one of them, both from an operational cash flow, but also some of the disclosures we offer in the PowerPoint around available cash and change in free cash generation. Part of that cash generation was because we are operating close to peak utilization in some of our geographies in terms of our logistics and CapEx, logistics fulfillment centers and sortation centers. So we do anticipate some incremental investments when we look at '23 versus '22 in terms of CapEx primarily on the logistics front as we build incremental capacity that we are needing in some markets, primarily in Mexico. - Pedro Arnt, CFO

Lowering credit risk due to the market conditions: I think let me describe in more detail what has happened over the last few quarters. As you recall, during the second quarter towards the end of the second quarter. As we saw that market conditions were worsening, we decided to be more restrictive and to lower our exposure to higher-risk segments. That has been the case for the third and fourth quarter, and we're in each of the countries and each of the businesses we lower our exposure to the higher risk segment. As a consequence of that, we had lower NPLs and that reduction in NPLs drove a reduction in provisions. But nonetheless, as we are originating loans that are less risky, the new provisions have slowed down proportionally. Nonetheless, they accurately reflect our best estimate of what the risk is. So we are comfortable with the level of provisions we have. It's just reflecting an improvement in the risk we are taking. - Osvaldo Gimenez, CEO, Mercado Pago

-> “That continues to be one of the most attractive revenue streams”: So I think over the last probably two or three quarters, we've been very consistent about talking about the new product deployment and how we've accelerated our focus and investments on technology and ad tech business. We've doubled the engineering headcount there for probably half a year. We also, I think, have been very consistent in saying that between the product launches and the technology improvements and when we actually see the results coming in, there is a lag, and it's hard for us to predict how long that lag might take. And so we'll need to see how that plays out throughout most of this year. We've continued to push significant product enhancements in the advertising business in Q4 and into the beginning of '23. And so we remain optimistic about eventually being able to reap the returns of those improved investments in the ad stack and hopefully, we'll be able to report something over the next few quarters. We continue to see constant penetration gains from advertising revenues as a percentage of GMV, and that continues to be one of the most attractive revenue streams when we look at the margin structure there. So I guess we all are very focused on this. - Pedro Arnt, CFO

-> Feature improvements for the ads platform: On the ads piece, we do think that technology is not just a nice to have or an additional benefit. It is a core necessity of being able to scale out the advertising business and have it reach the long-term size that we would like to reach. The improvements we've made in terms of incremental positions and inventory for advertising – the improvements in the ad server technology that delivers display advertising throughout the platform. The launch of a self-service DSP platform for ad displays. The improvements in self-service reporting for advertisers to be able to see their results in near real time and react to that quickly. And equally important, the ability to better target audiences. So all of the focus in terms of technology over the last few quarters, probably begins to put us on equal footing with some of the largest and most successful technology platforms before we simply weren't there. So this really is, I would say, a necessity to have launched this technology and get it right. We're very encouraged by the fact that it's now out there. And hopefully, we'll see over the adoption of all these different pieces of the stack deliver the kind of results that we. - Pedro Arnt, CFO

-> Logistics take rate and pricing: So in terms of the model, we charge for both rental space, and we charge for inventory that doesn't rotate quickly enough and generates inefficiencies in terms of floor space. What we've been saying over the last few quarters is that we have dual objectives of introducing monetization behind fulfillment yet at the same time push adoption and usage of that service primarily outside of Mexico to Mexico-like levels. And in a way, those two levers are opposing levers. So we've introduced the full model, but we've kept pricing relatively low. If you look at the fourth quarter results, the monetization overall in the logistics operation in Mercado Envios was actually higher. We have gradually been dialing up monetization around the cost side of logistics services, in part to offset cost increases and also in part to better reflect the services we're offering. But it's still being done at a very gradual pace. Again, repeating myself, bearing in mind that we still need to drive significant penetration growth in fulfillment, primarily in Brazil, Chile, Colombia and Argentina that are still 20-plus percentage points behind Mexico in terms of adoption. So it will be a very gradual and steady process. It will be a gradual and consistent process over the next many years. But I wouldn't expect any significant step functions in terms of monetization, not anytime in the near future at least. - Pedro Arnt, CFO

-> TPV on and off platform: I think that we are really happy with how TPV-off platform has been evolving. TPV on platform basically now already tracks the gross merchandise volume we do in the marketplace, we're already at 100%, and we have been at 100% for a long time. So that tracks e-commerce marketplace growth. And with regards to TPV off-platform, I think there are several avenues for growth there. Probably the 1 that we have seen grow the most over the last few years is in Mexico and Brazil is the POS volume, which is growing nicely, and Argentina has been more related to the wallet, which is also growing very strongly. There's also online payment, but online payments then is growing at a lower pace that in-store, basically because we already have a larger share online than we have in store. And because in Latin America, e-commerce or all in payments is a relatively small fraction of total retail. - Osvaldo Gimenez, CEO, Mercado Pago

-> Expects consistent margin expansion y/y going forward: We remain very consistent in saying that we try to manage the financial model for consistent central annual increase in EBIT dollars, ideally also modest but consistent margin expansion. That depends a little bit on what happens in terms of mix shift, but we do try to manage the different businesses and the different sub business units to deliver margin expansion year-on-year going forward. Yet at the same time, we still continue to see ourselves as a company that wants to deliver market share gains, and continue consolidating leadership positions. And as you mentioned in your question, have a lot of bets on many different future growth engines that today are, in many cases, negative EBIT businesses that we continue to see and we are committed to. So as always, I think consistent sequential increase in EBIT dollars, ideally margin expansion, but don't necessarily assume that the kind of leverage we deliver in one year, you can linearly extrapolate to the next year. I think if we do deliver on this consistency, when we look out three to five years, we have a very, very healthy P&L in our hands. - Pedro Arnt, CFO

-> Synergies; “the credit business is a very profitable business”: So on a consolidated basis, and again, these are not reporting segments. So this is to give you directional understanding of the businesses on a consolidated basis. The credit portion within FinTech, we disclosed interest margins after losses. And I think we've discussed that the operational expenses there are relatively low given that there is low spend on acquisition. A lot of the distribution is done to our existing either Mercado Pago or MercadoLibre users. So the credit business is a very profitable business. The online payments business which is the merchant acquisition business is also a profitable business with expanding and fairly attractive margin still very directionally 150 basis points of TPV. The MPOS business, which is also a merchant acquisition business is a profitable business with slightly lower margins than online payments, but still positive and a strong contributor of overall EBIT. - Pedro Arnt, CFO

-> Segment margin structures and opportunities: And then when we look at the franchise, we're trying to build in terms of the consumer financial services business. The digital wallet, the core digital banks, some of the savings text products, the consumer credit cards, those continue to be areas that do not have positive EBIT yet, but are very significant bets for the future. And that has shown very consistent improvements on the economics over the last few years. And then the final overlay on top of that, which is still fairly small in terms of volume. Very attractive from a margin perspective is the insurtech business. That continues to grow and is already on pace to deliver tens of millions of dollars of annualized EBIT. - Pedro Arnt, CFO

-> Discipline, layoffs, and headcount: Our strategy does not change based on what is happening with competitors. I think our tactics do adapt at the margin. And as we mentioned earlier, we will lean into specific opportunities that may arise if market share becomes available given changes in market structure and competitive dynamics. But I wouldn't say our strategy changes one bit. We've had a lot of conversations internally about this in that MELI in a way is an island within the tech world and that there are no layoffs. If anything, we've said we will continue to increase the size of our engineering teams, we see that as a key competitive advantage. And one where because we were disciplined throughout the pandemic, I don't think we over-hired or we overspent on capacity by and large. That puts us in a unique position now where we can continue to hire. But having said that, I think the rate of hiring will slow down versus what it was over the last few years, but we will continue to grow the engineering team. And in terms of headcount across business and staff positions, again, there is no downsizing necessary because we remain disciplined over the past few years. - Pedro Arnt, CFO

Generative AI and ChatGPT, the new era of computing, autonomous driving, the new Microsoft collaboration, and NVIDIA's unique computing architecture which allows them to be literally everywhere.

Q4 2023 Y/Y Δ
Revenue -21%
*Data Center +11%
*Gaming -46%
*Professional Visualization -65%
*Automotive and Embedded +135% 
EBIT -58%
*margin 21% (39)
EPS -52%

-> Open AI and Generative AI: AI adoption is at an inflection point. Open AI's ChatGPT has captured interest worldwide, allowing people to experience AI firsthand and showing what's possible with generative AI. These new types of neural network models can improve productivity in a wide range of tasks, whether generating text like marketing copy, summarizing documents, creating images for ads or video games or answering customer questions. Generative AI applications will help almost every industry do more faster. Generative large language models with over 100 billion parameters are the most advanced neural networks in today's world. NVIDIA's expertise spans across the AI supercomputers, algorithms, data processing and training methods that can bring these capabilities to enterprise. We look forward to helping customers with generative AI opportunities. - Colette Kress, CFO

-> “The world's most advanced AI platform”: The accumulation of technology breakthroughs has brought AI to an inflection point. Generative AI's versatility and capability has triggered a sense of urgency at enterprises around the world to develop and deploy AI strategies. Yet, the AI supercomputer infrastructure, model algorithms, data processing and training techniques remain an insurmountable obstacle for most. Today, I want to share with you the next level of our business model to help put AI within reach of every enterprise customer. We are partnering with major cloud service providers to offer NVIDIA AI cloud services, offered directly by NVIDIA and through our network of go-to-market partners, and hosted within the world's largest clouds. NVIDIA AI as a service offers enterprises easy access to the world's most advanced AI platform, while remaining close to the storage, networking, security and cloud services offered by the world's most advanced clouds. Customers can engage NVIDIA AI cloud services at the AI supercomputer, acceleration library software or pretrained AI model layers. NVIDIA DGX is an AI supercomputer, and the blueprint of AI factories being built around the world. - Jensen Huang, Co-founder & CEO

-> GeForce NOW members and Microsoft collaboration: RTX 40 Series GPUs will power over 170 gaming and creator laptops, setting up for a great back-to-schools season. There are now over 400 games and applications supporting NVIDIA's RTX technology for real-time ray tracing and AI-powered graphics. The AI architecture features DLSS 3, our third-generation AI-powered graphics, which massively boosts performance. With the most advanced games, Cyberpunk 2077, recently added DLSS 3 enabling a 3 to 4x boost in frame rate performance at 4K resolution. Our GeForce NOW cloud gaming service continued to expand in multiple dimensions, users, titles and performance. It now has more than 25 million members in over 100 countries. Last month, it enabled RTX 4080 graphics horsepower in the new high-performance ultimate membership tier. Ultimate members can stream at up to 240 frames per second from a cloud with full ray tracing and DLSS 3. Yesterday, we made an important announcement with Microsoft. We agreed to a 10-year partnership to bring to GeForce NOW Microsoft's lineup of Xbox PC games, which includes blockbusters like Minecraft, Halo and Flight Simulator. And upon the close of Microsoft's Activision acquisition, it will add titles like Call of Duty and Overwatch. - Colette Kress, CFO

-> Autonomous driving progress: At CES, we announced a strategic partnership with Foxconn to develop automated and autonomous vehicle platforms. This partnership will provide scale for volume manufacturing to meet growing demand for the NVIDIA Drive platform. Foxconn will use NVIDIA Drive, Hyperion compute and sensor architecture for its electric vehicles. Foxconn will be a Tier 1 manufacturer producing electronic control units based on NVIDIA Drive Orin for the global. We reached an important milestone this quarter. The NVIDIA Drive operating system received safety certification from TÜV SÜD, one of the most experienced and rigorous assessment bodies in the automotive industry. With industry-leading performance and functional safety, our platform meets the higher standards required for autonomous transportation. - Colette Kress, CFO

-> Buybacks: Moving to the rest of the P&L. GAAP gross margin was 63.3%, and non-GAAP gross margin was 66.1%. Fiscal year GAAP gross margin was 56.9%, and non-GAAP gross margin was 59.2%. Year-on-year, Q4 GAAP operating expenses were up 21%, and non-GAAP operating expenses were up 23%, primarily due to the higher compensation and data center infrastructure expenses. Sequentially, GAAP operating expenses were flat, and non-GAAP operating expenses were down 1%. We plan to keep them relatively flat at this level over the coming quarters. Full year GAAP operating expenses were up 50%, and non-GAAP operating expenses were up 31%. We returned $1.15 billion to shareholders in the form of share repurchases and cash dividends. At the end of Q4, we had approximately 7 billion remaining under our share repurchase authorization through December 2023. Let me look to the outlook for the first quarter of fiscal '24. We expect sequential growth to be driven by each of our 4 major market platforms led by strong growth in data center and gaming. Revenue is expected to be $6.5 billion, plus or minus 2%. - Colette Kress, CFO

-> “The operating system of AI systems”: NVIDIA AI is essentially the operating system of AI systems today. It starts from data processing to learning, training, to validations, to inference. And so this body of software is completely accelerated. It runs in every cloud. It runs on-prem. And it supports every framework, every model that we know of, and it's accelerated everywhere. By using NVIDIA AI, your entire machine learning operations are more efficient, and it is more cost effective. You save money by using accelerated software. Our announcement today of putting NVIDIA's infrastructure and having it be hosted from within the world's leading cloud service providers accelerates the enterprise's ability to utilize NVIDIA AI enterprise. It accelerates people's adoption of this machine learning pipeline, which is not for the faint of heart. It is a very extensive body of software. It is not deployed in enterprises broadly, but we believe that by hosting everything in the cloud, from the infrastructure through the operating system software, all the way through pretrained models, we can accelerate the adoption of generative AI in enterprises. And so we're excited about this new extended part of our business model. We really believe that it will accelerate the adoption of software. - Jensen Huang, Co-founder & CEO

-> Evolution of large language model processing: Large language models are called large because they are quite large. However, remember that we've accelerated and advanced AI processing by a million x over the last decade. Moore's Law, in its best days, would have delivered 100x in a decade. By coming up with new processors, new systems, new interconnects, new frameworks and algorithms and working with data scientists, AI researchers on new models, across that entire span, we've made large language model processing a million times faster, a million times faster. What would have taken a couple of months in the beginning, now it happens in about 10 days. And of course, you still need a large infrastructure. And even with the large infrastructure, we're introducing Hopper, which, with its transformer engine, its new NVLink switches and its new InfiniBand 400 gigabits per second data rates, we're able to take another leap in the processing of large language models. By putting NVIDIA's DGX supercomputers into the cloud with the NVIDIA DGX cloud, we're going to democratize the access of this infrastructure, and with accelerated training capabilities, really make this technology and this capability quite accessible. So that's 1 thought. The second is the number of large language models or foundation models that have to be developed is quite large. - Jensen Huang, Co-founder & CEO

-> Computing architecture: We've had competition for a long time. Our computing architecture, as you know, is quite different in several dimensions. Number one, it is universal, meaning you could use it for training, you can use it for inference, you can use it for models of all different types. It supports every framework. It supports every cloud. It's everywhere. It's cloud to private cloud, cloud to on-prem. It's all the way out to the edge. It could be an autonomous system. This architecture allows developers to develop their AI models and deploy it everywhere. The second very large idea is that no AI in itself is an application. There's a preprocessing part of it and a post-processing part of it to turn it into an application or service. Most people don't talk about the pre and post processing because it's maybe not as sexy and not as interesting. However, it turns out that preprocessing and post-processing oftentimes consumes half or 2/3 of the overall workload. And so by accelerating the entire end-to-end pipeline, from preprocessing, from data ingestion, data processing, all the way to the preprocessing all the way to post processing, we're able to accelerate the entire pipeline versus just accelerating half of the pipeline.

-> Chat GPT: ChatGPT is a wonderful piece of work, and the team did a great job, OpenAI did a great job with it. They stuck with it. And the accumulation of all of the breakthroughs led to a service with a model inside that surprised everybody with its versatility and its capability. [...] We now realize, and the world now realizes that maybe human language is a perfectly good computer programming language, and that we've democratized computer programming for everyone, almost anyone who could explain in human language a particular task to be performed. This new era of computing, this new computing platform, this new computer could take whatever your prompt is, whatever your human-explained request is, and translate it to a sequence of instructions that you process it directly, or it waits for you to decide whether you want to process it or not. [...] The activity around the AI infrastructure that we build Hopper and the activity around inferencing using Hopper and Ampere to infer large language models, has just gone through the roof in the last 60 days. There's no question that whatever our views are of this year as we enter the year has been fairly, dramatically changed as a result of the last 60, 90 days. - Jensen Huang, Co-founder & CEO

-> “There's no question this is, in every way, a new computing era.”: There's no question that this is a very big moment for the computer industry. Every single platform change, every inflection point in the way that people develop computers happened because it was easier to use, easier to program and more accessible. This happened with the PC revolution. This happened with the Internet revolution. This happened with the mobile cloud. Remember, mobile cloud, because of the iPhone and the App Store, 5 million applications and counting emerged. There weren't 5 million mainframe applications. There weren't 5 million workstation applications. There weren't 5 million PC applications. And because it was so easy to develop and deploy amazing applications part cloud, part on the mobile device and so easy to distribute because of app stores, the same exact thing is now happening to AI. In no computing era did one computing platform, ChatGPT, reach 150 million people in 60, 90 days. I mean, this is quite an extraordinary thing. And people are using it to create all kinds of things. And so I think that what you're seeing now is just a torrent of new companies and new applications that are emerging. There's no question this is, in every way, a new computing era. - Jensen Huang, Co-founder & CEO

-> Bouncing back to year-over year growth in Q1: When we think about our growth, yes, we're going to grow sequentially in Q1 and do expect year-over-year growth in Q1 as well. It will likely accelerate there going forward. So what do we see as the drivers of that? Yes, we have multiple product cycles coming to market. We have H-100 in the market now. We are continuing with our new launches as well that are sometimes fueled with our GPU computing with our networking. And then we have grades coming likely in the second half of the year. Additionally, generative AI, it's sparked interest definitely among our customers, whether those be CSPs, whether those be enterprises, one of those be start-ups. We expect that to be a part of our revenue growth this year. And then lastly, let's just not forget that given the end of Moore's Law, there's an error here of focusing on AI, focusing on accelerated continuing. - Colette Kress, CFO

Long-term thinking, key business drivers, inflationary pressure, expanded products and services offerings, and more.

Q2 2023 Y/Y Δ
Revenue +10%
*Services +11%
*Vehicles +6.8%
EBIT +5.2%
*margin 46% (49) 
EPS +1.7%

-> Long-term thinking, to say the least: We remain committed to empowering more buyers driving auction returns, which in turn enables our sellers to consign still more vehicles through us. In closing, I wanted to note the bedrock principles that have guided us and are the foundation of our success. These principles certainly long predate both Leah and me, and there's nothing particularly magical about them. We continue to make decisions for the 30-year prosperity of our customers and our shareholders. We will invest in the technology of today and tomorrow to enable us to serve both our members and our sellers. We will invest to recruit members to engage them and to expand the marketplace of services available to them to continue to expand the buyer universe. For every vehicle we sell, we are committed to finding the highest and best use of that vehicle anywhere in the world. And finally, we will invest in land. We will own our land whenever possible to ensure that our ability to serve our customers is never compromised by the wins or economic optimizations of third-party landlords. With that, I'll turn it over to our CFO, Leah Stearns, to provide some additional commentary and data and to walk through some key statistics and then we'll turn it over, open it up for Q&A. - Jeffrey Liaw, Co-CEO

-> Business drivers: I'd like to start by saying how excited I am to join Copart. For me, the opportunity was compelling for a number of reasons, including the collaborative and entrepreneurial culture, Copart's enduring focus on delivering best-in-class service to our customers, the business' natural position at the center of the circular economy in automotive, as well as our solid financial foundation. I believe that with these factors, Copart is positioned to deliver exceptional results for our customers and create enduring value for our shareholders over the long term. And I couldn't be more energized to help drive these objectives forward. Turning to the quarter. Global unit sales increased 4.7% year-over-year, including an increase of nearly 4% in the U.S. and over 10% internationally. In the U.S., our fee units grew about 5%, primarily due to growth across our insurance business and our purchase units declined 23%. Internationally, our unit growth came from a mix of fee and purchased units, which increased nearly 9% and over 23%, respectively. During the quarter, our U.S. insurance business grew relative to its 1- and 2-year comp of 9% and 35% respectively. This was primarily due to the continued recovery in driving activity, increasing accident frequency and severity, total loss frequency and share gains. - Leah Stearns, CFO

-> Margin decline due to inflation: We continue to believe that this portion of our business provides an opportunity for future growth and is an important enabler for us in new adjacent asset classes and geographies. Purchased vehicle cost of sales grew more than $14 million or 10% in the second quarter. As a result, purchased vehicle gross profit decreased by $4 million or approximately 24% during the quarter. Global gross profit in the second quarter increased by more than $23 million or 5.7%, while our gross margin percentage decreased by approximately 200 basis points to 44.6%. U.S. margins decreased to 48.9% and international margins decreased to 24.3%. The year-over-year margin decline on a consolidated basis was driven primarily by cost inflation and towing and labor of about 200 to 250 basis points. Over the last 2 years, our direct costs have seen pressures from inflation, primarily related to labor and fuel. We will continue to manage these costs with a long-term perspective. We view the increase in labor costs as a direct investment in our people, which will translate into best-in-class service for our customers. We constantly seek to optimize our operational processes through technology and automation. - Leah Stearns, CFO

-> Foundation for increased return on capital over time: We are committed to investing in our real estate, logistics and technology assets to ensure we are positioned to scale appropriately to meet the demand of our customers. We believe with this approach, we can increase margins and returns on capital over time. Turning to general and administrative expenses, excluding stock-based compensation and depreciation. G&A spend in the quarter increased $5 million or 12%. While G&A can be volatile from period to period, over the longer term, we anticipate G&A to decline as a percentage of revenue, as we benefit from the scale of our corporate infrastructure. As a result of our strong revenue growth, offset by the cost increases experienced in our business, our GAAP operating income increased by more than 5% to $366 million for the second quarter. Our second quarter income tax expense was $83 million, which reflects a 22.1% effective tax rate. And finally, second quarter GAAP net income increased about 2% to $294 million or $0.61 per diluted common share. Our global inventory at the end of January decreased 1% from last year. And when excluding low-value units like wholesalers and charities, global inventory increased by 1%. - Leah Stearns, CFO

-> Keeping an eye on the evolution of AI: I think we are certainly following it closely and think that AI will be deployed. In some respects, if you're viewing AI and machine learning, all collectively as the future of technology and neural computing and so forth. We do deploy some of those tools in our systems today, most notably for our vehicle valuation guide ProQuote, which helps insurance carriers make the optimal real-time decision about total losses, when and when not to total vehicles. I think you're referring specifically to, I think, the notion of automated chat and so forth. And that is the evolution, of course, of where FAQs eventually go. You end up with smarter and more informed answers on some of the questions you most frequently get here at Copart. I'd say today, with our sellers and members, the questions are often nuanced enough, specific enough to individual circumstances, lots purchased and so forth that it's not a ready solution for us today. We follow the space. [...] If and when relevant for our business to deploy much more broadly, we will certainly do so. - Jeffrey Liaw, Co-CEO

-> Expanding services and product offerings: There are additional services to be offered to both sides of the marketplace, and we are doing that today. And we haven't talked about them at great length on earnings calls, we find those more relevant in discussions with our sellers and our members themselves. Those services certainly include things like delivery, financing, and title services. And the buyers, that universe is expanding in real time. As you noted, if you went back 30 years ago and the buyers were largely dismantlers and so forth, they're not that interested in other services we have to offer waxing otherwise. As we expand our universe into more drivable vehicles, lighter damaged cars, I think that becomes more relevant over time. I'd argue that we are the industry leaders in that regard in terms of the mix in that direction. And so that thesis is a bit more relevant for us than it is for anyone else who is loosely in our industry. - Jeffrey Liaw, Co-CEO

-> Unit growth rate; “An unabated 40- or 50-year trend”: From here, yes, precisely when, I think it's harder to forecast. That's a function of the variables we talked about, which is the value of used cars and therefore, ACV or pre accident value as the Europeans call it, and what the car is worth before it's in an accident, what happens to repair costs and rental car costs and the like. I think we have total conviction that the total loss frequency reverts to historical levels and continues to grow from there. The precise trajectory from today until that point, I think it's more difficult to forecast. But this is an unabated 40- or 50-year trend with the exception of about 18 to 24 months. And so we do believe that it will revert. - Jeffrey Liaw, Co-CEO