By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants
Here are some of the stories about Uber’s 1Q published results.
The (paywalled) WSJ article provided links to actual P&L and cash flow tables.
As usual, it’s a mixed bag of reporting. The Recode, New York Times and Financial Times articles were especially weak, suggested the reporters hadn’t really been following the Uber story and weren’t good at reading financial reports. All stories mentioned that Uber’s reported “profit” was entirely due to the one-time. $2.94 B gain on the Grab sale. But most stories highlighted “Uber profit” in their headlines and ledes, and only Newcomer (Bloomberg) and Griswold (Quartz) made a serious attempt to explain to readers that this gain was a one-time accounting entry. Even with their attempts to clarify, the overall takeaway most people will get from these reports is “Uber is now profitable”
In contrast to these stories, the Financial Time’s Lex column (behind a premium paywall) explicitly emphasized that the results didn’t mean that Uber was anything close to a profitable business. “Uber is solidly lossmaking with slowing growth…and has some way to travel to convince markets its numbers add up before going public” But people who read the FT’s “news” story (or the NYT, or WSJ) would have no idea that the numbers told this kind of story.
None of the stories made any attempt to explain how the sale of a hopelessly unprofitable operation could generate a $2.94B accounting “profit”, or made any attempt to explain that it was entirely based on Uber’s opinion about how much Grab (currently money-losing) might be worth some day. None of this “profit” had nothing to do with the exchange of assets where the underlying value had ever been audited or based on exchanges in public markets.
None of the reporters seemed to grasp that making a (roughly) half-billion P&L improvement (aside from the Grab accounting benefit) in a single quarter, if true, would be a major story in itself, and didn’t explain how this was achieved. It appears to have come from a $280m cut in driver compensation vs the 4th Q (drivers getting less and less of what passengers actually pay–a piece of the Uber story that every major outlet ignores) and a $277m cut in G&A and Depreciation expense.
Most stories mentioned Uber’s hoped-for 2019 IPO, but none attempted to explain whether the 1Q data points toward the narrative Uber will need to gain a strong public valuation. “We are no longer losing a billion dollars a quarter” may be better news than the alternative, but neither Uber nor these reporters can explain how or when Uber might achieve breakeven, much less the sustainable profits investors will need to see. Dara Khosrowshahi has publicly stated that he expects Uber to grow to 20-30 times its current size, and that Uber’s driverless car “flying car” programs are critical to achieving those growth targets. But all of the things that drove the Quarter-over-Quarter P&L improvement directly undermine that “growth narrative.”
Much of the huge G&A/Depreciation cuts were related to reduced spending on future growth. Any company can goose current earnings if they stop spending for the future, but this is not what potential investors in Silicon Valley “growth companies” want to see. Most stories quoted Khosrowshahi’s comments about growth exceeding expectations, but none noted that the quarter-over-quarter growth in gross passenger payments was only 4%. Some of the stories mentioned the termination of driverless car testing in Arizona, and the recent departure of the head of Uber’s flying car project, but no one attempted to explain how any of these facts could be consistent with the company’s aggressive growth objectives. Obviously, the idea is that “growth companies” can use the strong profits and cash flow from their core business to fund a variety of longer-term growth opportunities. The reporting on Uber still ignores its awful year eight economics in its core businesses, and that its hope of eventually earning money in driverless and flying cars is even more inexplicable.