Hubert Horan’s Quick Take on Uber’s Second Quarter Results

From Hubert via e-mail:

Uber released 2Q P&L results Wednesday.

1. GAAP Net Loss for the quarter was $891 million. This was significantly worse than its 1Q $551 million loss.

The (paywalled) WSJ story, Uber’s Revenue Growth Keeps Up Fast Pace includes a link to the detailed P&L data.

Bloomberg’s press report, Uber CEO Embraces Losing Money With Revenue Growth Slowing, had a bit better balance.

2. Unlike 1Q, reported 2Q results did not appear distorted by any major accounting games. In 1Q Uber sold failing Asian operations to Grab, and asserted the Grab shares it obtained in the transaction were worth $3.0 billion, producing a 1Q accounting profit of $2.5 billion. Many (but not all) of the media reports of Uber’s 1Q results fell for the “Uber is now profitable” gambit. Press coverage generally emphasized the “2Q losses increasing” point, reversing whatever short-term PR benefits Uber might have gotten from its claims of 1Q “profit”.

3. Uber’s GAAP net loss for the year ending June 2018 was $4.00 billion. Its net loss for the year ending December 2017 was $4.46 billion. So losses are shrinking very slowly; at this rate they might achieve breakeven in their 15th year of operations. This dramatically contradicts the Morningstar claims (discussed in Part 16 of our series last Monday) that Uber would achieve a 45 point margin improvement in 2018 versus 2017, and achieve breakeven in 2020.

4. Uber supporters tend to emphasize revenue growth, while ignoring the profit problems. But Uber Net Revenue for the year ending June 2018 had increased 28% over Net revenue for the year ending December 2017. But Morningstar had predicted 2018 net revenue would be 60% higher than 2017. Without this type of rapid revenue growth, their entire case for a $100+ billion IPO valuation totally collapses. Other recent pro-Uber press reports have claimed extremely strong growth for Uber’s food delivery service. None of these claims have been substantiated, but they raise concerns that growth in Uber’s core car service business may be even less than 28%

5. A (paywalled) Tuesday piece in the tech site The Information — usually a reliable source of pro-Uber spin — reported that Uber was losing $125-200 million a quarter ($500-800 million annualized) on its driverless car efforts.

This would confirm the argument laid out in Monday’s Part 16 of our series on Uber’s economics that there is a fundamental contradiction between actions Uber might take to stem short term losses, and Uber’s need to promulgate an IPO narrative highlighting years of robust, profitable growth. Morningstar’s $100+ billion valuation estimate was based on ignoring the huge costs of developing these highly speculative future businesses. Even normally pro-Uber media outlets are beginning to recognize that they can’t continue to ignore $500-800 in annualized expense.

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  1. Larry

    So presumably the biggest costs remain R&D and driver sign up and retention. It makes me wonder if they could cut losses further by upping driver pay to cut down on the turnover in drivers, which must cost them a fortune.

    1. Michael

      I thought that extremely low driver cost was key to Uber’s biz model. Driver turnover costs should be relatively low – it takes very little to get a new driver onboarded. However high turnover sends the signal that drivers are having a hard time making money. I rarely take an uber – usually only when in a shared setting for work reasons – and every driver I speak to is new. It’s rare to find one who has more that 6 months. I suspect it’s only after 6 months the wear and tear of maintenance costs become real. I also wonder what kind of message the recent NYC protests send when current Uber drivers united with Lyft and traditional medallion taxi drivers to plead that the mayor limit the competition. So much for Uber’s free market message. This sends another signal that Uber’s biz model is wanting.

      1. Yves Smith Post author

        I suggest you read Hubert’s series, It appears you haven’t.

        First, roughly 40% of ride costs are subsidized by Uber.

        Second, Uber has had to give drivers special incentives to get them to stay three months.

        Third, “onboarding” is far from the only cost. Uber also has physical recruitments centers. Readers have reported on ones closing due to too little activity (as in difficulty of recruitment) to justify keeping them open.

        1. Michael

          Thanks. I will re-read. I’ve found this series to be refreshing coverage compared to the fawning press Uber typically receives. And, apologies because my point wasn’t very clear. Uber’s customers and the general public still believe that they are somehow providing 1000s of drivers a flexible way to earn because they can dip in and out whenever needed. My point should not have been to contradict Larry, but to reinforce that the idea that it’s a farce to consider Uber drivers as “cheap”.

          I am curious to know how others take the cap on taxis – including Uber and Lyft – that NYC set this week. From the NYT last week: “Taxi and Uber Drivers Back a Cap on Ride-Hail Vehicles: As New York City moves to limit for-hire vehicles, yellow-cab and Uber drivers are both hopeful that the proposal could ease their financial plight.” This again flies in the face of Uber’s intended “unregulated, free-market rules!” philosophy and seems to lay bare the holes in its business model. Will other municipalities follow suit?

  2. Louis Fyne

    Uber spends a fortune on driver subsidies, as doing the obvious—raising fares, will hurt demand.

    Only in certain discrete metro neighborhoods is Uber demand relatively inelastic (due to expensive parking/time wasted looking for parking, ample demand from the bar crowd, etc)

    To see if for yourself, just search “uber” or “uber driver” or “i want to be an uber driver” and AdSense/the advert platforms will throw Uber/Lyft driver ads at you for the rest of the day+

  3. lyman alpha blob

    So as an old boss on my once said referring to his own business, they may lose money on every transaction, but they make up for it in volume.

  4. Polar Donkey

    At my restaurant, we still have a steady stream of Uber eats orders. It seems to have plateaued though. Same at a couple other restaurants who’s owners/staff I talk too. We have 3 food delivery service, grubhub and Uber Eats are the big ones. A new company from California trying to come into Memphis. Not sure how much market space is left. There has been a restaurant boom in Memphis. Way too many have been opened. Next recession, I would say at least a 1/3 these new restaurants get wiped out. Possibly more since they all are either pizza or hamburger joints. It wasn’t like we didn’t have enough of those before. The past 3 years have been insane with fools opening pizza and burger joints. This is Memphis, we have had virtually zero population growth for going on 15 years. Total number of employed people is less than 15 years ago and poverty rate was in low 20’s, now high 20’s.
    In Memphis, every working class person worked in the fedex hub for a while or drove Uber. Neither for very long.

    1. Louis Fyne

      >>At my restaurant, we still have a steady stream of Uber eats orders. It seems to have plateaued though

      From talking to drivers, Uber drivers hate, hate, hate Uber eats. (pay structure, few tips) It’s only the subsidies that keep them begrudgingly doing it.

      And from what I’ve heard, Uber Eats ain’t a bargain for restaurant owners either (high commissions).

      1. curlydan

        The subsidies Uber Eats or its competitors throw out seem fairly ridiculous, too. I don’t use these services because they seem as exploitative as the ride sharing, but I’ll see “$50 in credits on your first Uber Eats order” at some places. I guess that’s just an acquisition cost, but the potential for similar competition (like Groupon a few years ago) make me scratch my head about the long-term potential.

  5. divadab

    About of quarter of Uber’s losses are due to driverless car development costs? Normally R&D costs are capitalised unless there is little or no chance of the R&D producing future profits. This makes sense, in a way – because IMHO driverless cars are a snare and a delusion and a stupid waste of time and money. But Uber needs to continue throwing money at this worthless exercise in order to keep their “Hey, Rube” going.

    It’s a Hobson’s choice for these guys. Too bad they are not public as most of their value seems to be as a short opportunity.

    1. grayslady

      because IMHO driverless cars are a snare and a delusion and a stupid waste of time and money

      Not only are they a waste of time and money, they are fantasies of the wealthy. The Chicago Tribune recently reported that the precursors of these “driverless cars”–those with lots of front and rear sensors–are outrageously expensive to insure. Manufacturers have elected to place these sensors in the front and rear “bumpers” (I deliberately use quotation marks because auto companies haven’t made a useful bumper since the 1980s), which are prime collision points. Consequently, accident repairs are vastly more expensive for these vehicles than for vehicles without the sensory devices.

      1. shinola

        While driverless vehicles may be expensive to repair, leading to high costs for physical damage insurance, consider the other part of the insurance equation: Liability

        Would even Lloyds underwrite this risk? At what cost? Self-insuring would require holding large amounts of cash and/or highly liquid assets.

        Of course the modern method to get around potential liability is to persuade (bribe) lawmakers to legislate it away, as in “driverless vehicles are so perfect that any accident must be the other party’s fault”.

  6. C Neill

    I have noticed over the past year both the quality of the cars and drivers have declined markedly. That is not a sign of a happy or prosperous workforce.

    1. Polar Donkey

      Yes, the appearance of the drivers is such with Uber Eats drivers that I would not consider using the service. Drivers picking up food in pajamas, kids in cars, cars that barely run, cars full of people, etc. Have had drivers eat the food they were picking up. Bitesquad and grubhub at least have some uniforms.
      If you don’t tip and use Uber eats a lot, some unpleasant things might happen to your food.

  7. Synoia

    120-200 Million on driverless cars.

    Uber has 1,000 to 2,000 people, expensive Engineer, creating software.

    A huge programming team.

  8. flora

    Uber ‘s business model is the old business joke: ‘We lose money on every sale, but make it up in volume.’

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