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
Overview of Uber 2018 results
Uber released a brief summary of its fourth quarter and full-year 2018 P&L results on Friday.
Excluding claimed benefits from the first quarter sale of its failed Southeast Asia operations to Grab, Uber had a 2018 GAAP loss of $3.3 billion.  2018 losses would have been $3.7 billion but were reduced by an unexplained $400 million reduction in fourth quarter tax liability.
Although Uber had provided reporters with detailed 2017 financial data, in recent quarters it only released five P&L numbers making it impossible to explain changes in reported totals. This is the first time year-over year total Uber GAAP losses have actually declined. Uber lost $2.5 billion in 2015, and $4.5 billion in 2017.
Uber has obvious interest in reducing losses prior to its IPO but there is no way to tell whether the improvements in 2018 were due to improved ridesharing efficiencies or the elimination of very unprofitable markets, or reduced spending on future markets and growth.
Uber’s fourth quarter GAAP loss was slightly lower than both its third quarter loss and its 2017 fourth quarter loss, but would have been worse without the income tax liability change. Uber remains hugely cash flow negative, and cash from operations worsened to ($645m) in the fourth quarter versus ($487m) in the third quarter. However Uber’s total cash on hand increased to $6.4 billion (from $5.9 billion at the end of 2017) thanks to new investment and borrowing.
Given nine years of abysmal profitability, Uber’s public statements have emphasized revenue growth, but that growth has continued to slow down. Fourth quarter net revenue was $3.0 billion, a year-over year gain of 24%, but the first quarter’s year-over-year gain had been 70% and the quarter-to-quarter gain was only 2%. Comparisons are complicated by the growth of Uber Eats, which appears to be growing much faster than Uber’s core taxi business. Uber has been aggressively trying to capture food delivery share from Grubhub and other incumbents. But Uber didn’t provide any data that would allow one to identify the separate impacts of taxi service, food delivery or scooter rentals other businesses on their total results.
Press Coverage Increasingly Negative
All of the major business and tech industry publications that follow Uber immediately reported the P&L results including:
While these reports appropriately focused on the data Uber released, it is worth noting that coverage was much more critical than the reporting that would have been seen a year or two ago.
The Wall Street Journal highlighted the revenue growth slowdowm; its lede was “As it steers toward a planned initial public offering later this year, Uber Technologies Inc. is hitting a bumpy patch on sales.”The Financial Times’ lede was “Uber’s revenue growth slowed and costs rose in the final three months of 2018, as the ride-hailing company spent money on price wars around the world.”
The headline in the Times was “As Uber Prepares for I.P.O., Its Losses Pile Up.” It speculated that Uber had been unable to take a higher share of ridesharing revenue due to growing competitive pressures and that lower Uber Eats margins had also hurt results. It also reminded readers that the post-IPO stock price of companies like Snap who went public while still making sizeable losses had collapsed badly when those losses persisted.
Both Bloomberg and Techcrunch highlighted the unexplained income tax liability adjustment and wondered how potential IPO investors would react to the results. Bloomberg suggested that “News that the company is still burning through more than $1 billion annually may give some investors pause” and might be unhappy with Dara Khosrowshahi’s approach since he was hired 17 months ago. “At the time, investors expected Khosrowshahi would focus on stemming losses. Instead, he has prioritized fending off rivals like Lyft and investing in areas of growth like food delivery.”
Everything Is Still Riding on the Upcoming IPO
As previously discussed in this series, this year’s IPO will be the most important event in Uber’s history. Roughly two-thirds of the cash Uber has raised came from investors who bought shares after 2015, at prices closely linked to its current $70 billion valuation. These investors were not established Silicon Valley venture capitalists (who had provided Uber’s original funding at much lower prices), but investors willing to pay much higher prices once Uber had become a hot, glamorous company and the biggest unicorn of all time.
The 2017 Board rebellion, that led to the sacking of Travis Kalanick and the hiring of Khosrowshahi, was not due to the sexual harassment issues Susan Fowler had raised, but because Kalanick knew that Uber was not ready to withstand serious capital market scrutiny and refused to initiate an IPO. Khosrowshahi was hired after promising the Board he would complete that IPO during the second half of 2019. The Board set bonuses for him that made it clear they wanted to achieve an IPO valuation north of $100 billion, which would provide those later investors to achieve the huge returns they had been promised. An IPO valuation of merely $70 billion would mean these later investors would have been better off stuffing their cash into their mattresses. Morgan Stanley and Goldman Sachs, the two firms competing to run Uber’s IPO process, both claimed that Uber could go public at $120 billion (Morgan Stanley was selected).
Uber accelerated the process when Lyft began its own IPO process in December, which it hoped would be finalized in March or April. Lyft’s ridesharing business model is identical to Uber’s and is pursuing a much more modest valuation (currently $15 billion).
Uber realized it would lose control of the public narrative. Investors might conclude that a ridesharing business might be worth $20 billion (but not much more) or might review the financial data in Lyft’s prospectus and realize it was worth even less than that. Uber and Lyft both recognized that the overall tech equity bubble might be bursting in light of growing awareness that long-term growth and profit expectations at companies like Facebook, Twitter and Amazon may not have been firmly grounded in reality. Uber and Lyft will also be competing with companies like Palantir, Airbnb, Slack and Postmates for investors attracted to prominent tech unicorns.
Companies who want to go public make an initial confidential filing with the Securities and Exchange Commission. Filings must include detailed, audited financial results (which neither Uber nor Lyft has ever released), pro-forma forecasts of future results, and a written discussion of business risks and why the company could achieve the profitable growth it has forecast. The SEC has 30 days to review initial filings, but can ask questions and demand changes before final approval. This schedule was delayed by both the government shutdown, and the need to update filings with the latest (full year 2018) financial data. Once approved, companies can release the prospectus (known as the S-1 filing), and conduct a public roadshow to convince investors to buy the stock, and gauge what price the markets will accept.
If Uber is satisfied it can achieve the $100+ billion valuation they need, they can announce the final price and pull the trigger on the actual stock sale. That would require convincing investors that the stock has significant appreciation potential above the IPO price. This means they need to demonstrate that Uber can quickly achieve breakeven in its core car service business, can steadily increase taxi revenues and profits for many years, and can also quickly achieve rapidly growing profits in a variety of other businesses (e.g. food delivery, scooters, driverless cars). The simple counter-example is Amazon’s IPO, where they had already demonstrated the ability to produce strong positive cash flow from their core bookselling business, demonstrated that their sophisticated ecommerce platform and warehousing/distribution infrastructure gave them powerful competitive advantages, and that their existing investment could easily be leveraged into profitable growth into a wide range of other retailing markets.
As readers of this series will understand there is no objective, verifiable evidence at hand that any claims about rapid Uber profit growth in ridesharing or any other business are likely to be true. Additionally, Uber faces a Catch-22 type dilemma. There are spending cuts Uber could make to goose the short-term P&L numbers, but these would show Uber was not investing in the profitable long-term growth it was promising. Likewise, increased investment in speculative future new businesses would make the (already awful) short-term P&L and cash flow numbers even worse.
Uber’s accelerated IPO schedule means it has had less time to clean up its results and forecasts, and develop a more convincing explanation as to how it will suddenly become “the Amazon of Transportation.”
Today’s P&L announcement sheds no light on how they might approach the IPO. It is unclear why Uber released such limited financial data when the public release of much more detailed, audited data is imminent. IPO investors will need clear information about revenue and spending broken down by each current and prospective future line of business. They will need to be able to track trends for key items such as rideshare prices, driver compensation and incentives, marketing and IT expenditures. They will need to see whether actual spending and margin changes are aligned with management’s explanation of how it can achieve strong profit growth in the future.
Over its ten year history, Uber has built a reputation as a highly successful and valuable company based on manufactured narratives, and propaganda techniques that hid (or diverted attention from) evidence about its lack of competitive economics and its terrible financial results. Over the past two years, this series has attempted to explain why Uber (as Travis Kalanick had predicted) was unlikely to survive capital market scrutiny once detailed financial evidence became widely available.
Perhaps Uber’s proven ability to manufacture narratives will convince investors to put up $100 billion in real money for the company’s shares. Perhaps Uber can get away with an IPO prospectus that doesn’t answer any of these critical questions about the company’s economics. If Uber raises the money they are hoping for, the Uber “problem” simply shifts from the current investors to the new public shareholders.
If Uber gets significant pushback from investors who don’t find its prospectus narratives convincing, things would become very messy very quickly. Cutting the valuation much below $100 billion, or significantly delaying the IPO could restart the Board battles that crippled the company in 2017. Major pushback from investors could completely burst the longstanding perception that Uber is a powerfully innovative company that has huge long-term profit potential. If the public begins to realize that none of those narrative-driven perceptions were true, Uber has no “Plan B” to fall back upon.
 The $3 billion first quarter profit gain was based on Uber’s assertion as to what the Grab shares it obtained (in exchange for quitting the market) would be worth someday. See Uber’s Q1 Results – Reporters Show They Aren’t Up to Reading Financials, Naked Capitalism, 24 May 2018