Uber Q3 FY2021 Earnings

In this post, I’ll share my notes on Uber Q3 FY2021 earnings and the business in general.

The last quarter saw Uber’s business continue to recover from the recent challenges, including driver shortages and lockdowns in various parts of the world. The number of Monthly Active Platform Consumers (MAPC) reached 109 million, an increase of 40% year over year. This is the highest number that Uber has seen in the last 12 months. The number of trips rose 39% as the average monthly trips per consumer was flat at 5 each. As usage increased, the company saw Gross Bookings (GB) and Revenue grow by 57% and 72% respectively (Figure 1). Adjusted EBITA, which Uber uses to measure profitability, was positive for the first time.

Specific segments (Mobility, Delivery and Freight) showed great progress in both GB and Revenue. Mobility led the way in GB growth at 67%, followed by Delivery at 50%, mainly because of the law of big numbers. In revenue growth, Mobility trailed Delivery (62% and 97% respectively), because the latter managed to raise its take rate by 410 basis points (Figure 2) while the former’s take rate took a modest hit. As the revenue continued to climb and operational optimization kicked in, Uber’s Delivery was inches away from profitability on Adjusted EBITA basis.

There is an argument to be made that Covid-19 created a golden opportunity for Uber to transform itself. The pandemic impacted its Mobility segment to great extent as lockdowns were imposed and consumers stayed at home. Not only did the company persevered, but it also pivoted successfully to grow its Delivery service. Since December 2020, the company’s total GB every month already exceeded that of February 2020. The key was in how Uber did it. While Mobility’s GB still hasn’t recovered to the pre-Covid level, Delivery has grown leaps and bounds by several folds (Figure 3). Furthermore, the two segments start to complement and support each other as one becomes a key acquisition tool for the other. Here is what Dara, the CEO, had to say on the earnings call:

So about 50% of, for example, U.S. and U.K.gross bookings come from cross-platform users. That number is closer to 45% globally and generally increasing. In the U.S. now, mobility continues to be a very significant customer acquisition tool for Eats. So now 1/4 of U.S.first-time eaters are coming from our Ride’s business, which is pretty extraordinary. For perspective, that’s more new users than we get from Google, Apple, Facebook, Instagram from all of these paid entities combined.So it’s free. We have tested that because consumers actually like this super asset that we’re building and the numbers are significant and increasing. And then on the other side, what’s interesting is that 20% of U.S. mobility first trips are coming from eaters. So now that we have a very, very big delivery business, we’re able to now cross platform into whether it’s offers or on the app or off app, we’re able to promote into our Mobility business. That number for the U.K., for example, is 40%. I’ll repeat it. 40% of U.K. first trip mobility users actually came from Eats — were Eats users, which is pretty extraordinary.

Source: Uber Q3 FY2021 Earnings Call

This synergy and ability to cross-sell is a competitive advantage over other Delivery rivals like DoorDash or Mobility nemesis (Lyft). None have this capability, especially on a global scale, like Uber does. From a consumer perspective, the extra utilities that Uber offers create a compelling reason to be a member and use the Uber app more often. According to the management team, there are 6 million members globally who already make up 1/5 of the total GB. On average on the Eat side, members’ basket size is 10% bigger than that of non-members. In Taiwan, Eat members made up more than 50% of the market’s GB and placed 3x more orders than non-members.

The increased utilization is also reflected on the driver side. A few months ago, in an article on the acquisition of Postmates and Drizly, I wrote: “Drivers have limited resources in their vehicles and time, as even the most dedicated drivers can’t drive for more than 24 hours a day. Nobody wants to drive around needlessly all day without getting paid while having to pay for vehicle expenses and gas. As a result, the more business opportunity Uber can bring to drivers, helping them better leverage their time and resources, the more drivers will sign up. When it comes to making more trips and money, do drivers care if it’s a parcel or a person that needs transporting?”. The sentiment was confirmed yesterday by Dara on the earnings call:

On the driver side, one thing that’s pretty cool is that about 1/3 of our new driver sign-ups now are driving both people and food, so to speak. And that is a higher number than our overall number. So about 25% of our drivers in the U.S. drive both people and food. That number was in the teens pre-pandemic.So it’s going up from the teens to 25% overall. And new drivers, 1/3 of them are electing to do both. So that, again, is like the iteration of our product getting better and better in terms of kind of pushing both services or offering both services, both on the demand and supply side.

So I think we’re going to see more earners on our platform for years and years to come. And we are finally getting the right muscle in terms of promoting cross-platform usage, which is going to lead to higher utilization on our platform in terms of time of day and in terms of driver utilization, structurally, it will be an advantage over the other players. So we want to be that platform that is kind of the one-stop shop for earners that they keep coming back to for a long period of time.

Source: Uber Q3 FY2021 Earnings Call

The investment in drivers that Uber made earlier in the year, plus the recovery from Covid and the increased driver utilization, helped the company tackle the driver supply issue. Compared to January 2021, Uber has seen 75% more active drivers in Q3. The wait time dropped from 7. 5 min on average in the U.S in March 2021 down to 4.5 min in October 2021.

In addition to the true ride-hailing and food delivery services that people come to know Uber for, there are a few other developments that are very promising and potentially beneficial to Uber. First is advertising. Having a marketplace (app) that is used by millions of users enables the company to monetize that traffic. Merchants wishing to broadcast their name and generate more business ought to pay advertising dollars to Uber. From Uber side, advertising revenue which Uber reported to amount to $100 million on an annualized basis in Q3 2021 and feature 140k merchants is high margin that allows the company to “fund” other emerging verticals. Which brings me to non-food deliveries. The new verticals make up about 6-7% of Delivery’s total GB and are expected to reach double digits next year. The investments that Uber has made to scale these verticals actually dragged down the profitability of the whole Delivery segment as the core verticals are now already in the black.

Additionally, the company is expanding alcohol delivery to more states in the U.S after the acquisition of Drizly. Drizly has a business model that is already profitable. It acts as a marketplace to connect merchants and consumers, but leaves the delivery duty to merchants. That way, Drizly can simply earn revenue from monthly subscriptions and a small fee every order without having to deal with drivers and all the expenses that come with delivery. Other ventures include rapid delivery, dark grocery (tiny warehouses that hold a limited selection of grocery to facilitate rapid delivery) and Baby + Kids vertical.

One stripe that people have against Uber is the tendency to burn money every quarter. The criticism is legit as that’s been the company’s model. This quarter saw net loss balloon to $2.4 billion, $2 billion of which came from a “net headwind (pre-tax) from revaluation of Uber’s equity investments in Q3 2021”. According to Uber’s CFO – Nelson Chai, the write-down resulted mainly from the loss of value of Uber’s stakes in DidiChung and this fluctuation can continue from one quarter to the next. I have quite mixed feelings about this issue. While I appreciate that Uber has valuable assets such as this equity, the fluctuation and complication don’t provide the simplicity and certainty to investors.

Lastly, Uber revamped its pricing tiers for merchants. The new pricing system mirrors very well what DoorDash offers with two distinct differences. One is that while DoorDash includes in its take rates the credit card processing fees, it’s unclear if Uber does the same. This can be an important point as 2.5% in credit card fees can mean the world to merchants. The other difference is that Uber guarantees 5 more orders every month with its Premier tier than DoorDash’s highest tier. As these table stakes are level-set, the difference between these two impressive companies will come down to: who executes better, who can bring more business & drivers to merchants?

Overall, this, to me, is a good quarter for Uber. The company took steps to address the driver supply issue and they worked. There is a great synergy between Delivery and Mobility that seems to go from strength to strength over time. Delivery doesn’t seem to show signs of slowing down and is actually profitable at the core while still in the red with the new verticals. Once Mobility gets back to the pre-Covid level and the new investments become more mature, the outlook will be even brighter for this company.

Disclosure: I have a position on Uber.


Figure 1 – Uber’s Q3 FY2021 Financial & Operational Highlights
Figure 2 – Uber’s Revenue and Take Rate in Q3 FY2021
Figure 3 – Uber’s Monthly GB
Figure 4 – Uber’s platform supply growth efforts showing results in the U.S

My estimate of Azure revenue. Its run-rate is not $28 or 29 billion yet!

Among the three biggest public cloud vendors, only Amazon provides revenue and operating income for AWS while Microsoft and Google (Alphabet) have refrained from doing the same. Alphabet (Google) will pull the curtain a little bit on the state of GCP in their imminent earnings call, but Microsoft hasn’t, even in the latest call last week. While it’s highly challenging to put a precise figure on the revenue from Azure without official disclosures, I think that by digging into their financial documents, we can have a pretty good idea of what it may be and as importantly, what it canNOT be.

If you read Microsoft’s financial filings, it can give you a headache trying to work out what all the buckets and segments mean and what goes into where. First, you can look at the business from a 4000-foot perspective into Products and Services. On a deeper level, there are three big segments: 1/ Productivity and Business Processes, 2/ Intelligent Cloud and 3/ More Personal Computing. Under each segment, there are different metrics which combine different products and services whose financial figures aren’t reported. According to Microsoft’s disclosures, Azure revenue falls into the bucket called “Server Products and Cloud Services”, as you can see in the screenshot below. Since Microsoft refuses to offer specific numbers on Azure, what we can do is to estimate it through Server Products and Cloud Services, whose numbers Microsoft does reveal.

Definition of Microsoft's metrics, including Azure
Figure 1 – The definition of Microsoft’s metrics. Source: Microsoft

Here is what Microsoft did say on Server Products and Cloud Services (SPCS) on their latest 10Q:

Server products and cloud services revenue increased $2.6 billion or 26%, driven by Azure. Azure revenue grew 50%, due to growth in our consumption-based services. Server products revenue increased 4%, driven by hybrid and premium solutions, offset in part by continued transactional weakness, on a strong prior year comparable that benefited from demand related to Windows Server 2008 end of support.

Source: Microsoft

Based on the disclosure and the composition of SPCS, we can be sure that Azure’s YoY revenue growth in the last quarter cannot be bigger than $2.6 billion. This insight can help us put a maximum limit on what Azure cannot exceed. Let’s assume that all the growth in SPCS is down to Azure and all the other products and services didn’t grow at all, meaning that Azure grew by $2.6 billion in Q2 FY2021. Because Microsoft said that Azure grew by 50%, that means its revenue in Q2 FY 2020 would have been $5.2 billion. As a result, Q2 FY2021 revenue would be $7.8 billion. Using the same logic, let’s go back to a few quarters and see what it would look like.

SPCS YoY Revenue Increase $           1,562  $           1,492  $           1,710  $           1,729  $           2,134  $           2,328  $           2,437  $           1,858  $           2,003  $           2,610 
Azure Revenue Growth (100% of SPCS growth) $           1,562  $           1,492  $           1,710  $           1,729  $           2,134  $           2,328  $           2,437  $           1,858  $           2,003  $           2,610 
Azure Revenue YoY  Growth76%76%73%64%59%62%59%47%48%50%
Revenue Base $           3,617  $           3,755  $           4,131  $           3,953  $           4,173  $           5,220     
Quarterly Revenue $           3,617  $           3,755  $           4,131  $           3,953  $           4,173  $           5,220  $           6,568  $           5,811  $           6,176  $           7,830 
4-quarter revenue (annual run rate)    $        15,455  $        16,011  $        17,477  $        19,914  $        21,772  $        23,775  $        26,385 
Figure 2 – The scenario in which Azure was responsible for all Server Products and Cloud Services’ revenue growth

The first row is the revenue growth in absolute numbers every quarter of SPCS that Microsoft revealed. In this line of logic, we assume that is also the growth of Azure. Microsoft also revealed the YoY growth rate of Azure on the 3rd row. Based on the absolute numbers that we assume and the YoY growth rate, we can calculate the revenue base. For instance, the revenue base in Q2 FY2020 of $5.2 billion would be equal to $2.6 billion divided by 50% and the revenue base in Q1 FY2020 would be equal to $2 billion divided by 48%. To arrive at the estimated quarterly revenue of the last four quarter, we add the revenue base and the increase that we assumed accordingly. For instance, the $6.6 billion in Q32020 would be the sum of $4.1 billion in Q3 FY2019 and the $2.4 billion increase. Based on that logic, the absolute maximum revenue Azure could achieve in Q2 FY2021 would be $7.8 billion. If we do a quick calculation of 4-quarter revenue or what they call run-rate, the absolute maximum Azure could generate in 4 quarters would be $26.4 billion.

But since this scenario is impossible as the other components under SPCS do generate revenue growth every quarter, Azure’s run rate as of Q2 FY2021 has to be less than $26.4 billion. What would it look like if Azure’s growth was responsible for 95% of SPCS’ growth every quarter?

SPCS YoY Revenue Increase $           1,562  $           1,492  $           1,710  $           1,729  $           2,134  $           2,328  $           2,437  $           1,858  $           2,003  $           2,610 
Azure Revenue Growth (if 95% of SPCS growth) $           1,484  $           1,417  $           1,625  $           1,643  $           2,027  $           2,212  $           2,315  $           1,765  $           1,903  $           2,480 
Azure Revenue YoY  Growth76%76%73%64%59%62%59%47%48%50%
Revenue Base $           3,436  $           3,567  $           3,924  $           3,756  $           3,964  $           4,959     
Quarterly Revenue $           3,436  $           3,567  $           3,924  $           3,756  $           3,964  $           4,959  $           6,239  $           5,521  $           5,867  $           7,439 
4-quarter revenue (annual run rate)    $        14,683  $        15,211  $        16,603  $        18,918  $        20,683  $        22,586  $        25,065 
Figure 3 – The scenario in which Azure was responsible for 95% of Server Products and Cloud Services’ revenue growth

Based on this assumption, the annual run-rate of Azure as of Q2 FY2021 would be $25 billion and the growth of SQL Server, Windows Server, Visual Studio, System Center, and related CALs; and GitHub combined would be around $130 million. Lacking visibility into these products and services, I cannot say if that increase in revenue for a quarter is reasonable. What about if Azure was responsible for 90% of SPCS’ revenue growth every quarter?

SPCS YoY Revenue Increase $           1,562  $           1,492  $           1,710  $           1,729  $           2,134  $           2,328  $           2,437  $           1,858  $           2,003  $           2,610 
Azure Revenue Growth (if 90% of SPCS growth) $           1,406  $           1,343  $           1,539  $           1,556  $           1,921  $           2,095  $           2,193  $           1,672  $           1,803  $           2,349 
Azure Revenue YoY  Growth76%76%73%64%59%62%59%47%48%50%
Revenue Base $           3,255  $           3,379  $           3,717  $           3,558  $           3,756  $           4,698     
Quarterly Revenue $           3,255  $           3,379  $           3,717  $           3,558  $           3,756  $           4,698  $           5,911  $           5,230  $           5,558  $           7,047 
4-quarter revenue (annual run rate)    $        13,910  $        14,410  $        15,729  $        17,922  $        19,594  $        21,397  $        23,746 
Figure 4 – The scenario in which Azure was responsible for 90% Server Products and Cloud Services’ revenue growth

Under this scenario, Azure’s run rate would be $23.7 billion and all the other products under SPCS would contribute around $260 million in revenue growth in the last quarter. For the same reason stated above, I am unable to say if the latter figure is correct, but you can use the same rationale and play around with assumptions to get an estimate of how big Azure can be.

In the Q1 FY2021 earnings call, an analyst commented that Azure revenue made up 17% of Microsoft’s total revenue; which the Executives didn’t comment on:

Figure 5 – A comment from an analyst on Azure from the Q1 FY2021 Earnings Call. Source: Fool.com

If that estimate is true, this will be Azure’s quarterly revenue

Total Revenue $        29,084  $        32,471  $        30,571  $        33,717  $        33,055  $        36,906  $        35,021  $        38,033  $        37,153  $        43,076 
Azure Revenue (17% of total revenue) $           4,653  $           5,195  $           4,891  $           5,395  $           5,289  $           5,905  $           5,603  $           6,085  $           5,944  $           6,892 
Figure 6 – What 17% of Microsoft’s total revenue looks like

The number in Q1 FY2021 ($5.9 billion) isn’t so far off what we had in the 95% scenario above. While nobody, except the people at Microsoft, can say for sure what Azure revenue is, I think it’s fairly likely that its run rate is about $25 billion as of Q2 FY2021.

Disclaimer: I own Microsoft stocks in my portfolio.

Microsoft – A well-oiled, expertly run and growing giant

Microsoft is one of the three tech giants, along with Facebook and Apple, that reported a blow-out quarter this past week. What impressed me is that Microsoft is a giant that recorded $43 billion as quarterly revenue in Q2 FY2020 AND grew at an unbelievable clip of 17% YoY for a company that size….AND showed improved efficiency with the operating margin of 42% in the latest quarter. Looking deeper at the segments, they have all exhibited growth, especially their Office Products, Cloud, Server Products and LinkedIn.

Some of their notable and strategic products continue to show their strengths. Microsoft 365 Consumer Subscriber Base stood at 47.5 million in Q2 FY2021 and its YoY growth is the highest since FY 2018. Even though its YoY growth has been hampered by the law of big numbers, Azure hasn’t seen this number dip below 40% since FY 2017. Teams, the product that has attracted a lot of attention so far during the pandemic, also saw great adoption from corporations and had 115 million Daily Active Users as of Q1 2021.

I created some charts here that hopefully can help show what an incredible business Microsoft is right now.

Microsoft's quarterly revenue
Figure 1 – Microsoft’s quarterly revenue. Source: Microsoft
Microsoft's segment revenue
Figure 2 – Microsoft’s segment revenue. Source: Microsoft
Microsoft's operating margin
Figure 3 – Microsoft’s operating margin. Source: Microsoft
Microsoft segments operating income, including Productivity & Business Processes, Intelligent Cloud and More Personal Computing
Figure 4- Microsoft’s segment operating income. Source: Microsoft
Microsoft's consumer subscriber base and YoY growth
Figure 5- Microsoft 365 Consumer Subscriber Base and YoY Growth. Source: Microsoft
Azure YoY Growth
Figure 6- Azure YoY Growth. Source: Microsoft
Teams adoption from corporations
Figure 7 – Teams adoption among corporations. Source: Microsoft

Disclaimer: I own Microsoft stocks in my portfolio

A look at Amazon financials (2013 – 2018)

My understanding of Amazon’s business model is as follows:

  • Successfully become a household online store for shoppers and build a loyal user base (Prime members in particular)
  • Leverage the infrastructure (supply chain) for the online store to allow sellers to fulfill orders and sell products through their stores (3rd parties)
  • Leverage the IT infrastructure built to maintain online stores to offer Enterprise IT services (AWS)
  • Leverage the immense traffic to its online sites and ability to turn traffic into orders to sell advertising services to brands

In my free time, I like to go through annual reports of companies to understand their businesses and performance, in addition to reading the news from sources such as WSJ, Techcrunch, CNBC, to name a few. I did it before for Adobe, Spotify and Apple. Below are my findings from digging through Amazon’s financials from 2013 to 2018. Unavailable figures are due to the lack of reporting from Amazon.

Amazon’s total revenue has been growing increasingly fast in the past 5 years

In terms of net income, except for 2014, it has been growing as well, with 2018 as the standout year

With regard to revenue breakdown, every segment, except online stores, has seen its influence on the total revenue grow for the past 3 years (two for physical stores). AWS, in particular, is making up around 11% of Amazon’s total revenue. Amazon started to report on physical stores’ revenue in 2017. As of 2018, it made up around 7% of the company’s revenue.

Despite making up only 11% of Amazon’s total revenue, AWS is responsible for the majority of Amazon’s operating income. The reason seems to be that the company lost money from its International segment

Much has been discussed about the growth of advertising and AWS. The two segments have indeed been impressive. Advertising has gone nuts for the past three years while AWS’ growth has never been lower than 42% since 2013

Shipping costs have been growing at a 2-digit clip since 2013, a concern that many analysts and investors expressed. However, the growth rate has slowed down since 2016

Expenses have been growing at a two-digit clip in the past 5 years

In terms of expense breakdown, Cost Of Sale is still the dominant item, though its contribution to the total expense has been declining steadily. There is one item called Other Expenses in the reports, but I decided to ignore it since it wasn’t significant compared to other items.

Amazon looks to have been successful in diversifying its business, transitioning to more profitable segments from merely relying on the low-margin online stores. With its dominant market share in the cloud and companies moving to the cloud, I believe AWS will continue to grow its importance to Amazon’s first and bottom lines. It also won’t be a surprise to see a middle two-digit growth this year for advertising.