Even with a loss of $2.6 billion, Uber had a great quarter

Uber lost $2.6 billion in the last 90 days!

However, that headline-grabbing figure doesn’t fully tell the whole picture. The fact that Uber stocks went up by more than 10% after hours indicates investors were pleased with what they saw and heard from management. There are reasons to that.

Total Gross Bookings (GB) grew by 33% amidst a challenging environment when inflation was the highest in decades. Revenue went up by 105%, although that included contribution from the acquisition of Transplace. Without the acquisition, my estimate is that Revenue would still be up by at least 30-40%. The number of monthly active platform users hit an all-time high record of 122 million while the number of trips increased by 24% to 1.87 billion, just a tad shy of the all-time record of 1.9 billion set in Q4 FY2019, right before Covid.

More importantly, Uber became a free cash flow generator for the first time in history. All three main businesses, including Mobility, Delivery and Freight, were all profitable on an adjusted-EBITDA basis. I understand that some folks have a bone to pick with the adjusted-EBITDA numbers, but Free Cash Flow doesn’t lie and it indicates Uber is on the right track. The giant net loss quoted above included $1.7 billion of unrealized losses related to Uber investments in Zomato, Aurora and Grab, as well as $470 million in stock-based compensation expense.

Back in my review of Uber Q3 FY2021 earnings, I wrote that Covid created a golden opportunity to transform itself. The latest results were further proof of that. Before Covid, Uber was all about Mobility, both in terms of gross bookings and revenue. The pandemic hit Mobility hard, but gave Delivery a great momentum that has not been relinquished since. In the last quarter, both segments notched the second-highest gross bookings in history in Q2 FY2022 while each recorded the highest revenue ever, albeit with some benefits from the model changes in some markets. Without Covid, I doubt that Uber could turbocharge its Delivery business that quickly. Now, instead of relying on Mobility, Uber has two weapons that complement each other well.

Uber Mobility and Delivery's Gross Bookings and Revenue
Figure 1 – Mobility and Delivery’s Gross Bookings and Revenue
Uber Delivery Gross Bookings and Basket Size
Figure 2 – Uber Delivery Gross Bookings and Basket Size

In A look at Uber after it acquired Postmates and Drizly, I wrote:

The way I think about Uber as a business is that it connects end users, partners and drivers altogether. The more end users Uber can present to its partners, the more partners it is likely going to sign. In turn, that means Uber’s end users can have a bigger selection at their finger tips, raising Uber’s value proposition. On the other hand, a bigger end-user pool helps the company sign up drivers. 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.

The rise of Delivery does wonders for Uber as it can bring more businesses to drivers. At times, when there is no rider to transport, couriers can deliver food or other items to better utilize the one resource that we can’t get back: time! Now that consumers are back on the road to office and travel, drivers have more opportunity to earn. On the call, the executives bragged that drivers in the US earned $30 per hour on average. That’s pretty competitive. Thanks to its scale, Uber believes it is best positioned to attract and retain drivers. The company has consistently talked about being more efficient with their operations and relying less on incentives. Such self-sustained growth is reflected by the fact that Delivery has had positive adjusted EBITDA for three quarters in a row.

Uber Delivery Net Revenue and Adjusted EBITDA
Figure 3 – Uber Delivery Net Revenue and Adjusted EBITDA

Uber is a multi-sided network, dealing with consumers, drivers and merchants. They co-exist together and each cannot without the other two. Retaining drivers is crucial to retaining merchants and riders. In addition to the $30+ per hour income, Uber recently introduced some new features to support drivers. Soon, for the first time ever, drivers will be able to see in advance where the trip will end and how much they will earn for that trip. Drivers can compare multiple trips at once and decide what works best for them. Then, Uber will offer drivers a chance to earn 2-6% cash back at gas stations with Uber Pro Card. Gas is arguably one of the biggest expenses for drivers. The cash back is a nice gesture that will go a long way to retain this important class of stakeholders.

When delivery companies such as Getir or GoPuff are forced to shrink operations, the scale that Uber is operating on provides a great deal of advantages. If they can maintain that scale, other competitors will find it highly challenging to take share from Uber without near-term damage to profitability. And in case you haven’t noticed, profitability and sustainable growth is the tune that Wall Street wants companies to sing, not growth at all cost.

Sustainable growth is one area where Uber has been much better since Dara became CEO. Back in 2020, in Uber’s latest chess moves, I wrote about the downside of Uber operating in many markets and praised Uber’s effort to withdraw from countries where it was not competitive. Yesterday, in a conversation with Bloomberg, Dara reiterated that stance by saying that Uber is still operating Mobility in India, but will shut down Delivery because they don’t think they can be the market leader. This type of strategic thinking and discipline can only benefit a company like Uber in the eyes of investors.

Moving forward, there are several levers that Uber can pull to stimulate growth and profitability. The first is Uber One. As of Q2 FY2022, Uber One has 10 million paid subscribers. That’s a respectable figure, compared to the 6 million reported in Q3 FY2021. However, considering that the company has 122 million monthly active platform customers, Uber One’s penetration is less than 10%. Once that number increases, it will boost the company’s top and bottom line meaningfully.

The second lever is advertising. Every company wants those high-margin ads dollars and Uber is no exception. Since its launch in Q3 2020, advertising on Uber has been used by 27% of all active Delivery merchants. Though Uber should be mindful of how a litany of ads can adversely affect customer experience, I don’t see any reason why the share of active advertising merchants cannot reach 40%.

Uber Active Delivery Merchants and Share of Active Advertising Merchants
Figure 4 – Uber Active Delivery Merchants and Share of Active Advertising Merchants

Then, there are New Verticals in Delivery (groceries and non-food items) and Uber 4 Business. Combined, these two levers make up less than 10% of Uber’s Gross Bookings, indicating that there is room to grow in the future. The management team mentioned that they are still hiring for Uber 4 Business, a strong signal that they consider it important to the company’s future. New Verticals, like the partnership with Albertsons, plays a key role in increasing the utility of the Uber apps to consumers. Here is what Uber had to say:

As far as new verticals go, we’re quite satisfied in terms of the growth of that team. It’s at about a $4.5 billion run rate in terms of gross bookings. We are investing in this business. And despite investing in this business and it’s in the hundreds of millions of dollars, you can see the profitability that we’ve been able to drive with the delivery business overall. It’s really because of the scale and efficiency that we’re bringing to bear.

What we’re seeing with new verticals customers is that Uber Eats customers who also order from new verticals tend to stay with us, tend to have higher frequency. And it’s really a part of the power of the platform that we’re having. If you ride with us, if you eat with us, if you drink with us, if you order groceries with us, we just become an everyday part of your life. You top that off with the membership program. And we think we have a relationship with customers that really can’t be duplicated in industry on a global basis. That’s what the strategy is all about and we’re quite optimistic about our progress to-date

Source: Alphastreet

Overall, I am pleased with what Uber reported this quarter. Even though the stock is still down significantly, the business is in a stronger position now than it was before and during Covid. That is not to say that the company can afford to take its foot off the gas pedal and to lose discipline. What is gained today will be easily lost in 90 days. The macro economic situations remain chaotic and unpredictable. Consumers may have to cut back on non-essential spending and Uber, whether they like it or not, often falls into that category. Regulatory threats are always there. Formidable rivals such as DoorDash and Instacart are still competing hard. Hence, they need to stay focused and relentlessly execute. But with this result, I think at least they gained some investors’ confidence, including mine.

Uber’s Delivery is on fire. Driver dispute cost $600 million, but may be a blessing for the business

Uber is well on track to a full recovery. Delivery continues to be the bright spot

Yesterday, Uber released their financial results for Q1 FY2021. In general, the overall business mostly recovered from the impact of the pandemic. Even though it made fewer trips and less revenue than last year, gross bookings rose by 24%. Mobility Gross Bookings continued to be down year over year as countries are still battling Covid-19. On the other hand, Delivery Gross Bookings increased by 166%, up to $12.5 billion from $4.7 billion a year ago, due to strong demand. To put it in perspective, Uber generated almost as much Gross Bookings in Delivery in Q1 2021 as it did in the entire year of 2019.

Uber's Mobility and Delivery Gross Bookings
Figure 1 – Uber’s Mobility & Delivery Gross Bookings

In Q1 2021, the company’s adjusted EBITDA was -$360 million, but it was up from the loss of $612 million a year ago. Mobility was still profitable, albeit down 49% YoY. Delivery and Freight remained loss-makers, but the loss narrowed compared to Q1 2020. According to Uber, Delivery was profitable on the adjusted EBITDA basis in 12 markets in Q1 2021. Take rates for Mobility and Delivery were 12.6% and 14%, respectively. Mobility’s take-rate dropped from their usual 20% range because Uber took a draw-down of $600 million for driver expenses following the High Court’s verdict in the UK that would force Uber to classify drivers as employees. Without the draw-down, Mobility take rate would be 21.5%. Delivery’s take rate has been steadily increasing since Q4 2019. As the platform continues to grow in scale and fine-tune its operations for higher efficiency, I expect to see Delivery take rate to hover around the 14-15% range.

Uber's Mobility & Delivery Take Rates
Figure 12- Uber’s Mobility & Delivery Take Rates

Driver-friendly regulations can be both a threat and a blessing for Uber

This is the first time that investors could, to some extent, quantify the impact of regulatory threats on Uber’s business. Yesterday, the Biden administration rescinded the previous administration’s rule which would have made it more difficult for drivers to be considered employees. The Secretary of Labor also mentioned that drivers should be treated as employees with benefits instead of just contractors, but stopped short of announcing a concrete policy change. That’s why Uber’s executives repeatedly emphasized that they would engage in dialogues with the federal government moving forward to find an agreeable solution and that it’s not doom and gloom yet for their business.

Some are justified in their pessimism for Uber. A driver-friendly regulation would definitely hurt Uber’s bottom line in the short term. In the long run, I am not so sure. Any new regulation regarding gig workers would affect not only Uber, but also and more importantly its smaller rivals. Every company from Lyft, Instacart, Doordash to Gopuff will have to pay more personnel expenses. But few of them have the scale and resources that Uber does. Take Lyft as an example. It operates in Canada and the US only and doesn’t have a Delivery service like Uber, at least not yet. As a result, it would have a higher driver expense per order than Uber because the latter could stretch the fixed expense over many more Ride/Order. That’s a unit economics advantage that comes with operating in more markets, more verticals and at a higher scale.

Figure 3 – Uber’s Outside Equity

Plus, if Uber decided to pay drivers more than others, it could lock in drivers exclusively on its platform and create a driver supply problem for its smaller rivals. Fewer drivers mean slower services. Slower services lead to less satisfied customers. Less satisfied customers result in less business. That’s the vicious cycle that Uber could inflict on its smaller rivals. Plus, Uber has about $13 billion in equity in the likes of Grab, Aurora or Didi. If push comes to shove, it can sell off all of it to finance its operations, something that I doubt other delivery services can do.

Other positive developments

Uber mentioned that its Delivery would debut soon in Germany. Germany is arguably the biggest consumer market in Europe and it doesn’t make sense to not have one of its main business lines in the country. As a new market, Uber may have to take a loss in the short run to establish its presence, among local competitors. Since the CEO took over, Uber has scaled back operations in areas where it didn’t believe it had competitive advantages. If they decide to launch in Germany, there may be a good reason.

This may be the first time I remember that Uber specifically called out its advertising business. While it’s not really surprising, it has plenty of potential. As a household name that has millions of users on its platform, Uber is an attractive partner to merchants. Hence, it makes sense Uber wants to monetize its valuable real estate on its app. Advertising is a higher margin business and should help Uber with its profitability goal.

Additionally, the company also mentioned that its New Verticals (grocery, alcohol and convenient items) reached an annualized Gross Bookings of $3 billion in March. The revelation contained some caveats such as: what does “annualized” mean? What is the distribution of such Gross Bookings between grocery, alcohol and convenient items? Nonetheless, with the acquisitions of Drizly, Postmates and the partnership with Gopuff, it’s a vertical to watch out for in the future.

A look at Uber after it acquired Postmates and Drizly

Compared to 2 or 3 years ago, Uber is a much more focused company nowadays. Instead of stretching itself thin across the globe, losing money significantly in many markets and fighting legal battles everywhere, Uber is now present in only markets where it’s among the market leaders. In addition to selling its operations in a few markets like South East Asia, China and Russia to local rivals, Uber purposefully exited other markets that it deemed not worth fighting for. Plus, it sold operations that might have future potential, but was bleeding cash such as autonomous vehicles. I mean, innovation can be sexy and as a tech company, Uber may be tempted to pursue that, but because it hasn’t made profit as a company, it’s understandable that Uber tries to focus on what matters: Mobility, Delivery and the markets where it is confident it can generate meaningful revenue and profit.

Uber's Mobility Footprint
Figure 1 – Uber’s Mobility Footprint. Source: Uber
Uber's Delivery footprint
Figure 2 – Uber’s Delivery Footprint. Source: Uber

Mobility used to be a much bigger business than Delivery, but Covid-19 turned things upside down. Delivery has grown substantially in the past year and been the savior of a business whose major cash cow was badly damaged by the pandemic. Delivery’s gross bookings in Q4 2020 exceeded $10 billion, compared to $6.8 billion in gross bookings for Mobility. If we look at the rolling 4-quarter average gross bookings, Delivery surpassed Mobility in Q4 2020, but of course, it’s likely that once we get back to normal, Mobility will regain its crown. Delivery has seen its take-rate grow steadily since Q4 2018 to reach 13.7% in Q4 2020 and is now not so far off the long-term target of 15%. Furthermore, while Mobility has been profitable, Delivery hasn’t. The good news for Uber is that it is achieving increasingly positive operating leverage in Delivery. While its Delivery net revenue has grown fast, its adjusted EBITDA has also gone in the right direction. If Uber can make true of its plan to be adjusted EBITDA positive in 2021, it likely means that we’ll see a profitable Delivery in 2021 as well; which already happened in 15 markets.

Uber's Delivery has been on fire
Figure 3 – Delivery has been on fire in 2020
Uber's take-rate
Figure 4 – Deliver take-rate has been on the rise and is not far off the long -term target
Uber's EBITDA
Figure 5 – Delivery EBITDA is getting better and better
Uber's long term goals
Figure 6 – Uber saw profitability for Delivery in 15 markets and an improved economics in others

Uber’s main four stakeholders are end users, partners (whether they are mom-pop restaurants, well-known chains or grocery stores), drivers/deliver people and lawmakers. Lawmakers have an influential role in Uber’s future as the laws they make can have major impact on Uber’s top and bottom line. But for this section, let’s just talk about the other three.

The way I think about Uber as a business is that it connects end users, partners and drivers altogether. The more end users Uber can present to its partners, the more partners it is likely going to sign. In turn, that means Uber’s end users can have a bigger selection at their finger tips, raising Uber’s value proposition. On the other hand, a bigger end-user pool helps the company sign up drivers. 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? In return, more drivers lead to faster “delivery” (transportation of an object from one place to another), whether it’s the delivery of a person or an item. Faster delivery means that customers will be happy and stick around using Uber more. In short, it’s an intricate multi-party relationship that Uber has to manage. It’s not easy or cheap to begin with, but once Uber sets these flywheels into motion, they can gain lasting competitive advantages. For example, at the end of Q4 2020, Uber recorded 675,000 active merchants, up from 450,000 in Jan 2020. It’s unclear whether this 675,000 figure includes the 100,000 partnered merchants that Uber inherits from its acquisition of Postmates. Meanwhile, Grocery Gross Booking exceeded $1.5 billion annualized run-rate. These numbers indicate a growing ecosystem.

My understanding of Uber flywheel
Figure 7 – My attempt at creating flywheels for Uber

So how does Uber make money? In short, from all three stakeholders: customers, partners and drivers. Here is what Uber said in its latest SEC filing back in Q3 2020:

Mobility Revenue

We derive revenue primarily from fees paid by Mobility Drivers for the use of our platform(s) and related service to facilitate and complete Mobility services and, in certain markets, revenue from fees paid by end-users for connection services obtained via the platform. Mobility revenue also includes immaterial revenue streams such as our Uber for Business (“U4B”), financial partnerships products and Vehicle Solutions. Vehicle Solutions revenue is accounted for as an operating lease as defined under ASC 842.

Delivery Revenue

We derive revenue for Delivery from Merchants’ and Delivery People’s use of the Delivery platform and related service to facilitate and complete Delivery transactions. Additionally, in certain markets where we are responsible for delivery services, delivery fees charged to end-users are also included in revenue, while payments to Delivery People in exchange for delivery services are recognized in cost of revenue.

Source: Uber

On the Mobility side, Uber takes a cut from bookings (around 20-25%) paid by customers before transferring the rest to drivers. On the Delivery side, it makes money from everybody involved in an order. After paying a one-time set-up fee of $350, restaurants have to pay Uber 15% or 30% commission on every order, depending on what delivery method they choose. If they user Uber for the delivery, the commission rate is 30%. If restaurants use other delivery methods, it falls to 15%. With regard to drivers, drivers receive a fixed fee for picking up and dropping off items and a variable rate based on the distance they cover. From the end-user perspectives, there are more than one fee involved in every order. According to Uber:

– Delivery Fee: Delivery fees vary for each restaurant based on your location and availability of nearby delivery people. You’ll always know the delivery fee before selecting a restaurant.

-Service Fee: Service fees equal 15% of your order’s subtotal, subject to a minimum of $2. The fee does not apply to restaurants that deliver their own orders.

– Small order fee: Small order fees apply when an order’s subtotal is less than a certain amount. This varies by city, but is either $2 for subtotals less than $10 or $3 for subtotals less than $15. You can remove the fee by adding more items.

– Delivery adjustment fee: A delivery adjustment fee refers to an update you made after placing your order- like changing your address. It helps to pay your delivery person for extra time and effort.

Source: Uber

In short, if there is no delivery adjustment and orders are above the small order threshold, Uber typically can take at least 15% of the order from merchants and delivery fees from end users which Uber doesn’t share with drivers. If merchants don’t have in-house delivery workforce, Uber can earn more from both ends of the transaction with 30% coming from the merchants and service & delivery fees coming from end users. Mom-and-Pop merchants whose limited resources don’t allow them to retain on the books a delivery team represent a more lucrative segment to Uber. During the pandemic when delivery is a trend, these merchants may not have a choice, but to partner with the likes of Uber. The question is: what will happen when seated dining resumes? How will that affect Uber’s Delivery business?

In Q4 2020, Uber closed the acquisition of Postmates. Similar to Uber, Postmates charges merchants at least 15% on every order and its fee structure imposed on end users is, in principles, similar to Uber’s. What Postmates offers to Uber is less competition, access to Postmates’ footprint and the deliver-as-a-service capability. Instead of building the infrastructure and signing merchants from scratch, Uber can quickly snap up what Postmates has and build from there.

With Postmates, we bolstered our local commerce capability through their delivery-as-a-service offering that already counts Walmart, Apple and 7-Eleven as customers. In December, delivery-as-a-service, represented 18% of Postmates orders, and we intend to scale this out further along with our Uber Direct product.

Source: Uber’s Q4 2020 Earnings Call – From Koyfin
Uber Direct
Figure 8 – Uber’s Delivery-as-a-Service Portfolio. Source: Uber

In Feb 2021, Uber announced its acquisition of Drizly for $1.1 billion in stock and cash. I think it’s a smart acquisition on Uber’s part. Let’s look at it together. Drizly was founded in 2012 when their founders realized the complexity of alcohol distribution in the US could present a golden business opportunity. Liquor distribution in the US mainly follows the three tier system and can be pretty fragmented and complex. In short, liquor producers or importers can only sell to wholesale distributors which, in turn, can only sell to retailers who, with a liquor license, can sell to end users. There are exceptions across the states and can vary even from county to county. Added to the complexity are the restrictions on alcohol delivery. Some states allow delivery of liquor, beer and wine. Others restrict delivery to only beer and/or wine while a few prohibit delivery of alcohol altogether.

Alcohol delivery restrictions across the states
Source: Consumer Choice Center

How does Drizly make money? Drizly works with local retailers that wish to sell alcohol to consumers and charges these retailers a fixed monthly fee for the privilege. In return, retailers receive two things: marketing and an age-verification technology. Local retailers, especially smaller ones, don’t have the coins to spend on marketing nor do they have the ability to verify the legal age of buyers during the transaction. Hence, these retailers could face a huge legal liability if things went wrong and they were caught selling alcohol to whomever they shouldn’t have. Drizly offers retailers its proprietary technology to verify IDs to ensure buyers are who they said they are. Furthermore, Drizly charges consumers roughly $7 on each transaction, including a Delivery Fee of around $5 and $1.99 Service Fee. It’s important to note that retailers are responsible for the delivery task. What it means is that Drizly never takes possession of the alcohol during the transactions and therefore, doesn’t have to get a permit. By avoiding the expensive delivery business, Drizly can focus on what it does best: navigating the complex legalities, connecting merchants and consumers and marketing. On the merchant side, they are free to set up their own prices on Drizly marketplace and do not have to relinquish a cut of the sales to the company. The more alcohol Drizly can help them sell, the cheaper that monthly fixed fee becomes and the more likely retailers can negotiate a better term with distributors.

First of all, by acquiring Drizly, Uber gains access to a profitable and growing business. According to Uber, Drizly is growing at 300% YoY and already profitable on an EBITDA basis. I suspect that once we get out of this pandemic, consumers will be more aware of the prospect of alcohol delivery. Hence, Drizly will likely continue to see growth in the future, albeit perhaps not on the level that it saw in 2020. Furthermore, Drizly is a boon to Uber’s target of becoming profitable in 2021. Not only is the acquired profitable itself, but Drizly’s monthly revenue from retailers presents a much higher gross margin than Uber’s main businesses.

Second, Uber acquires a team that knows how to navigate the legal challenges in the alcohol market and an ID verification technology. Uber is well-versed in dealing with local authorities itself, but transportation is a different beast from alcohol delivery. With Drizly, Uber won’t have to start from scratch and will be able to stimulate Drizly’s growth with its much more sizable pocket.

Third, snapping up a market leader like Drizly prevents it from falling into the hands of Uber’s competitors. It’s a pre-emptive strike. Once the integration of Drizly into Uber’s platform is completed, Uber users can order the transportation of themselves (Mobility), food, groceries, parcels and alcohol all under one app. Uber’s competitors can match its offerings to some extent, but none can offer the same breadth of services like Uber, now that it adds alcohol delivery to the mix. To be able to do what Drizly does is not an easy feat, but to Uber, it’s adding to their competitive advantages.

Fourth, Uber has an advertising business that Deutsche Bank estimates to earn $1 billion in 2024. With the integration of Drizly, Uber adds to the potential clientele of advertisers and more data generated by Drizly’s marketplace.

In short, this is a great marriage between Drizly and Uber. Uber offers the smaller app its experience in building a marketplace, more financial resources, a much bigger brand name and especially marketing reach which is important to Drizly’s merchants. On the other hand, Drizly gives Uber a growing & profitable business, as well as access to a highly regulated business that is challenging to replicate.

Uber’s ambition to become a Super App has been obvious for a while. What should be encouraging news to investors is that it restructures itself to be more focused, exiting cash-bleeding businesses and unprofitable markets, and is willing to invest in its vision with the acquisition of Postmates & Drizly serving as proof. Of course, nobody can say with 100% certainty that these acquisitions will work out in the future, but in theory, I personally think that they make sense and are important pieces of a growing jigsaw.

Disclosure: I have a position on Uber.