Weekly readings – 11th July 2020

What I wrote last week

I wrote a bit about the challenges of corporations in addressing different stakeholders’ needs

Here is a what I wrote about the company behind FICO score

My thoughts on the latest suspension of H1B visas till the end of the year, a self-inflicting move by the US

Business

How I grew my Shopify micro-SaaS to $25k MRR and 20k users in 14 months

A very good analysis on Twitter, discussing the company’s valuable network and challenges

Exclusive: Inside Uber’s billion-dollar bet to deliver food, people, and everything else

Technology

The Post-Covid-19 Agenda for Technology and Media Companies.

What I think is interesting

How to understand things

Charlie Munger: Turning $2 Million Into $2 Trillion

Peter Kaufman on The Multidisciplinary Approach to Thinking: Transcript

In Praise of Idleness

Growth without goals

Money Is the Megaphone of Identity

Notes from Uber’s Q1 2020 Earnings

As a student of business, I find Uber an interesting business. It is interesting because there are a lot of aspects that go into the operations of this ride sharing player, including geographical segments, different lines of business with different margins (Eats, Rides, Freights), add-on services to improve profitability (Rewards, Credit Card), exiting marketings where it is losing money and focusing on the ones where it is a dominant player, and different stakeholders (riders, drivers, restaurants, corporate customers and authorities).

Like many other companies, Uber had its operations seriously disrupted by the Coronavirus. Rides bookings had a YoY growth of 20% in the first two months through February before plummeting to a decline of 40% and 80% in March and April respectively when the lockdown took hold. Eats, on the other hand, had a 54% YoY growth in bookings and 124% YoY increase in net revenue with take-rate of 11.3%, not too far from their long-term goal of 15%. Eats, for this quarter, remains the biggest loss-making segment, even though Freights’ loss growth is significantly bigger while Rides is still the only profitable business

Source: Uber

Uber shed a bit of light on the effect that Covid-19 had on its business. Airports make up 15% of Rides bookings and 16% of its EBITDA. Obviously, when traffic to airports declined substantially, that significant chunk of business was gone. In terms of cities and countries, Uber provided the following

Last week, we saw 9% [indiscernible] growth and 12% gross bookings growth globally weak-on-weak. We believe the U.S. is of the bottom. U.S. gross bookings were up last week by 12% overall week-on-week, including New York City up 14%, San Francisco up 8%, Los Angeles up 10%, and Chicago up 11%. Perhaps more interestingly, gross bookings in large cities across Georgia and Texas, these are two states that have started opening up significantly, are up substantially from the bottom at 43% and 50%, respectively. Hong Kong is back to 70% of pre-crisis gross bookings levels.

Second, at a time when our Rides business is down significantly due to shelter-in-place, our Eats business is surging. We’ve seen an enormous acceleration in demand since mid-March, with 89% year-over-year gross bookings growth in April, excluding India.

Source: Uber’s Earnings Call

According to the quarterly filing, Eats bookings annual run-rate was about $18.8 billion. However, on the Earnings Call, the CEO said: “And just last week, Eats crossed the $25 billion gross bookings annual run rate”. If I understand that statement correctly, it meant that for the 3rd or 4th week of April, Eats bookings was around $480 million. Given that it reported the annual run-rate around $18,8 billion for the first three months through March, the increase to $25 billion only in April was extraordinary. Plus, Uber seemed to be confident that this level of growth in Eats would be sustainable, moving forward. So it’ll be interesting to see how it is 3 months later.

As for now, it’s an encouraging sign for Uber that their economies of scale seem to go in the right direction as revenue increased disproportionally compared to the driver incentives required.

Picking their battles

Uber commented on the recent exit of 8 Eats markets:

Uber Eats: On Monday, consistent with our long-term strategy, we announced a change to the geographic footprint of Uber Eats operations affecting 8 markets. We will discontinue Uber Eats in the Czech Republic, Egypt, Honduras, Romania, Saudi Arabia, Uruguay and Ukraine, and will transfer Uber Eats operations to our Careem subsidiary in the United Arab Emirates. The discontinued and transferred markets represented 1% of Eats Gross Bookings and 4% of Eats Adjusted EBITDA losses in Q1 2020.

Source: Uber

For what it’s worth, the management team deserved credits for exiting unprofitable markets, especially some that bled them dry such as China or Southeast Asia. In their presentation as of 31 Jan 2020, Uber presented their footprint map like this. Obviously, it’s better than being in more markets, yet with smaller presence

Source: Uber

Some other interesting points

  • As of Q4 2019, Uber for Business made up around 9% of Uber’s Rides bookings
  • Uber reported in Q1 2020 that there were 31 million members of Uber Rewards Program. Given that they have 103 million monthly active users, that means out of 3 active users, one is a Rewards member. It’s promising and interesting especially because Rewards had been available in 5 markets only, with France recently added to the fold
  • In Q4 2019, an average Rides trip was $9.5. Uber reported in the same period that an average Eats order was 50% bigger than a Rides order. That means an average Eats order in Q4 2019 was about $14.25
  • “Eats insurance costs as a percentage of Gross Bookings are <1/5th that of Rides”
  • Uber claimed that 46% of US national vehicle trips were less than 3 miles. It can be an opportunity for micro-mobility. However, it’s worth noting that scooter companies like Lime or Bird are notoriously not profitable. Lime recently saw its valuation plummet to around $510 million after previously being valued at $2.4 billion
  • “Finally, we expect that shared Rides will be less important in the near-term. This was historically sweet spot for a primary competitor in the U.S. with around a 50% category position on shared Rides.”
  • 23% of our Rides Gross Bookings from five metropolitan areas—Chicago, Los Angeles, New York City, and the San Francisco Bay Area in the United States; and London in the United Kingdom” – Source: Uber 2019 annual report
  • In 2019, cash-paid trips accounted for approximately 11% of Uber Global Gross Bookings, about $7.5 billion.

Revenue and margin makers

What I noticed in many businesses is that there are revenue makers and margin generators. Revenue makers refer to activities that draw in the top line numbers in the income statement, but small margin. In other words, these activities can bring in $10 of revenue, but about $1 or less of gross profit (revenue minus cost of revenue). On the other hand, margin generators refer to activities that don’t bring in as much revenue as revenue makers, but act as the source of most margin. Usually. these two complement each other. Let’s take a look at a few examples.

Apple sells their products and services that can only be enjoyed on Apple devices. Products bring in multiple times as much revenue as services, but products’ margin is much smaller than that of services. Take a look at their latest earnings as an example. Products’ margin is about 32% while services’ margin stands at 65%. Folks buy Apple devices mainly to use the services and apps that are on those devices. Apple continues to sell devices to maintain their own monopoly over their unique operating systems and ecosystem.

Source: Apple

Amazon’s eCommerce segment is a revenue maker. They warehouse the goods and ship them to customers. It generates a lot of revenue, but the cost is high as well. Built upon the infrastructure Amazon created for eCommerce, 3rd party fulfillment is a margin generator. In this segment, Amazon acts as a link between buyers and sellers to ensure transactions go smoothly without having to store and ship the goods itself. Margin is significantly higher than that of eCommerce. Amazon takes it to another level with Prime subscriptions and AWS. While trying to figure out how to keep their sites up and running 24/7 smoothly, Amazon came up with the idea of selling unused IT resources. Long behold, AWS is now a $40 billion runrate business and Amazon’s arguably biggest margin generator.

Costco is a household name in the US. Families go to their warehouse-styled stores to stock up essentials and groceries. Due to the volume they sell every year, Costco manages to keep the prices low, but thanks to the cut-throat nature of the industry they are in, the margin is low, about 2-3%. That’s their revenue maker. To compensate for the low margin, Costco relies on their membership fees. Whatever customers pay to be able to shop at Costco is almost pure profit to Costco. There is virtually no cost to process an application and issue a card.

McDonald’s essentially has two business segments: their own McDonald’s operated restaurants and franchising. The brand’s own operated restaurants serve as references to franchise owners for how good McDonald’s brand is as an investment. However, it offers the brand way lower margin than their franchised restaurants.

Airlines make money by flying customers, but there are a lot of costs involved such as planes, airport services, food and beverage, fuel, etc…Airlines can generate more margin with their branded credit cards. Many airline-branded credit cards come with an annual fee. Plus, card issuers may pay airlines a fixed fee for new issued cards and a smaller fee for renewals. Plus, there may be a small percentage for first non-airline purchases. Agreements vary between airlines and card issuers, but it brings a lot of margin to airlines.

Ride sharing apps are notoriously unprofitable. Uber and Lyft lost billions of dollars in their main operations. Recently, they tried to launch a subscription service and in Uber case, a credit card, hoping that these services could help generate the margin they need.

We all know the saying in business: cash is king. Cash can only increase, from an operating perspective, when margin increases. Revenue is crucial because, well, a business needs to convince folks to pay for products or services first. Nonetheless, a business is more robust and valued when margin increases.

Weekly readings – 25th April 2020

IEEE has an article outlining the role of mainframes even before the crisis. I am always of opinion that mainframes aren’t going anywhere soon. The legacy system has its strengths that work in favor for data-processing companies such as financial institutions. I had a professor in Omaha before who was an executive at Mutual of Omaha. He told me in 2018 that one of the important applications at the insurance company is still on mainframe and they fly periodically a mainframe developer from Chicago for maintenance work.

In the last 70 years, the physical size of Kansas City has quadrupled while the population has remained relatively stable. (Put another way, every resident of Kansas City is on the hook for maintaining four times as much of the city as his or her predecessors.)

Source: We’ve Built Cities We Can’t Afford

Everyone is baking — and entrepreneurs are rising up to meet the demand

Uber’s Paid Sick Leave Policy Is a Perpetually Moving Goal Post

Magic Keyboard for iPad Pro: A New Breed of Laptop

Bloomberg’s story on AirBnb and the state of the known startup

Gruber’s review of iPhone SE

A report by WSJ on how Amazon allegedly uses merchants’ data to launch its own private labels. There is nothing wrong with Amazon launching private labels. The problem is that the company vehemently denied using merchants’ data to help it do so

A decision by Supreme Court that can prove to be defining in the future. I understand the logic behind deporting folks who committed crimes. What concerns me here is that the process didn’t take into account the recent behavior.

A damning report on Bird. I haven’t been a fan of the company or products. I get its value proposition, but coming from a country where scooters are the primary transportation method, I am as enthusiastic about Bird scooters as others. Plus, the high valuation in a short period of time, despite an unproven unit economics, always feels wrong to me.

Weekly readings – 15th February 2020

An interesting piece on Lyft vs Uber

An argument for the challenges that Google is facing

This is what a hearing should be. Not the kind that has taken place lately

Spotify is evolving

Oklahoma State’s new identity. In my opinion, the new logo doesn’t look bad at all

This article sheds some light on the secretive S team at Amazon

The government’s revenue depends significantly on the tax receipts from citizens and corporations. So the revenue projection depends much on the assumptions of economic growth which seem too optimistic. It’s important to take into account the feasibility of these assumptions; which the media may not capture fully or an average citizen cares enough about

Thoughts and notes on Uber’s latest earnings

On 6th February 2020, Uber announced its Q4 FY2019 earnings. Below are some of the thoughts I had from reading their press release

Take Rate

Uber defines take rate as the result of adjusted net revenue divided by gross bookings. In a layman’s terms, it is the amount of Uber takes from what riders pay for rides, after paying drivers their share. In Q4 2019, the take rate reached 20.6% compared to 18.7% in Q4 2018. It meant that out of $100 taken from riders, Uber took in more money in 2019 than in 2018

Source: Uber

However, if we look at 2019 as a whole, take rate dropped to 19.8%, compared to 20.7% in 2018, almost a full 1% lower.

Source: Uber

Overall, in the second half of FY 2019, Uber had higher take rates overall, for Rides and for Eats individually than in the second half of FY 2018. However, the gain was sufficient to make up for the deficit of the first half of FY 2019 to the first half of FY 2018. As you can see from the graph above, Eats provided a terrible take rate, compared to Rides.

Driver Incentives and Driver Referrals

The incentives and referrals help reflect the health of the brand and business. Low payout for incentives and referrals means that Uber spent less money to recruit drivers and increase rides. Incentives and referrals are usually presented in this manner by Uber

Source: Uber

I calculated the ratio of Adjusted Net Revenue (ANR) over revenue in 2018 and 2019 for both Rides and Eats. The higher the figures, the better for Uber

Apparently, it keeps getting better and better for Rides. On the Eats side, Uber seemed to recover from the slump in Q3 and Q4 2018.

Rides

Rides continues to be the silver lining in the EBITDA area for Uber. It is the only segment with positive EBITDA in Q4 2019 or FY 2019 as a whole.

Source: Uber

It’s even better for Uber that YoY growth for Rides EBITDA (34%) is bigger than that for Rides Bookings (18%), Revenue (27%) and ANR (30%).

Eats

Eats registered the biggest loss among Uber’s segments in Q4 2019. Uber may find it encourage the fact that Eats’ Q4 loss is only 111% of ANR, compared to 168% in the same period last year.

Uber recently announced the divestiture of Uber Eats in India. Since Uber Eats was losing money and users in India, the decision looked a wise one and in line with the strategy pursued by the company.

Source: Atom Finance

CEO of Uber revealed on the earnings call that Uber Eats in the US made up almost 39% in gross bookings of the global Eats GB ($1.7 bn out of $4.374 bn). There are 400,000 active restaurants in the US on the Eats side, up by 78% YoY.

Freight

Freight’s Q4 loss was a tad more than 25% of its ANR, compared to a bit more than 18% of the same period last year. Not a trend that Uber would want in their quest to become profitable.

Cost structure

On a full year basis, only depreciation as % of revenue decreased in 2019, compared to 2018. Overall, operating cost and expenses increased significantly in 2019, reaching 161% of revenue in 2019. However, Q4 2019 provided a brighter picture for Uber. Only R&D as % of revenue went up in the quarter, compared to the same period last year, especially given that operating expenses as % of revenue in Q4 2018 were higher than those of FY2018.

Good bits of information here and there

  • Uber for Business’ Gross Bookings made up 9% of the total GB
  • In Q4 2019, Uber Rewards Program had 25 million subscribers from multiple markets, up from 18 million from the US alone reported in Q3 2019
  • Multiple-app users had almost 3 times the number of transactions as single users

Thoughts

Though challenges remain, including those posed by local authorities threatening to impose infavorable regulations, driver/rider safety and competition, Q4 2019 seemed to offer the team at Uber and bull investors something to be optimistic about.

In an ideal world, I would love to see more transparency regarding:

  • Margin of products such as Uber for Business, Airport, Helicopter, Comfort, Scooter
  • Margin of Eats in the US or products in the key market
  • More details on subscriptions
  • Engagement data regarding the use of multiple apps per user

Weekly readings – 1st Feb 2020

This post is a little bit late since I have been sick the whole weekend

The decade of the very poor and the super rich

A good read on marketplace and under-utilized assets

How the Dutch Use Architecture to Feed the World. I didn’t know that Netherlands is the second biggest exporter of agricultural products in the world.

Uber tests letting drivers set their own prices. I never thought Uber would, one day, let drivers set up their own price, but apparently they seem to be experimenting on it. I wonder whether Lyft will follow suit and whether this development will pave the way for aspirational startups.

I am very disgusted and disappointed by Southwest. After all the consequences that Boeing has had to face in the aftermath of Boeing 737 Max, Southwest still doesn’t learn the lesson. I hope they will soon

Southwest pilots flew more than 17 million passengers on planes with unconfirmed maintenance records over roughly two years, and in 2019 smashed both wingtips of a jet on a runway while repeatedly trying to land amid gale-force winds, according to the Transportation Department report, reviewed by The Wall Street Journal.

Source: WSJ

An Electronic Heath Records system provider worked with a drugmaker to implicitly encourage more opioid prescriptions to patients, despite an alarming rate of deaths by overdose.

Groundwork for the deal between the companies began in 2013, according to the statement of facts agreed to by Practice Fusion under a deferred prosecution agreement. The idea was to get the opioid maker’s pain drugs to certain kinds of patients: ones who weren’t taking opioids, or those being prescribed the company’s less profitable products. It also aimed to secure longer prescriptions, according to the court papers.

Source: Bloomberg

Weekly readings – 11th January 2020

Commission-free investing with Vanguard. Introduced by a…vanguard like Robinhood and adopted by others like TD-Ameritrade or E-Trade, commission-free trading is now available with Vanguard as well

Analyst, analyze yourself

The environmental impact of today’s transport types

How to lose a monopoly: Microsoft, IBM and anti-trust

Cities Struggle to Boost Ridership With ‘Uber for Transit’ Schemes

How a plant saved a Japanese island

Uber incorporated transit ticketing into its platform

Uber rolled out the feature first in Denver last summer, allowing the city residents to buy public transit tickets straight from its platform. Apparently, it has been a positive experiment so far. The company reported an average growth of 42% each week from May to the end of June 2019. In an interview with Bloomberg Technology today, the Head of Uber Transit said that the feature’s user growth in Denver was 15% week over week. Judging by the difference of the two growth figures, I guess that the latter was taken over a longer time period and a bigger base. Furthermore, Uber announced today that it would bring the ticketing feature to Las Vegas.

Uber also said that the number of repeat ticket purchases has increased every week since ticketing launched. As of the week of June 24th, approximately 25 percent of tickets sold were purchased by users who had previously purchased tickets on the app.

Source: The Verge

I think adding the ticketing option to the platform makes sense.

In the beginning, Uber under Kalanick tried to grow exponentially by reaching as many domestic and international markets as possible. After the change in the leadership, Uber scaled back its presence overseas and sold unprofitable businesses in South East Asia and China. If it couldn’t expand geographically, how growth could be obtained? By going vertically and more deeply in the existing market.

Hence, Uber offers additionally services like Uber Eats, Uber Bike, Uber Freight or Uber Fly. Uber’s transit ticketing is another way to move towards the goal of being a one-stop shop for transportation.

I used to rely on public transit in Omaha a lot. The local bus operator’s website offers a detailed schedule of what time buses approximately will come and leave. However, it doesn’t provide an estimate arrival time and the user interface pitifully leaves a lot to be desired. Map applications such as Apple Maps and Google Maps are fairly helpful in tracking bus movements and giving an estimated arrival time. But it doesn’t provide a comparison between options such as public transit and an Uber ride. Uber’s value propositions lie in its household name, a comparison between options in terms of time and cost, cashless payments and convenience. If you can help users eliminate one click or action on the phone during a user journey, it can be an added value.

Source: Uber

It is unclear whether and how Uber has so far managed to earn revenue and profit from the new feature, though the Head of Uber Transit confirmed that it was a revenue-generating vehicle. Even if there is no money to be made yet, when the application attracts more usage, users and traffic, it will find ways to make more money later on.

Another benefit that I suspect the new feature will bring to the table is to act as an anchor option for its rides. An anchor offer is one that is presented to make the truly primary offer more attractive. It’s similar to readers, after seeing a package of online and offline access to a newspaper have the same price as the exclusive digital access, choosing the combination package. As you can see in the screenshot above, even though the transit option comes with a saving of $8, it will cost a rider 20 minutes more. In some situations, riders may be more motivated to choose an Uber ride, instead of waiting for a public transit.

Uber may not make any money when it sells bus and subway tickets through its app, but it is seeing an uptick in business as a result. Since Uber launched its transit planning feature in January, Uber trips in Denver that start or end at a transit station have grown 11.6 percent. This helps bolster Uber’s claim that it is helping solve the first mile / last mile challenge that plagues many cities.

Source: The Verge

So the transit option is just one way in which we are increasing our relevance to a greater number of consumers on a global basis. And we are seeing it in higher engagement in the app specifically with London and some of the other areas where we’ve grown transit.

Source: Uber’s Q2 Earnings Call Transcript

Furthermore, The Verge reported a concerted effort by Uber to appear less contentious towards public transit. Working with various stakeholders in the markets in which they operate will earn Uber some goodwill. For a business endlessly engaged in legal issues with local authorities across the world, some goodwill is definitely helpful.

Weekly readings – 16th November 2019

150 years of nature

The Slowness of Literature and the Shadow of Knowledge

It’s Not Enough to Be Right—You Also Have to Be Kind

Wework pitch deck

Wework’s issues with the SEC before IPO. It’s mind-blowing that this didn’t get reported at the time

Uber Hit With $650 Million Employment Tax Bill in New Jersey

If You’re Busy, You’re Doing Something Wrong: The Surprisingly Relaxed Lives of Elite Achievers

Rules that are likely to increase transparency in hospital pricing

How Google turned its back on its own founding philosophy for search results