Harry here. Today, RSG senior contributor John Ince takes a look at Uber’s latest financials, an interesting series on Uber’s profitability and an article on the fading investor interest in the on-demand economy.
Uber’s Loss Exceeds $800 Million in Third Quarter on $1.7 Billion in Net Revenue [Bloomberg]
Sum and Substance: Even as Uber Technologies Inc. exited China, the company’s financial loss has remained eye-popping. In the first nine months of this year, the ride-hailing company lost significantly more than $2.2 billion, according to a person familiar with the matter. In the third quarter, Uber lost more than $800 million, not including its Chinese operation.
At the same time, the company’s revenue has continued to grow even after leaving the world’s most populous country. Uber generated about $3.76 billion in net revenue in the first nine months of 2016 and is on track to exceed $5.5 billion this year, said the person, who asked not to be identified because the information is private.
Uber, a closely held company based in San Francisco, has stayed mum about its financial performance even as its valuation has soared to $69 billion, making it more valuable on paper than General Motors Co. and Twitter Inc. combined…. The slowdown in Uber’s bookings growth can at least partially be explained by the company’s decision to leave China. Uber said on Aug. 1 that it came to an agreement with Didi Chuxing to exit China in exchange for 17.5 percent of the Chinese company. As part of the deal, Didi invested $1 billion in Uber. Uber’s third-quarter financials don’t include the business in China, which were part of the previous quarterly results.
Net revenue—the amount of money Uber generates after it pays its drivers—was $1.7 billion in the third quarter, growing from $1.1 billion in the second quarter and $960 million in the first, according to the person. … The company is said to have lost at least $2 billion last year and is on track to pile up a loss of at least $3 billion this year. Those are rough figures that may underestimate how much money Uber is losing and don’t include interest, taxes or stock-based compensation.
Here’s what we do know: Uber’s loss in the first quarter of this year was about $580 million, according to the person. By the second quarter, the loss significantly exceeded $800 million, including China. That number is likely far higher. Even in the U.S., Uber’s home market, the company continues to lose money. After turning a slight profit in the in the first quarter of this year, Uber lost $100 million in the U.S. in the second quarter. The loss increased in the third quarter, the person said. Lyft, Uber’s largest U.S. competitor, has promised investors that it will keep its losses below $150 million a quarter.
My Take: It’s important to remember that Uber’s losses may even be larger than the $3 billion loss for 2016 implied in this article. Uber’s figures are unaudited and not made available to anyone other than a few choice investors. One has to wonder, with a burn rate approaching $3 billion a year, how much cash they now have left in the bank. It wouldn’t surprise me to see fares starting to go up soon, and Uber’s cut of drivers’ compensation even larger, as pressures from concerned investors are applied to management.
Can Uber Ever Deliver? Part Three: Understanding False Claims About Uber’s Innovation and Competitive Advantages [Naked Capitalism]
Sum and Substance: This is the third of a series of articles that will use data on industry competitive economics to address the question of whether the Uber’s aggressive efforts to completely dominate the urban car service industry has (or will) increase overall economic welfare. …
The first article presented evidence that Uber is a fundamentally unprofitable enterprise, with negative 140% profit margins and incurring larger operating losses than any previous startup. Uber’s ability to capture customers and drivers from incumbent operators is entirely due to $2 billion in annual subsidies, funded out of the $13 billion its investors have provided. That P&L evidence shows that Uber did not achieve any meaningful margin improvement between 2013 and 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber imposed cutbacks to driver compensation.
The second article presented a breakdown of the taxi industry’s cost structure, and demonstrated that Uber was the industry’s high cost producer, with a significant cost disadvantage in every cost category except fuel and fees where no operator could achieve any advantage. It also explained that Uber could not “grow into profitability” because there were no significant scale economies related to any of these cost categories. Both findings were completely consistent with the P&L evidence in the first article showing huge operating losses, and no evidence of the rapid margin improvement shown by past digital startups, whose businesses could exploit major scale economies.
… Uber has never presented evidence about their efficiency/service impacts that independent outsiders could review. There have been scores of articles in the business press speculating about possible explanations for Uber’s rapid growth, but all ignore the billions in subsidies that have funded growth to date, and none were based on any hard evidence about their impact on industry competition.
My Take: This entire series is thorough and well researched. I highly recommend it, but be warned readers, it’s a bit dense and some of its assertions warrant further investigation. This installment in the series addresses a question that’s central to Uber’s future: is it possible to sustain a competitive advantage in this industry? If you can’t, then Uber’s got some serious problems ahead. Yes, Uber has demonstrated they can achieve impressive growth rates – both in drivers and ridership. But they’re doing it by subsidizing passenger fares and padding drivers’ incomes with bonuses and guarantees. Clearly that’s not sustainable, as evidenced by Uber’s mounting losses. (See article above.)
Silicon Valley VCs are growing wary of on-demand delivery [Reuters]
Sum and Substance: Michael Moritz – chairman of Sequoia Capital and one of the most successful venture capitalists in history – says a simple vision led him to invest hundreds of millions of dollars in on-demand delivery startups. “The movement of goods and services and people, by easier, more convenient means,” he said in an interview. “That’s a huge trend, enabled by smartphones.”
Led by Sequoia and another blue-chip Silicon Valley firm – Kleiner Perkins Caufield & Byers – venture investors have poured at least $9 billion into 125 on-demand delivery companies over the past decade, including $2.5 billion this year, according to a Reuters analysis of publicly available data.
But that torrent of money has slowed to a relative trickle in the last half of this year, and many VCs have lost faith in a sector that once seemed like the obvious extension of the success of ride-services juggernauts such as Uber. The bulk of this year’s investment – about $1.9 billion – came in the first half of the year. Only $50 million has been invested so far in the fourth quarter, the Reuters analysis found. Several prominent Silicon Valley venture capitalists said in interviews that they now believe many delivery startups could fail, leaving investors with big losses. “We looked at the entire industry and passed,” said Ben Narasin, of Canvas Ventures. “There is more likely to be a big, private equity-style roll up than a venture-style outcome.” …
Delivery startups continue to grapple with fierce competition, thin margins and a host of operating challenges that have defied easy solutions or economies of scale, venture capitalists told Reuters. Widespread discounting and artificially low consumer prices have made on-demand delivery “a race to the bottom,” said Kleiner Perkins partner Brook Porter in an interview.
My Take: These types of disappointing financial results finally seem to be sinking in for investors. Companies that were hyped as “Uber for X” were able to raise large sums from investors without rigorous analysis of their business models or the overall economics of the delivery space. Now it appears investors are realizing these opportunities are not nearly as attractive as they once believed. Stay tuned: this sector is quickly turning into an economic quagmire as investors and startups alike get that sinking feeling.
Uber, Lyft Get Fingerprint Waiver in Maryland, Model for Other States [Bloomberg BNA]
Sum and Substance: Uber and Lyft will continue operating in Maryland after winning permission to use a driver background check process that doesn’t require fingerprinting. Maryland’s process in granting the waiver could be model going forward, at least for other states. Background check processes by the ride-hailing companies are “as comprehensive and accurate as the fingerprint-based background check process” the state law contains, the Maryland Public Service Commission found. Therefore, it approved the companies’ proposed alternative processes (In the Matter of the Petitions of Rasier, LLC and Lyft, Inc. for Waiver of Public Utils. Art. Section 10-104(b) , Md. Public Service Comm’n, No. 9425, 12/22/16 ).
The commission’s decision calls for only slight modifications to the background check processes already used by Lyft Inc. and by Uber Technologies Inc.’s Maryland subsidiary, Rasier LLC. The companies already do annual reruns on background checks, for example. Representatives for both companies told Bloomberg BNA they will comply with the terms. The companies contended that background checks based on name, Social Security number and other identifiers are superior to fingerprinting. The Maryland waiver application was the first time they argued in a quasi-judicial setting.
Previously, they had to make their case before legislative bodies and committees in the dozens of states and municipalities that have enacted ride-hailing regulations. Creating a waiver process was part of the bargaining that led to legislation amenable to all sides, state Sen. Bill Ferguson said. “No side was thrilled about it but all sides were willing to accept it to move forward the other agreements,” he said. The Baltimore Democrat was the bill’s lead sponsor.
“I think Uber and Lyft would be happy to use this model going forward, but it doesn’t make a whole lot of sense for cities to pursue this option,” said Harry Campbell. He drives for both companies in Los Angeles and runs a blog called The Rideshare Guy. “Taxis already have to follow much stricter regulations and companies like Uber and Lyft are typically the only ones affected by new regulation. So it seems like a lot of hassle and bureaucracy for governments to enact new regulations and then just provide Uber and Lyft with a waiver that effectively keeps the status quo,” Campbell told Bloomberg BNA Dec. 22.
Ferguson, the state senator, said these issues are just the beginning of a larger discussion that needs to happen throughout the economy. “We’ll never be able to forecast or see ahead what industries are next,” he said. “In this case it’s about whether or not to fingerprint,” he said. “We’re seeing a radical change and departure in the traditional employee and employer relationship in the startup culture that is coming into existence.”
My Take: Score one for Uber and Lyft in this decision. They get what they want, which is a streamlined process for onboarding more drivers. Has public safety been comprised? Uber and Lyft say “no.” Taxis and other agencies say “yes.” What do you say?
Readers, what do you think of this week’s round up and the future of in-demand companies?
-John @ RSG
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