Hubert Horan: Uber’s Q1 Results – Reporters Show They Aren’t Up to Reading Financials

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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

Here are some of the stories about Uber’s 1Q published results.

The (paywalled) WSJ article provided links to actual P&L and cash flow tables.

As usual, it’s a mixed bag of reporting. The Recode, New York Times and Financial Times articles were especially weak, suggested the reporters hadn’t really been following the Uber story and weren’t good at reading financial reports. All stories mentioned that Uber’s reported “profit” was entirely due to the one-time. $2.94 B gain on the Grab sale. But most stories highlighted “Uber profit” in their headlines and ledes, and only Newcomer (Bloomberg) and Griswold (Quartz) made a serious attempt to explain to readers that this gain was a one-time accounting entry. Even with their attempts to clarify, the overall takeaway most people will get from these reports is “Uber is now profitable”

In contrast to these stories, the Financial Time’s Lex column (behind a premium paywall) explicitly emphasized that . “Uber is solidly lossmaking with slowing growth…and has some way to travel to convince markets its numbers add up before going public” But people who read the FT’s “news” story (or the NYT, or WSJ) would have no idea that the numbers told this kind of story.

None of the stories made any attempt to explain how the sale of a hopelessly unprofitable operation could generate a $2.94B accounting “profit”, or made any attempt to explain that it was entirely based on Uber’s opinion about how much Grab (currently money-losing) might be worth some day. None of this “profit” had nothing to do with the exchange of assets where the underlying value had ever been audited or based on exchanges in public markets.

None of the reporters seemed to grasp that making a (roughly) half-billion P&L improvement (aside from the Grab accounting benefit) in a single quarter, if true, would be a major story in itself, and didn’t explain how this was achieved. It appears to have come from a $280m cut in driver compensation vs the 4th Q (drivers getting less and less of what passengers actually pay–a piece of the Uber story that every major outlet ignores) and a $277m cut in G&A and Depreciation expense.

Most stories mentioned Uber’s hoped-for 2019 IPO, but none attempted to explain whether the 1Q data points toward the narrative Uber will need to gain a strong public valuation. “We are no longer losing a billion dollars a quarter” may be better news than the alternative, but neither Uber nor these reporters can explain how or when Uber might achieve breakeven, much less the sustainable profits investors will need to see. Dara Khosrowshahi has publicly stated that he expects Uber to grow to 20-30 times its current size, and that Uber’s driverless car “flying car” programs are critical to achieving those growth targets. But all of the things that drove the Quarter-over-Quarter P&L improvement directly undermine that “growth narrative.”

Much of the huge G&A/Depreciation cuts were related to reduced spending on future growth. Any company can goose current earnings if they stop spending for the future, but this is not what potential investors in Silicon Valley “growth companies” want to see. Most stories quoted Khosrowshahi’s comments about growth exceeding expectations, but none noted that the quarter-over-quarter growth in gross passenger payments was only 4%. Some of the stories mentioned the termination of driverless car testing in Arizona, and the recent departure of the head of Uber’s flying car project, but no one attempted to explain how any of these facts could be consistent with the company’s aggressive growth objectives. Obviously, the idea is that “growth companies” can use the strong profits and cash flow from their core business to fund a variety of longer-term growth opportunities. The reporting on Uber still ignores its awful year eight economics in its core businesses, and that its hope of eventually earning money in driverless and flying cars is even more inexplicable.

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17 comments

  1. cnchal

    . . . Dara Khosrowshahi has publicly stated that he expects Uber to grow to 20-30 times its current size, and that Uber’s driverless car “flying car” programs are critical to achieving those growth targets. . .

    I was astounded to see an Uber commercial the other day, slickly done with the smell of bullshit wafting from the TV. Khosrowshahi – mistakes were made – we will do better.

    Since following along with this Uber series on NC, we know Uber sinks a Nimitz unit per year, so were it to grow like a cancer to 20 to 30 times it’s current size, I would expect the equivalent of a fleet of Nimitz units sunk per year. That’s what scale means, right?

    1. Jim

      Watching TV these days, it’s not unusual to see slick ads from Uber, Facebook, and Wells Fargo in rapid succession. All are apologizing for having “lost their way,” and promising to do much better.

      If they’re lost, I’m sure we can show them the way to a Federal Penitentiary, where their executives belong.

      1. Cameron

        I don’t have access to television so I was unaware of this apologetic trio, this CNN Money article by Danielle Wiener-Bronner frames it nicely. “Facebook, Facebook, Uber, Wells Fargo: The strategy behind 3 corporate apology ads”:

  2. Larry Mulcahy

    Excellent piece of reality per usual from Hubert and Cfdtrade in general. Uber has become extremely desperate, with a major PR ad campaign featuring the CEO airing during the NBA playoffs:

    It’s hard to swallow. I’m sure the drivers are loving the compensation decrease. The ad basically acknowledges that the Uber brand was becoming toxic. A common theme with “tech” companies these days.

    The growth numbers are interesting too. Uber and Lyft have crushed rental cars in the all important business traveler segment, but the other bit that’s going to halt Uber’s growth is the fact that Lyft is competing with them. Lyft has partners and is well capitalized, so the future where Uber is a quasi-monopoly and gets to set profitable rates seems even further and further away.

  3. Thuto

    One starts to wonder whether this failure to dig deeper, itself a form of “taking uber at their word” cheerleading, isn’t a disgrace to the field of journalism. I’m no journalist but surely the minimum entry requirement for planting your behind on a chair in a “respectable” news room is the ability to question the official story emerging from those you report on no?? Or am I hankering after the heydays of journalism when news reporting was done “without fear or favour”…

    1. Harry

      Journalism? Do you mean blogging? Cos newspapers don’t do journalism. They do product placement.

  4. Watt4Bob

    None of the reporters seemed to grasp that making a (roughly) half-billion P&L improvement (aside from the Grab accounting benefit) in a single quarter, if true, would be a major story in itself, and didn’t explain how this was achieved. It appears to have come from a $280m cut in driver compensation vs the 4th Q (drivers getting less and less of what passengers actually pay–a piece of the Uber story that every major outlet ignores)

    First rule of capitalist predation, don’t talk about capitalist predation.

    So it’s a race, will Uber eventually make billions for a few people through an IPO, or will its many thousand drivers finally figure out they’ve been had.

    Of course there might just be an endless supply of potential Uber drivers willing to give it a try.

  5. JTMcPhee

    Where do I go to put in my bid for some of that Uber IPO stock? It’s going straight through the roof, I tell ya! There’s clearly an IPO in “OPportunIty!”

  6. Arizona Slim

    Donning my “Have Money To Invest” hat for a moment. While wearing this hat, I look at potential investments this way:

    1. Is it a good thing?
    2. Does it make money?
    3. Does it bring me joy?

    Pretty simple investment screen, and here’s how Uber measures up:

    1. I don’t understand how exploiting people who are down, out, and desperate is a good thing. I’ve seen Uber drivers interacting with the company management. The nicest word I could use to describe these interactions is “condescending.” And such condescension wasn’t necessary.

    2. Does it make money? Well, Hubert has made that answer quite obvious: NO.

    3. Does it bring me joy? Given the answers to Questions 1 and 2, I’d have to say NO. Again.

      1. ChrisPacific

        That highlights the dirty secret of the whole self-driving car business, which is that (despite marketing claims to the contrary) algorithms are still nowhere near as good as humans at detecting and classifying objects in most scenarios.

        The two metrics typically used to assess the quality of a classification algorithm are precision and recall. The former measures the percentage of time the algorithm was correct when it thought it had a “hit.” In this case: when the car thought it had detected a person, how often was it correct? The latter measures the percentage of actual cases that the algorithm was able to detect: out of all the cases where a person was present, how often did the algorithm spot them?

        There is a direct trade-off between these two metrics. You can tune an algorithm to have very high precision at the cost of low recall, or vice versa. Achieving a high score for both is an indicator of the quality of the algorithm. Generally when safety or health is a factor you want to err on the side of caution, meaning that you aim to maximize recall. If you miss a tumour that turns out to be cancerous, for example, that’s much more serious than incorrectly flagging one that turns out to be benign. If your algorithm is of low quality overall, or lower quality than you are claiming, that will inevitably result in a lot of false positives as precision suffers due to the above tradeoff.

        In the self-driving car world, that means you’d effectively have a skittish horse that was always jumping at shadows. False alarms (slamming on the brakes or taking evasive action when there was nothing there) would be a common occurrence. If you were trying to build a marketing narrative that your self-driving technology was production ready, this kind of thing would undercut it pretty severely. I imagine there would be fairly substantial pressure to tweak the algorithm from, say, 1 in 10,000 missed detections to 1 in 100 if you could achieve a significant reduction in false positives and better driving experience by doing so. Regulation is the typical way of counterbalancing this. It’s why nobody but the desperate buy drugs or medication from guys on street corners, and why it’s such a risky activity for those that do. Uber, of course, prides itself in renouncing all such constraints – often (as in Arizona) with the cooperation of government.

        So the question is: where did Uber draw the line, and did they breach their duty of care in doing so? And how much is it worth to Uber to ensure nobody puts that question to them in a court of law? The settlement amount would give us a clue, if we knew it.

    1. 2short2stand

      I wish consumers were just as critical in their thinking, problem is people love what’s cheap and that’s Uber’s core subsidized model at the drivers expense.

      I’m still blown away a third competitor is not in the game. You can simply charge a flat rate commission $1-$1.50 and have the driver keep the rest, minus credit card and TNC insurance per mile which is at $0.25-$0.38.

      The drivers would finally have a platform for protest
      against this corruption,and then once traction starts push away these bad players.

      I’ve worked in private transportion in SF for over 8 years and know that the daily rate of rides are 175k-250k as the week progresses.

      A rideshare with a saturation of Uber’s 75%, that only takes a $1-$1.50 would generate $3.4M-$7.3M in SF alone each month.

      I’m still blowing away this is not happening yet.

  7. Ash

    > It appears to have come from a $280m cut in driver compensation vs the 4th Q (drivers getting less and less of what passengers actually pay–a piece of the Uber story that every major outlet ignores)

    The problem with the reporting comes from most reporters being ignorant and fans.

    Even the most critical reporters of Uber can be seen on Twitter gushing about attending parties at Uber or just using Uber on a daily basis. Uber is targeted towards the demographics of young Manhattan or major city lifestyles.

  8. Altandmain

    To be honest, I doubt most journalists these days do their due diligence.

    They may simply not have the time or in the case of the media, they may be afraid to upset a major advertiser or potential advertiser.

    Much like Tesla, this has become another overhyped money losing company. The fallout from this though will be much larger than say, Juicerio or Theranos, both of which fell apart.

  9. ChrisPacific

    Amusing article on the flying cars thing:

    “The battery we need to do this really well…does not exist,” Mikolajczak admitted. She had come to Florida with a challenge for the battery-expert community: develop a battery that is lighter and has more storage capacity than anything produced so far.

    Then came time for questions. “Do you have a back up plan?” asked Jeff Dahn, one of the world’s leading battery experts. The audience exploded in laughter, grounding Uber’s planes before they even took off.

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