Uber Technologies, Inc. (UBER) Earnings Call Transcript & Summary

Great. So we'll go ahead and get started. My name is Heath Terry. I cover the Internet sector for Goldman Sachs. Really excited to have with us today Nelson Chai, Chief Financial Officer at Uber. Nelson, and I know this is an incredibly busy time for you in the company. So thanks for taking the time to be here with us.

So I'm happy to be here. And thank you, guys, all for coming. Have a nice showing out here, so...

Yes. Yes, standing room only. So obviously, everyone in the room knows Uber, at the very least, as a service. Can you just take some time for the investors in the room to explain what it is that you and Dara and the team are sort of building as a company?

So look, it's interesting because everybody here knows of the company, hopefully, and I presume everybody here uses the service. So for a 10-year-old company, right, and a company that took an adjective, right, made it a noun and everybody in this room made it a verb, it's pretty incredible if you think about what we do every day. And so every week on our Rides business, there'll be $1 billion of gross bookings that happens across the globe. Today, there'll be 21 million trips for food deliveries that happen by 5 million drivers and other earners on our system. And so if you just think about that impact over 60 countries and 800 cities around the world, it is incredible to think about what's been built. I think as we've gone down, and I've been there for about 1.5 years now, and clearly, 2019, besides our IPO, was obviously a pivotal year in the markets, and I'm talking beyond Uber. And certainly, companies that were funded over the past 10 years were really funded, focused on just growth. And Uber is no different. I'm not sure if it was a different environment, if the company could have grown and scaled the way it had over the past 10 years. And it created a little bit of a disconnect, I think, between the private and the public markets, which has been well written about. But obviously, last year was a pivotal year, and the company had to make the pivot. I think because of our scale, I think for -- as you know, Dara had 9 successful years running Expedia. And you can look at my back or look at my hair and you can look at me and know that I have a lot of tread on my tire as well. Look, we were prepared for the pivot. When I was on the road in April last year, there are many investors, and some of you I probably saw on the road, that would ask questions on is the ridesharing business a good business. For the past few days, as I've seen investors, and I said, if I told you in the fourth quarter of 2019, our Rides business would generate $742 million of segment EBITDA, profitability, every single investor would have said, "There's no way." And so I think over the course of the year, both of us, we'll continue to show that it's -- not only is it a good business that it can be -- it's a great business for us. We put out long-term margin targets for that business. We are confident that we'll continue to make progress towards executing against it. It was the success of that business because obviously it's the biggest part of our portfolio, that really led to us, as we're going through our 2020 planning, to bring in the number of profitability and why we are targeted as a company to be profitable in the fourth quarter of this year on a consolidated basis on EBITDA. And then now what the goal is, is to really make sure that we take that same capital allocation model and execute against our Eats portfolio, which the business is only a few years old, has grown quite quickly. We're the largest food delivery business outside of China. In the U.S., we're #2 right now. It is a business that still needs to go through some more rationalization. It's a business that, if you believe the funding markets are going to continue to tighten, we think will play well to us. We put a marker out on our third quarter call that our plan is to be the #1 or #2 in the markets in which we compete in or we wouldn't be. And we've taken action over the past 6 months. We exited our South Korea food business. You saw us in -- the market saw that we've sold our India Eats business to Zomato in January. And we're going to continue down that path. And so I think that people should expect that we will execute that game plan over the next 12 to 18 months. And then the rest of it is really just about getting us continued leverage over our fixed cost structure, which we're committing to. And then there's just dialogue on some of the other bets we're making.

So a lot to dig into there. Obviously, you mentioned the fact that you did pull -- make the decision to pull forward your planned profitability target from 2021 to Q4 of this year. You grew bookings 28% in this recent quarter. What impact is that decision going to have on your ability to grow bookings?

So I think this year, we think it's critically important that the leader globally of a business that we think is a really good business gets the profitability. And we think if we're going to be a great company to invest in for the long term, it matters that we don't just grow at scale but we make money doing it. So it does mean that this year, we are optimizing for that. One of the things we have now, which the company didn't have was more of a capital allocation model, where we spend time looking more at the returns if we're going to spend dollars. And so what this means is that when we consolidated our marketing operations in the summer under Jill Hazelbaker, it wasn't that we were going to spend less on marketing overall. And we may or may not. It just meant that we were going to consolidate the resources and then be better, more purposeful in terms of where we're going to spend. And so we're going to -- we'll see the benefits of that, and we'll get more efficiency out of that. It does mean that there were some things we were doing to grow the business that we deem to be empty calories. And so the return profile wasn't good, and so we stopped it. We've been public about talking about the fact that we were doing less on shared rides today. It was a product that we rolled out that really wasn't serving its purpose and in many instances, was just a much cheaper UberX ride. And so those are the types of things that just weren't good returns. Now does it mean that we're not going to invest in the business? No. As you and everybody here knows, we are still making significant Other Bets, other businesses, and we will continue to. We will continue to focus on continuing to grow our business. If you think about the step function of our business going from, on a gross bookings basis, $20 billion to $35 billion to $50 billion to $65 billion in gross bookings; and importantly, on a revenue basis, going from $7 billion to $10 billion to $13 billion. Those are pretty significant increases that will continue to grow on. But it is important that we focus this year on delivering against our plan and our stated goal that we talked about last week.

When you look at the business long term with the mix of business that you have or the business that you're targeting longer term, what does the profit margin profile of Uber look like?

Right. So we confirmed last week on the call the long-term profit margins. And so we said the Rides business, we believe, can get to 45%. And that's EBITDA margin as a percentage of adjusted net revenue. We talked about on the call about 30% for our Eats business and 25% for the overall company. Now it will take us some time to work through there. We believe that there's a room that we'll continue to make progress against the long-term margins, nearer term on the Rides side of the business. We think that it will take a little bit more time to get there on the Eats side of the business. And so again, those are -- that's what we're marching towards. And the team has -- we have pretty good long-term and medium-term plans to get there. And so we feel pretty confident about the path.

Yes. Once you get past breakeven, how do you think about the trade-off between incremental growth and profitability? How long do you -- are you willing to take to get to that 25% if it means being able to grow faster?

So I think once we get to profitability, we're just not going to stop, right, and hope to make $1 a quarter. I think that you'll see us continue to try to improve and enhance our margins over time. But we will continue to invest. But we just want to make sure we're getting good returns. And yes, internally, I talk about the fact that lots of things we would have looked at would have been viewed from an NPV lens, but IR actually matters a lot as we're thinking of going through this. And so that's what you should expect. And we -- the company is not going to stop investing for growth.

Right. Price increases have obviously been a big part of improving the profits in the Rides business. What impact have you seen that have on customer churn, engagement, growth overall in the Rides business?

So our focal point actually hasn't been on trying to increase the end price or -- we are probably more focused on pulling back some of the promo and the marketing and the subsidies. So it doesn't change the top price. It just means it improves our margin. We've seen in marketplaces, whether it be for regulatory actions like in a place like New York, where it really hasn't had a significant impact. And so it's relatively inelastic, at least to date. We've been in marketplaces, like Argentina that's gone through some difficult economic times, and our business has grown tremendously. But one thing we find in marketplaces when they're going through some economic downturn is it eases up on the supply side, meaning finding people who want to earn on the platform increases. But -- so net, we haven't seen yet the real -- any kind of elasticity on pricing. We do believe that if there's a huge step function down in terms of the affordability, it will increase the number of riders who will be able to use Uber. One of the disadvantages is price increases. So if you think about New York and all the actions that the city has taken -- a few years ago, Uber used to be something that would be -- that riders in some of the boroughs could use, the outer boroughs that actually weren't serviced by cabs or mass transit. Unfortunately, those riders were priced out of the market. And it just has to do with utilization of our supply, and we're going to do it. And that's actually unfortunate.

Yes, yes. When you -- you mentioned some of what you're seeing in Latin America, in Brazil. When you look at that market now and the way that it's evolving, how would you characterize sort of the health and the competitive environment there on both the Rides and the Eats side of the business?

So I would say, on the Rides side of the business, it was a spectacular business for us, particularly in Brazil, through the first half of 2018. We were, by far, the largest player in the marketplace, and the profit margins were extremely strong. As you know, have been well documented, DiDi came in through 99 and really hurt the profit pool in Brazil. The good news is, we've talked about, the market has stabilized. We've gotten very good in terms of our competitive response. And so now I think it's a very healthy marketplace. And as you know, in our Rides business, in all the areas in which we operate, we are at least 2/3 of the marketplace or higher in terms of our category position with the exception of India where we think we're closer to 57% or 58% category position. And so that market has stabilized. On the food side of the business, it's a big opportunity. We're the #2 player there, but I would say that there's still a fair amount of incentive going on in that marketplace. And we have a local competitor there that is probably outspending us 3:1.

Do you see that rationalizing in the same way that we're starting to see the competitive environment in the U.S. business rationalizing?

Yes. So I think the drivers of that are going to be, first and foremost, just the funding markets, right? So we've seen competitive competitors who've been funded in the private markets by some of the folks who have been doing it. And we're starting to see that marketplace tighten, so I think that's a positive. I think as -- we expect that we will try to lead as much as we can on doing so. There should be some consolidation as all of those businesses try to work towards profitability. And I think the pivot that happened here in the markets last year will continue across the globe.

Yes. When we look at the Eats side of the business, bookings growth was surprisingly stable in the most recent quarter. How directly is that related to profitability in that business? And how do you see the competitive environment as funding environment changes for those companies currently in the U.S.?

There's a school of thought that says all of the competitive intensity pulls through some volume, and so that may be true. And so if you look at a place like Taiwan, where we're in a 50-50 fight with foodpanda, that market is a very highly dense food delivery marketplace in terms of its per capita. That being said, there's plenty of markets that's still developing. And so it's hard to disseminate between funding versus just competitive intensity. Certainly, there are marketplaces where there are too many competitors. And over time, there should be some level of consolidation that will occur and that will help drive. We fundamentally believe that the food business can be a very, very good business. A lot of it is continuing to build the take rates. So we would think mid-teen-type levels, and we're seeing and getting close to that in some of our most important markets like the U.S. A lot of it is about efficiency on the logistics side, which we're quite good at. And then part of it is just rationalization on the marketing spend. And so already today, we have -- we're profitable on an EBITDA margin in over 100 cities in which we operate today. And so again, we just think that there'll be good opportunity there over time.

Strategically, how do you think about your asset allocation decisions between exiting or selling markets the way you did in Korea, India versus maybe adding to markets the way you did to a degree in Brazil with the investment in Cornershop?

So first of all, our Cornershop investment isn't closed yet. It's a 51% investment. We are hoping that will close in the second quarter. And that's just extending the category out into grocery. Our business in Brazil is an Uber Eats business. The way we're thinking about our capital allocation model on the Eats is pretty simple. We look at the marketplace we're in. A lot of it has to do with the individual market. So if you're talking about a market with a lot of people with high GDP per capita, that's probably attractive to us that has major urban areas. If it's a marketplace that has 10 million people and GDP per capita is $300 per person, even if we're there now, somebody like me sitting, "Well, why are we doing that, right, because how do you ever win?" I think the situation of India was one where there are a lot of companies that go to India because of the potential and the opportunity, but it was a negative in our marketplace. The unit economics were quite difficult. There actually wasn't enough restaurant supply in the market, and that's actually a challenge for the marketplace. And so the chances of us staying there and winning against 2 strong competitors, it just didn't make sense. And so that was really the rationale there. There are other markets where we may not be 1 or 2 now that we continue to lead them on and we get traction. And there may be some others where we think that there's -- we can acquire. We continue to improve our position that way. So there's not one set thing, but we look at all the natural things you would look at if you're assessing the market.

Yes. How do you think about consolidation in the U.S. market? We had an antitrust speaker here yesterday talking about it, and she spoke about this at some level. Do you think, given the concentration that we already have in the U.S., that we can see consolidation here?

So again, it sounds like you got an expert. I'm not an expert on the topic, but I do think consolidation would probably be healthy in the marketplace. I think the conditions would have to be right for it. A lot of it would be based on the review you get on whether it'd be at the FTC or at the Justice level. Certainly, I think anybody who had participated in that would go after and get the best advice they could get. And then we'll see what happens, right? And so the Caviar deal is quite easy. There are 4 competitors now. I think most people would say Postmates is a lot smaller than the other 3. And so the question is, can you go from 4 to 3? I don't know.

Yes. So regulation continues to be an important issue for the company and the ride-hailing category more generally. I guess because we're here, let's talk specifically about what you're seeing in California with AB5. I think everybody in the room likely has their own opinion about how the service has been impacted by AB5, if it has at all. Strategically, what are you seeing? And how are you thinking about the different ways that the company is responding?

Well, so as you know, we've been operating with an ABC test in a number of different places. California has definitely proven to be unique. As you know, there are a number of different avenues we're taking. Nobody knows where the outcome is going to be yet, right, in terms of -- we are funding the ballot initiative, which will take shape next fall. We are started -- we are working through the courts, and so we'll continue to do that. We did test and we spoke about this earlier, which is we are testing right now in California. And for everybody at the conference who's using Uber, you might notice that it's not necessarily working as well as you do if you come from a different part of the country. Part of it was to think about opportunities to enhance the driver and their opportunity to decide what they're going to go do. Really, what it was is actually a pretty monumental effort on our part to be -- over a couple of months to totally reach the shape of the app, and we just felt like we should. And as you know, our company, we believe that we should be leaders -- take leadership positions on things when we did on safety. And so this is just another one we were doing it. And we're testing it, and you should expect that we'll continue to modify the testing as we're doing it. The net outcome right now is that when you press your Uber and say you want to go someplace, the driver in the queue gets to the side if you want to take the ride. And so the edge cases where you're seeing service really this heard is that if you're sitting here at the Palace Hotel and it's 9:00 at night and you want to go to Palo Alto, well, so the driver now can see where you're going, and they can decide, "Do I want to really be in Palo Alto at 9:45 or not?" And so what it means is you probably have some latency when you press the button. What it means is there are probably more cancellations than you're used to. We are collecting data. The first week was really rough when we did it here. There is another large bank having a health care conference here. And it created a little bit of chaos because it's the week we rolled that out. But since then, things have stabilized a little bit. It's funny because some people would say, "Well, while the drivers shall love it and that's great, you should get all the supply," it actually doesn't work that way. We do find some drivers that wait. They actually wait too long to cherry-pick the exact ride they want, and so they're learning how to use the system. The rider experience has not been up to our standards, and so we're working to tweak it. But this is all a testing to make sure whatever the outcome is that our company is ready and going to see changes to the service. And I would say it's too early to tell really where things are going to really fall. Obviously, if there's a negotiated settlement, we would be open to have that dialogue.

Yes. What do you see is the chances of more states following the California model? And then more broadly, when you look at sort of regulation in New York, London, Germany, how do you see the regulatory environment evolving for Uber?