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

Good morning, and welcome to day 2 of the Deutsche Bank technology conference. My name is Lloyd Walmsley. I lead the Internet research effort here at Deutsche Bank. We have another good day in store for us, and I'm excited to kick things off with Pierre-Dimitri Gore-Coty, the VP of Delivery at Uber. Pierre, thanks for being here.

Yes. Thank you, and thanks, everyone, for the time.

Yes. So I'll go through some questions with Pierre. But if anyone in the audience wants to ask a question, you can use the module below the webcast or feel free to send me an e-mail or Bloomberg chat, and I can integrate your questions into our conversation.

So Pierre, I wanted to start off at a high level. You've now been in charge of the Delivery business for about 6 months. Can you talk about what it looked like when you came in and what some of the key changes have been in strategy and operations?

Yes, of course. So I took over, indeed, the Delivery business back in February, so about 6 months ago. It is very clear that the business had been geared towards growth at all cost and, frankly, did a pretty good job at that, considering that in a matter of 4 years or so, we turned Eats -- Uber Eats into one of the largest food delivery platforms outside China. But as far as I'm concerned, a big chunk of my focus has been in moving this business towards more of a sustainable growth model. And so a couple of things I can highlight in particular that have kept me busy over the past few months. I'd say, number one and at a macro level, it's really been around further focusing our efforts. As you know, we are -- as you probably know, we have shut down a number of countries in the early part of the year to try and make sure that we could invest and lean into places where we see the biggest opportunity for ourselves. So that's kind of been, I'd say, a macro focus point. Two, we have been leaning into the growth opportunity that COVID has created for us, and hopefully, some of the numbers that we've published for Q2 makes that clear. And this has really been about making sure that we could very quickly tweak our products and our service to really adapt to the new realities of COVID. And I'm sure we'll have a chance to chat more about that from the conversation today. We have -- and I have tried to reinvigorate or create a strong sense of emergency around all of the competitive sites that we're having around the world. And I would say I'm pretty happy with some of the progress that we made in a number of important markets, for instance, most recently, Canada or Japan, but I'd say many more. And finally, it's really been about improving our P&L, improving the efficiency of how we do business. And you've seen already some strong improvements on our growth profile and our margins. And this is, frankly, a path that we are all marching towards inside the Delivery business unit and that eventually will get us to at least a breakeven position.

So on profitability, it's a big focus among investors and inside the company. So before we get deep into the operational levers, are you done rationalizing which markets you're in on the Delivery side? Or is that still an ongoing effort?

Well, I'd say, overall, I am pretty happy with the portfolio that we are now left with. We are #1 player in 2/3 of the gross bookings -- international gross bookings that we have right now, and we are actually a strong #2 in the majority of the remaining countries. So overall, the portfolio feels strong, which means I don't see a burning need to do more. Now we're going to remain opportunistic, as we've always been. And that means there could be deals on the margin or moves on the margin, but that's not a priority right now. Our strategy as a whole, maybe I should have -- sorry, there continues to be that we want to be either in a leadership, in the #1 position or in a strong #2 position in the countries where we operate, and that remains the case today.

Can you call out some of the key drivers to getting to profitability and maybe the trade-offs of pulling some of those levers, touching on things like cost per delivery, optimization, basket size? Where are you now? And how much room is left on some of these key levers?

Yes, of course. So the way I think about getting to profitability as a business when it comes to the food delivery side of things is really about improving our take rates, our net revenue margins, and I'll touch about that in a minute, and then optimizing everything that is below the take rate level. As far as take rate is concerned, some of the biggest movers are really the basket size, number one. Obviously, COVID has been helping us to some degree. But we've also done a lot on our -- we've done a lot on our side, sorry, to increase basket size. I'm sure if you use the app, you are noticing that we are doing a much better job at suggesting bundles and things like that. And we've had pretty good results in Q2. I don't know that we have shared that before, but the basket size improved by about 17% in the U.S. and 11% globally on a year-over-year basis. That's for Q2. So this is basically a big and substantial lever when it comes to improving the unit economics of the business and one that we expect to continue and pull from. The number two that I want to call out that still plays into the take rate margins is the cost per deliveries. This is something that we're very much focused on. It's a factor or a matter of like what is the network density overall, both on the restaurant side and on the courier/demand side of things, how do you reduce idle time, how do you get to batch more and more orders together to try and really reduce that cost per delivery. We have seen also strong progress on that front. If you look at batching, for instance, we had in August about 1.5x more batch orders on a relative basis, on a rate basis than we did back in January. And that's really coming on the back of [ iPOS ], the technology, but also the increase in scale that the business now have in most countries around the world and pretty much all countries around the world nowadays compared to earlier in the year. So that's kind of the 2 big levers that play into the take rate. The additional levers, I can touch on if you want. What's under the take rate are really things like promotion, which tends to be a factor of -- that tends to correlate to the competitive intensity that we see in a given country. And so as, hopefully, things continue to rationalize over time, we think that this -- the need for us to spend on promotions will probably get down. So this is something that can prove to be an important lever as well. And finally, you have all of the operational cost lines, things like support costs, people costs, payments and so on that were probably not for the Eats business big areas of focus up to a few months back and now areas I'm spending a lot of time on and where we're seeing actually pretty strong progress.

So asking it a slightly different way as well. How much of the improvement from today's roughly 12% ANR take rates to the long-term guidance, to 15% will come from kind of a mix shift to smaller restaurants or higher fees to restaurants, higher fees to end users versus just more efficiency on the Delivery side?

Well, I don't want to be too prescriptive, but what I'd say here is, at a macro level, I don't think that we need to charge higher fees from restaurants or higher fees from end users to be able to deliver on the take rate improvements that I've alluded to and that 15% -- get to that 15% aspirational guidance we've given everyone. The key levers, as I said earlier, are really going to be about basket size improvements, delivery efficiency, restaurant mix shift. I have not touched a lot on that actually in my previous answer, but if you look at the business, you'll see a pretty large divergence between the sort of marketplace fee we have when we are dealing with, say, a small mom-and-pop relative to what we have when we're talking about some of the very large and global enterprise partners. And so the way we influence shift -- we influence mix, sorry, has a big implication on the take rate as well, the average [ MTF ] we get. And finally, some of the consumer incentives, some of the promotions that I touched on before, some of them being above and some of them below the net revenue -- the net rate -- the take net rate -- the adjusted net revenue margin.

So looking beyond ANR take rates to the kind of 30% EBITDA profitability, where do you see the biggest levers on the cost side below that ANR line? You touched on it a little bit. But wanted to also dig into customer support. It seems like you've changed that to more of kind of an automated model. So wondering if that's having any impact on customer or restaurant churn.

Yes. Well, of course. So maybe starting with customer support, and then I can broaden a bit my answer. But starting with customer support, you're exactly right that this is definitely a big chunk of our cost structure basically. We are making and investing in a lot of automations that are helping us reduce the number of trips that need to have a human contact or human involved. Actually, our contact rates on a global basis have been down about 40% on a year-over-year basis. And that's really on the back of deflecting a number of those contacts to automations but also, frankly, reducing the overall defect rate. So some of the contracts are just being killed in the first place by continuing to focus more and more on the customer experience, on the restaurant experience and making sure that we tackle each and every of those defects one after the other and find structural solve for each of them. So this is -- this has been already something that really moves in the right direction, but this is one that we will continue to invest into. I think there's a lot more we can do. That's for customer support specifically. Beyond that, a bunch of things. There's clearly some operating leverage on fixed cost. As you've seen, our top line has been growing substantially over the past few months, and we've done, I think, a good job at being very disciplined with our fixed costs. And if anything, taking tough decisions, hard decisions like what we've done with head count reduction, that have saved across the company entirely about $1 billion, and we'll stay focused on that fixed cost line. So that's kind of another set of things to -- where to expect some tailwind from. And finally, I alluded to that earlier, but it's very clear that marketing plays a big role as well in our P&L. Some of that is a function of competitive intensity promotions and so on, but some of that is also a function of how efficient we are at acquiring customers, engaging them over the long term. And on that front, I would say that I feel quite good about some of the levers we're starting to deploy to create the engagement or to help with acquisition, be it membership program that has now rolled out in a number of additional markets, most recently in Brazil, in Japan and Mexico, for instance. So this membership program is a good example of that. A lot of the things you can now see in app, where we're trying to encourage a lot more cross-promotions between our different business lines. If you look at, for instance, our core Uber app, you will see now that you have the Eats use case that's being promoted, you have the grocery use case with Cornershop that's being promoted. And those are things that are actually helping a lot with customer acquisition cost and frankly, engagement as well. So this is also going to be a driver of improving marketing efficiencies effectively.

So you all have talked about batching as something that Postmates has done well. Can you talk about what they've really figured out and where are you guys in terms of maybe percent of deliveries that are batched? And where do you think that can get to?

So I'd say we were certainly very impressed overall with what Postmates have been doing on the batching front and more broadly on the cost per delivery front. It is very clear that this has been a top priority for them for quite some time. So we're kind of looking forward to learning from that or to joining forces down the line once the deal gets approved. The things -- when it comes to batching, there are few things to keep in mind. Well, first, as usual, it's a factor of your densities, i.e., how often do you have 2 orders that are going in the same place, in the same direction at the same time. And so it's a factor of density in a given city. It's also a factor of decisions and trade-offs you decide to make as a business. And if I think about Uber Eats, we have over-indexed quite a lot on things like delivery times, for instance, which means we might have been a bit less aggressive than other players when it comes to batching. It is a matter of the technology you have and how refined or sophisticated that technology is. And very clearly, to my earlier points, Postmates has a lot there. And finally, there's an element of, and that's kind of a sub bullet of the technology point, but being smart about what is it that you are actually transporting and starting to understand what are the items that are going to be most easily batched. Is the food cold? Is the food hot? And as we expand towards nonperishable delivery use cases, like Postmates does today, that's also going to change the land of opportunities when it comes to batching. Those are a lot of the things that I'm certainly looking forward to engaging with Postmates on and that I think can drive some improvement on the Uber side.

So yes, personally, I noticed recently some increase in batching from Uber Eats. Is there -- are there some things you guys have been ramping up even prior to Postmates on the batching side in the U.S.?

Well, I'd say with me joining the Uber Eats business and taking on this role, the focus or the shift that I described towards more of a sustainable growth model has gotten me to focus on a ton of things that maybe were not as big of a priority just yet before. And I think the efficiency of the courier network is a very natural place to focus on just because it flows straight into our P&L, which means any single cent you save is something that has a substantial impact on margins and P&L. So I will definitely tell you that I've put a lot more of an effort on that, and that's probably why you've seen us test a lot more things and drive our batch rates up to the point I was making earlier with batch rates being up 1.5x what they were in January. So yes, we've certainly been pushing a number of things, and we'll continue to do so and won't wait for Postmates to try and make that a big focus area for us.

So I have one along this profitability question line from the audience I'll go ahead and ask, which is, do you all have in mind an optimal percentage penetration of delivery versus marketplace orders in order to meet your margin targets? Or in other words, how much do you need the marketplace business to grow, to turn profitable versus kind of Delivery business being profitable as a standalone?

Well, I can address that. It's a good -- it's a really good question that I get asked a lot about. My conviction is pretty simple. If you take a step back and you look at the food delivery industry everywhere around the world, what you see is that the delivery categories is gaining share versus the marketplace models or the aggregator models. And the reason is simple. It is gaining share because that model allows you to tap into a broader set of restaurants, which is something basically consumers want, and allows you to deliver much more -- or much shorter delivery times. Think about that. Our delivery time, for instance, in France is 24 minutes on average, which I suspect is a lot smaller than any of the aggregator model or the marketplace models are able to achieve. So my first point is it is a model -- the delivery model is a model that is structurally gaining share. There isn't a single country around the world where Uber Eats hasn't been gaining share versus Just Eats Takeaway, as an example, over the past year. And my conviction is this is going to continue. Number two, I really don't think we need -- as Uber Eats, I really don't think that we need an aggregator or marketplace model for us to be profitable. So a lot of what I've told you about us marching towards profitability are things I have conviction we can do with the ball as it is. Now of course, strategically, it's in my interest to make sure that I can tap into that marketplace model. And with that in mind, I'm actually quite pleased with some of the progress we're making. We have an offering which we call internally BYOC, bring your own courier, which is effectively an offering targeted at merchants, at restaurants that already have their network of courier -- their own network of couriers. And that offering is actually getting a lot of traction. We have in Europe, for instance, I think, more than 7% or 8% of the orders that are actually done with this BYOC model, which is not insignificant. And secondly, the thing that I find very interesting when I look at this model as far Uber Eats is concerned is that we offer to restaurants what we call a fallback mechanism, which means that whenever the courier -- their own couriers are busy, instead of having a consumer wait and hang around and get a cold pizza, we are defaulting back this order or falling this order back onto the Uber Eats network of couriers. And I was looking at the data recently. Around 30%, 3-0 percent, of the orders that we have with this BYOC, so this marketplace model, are actually falling back onto our own network of couriers. So that just speaks for the increased efficiency that they release with the model we have. And I'd say, overall, the customer satisfaction, the restaurant satisfaction for all of the partners that we have under this model is actually really, really high because of that fallback option. So that's kind of what makes me overall excited about being in a business that fundamentally relies on that delivery model, why we will continue for sure to expand our offering into that marketplace side of things. That's why I don't think this is something that is actually needed for us to be profitable because I have full conviction that this delivery model will be profitable.

Pierre, wanted to talk about advertising. What have you all seen in the test of an ad product in Miami? And when should we expect this to expand to more regions? And I guess, can you touch on whether this is contemplated in the 15% long-term take rate guidance? Or would a scaled advertising model be incremental?

So I'm very excited actually about that advertising opportunity. We have made quite some progress since I last spoke about that publicly. We have, at this point, rolled out our advertising product everywhere across the U.S. as well as in Vancouver and Toronto in Canada. It is not rolled out to 100% of the restaurants. I think it's -- I think we have about half of the restaurants that are eligible for this product just yet, as far as I remember. But we are quite happy. And the reason why we managed -- or we decided to expand that is we were quite pleased with some of the early results. Of course, there's more work to do. You don't build an advertising business overnight. But all the time, I think that will be a substantial source of profit that we can reinvest into our growth, reinvest into a bunch of things or frankly, use as a way to get to this breakeven level and to improve our margins. On your question specifically as to how to think about that relative to this 15% take rate, whether that's fully incremental or not, I don't have a perfect answer. But I think my mindset at this point would be it's going to be a bit of both, i.e., some of it will be incremental and some of it will be not. The reason why I say that is restaurants are going to be prime set of users, are going to be prime customers for this offering. And it's not like restaurants' P&L can ever extend, so to speak, which means there's a bit of a zero-sum game dynamic. So while I expect us to be able to charge for that product for sure and extract the margin, I can see how that might mean we have to give back on other parts of the model. However, the good news is that there are other -- a lot of advertisers and specifically CPGs, for instance, that have clearly expressed their interest in spending onto this platform we have built. And those would be, by nature, very much incremental dollars flowing in. So I'd say, on balance, when you kind of net out those 2 effects and when you kind of think about the set of merchants that you would be targeting or advertisers that you'll be targeting for what we're building, I do think some of it will be incremental and some of it probably not.

And that's interesting. You mentioned the CPG interest. I think of the advertising model as similar to what we've seen in online travel, where kind of a biddable take rate, kind of commission override can impact sort order. Is that the right way to think about it in the -- on the restaurant side?