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

Okay. Good morning, everyone. Welcome to the next fireside chat conversation we're having this morning at the Morgan Stanley 2023 TMT Conference. It's great to see everybody live again. We are thrilled to have Dara Khosrowshahi with us, the CEO of Uber. Let's start with the disclosures first. Please note, all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or they're also at the registration desk. Some of the statements made today by Uber may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements made today by the company are based on assumptions as of today, and Uber undertakes no obligation to update them. Please refer to Uber's Form 10-K for a discussion of the risk factors that may impact actual results. Good to see you.

Is this a new feature?

Yes. New -- yes. We're [ covering good ]. Good to see you, too. Thanks for coming once again.

Happy to do it.

So let's sort of start with a high-level question about the 2024 guidance that was laid out at Analyst Day last year. You sort of laid out some targets for 2024 bookings and EBITDA. Some things have changed from a macro and micro perspective since then. Maybe talk to us about some of the things that have sort of changed most in your mind that sort of could impact the pluses and minuses getting to those 2024 targets.

Yes, definitely. So -- and they've been both good and bad, more good than bad, thank God, but definitely both good and bad. I'd say, one significant change in terms of our view then versus what we're seeing is just what I think all of the markets are seeing in terms of cost of capital, right? So the cost of capital has come up for every single competitor out there. That has resulted in everybody pulling back in terms of incremental spend and there being, I would say, an increasing level of discipline as it relates to return on investment, whether it's overheads or whether it's marketing spend, et cetera. And so that changed. We were probably, on a net basis, a bit ahead of the curve there. Early last year, I said, hey, whatever plans we have, they're not good enough. We're going to have to change, essentially, what the target is and what the definition of good is. And so we were early in making those changes. If you look at our headcount for the core business from 2022 to 2019, total headcount was up 10% in total during that period. So I think our being a little bit ahead of the curve, our experience post pandemic, et cetera, has for us put us in a position where we didn't have to, let's say, adjust as quickly as some of our competitors. And then I think because we're the #1 player in the world, because of the benefits of the platform that we have in terms of Mobility and Delivery both on the supply side and on the demand side, on a relative basis, this environment is on balance better for us. And in the Mobility business, we gained category position in 8 out of the top 10 markets; Delivery, 7 out of the top 10 markets within the context of our improving our margins pretty significantly. So I'd say that has -- it's mix. But for us, it's been the environment is, I'd say, net-net, been a positive environment. In terms of profitability, the Delivery business, we had talked about overall incremental gross bookings -- incremental EBITDA as a percentage of gross bookings improving 7%. That was our target. We've been over-delivering against that target. And the majority of the over-delivery as it relates to margins has been the Delivery business. And a couple of things have happened there. One is we talked about the environment getting better. The competitive environment is getting better. Second for us is our tech teams have delivered very significant algorithmic improvements that have resulted in a cost per transaction for delivery coming down substantially. We talked about cost per transaction last quarter improving 20% on a year-on-year basis. That is a -- those are big dollars that our tech team and our operations team are delivering to the bottom line of the business. And then our Advertising business is scaling, net-net, faster than, let's say, our internal targets, which were already aggressive. So I'd say that's been a positive in terms of margins. And then, I'd say, a negative operationally is the Freight markets, and the shipping markets have gone negative pretty substantially. And that has had a negative effect as it relates to our Uber Freight business in terms of top line growth and margins as well. Fortunately, it's something that we can kind of taken and adjust. And I think long term, this could be a pretty good environment for Uber Freight because during this difficult environments where you see the players who are building truly great product, truly tech, pull ahead, and I think Uber Freight certainly has that opportunity.

Okay. That's very helpful. Maybe if we could peel back the onion a little bit on the multiyear rides growth drivers. Can you just sort of talk to us about how you think about the breaking down the drivers between new users coming to the platform, price -- average price per trip and then frequency? And how can you increase frequency on your users without lowering price?

Yes. So the first thing I would say is that most of our investors in terms of our long-term growth for Mobility are very much focused on what you're talking about. We're much more focused about supply, right? So actually, I think the rate delimiting factor in terms of the growth for Mobility for us over the next 5 years is how many drivers can we add on to the platform? What percentage of those drivers can we hang on to? How does the retention of those drivers look like? And what is the engagement of those drivers look like in terms of the supply hours per driver on our platform, whether it's driving people or delivering things? That is the more important factor. And on driver supply, engagement is higher in terms of suppliers per driver. Retention has been improving because actually driver earnings are really strong, and we are improving our service for drivers. And then the number of drivers we have on the platform globally, Q4 was up 35%, and the U.S. was up 30%. So very, very healthy levels: one, because earnings are really good; two, because we have significantly improved our onboarding processes, much more easy to sign up for Uber, much faster. You can earn very, very quickly. And then the labor environment, even though it's not showing up in unemployment rates, the labor environment feels looser for us. About 70% of drivers are saying that they're coming on to the platform because of some of the inflationary effects that they're feeling they need to make augment their earnings, and we are a very good platform for earnings augmentation. So we're much more focused on supply. Now to answer your question, the -- I'd say the following, which is we expect to see growth in all 3. The way we look at growth is new customers, frequency, price. If I were thinking about the past 2 to 3 years, we have had the balance between price and transaction growth has been more on price than transactions. And I think going forward, it's going to be more on transactions or trips than price. When I break out kind of new customer acquisition for the Mobility business, very, very healthy generally. People think Uber is a verb. But the fact is that in most of our developed markets, less than 30% of adults 18 or over have ever used Uber. So there's a 70% of the population that we have yet to penetrate into. And over a period of time, we believe that we can penetrate into that 70% in terms of new customers. Now we can't just depend on that happening by itself. So we are aggressively going after new customers. And one of the key new customer acquisition tools for us is actually some of the newer products that we're launching. So for example, our hailables business, these are taxies 2-wheelers, 3-wheelers, that part of our portfolio accounts for single-digit percentages in terms of our overall gross bookings but it's 15% of new customer acquisition. So much higher penetration of new customers. And about 1/3 of people who come to us to get a hailable, whether it's a taxi or other hailable, 1/3 of those customers then go on to use other Uber products as well. Our Reserve product is a product that is -- has higher prices than -- you're getting a benefit in terms of knowing that your Uber is going to be there. So consumers are willing to pay higher prices, but Reserve is opening up newer use cases as well. So we think 50% of the Reserve use -- it's early. This is estimate. 50% is you replacing a trip that you would have taken anyway and pay more. Driver makes more. We make more. Everyone's happy. And 50% of use cases is actually a new use case. You might have gone a Black car to the airport, et cetera. You know that higher dependability actually increases the percentage of time that you use Uber as well. So the new products penetrate into new customer bases. And new occasions, our rental car product, for example, that's another new occasion for you to use Uber as well. And then there's pricing. And for us, pricing -- increases in pricing, we want to have more about personalization and occasion-based pricing. Reserve, we talked about. But for example, Uber for Business product -- enterprise product and generally a higher percentage of Uber for Business trips are on premium product, whether it's a comfort product, et cetera, than an X product, that will improve price. So pricing will come up more because of mix than because of, let's say, comparable pricing, unit-to-unit pricing. But all 3 of those are going to add up to healthy growth rates going forward. All that said is it all starts with supply, and the supply position in the company is very, very strong right now.

Okay. Let me ask about some of the innovation around upfront fare. It seems like you've seen some very good early progress around upfront fare driving demand and supply, but better matching dynamics in the marketplace. Maybe just remind us of the latest quantifiable benefits you're seeing from upfront fare? And how should we think about how big that could become over time?

Yes, sure. So I think just to step back in terms of what was the goal of upfront fare. First of all, upfront fare was the #1 feature that drivers were asking for, not necessarily upfront fare, but upfront destination. They want to know where they are going. It makes all the sense in the world. It might be at the end of the day. So you might not want to have a drive to the airport. You might want to stick around to drives that are closer to home. The trades that we were able to build a product that delivered upfront fare and destination to drivers, what we got in exchange is typically being able to price our supply side algorithmically. So previously in many markets, driver pricing was based on time and distance, and time and distance in most routes gets the pricing wrong. So a very easy example is if you land in SFO and you're getting a ride into the city versus getting a ride, let's say, into the suburbs or somewhere where there won't be another ride after the drop off, the ride into the city, if it's equal time and distance, those 2 rides will be priced equally to the driver. The utility to the driver for the city ride is much higher, and therefore, that should go into the price. We should price the other ride at a discount, going out to suburbs, we should price the city ride at a discount with the total net price being the same. So that trade in terms of giving upfront pricing and destination, because we're actually pricing trips accurately, that is the magic that happens as it relates to upfront fares and upfront destination. And all of that is made possible from very, very sophisticated algorithmic pricing. We generally then are able to, because we're pricing rider side pricing and we're giving riders -- sorry, we're pricing driver side pricing more accurately and we're giving drivers upfront destinations, that typically is we're able to improve the throughput of the marketplace with all other characteristics being the same. At the same gross bookings level, at the same margin levels, marketplace throughput is improving. I'd say marketplace throughput has -- trip throughput has probably increased by about 4%, all else being the same. And I think those increases can continue over a period of time. But it has been a very, very significant innovation for the business. And we are now expanding upfront destinations and upfront prices and this decoupling of the pricing in markets outside of the U.S. For example, we just rolled it out into the U.K., and we're quite optimistic about the results that we can see there.

Okay. The other part of the platform that's unique is the multiproduct offering across Rides and Eats and Grocery and Last Mile, et cetera. Maybe just can you give us an update? When we look at your 131 million Rides users and Eats users, what's the latest that you're seeing around overlap of people who are taking on both products? What are you seeing in the spend uplift? And what are the key innovation points to take those higher?

Yes. So generally, about 45% of our gross bookings come from users that use multiple products, and about 25% of our overall gross bookings come from membership. And when you talk about cross-platform or cross-product use, it's really one is the product itself and upselling the products into making you offers at the right time at the right place that drive multiproduct or multiplatform use. You might have noticed actually the Uber app, we relaunched Uber app, the smart app that has built in our Mobility and Delivery product in a very, very elegant way. We are then using machine learning and AI algorithms to get you in the right circumstances the right products at the right price to drive multiproduct usage. And so we expect kind of design and ML to drive that multiproduct usage higher. And users who use multiproducts for us, they stay more. Engagement is higher. Frequency is higher. Just all the goodness happens. On top of that, we have a membership program. And so we talked about now membership being over 12 million members, almost doubling on a year-on-year basis. And so the combination of platform and membership, we think, are going to continue to drive more cross-product usage, higher frequency and ultimately, higher lifetime value for our customers going forward. We're very, very early in the use case here. And remember, in multiproduct and multiplatform, there's no such thing as a free lunch, right? So if I am -- if you are a Mobility user and I'm promoting Grocery to you, that could be taking space away from an advertisement, that could be really high margin, or could be taking space away from you wanting to get home. So how you tune the upsell machinery, both in terms of what the goals are, what are you trying to maximize and making sure that whatever the business is trying to maximize is not getting in the way of the consumer desires or driver desires, that tuning is actually incremental tuning that gets smarter based on very large data sets that we're experimenting against on a global basis. And it's like small improvements that are very, very difficult than for competitors to match that start compounding over a period of time. And I think we've been talking about the power of the platform, I'd say, for the past 2.5, 3 years. That power shows up in a couple of percentage points advantage over competition every year. And I think some of the output that you're seeing now in terms of our business, being able to deliver both top line and bottom line and category position is because of these -- the compounding effect of the platform that keeps adding on top of itself.

Let me ask you one about that tuning point you're sort of managing the different markets. And I guess the question is really how do you sort of balance growth versus profitability in this city-by-city situation on Rides and Eats? Are there points at which you get to a certain market share where sort of the incremental returns are lower and sort of you run the market more for profitability than growth? Or how do the algorithm sort of work city-by-city?

Yes. So generally, the algos are tuning against supply balance in a particular market, demand-supply balance. And then we have a capital allocation framework overall in terms of geography and product as far as how we allocate our capital. And the marketplace balance, kind of the algos that are driving marketplace balance and improve throughput in a marketplace based on everything else being the same, the output of that is better competitive position for us. So we don't really -- I think a lot of investors are really focused on competitive position. We are focused on it as an output every week, every month, every quarter. But the algos aren't tuned to try to maximize CP, competitive position. They're tuned to balance the market at the lowest cost possible -- aggregate cost possible while driving the highest throughput possible. That's what the algos are doing. The CP is the output, and I think that our algos can operate at bigger scale and over larger data sets than anyone else. One of the newer features of our models now has been, typically, you have to train a model on a city by city by city basis. And so the data advantage that you had might be -- in a city if you're, let's say, 70% of the category position of city versus 30% on the #2 player, that's a nice advantage. But now the newer models that we are -- we built train against global data assets. And those models will find similarities in terms of customers and occasions and cities or neighborhoods at particular times that human beings would never find. And so the -- with larger models, these transformer models that you read about, the ChatGPT is kind of the thing that's taken -- captured everyone's imagination, these are -- it's all -- they're our models, and larger models give us a bigger advantage as it relates to our database than where we were before. The advantage used to be local. Now the advantage is global. The more products we throw in the occasion, the more geos we have and the fact that we are multiproduct, that's just more data for algos to train again -- against that creates a bigger competitive advantage over any of the other players. Then as it relates to kind of margins and the trade-off between growth and margins, we have this capital allocation framework. We're generally -- I'm generalizing. But if we have margin to play with, we will typically then overinvest in geographies that have lower margins. Japan, for example, we want to grow there, or a Germany or a Spain or an Italy. And that will kind of improve our TAM over a long period -- improve our long-term growth rate, and the same can be set for certain products. Our hailables product is a lower-margin product than our UberX product. When we see room in the business, and generally, we've seen margin improvement in the business, we'll lean into grocery. We'll lean into direct business. We'll lean into hailables, or we'll lean into taxi, et cetera. So the capital allocation framework changes based on -- it's really based on geo and based on product mix.

Okay. Let me ask one about the U.S. competitive intensity a little bit. Recently, your biggest U.S. rideshare peer announced intention to remove its insurance fee and essentially bring their pricing more in line with Uber's. Anything you can update us on what you're seeing as a result of those changes in competitive intensity or the pricing dynamics in some of these markets?

Nothing to report significant at this point. We've -- I think generally, we have been able to -- we've been fortunate enough, and I think this is the result of a great team that we have as it relates to insurance costs. Insurance costs have been inflationary generally. And if you look at insurance costs, there are 3 components. There's the rate of issues that you deal with. So there's rates. There's a cost per event. And then there's how you run your marketplace. Do you outsource the risk to third parties? Or do you take the risk internally? We have a big captive insurance company. We have been able to do really good work in terms of reducing the rate of incidents. I think because we have a captive insurance company, we have been able to negotiate pretty effectively where it makes sense. We take risk. Where it makes sense to write off risk against a third party, we'll do so. And rates has been a headwind for the whole industry. I think generally, based on what we can tell, it's been a bigger headwind for Lyft than it has been for us. And so any adjustments that they've had to make in their model, on a relative basis, we haven't had to make significant adjustments as it relates to pricing. So I think we feel pretty good about where we stand, and it certainly seems like they've taken the necessary steps to adjust to the realities of the marketplace going forward.

And I think the Uber insurance reset, they come in March. So we're sort of about to sort of come into new potential insurance clauses. Any way we should think about philosophically how you would manage through any significant changes in those terms?

I mean all of those -- while the terms haven't maybe technically rolled over, we know exactly what those terms are going to be, and we dynamically price insurance into the marketplace. And so whatever changes are happening, they're happening kind of on a live basis. And we will price insurance differently based on location. We'll price insurance -- we're actually now working on improving our pricing to be more insurance aware. So there may be certain trips in terms of trip length, trip place that may have a higher projected insurance costs versus other trips. And so building our pricing to be insurance aware is something that we think has real potential in terms of optimizing insurance costs going forward.

Okay. Talking about the cloud, cloud migration. You recently announced your plans to move your IT from our own data centers to Google -- or Alphabet and Oracle. Pretty big switch. Previously -- well, 95% of the system right now runs through your own data centers. So I guess 2 questions. First, any way you could talk to us about sizing the OpEx or CapEx savings from the change? And then as you sort of move into these clouds, are there new types of tools or analytics or AI tools that you're gaining that you previously didn't have on-prem?

Yes. So I think generally, if we look at the cloud and we look at it over the long term, we believe that moving on to the cloud is going to drive significant savings in terms of overall free cash flow, okay? The geography of that free cash flow is going to change in that cloud costs tend to hit operating costs, but we don't have to take on capital costs. So operating costs may come up a bit. Capital costs should go down. The difference between EBITDA and free cash flow is going to shrink. And overall, free cash flow over the period of those contracts is going to improve. The geography, the P&L may change. We -- that really shouldn't be significantly noticeable to anyone other than our free cash flow generation as a percentage of EBITDA should improve over time. We have built a pretty sophisticated provisioning layer in terms of provisioning compute and storage on top of the cloud layer so that we, essentially, have put ourselves in a position to not be dependent on any cloud provider going forward. It's a little bit like our strategy in insurance and taking risk or not taking risk depending on what the opportunity is. So this layer that we built will be able to dynamically kind of move volume between data centers. It really helps with the transition to cloud, but also puts us in a pretty strong negotiating position going forward on cloud provisioning going forward both on the data side, the storage side and the compute side. So we will look to use certain tools that our partners provide. And Google, for example, we use lots of mapping tools from Google. They have some pretty sophisticated data technology with Spanner that gets you like all of the -- all the benefits of a relational database without the cost at higher reliability, et cetera. So there are value-added tools that we will use with these providers. And we do think that overall, it's going to allow us to focus our engineers on value-add work versus recreating what has already been built by a lot of these cloud providers.

Okay. One of the areas of value-add work you've done a good job has been the advertising business. You have a $500 million annual run rate on the ad business. And that's with only, I think, 25% of the merchants actually participating in the auction market. So I guess 2-part question really. Where have you made the most progress to sort of get to that point? And if we want to make this into a multibillion-dollar annual business, what's the innovation you still need to get more dollars?

Yes, which we certainly do. So first of all, those 25% of merchants are getting a great deal. The return on ad sales for those merchants on average is about 7 to 9x spend. So it's a very, very healthy marketplace. So frankly, we want to keep it as a healthy marketplace, so we continue increasing merchant penetration. The vast majority of our advertising dollars now come from auctions, right, which is merchants essentially paying to get higher placement in an auction and getting more business, which gets to that 7 to 9x. What we're seeing, that business is going to continue to grow. Some of the newer businesses that we see potential with is Mobility, for example, Journey Ads. Our Mobility customer is a very high demographic customer. We know a lot about them in terms of -- for potential personalization. So we're seeing our Journey Ads, kind of our Mobility ads business, grow very, very healthy rates at very healthy CPMs. Our -- generally, our tool set for enterprise customers is not as mature as it needs to be. Some enterprise customers, they may want to focus on new customers or customers that give them highest incrementality factors. We think we can improve our tool set and get more engagement from our enterprise customers. And then the Grocery business generally, which is one of our fastest-growing segments, has very high potential in terms of advertising penetration, and we are quite low as it relates to, again, the maturity of those tool sets and the relationships that we built with CPG companies. So I think there's a ton of improvement that we can see on the Grocery side on the advertising business as well. So lots of potential there.

Okay. We're going short. We have so many topics to cover. I'm going to squeeze one more in [ at the buzzer ]. Every year, we ask about regulation. I hate to end on it, but I know there's a couple of things going on with regulation. The first thing with DCWP in New York food delivery regulation, we're sort of waiting to hear any day, I think. The second one being Prop 22 and sort of potential jury decision around Prop 22. I guess the question is how should we think about next steps for each of those when we do hear the appellate process and sort of your response to when we do get headlines [ out of each ]?

Yes, sure. In 30 seconds or less, I'll start with Prop 22, which is whatever the decision for Prop 22 is it's going to be appealed. We think -- we believe we have a strong decision. We're hoping that the court kind of retains the will of the people. And also, we're hoping that drivers and couriers win. The vast majority of drivers and couriers want to be independent contractors. So we're hoping for the best knowing that any decision, whether it's a good decision for us or a bad decision for us, is going to be appealed. So I wouldn't expect anything significant to happen in California one way or the other, other than the decision. On the ground, we'll see what the decision is, and then we'll react accordingly. As it relates to New York, I do think that New York is taking its time to get the decisions right as it relates to delivery. New York for us is -- New York delivery is about 2% of our overall volume on a global basis. That's all of Uber, to be clear. And it's a much, much, much lower percentage of EBITDA, right? And whatever the outcome is, and we're hoping for the best outcome, we can make adjustments to our business to essentially, we think, be certainly net neutral from an EBITDA basis one way or the other.

All right. Dara, thank you very much as always.

Thank you. Really appreciate it.