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

Thanks, everyone, for taking their seats. It's my pleasure to introduce Dara Khosrowshahi, CEO of Uber. Dara, thanks so much for being part of the conference this year.

Happy to be there. Thank you for having me.

Okay. So let's dive in. There's always a ton of space to cover. The last year and even the last couple of years, the platform has been on quite a journey of evolving and changing and the product continues to iterate. Talk a little bit about the path the company has been on over the last couple of years and how you're sort of positioning the company for the longer term?

Absolutely. So I think the post COVID -- COVID forced us as a company to really take a hard look at what we consider core to the business versus non-core activities. And obviously, we were pretty aggressive in terms of moving out activities that were non-core, partnering with them and deciding that it shouldn't necessarily be a part of Uber. At the same time, the significant growth that we saw on the delivery side of the business, caused us to some extent to re-architect the business as a platform, whereas previously Mobility and Delivery for a kind of vertical stand-alones that operated largely independently with some technical commonalities, we really decided to bring the platforms, the Mobility and Delivery platforms together is usually when you're growing your business from a really small size, you have to kind of grow it on a stand-alone basis. Otherwise, it doesn't get the kind of focus that it needs to, but the incredible growth that we saw in Delivery allowed us to bring the platforms together. Now our strategy very much is, we believe that we want to be building best-in-class verticals. So if our Mobility business was a stand-alone Mobility business, we'd expect it to be the absolute best Mobility business globally. Same with Delivery, and I think that we've accomplished that all of our feature sets, our tech, our service levels, our brand, we believe should be best-of-breed. And then having it all together on a single platform will accrue benefits that will allow us to either and sometimes in both ways, gain share on our competitors and have a superior margin profile than our competitors. And I think the company has been quite focused on kind of driving that strategy forward. And you're seeing the results in terms of the super strong top line growth that we've had, our margin improvement, we've talked about a 7% incremental EBITDA margin as we grow the business. We deliver, for example, 12% last quarter, where we have guided to, let's say, midpoint of 9% this coming quarter. And generally, we've been in a position of promising something and over delivering them. So I think the company is in a good spot in that, the surprises are less surprising. We have gained category position in 8 out of our 10 top markets on the Mobility side. We gained category position in 9 out of our 10 top markets on Delivery with growth that for our core business, constant currency growth of 21%, substantial incremental EBITDA margins. And you're seeing that now translate to the bottom, bottom line, right? We were GAAP profitable on an operating basis for the first time last quarter. We think that will continue, hopefully, add infinitum. And we had $1.1 billion in free cash flow as well, which obviously is a much, much better spot than we were, let's say, 3, 4 years ago. So hopefully, more to come.

Understood. And there's a lot in there that I want to unpack and go a little bit deeper and do. Maybe starting with the Mobility business. You talked about the market share dynamics, you talked about strength in the business on your last earnings call in July. Always super interesting as we get into August and September, there's elements of travel season at the end of the year, return to office, it seems to be picking up some momentum in September. How should we be thinking about the Demand trends broadly exiting the summer and moving into the later part of the year for the Mobility business?

Yes, absolutely. So September post Labor Day is like the big demand spike as people go back to school, go back to work, et cetera. And the first order of business for us is to make sure that we're prepared from the supply side. And you see the number of drivers now on the platform growing well over 30%. And the average driver who's on the platform is earning at very healthy levels. In the U.S., it's about $35 per utilized hour, in Q2, up from Q1. So earnings are healthy. Drivers are staying on the platform longer because typically, we are the earning platform of choice. So as we enter into peak season, September, October, November, we're in a very, very strong position as it relates to our supply position. And to your point, the categories in terms of demand growth are very consistent with what you'd expect, which is travel is booming -- you hear that from travel providers. For us, our reserve product is kind of booming plus, so to speak, in terms of it's a use case that's specifically built for travel although we want it to be used for more than just travel, right? If you're going out to dinner and you don't want to be in a hurry, et cetera. So travel is a very strong use case. And we are seeing weekday and commute particular strengths as well. As I think more companies, including us, are telling their teams, "Hey, let's get back to the office, let's have those kinds of face-to-face encounters", but we're quite optimistic in terms of the demand trends. The consumer in the U.S., the consumer around the world remains strong. And when you look at personal consumption expenditures, services versus goods, service levels or expenditures on services are still not where they were pre-COVID. So we think that generally, the pent-up demand for services continues to be pent up. And as long as we're in a strong supply position, we see very, very strong growth coming.

Maybe just 1 follow-up on what you said there because we're obviously in a very different position for the industry on supply today from when we had this conversation a year ago. How do you think about supply and competitive dynamics feeding off each other and elements of needing to invest in supply or scale feeding into growth of supply irrespective of needing to make investments?

Yes. So we were, I think, early in terms of most of our competitors and having the hypothesis post pandemic that is the most important area for us to invest in was supply. And early on, we invested dollars, right? But then really, we underwent a very significant focus in building out the best product for drivers, for couriers. And that encompassed a couple of factors. One is unified onboarding so that we could onboard anyone who wanted to work and have and work independently on to the platform, and onboard to them, and they'll be able to deliver, they'd be able to drive, they're able to shop, et cetera. And generally, the onboarding for Delivery is faster than the onboarding for Mobility. So that has given us a superior structural onboarding profile, certainly versus our mobility competitors. At the same time, we have been making certain that the onboarding experience is smoother, right? So using AI and ML algorithms to transcribe your license or your insurance documents. So if there's something wrong, we can tell you right away, there's something wrong, then, let's say, an agent reviewing the document and getting back to you 4 hours that there's something wrong. The picture isn't right, it's blurry, et cetera. So all of that onboarding is now moving much faster. It's powered by AI. It's lower cost and the experience is better. And at the same time now, increasingly, we are pulling documents digitally so that the faster we can get you from that moment when you say you want to earn to activating you, the faster that time frame is the higher our conversion rate as it relates to bring someone on board. So we think all of those investments now put us in a position where we no longer have to invest, let's say, significant dollars in terms of supply positioning, just natural supply continues to grow. About 70% of our earners are saying that inflation is playing a part in their decision to come on to the ecosystem. Earnings are very healthy. Earnings are $35 per utilized hour in the U.S. And so I think, again, the supply decision is very, very strong, both in terms of absolute numbers, but also versus our competitors.

Okay. If you look back over the last 12 months, you've talked a lot about product initiatives you referenced earlier reserve, hailables, shared rides. I think investors always want to be interested in how new product initiatives can unlock elements of market opportunity and how that feeds into the longer-term growth algorithm for the business. How should we be thinking about those product initiatives against your confidence interval in long-term growth?

Are you talking Mobility or Delivery or all around?

Mobility first.

So generally with Mobility, the growth algorithm that we talked about is that about 50% of our growth is going to come from, let's say, our core UberX business, about 35% of growth is going to come from new bets and new products that we're launching. And about 15% is going to come from countries that we had not launched in previously, because of the business model, but essentially, we've changed the business model to be able to launch into those countries. South Korea and Japan as it relates to taxi model, Spain or Germany with a fleet model, et cetera. So these are all countries with huge GDPs and we're running the same Uber playbook with nuance positioning in terms of changing the model so that we can launch the proper way, the right way into those markets. As far as the new products go, if I were to categorize a different products, one is we're going after enterprise business with U4B and that includes traditional businesses. It includes health vertical, for example, providing transportation to and from doctors, medical offices. It includes verticals like working with Tesla, where if your Tesla breaks down and they don't have another Tesla available, they'll give you Uber credits for rides or transit, for example. So enterprise is a large segment that we bet on. Hailables and taxis for the platform is another large segment. There's over 5 million taxis in the world, and we think we should wire of every single one of them. And San Francisco or New York now if you order an UberX, we've now coalesce taxi product without UberX. So you might get a taxi, we'll let you know. And most people are completely fine with it because the quality of the taxi product has improved in New York and has improved in San Francisco. So that just totally increases, again, our supply positioning in a way that many of our competitors can't match. And taxi also in some newer markets and in Japan, South Korea, Turkey, Argentina, gives us access to whole new markets and whole new audiences versus what was available to the product previously. We also looked at kind of 2-wheelers, 3-wheelers that are growing very quickly in India and South America. And then obviously, the reserve product, which is a whole new use case that we're launching and then low-cost products, UberX Share and high-capacity vehicles. So there's a whole kind of portfolio of new bets that we're making. The new bet portfolio is now about $8 billion in gross bookings. It has accounted -- it's about 12% of our Mobility gross bookings, but it's about 30% of our new customer acquisition. So not only are these products a source of kind of new business but they punch above their weight in terms of new customers that -- and those new customers we can bring on to the platform, and once they get introduced to the Uber platform, we get them to take an UberX, we can move them over to Eats. We can move them up over to grocery, sign them up for membership as well. So it's actually -- it's another entry point into the platform, which we think is a powerful competitive differentiator.

Okay. Maybe pivoting to the Delivery business. You talked about the broader strength in the consumer. But is there anything different you're seeing in terms of consumer demand on the Delivery side of the business versus the Mobility side of the business or anything to call out there just from a demand standpoint?

I think generally, demand is actually for delivery proven to be quite resilient, right? I think of any category that you would categorize as benefiting from the pandemic, a lot of them took a hit, let's say, post comp, but Delivery has continued to be quite strong. And for us, actually, Q2 Delivery gross bookings growth was 14%, which was an acceleration over Q1, which was 12%, and we expect Delivery growth in the back end to be at least 14-plus percent in the back half of the year. So we see a good amount of strength in terms of delivery. The growth in our Delivery business has been mostly frequency, it as we improve selection quality, so selection is up over 10% on a year-on-year basis as we improve average delivery times, reduce the amount of things that go wrong of defects in the system as well and then increase our penetration in terms of membership we're seeing frequency improve, both on Mobility, but especially on Delivery. So Delivery frequency was up 8% year-on-year, which is quite healthy. And so the delivery growth formula this year has been more on frequency and price, menu pricing increasing. We think going forward, menu, pricing and inflation is coming down. And we think we will see more growth coming from audience and frequency on the delivery side. But the combination of core delivery growing at healthy rates and then our new verticals product, grocery now $5-plus billion in run rate actually with accelerating growth, we think we've got a growth profile that can be quite healthy for the next 3 to 5 years for Delivery as well.

I do want to get to new verticals in a second. But before that, I think one of the more interesting announcements in the last couple of months was the partnership with Domino's. I don't think I'm overstating when I'm saying that took the investment community a bit by surprise, because of some of the statements that Domino's have made in the past about delivery. So give us a little bit of color on how we should be thinking about the rollout of that partnership? What do you think it means for the business for the long term?

Yes, absolutely. So we're thrilled to partner with the folks at Domino's. They're incredible partners, they're incredibly good at what they do. And they're kind of the last large merchant out there who had not worked with aggregators. So I think that their decision to launch with us reflects generally the value of aggregation and the fact that we are bringing incremental audience to our restaurant partners, to our grocery partners as well. And I think the Domino's folks saw that and our global positioning, right? I mean, it's no secret that we're the #2 player in the U.S. We're a strong #2 player in the U.S., but we can bring -- because of our global positioning, we can bring audience in markets where Domino's is not, let's say, the #1 seller, and I think that absolutely played a part in the decision. So we expect to now operate in Domino's in every market that we're both active in. We expect to see a launch in probably Q4 this year starting in a few cities. And by the end of the year, we hope to have every Domino's store on our platform. And then next year, you see significant growth. Domino's talked about anticipating $1 billion plus of gross bookings on our platform. So we will absolutely work to make sure that, that prediction comes true.

Okay. You talked a little about new verticals, and it's been interesting to watch from the outside because you've had organic, inorganic and partnership approaches to growing these new verticals. Talk about what you've built in the new vertical categories and how you think they feed back into the broader delivery strategy and the broader platform strategy?

Yes, absolutely. So we're very excited in terms of new verticals, and as far as our development and the potential there. We got into the business through an acquisition of Cornershop. And that acquisition provided us with a great positioning in terms of Latin America, which is a very, very attractive marketplace, and more importantly, a hugely talented entrepreneurial team who has largely stayed with the company since. What we saw was that in order to drive maximum cross-sell between Mobility, going to Eats, going to new verticals, it makes sense for us to build out a robust, native grocery experience in Uber Eats, that moving people from Eats to, let's say, Cornershop created too much friction in the experience and that people often even in the same session, if you order from a restaurant, get dessert and the favorite ice cream place, that's just 2 blocks away. Even in the same session, people were open to shopping across food and with grocery as well. And as you know, a lot of grocery providers, one of the fastest parts of their business is hot food. So it made sense for us to build out the grocery capabilities natively in Eats. Our team has been doing so at a rapid pace. By the end of this year, we believe we will have a fully mature native experience in Eats for new verticals that will give us the opportunity to consolidate our efforts 1 platform versus 2 platforms. And what we're seeing is that the experience of eaters who are using -- who are now ordering grocery on the platform is getting better. So retention rates are up on a year-on-year basis. Basket sizes are up nicely. About 13% of our eaters have ordered grocery. That's about up about 300 basis points on a year-on-year basis. So all of the experience metrics are improving in new verticals and what we're seeing consistently and it's not just unique to, let's say, Eats to grocery. A user who buys more than 1 thing on our platform, whether it's someone who has been using UberX, who then reserves or someone who's been using Uber Mobility who then goes to order on Eats or a person who is on Eats who orders grocery, the more stuff you order on Uber, the higher your spend on our platform, the better your retention, the higher your frequency. You add to this our membership program, and we really now have a formula for increasing activity on the platform, continuing to drive frequency on the platform in a way that other competitors who are monoline just can't match.

Sticking with that theme, just bringing it back to competition. And how do you see the array of investments you've made on the delivery platform feeding your competitive position and moat around the business for Delivery, but also bring it back to how you think about it more broadly as a platform because in many ways, when I'm in New York City, I'm taking rides, I'm ordering food, Uber One subscriber, it all feeds into itself in a lot of ways. So how we should think about competitive positioning, delivery stand-alone versus delivery within the broader platform you're trying to build?

Yes. I mean, I think the -- first of all, we want to build as I said previously, a delivery platform that stand-alone is best-of-breed, right, which means we got to have the best selection out there. We've got to have the lowest defect rates. The customer experience consistently has to be best-of-breed. And while we're not as good as I think we can be, we are generally on an overall experience in delivery, best-of-breed on a global basis, and we continue to get better there. And I do think that, yes, you can look at a delivery on a stand-alone basis, but what really differentiates us as a company is the platform. And if you look at Delivery, now we -- Delivery gets twice as many new customers from our Mobility business as we do against all of our paid channels out there, and the cost of this twice as many new customers, there's about 1/4 of what it will cost to bring in a 1/4 of what it does cost to bring in customers from pay channels. That is a huge structural advantage that we have over the stand-alone delivery players. And in a particular, the -- if you look at our cohorts, et cetera, the new customer cohort any single year as a percentage of the overall delivery business, it's actually relatively low, because customers come in, they stick around. Cohorts that we acquired 6, 7 years ago are significant contributors and often bigger contributors than, let's say, our new customer cohort. But when you have this structural advantage, twice as many customers coming in from pay channels, core of the cost, I mean all the investors here, you understand the power of compounding. In 1 year, you don't really see it, but it's been about now 3 years where this advantage has compounded on top of itself. And it's only going to continue. The machinery that we're building in terms of upselling either the next best product or moving you over from Mobility, Delivery or Delivery to Mobility, whereas previously it was let's say, people in a room deciding what percentage of audience should go to X, Y and how much we value 1 activity versus another activity. Increasingly, all of this has being driven by AI, right? So we essentially give some guidance to algos and then these algos just go out and optimize at the lowest cost, how can I move a Mobility person to a Delivery audience? What's the next kind of pixel that actually show this person? So I think the machinery that we have in terms of cross-sell is only going to improve. And then with the membership program that we got in place, which is about 27% of our gross bookings, it's higher than that with our Delivery business. It's over 50% of our volume in new verticals. We think these structural advantages are only going to accrue upon themselves. So we're quite confident. I mean, again, you see the results, which is gaining category position, 8 out of 10 markets in Mobility, 9 out of 10 markets in Delivery, while driving higher incremental margins than basically the whole industry, I think you're seeing the strategy now coming to life, and we don't see anything changing that at this point.

Just 1 more follow-up before we go quickly through some of the other topics, bringing it all together, Uber One, the subscription that you've introduced. How should we be thinking about the inertia around Uber One? What did afford you in terms of competitive positioning longer term? And how do think about flexibility around Uber One and how it might be used to go into new verticals, new areas and expand the platform approach?

We don't necessarily think about Uber One, let's say, from a competitive positioning other than we want to price it at the same price at our competitors with many more benefits, right? So we have essentially better content at the same price, right, and better content at the same price over a long period of time tend to win. What we're much focused on in terms of Uber One are what is the cohort behavior of a member versus a non-member, and how can we affect that behavior. And generally, we see members ordering 4x more volume than non-members. So it's a very significant step-up in terms of volumes, and member retention is also significantly higher as well. And for us, membership is also a vehicle to make our products more affordable in a world where people are worried about inflation and pricing, et cetera. We essentially are able to translate the higher engagement and the higher retention into the platform on lower prices if you're using our mobility products, cash back or no delivery fees along with other discounts on the delivery side of the coin. From a short-term standpoint, we take a profitability hit when we move someone over to membership because of the lower prices. But from a long-term standpoint, we think on a LTV basis, membership will pay off and then more. We are still relatively early in terms of membership in all of the various optimizations that we believe we can bring forward. So moving monthly members to annual members that increases retention, for example, making sure that the messaging is very consistent in consumer understanding of what the benefits are when you're a non-member once you flip over to a member as well. And then also, importantly, bringing non-financial, let's say, benefits to members, upgrading you from X to a comfort or securing higher discounts for merchants for members. We're still pretty early on that path. So we think as a product, membership can improve significantly over the next 24 months is our engineers kind of build out the vision that our product folks have.

Okay. Advertising, obviously been a nice tailwind for the business. Give us a quick update on where the advertising efforts sit today? How your thinking continues to evolve about what advertising might do for the platform long term?

Yes. The potential is enormous. Our Advertising business now is at a $650 million plus run rate, very high margin, as you would expect, and we are on track to exceed the $1 billion target that we have for 2024. The majority of our advertising revenue right now is SMBs, that are essentially bidding for audience. They have a certain budget every week, and they -- and so we're penetrating a higher and higher percentage of SMBs that use the advertising product, the return on ad spend of our advertising product is usually higher than 7x. So it's in the interest of the SMB to sign up for advertising product because the return is great. There are newer areas of growth in terms of advertising for us, which is building out deeper functionality for enterprise customers. Enterprise customer may want to target certain customer segments, certain times of day, certain geos, et cetera, so building out a more sophisticated tool sets for enterprise is 1 area that we're focused on. Building out products on new verticals for CPG advertisers, which we are relatively immature and young in. We think that you can get to the mid-single digits in terms of advertising as a percentage of gross bookings for grocery product, and we're well below that at this point. So we think there's a significant amount of growth on grocery and CPG advertisers. And then, of course, journey ads, which are ads that show up for our mobility customers and our delivery customers for Apple Plus and other top brands as well. So there's a -- the business is scaling. It's growing at high rates, but there are very significant chunks of advertising revenue that we haven't penetrated into. The last area that we're pretty excited about is also car tops and tablets where we get the revenue share with our drivers. So the focus there is actually more on building a product that can increase driver earnings in the markets in which they operate.

Okay. The analyst, the Investor Day you had 1.5 years ago, you introduced talking about incremental margins, you referenced them earlier in one of your answers. You've pretty consistently outperformed on margins since that Investor Day. Talk about some of the key learnings around incremental margins and how investors should be thinking about the balance between margins and growth you're trying to capture in the business in the years ahead?

Yes, absolutely. So we've -- we had a goal for 7% incremental margins, EBITDA margins. So if you grow gross bookings a $100, [ through ] $7 of incremental EBITDA, we have consistently overperformed there. And generally, as a company, you want to put out targets that you want to overperform it against those targets. I think as a company now, with our Mobility business, we're by far the #1 player there, and the strategy of building out a higher-margin portfolio of products, a reserve, enterprise product, comfort, black product and then using those funds to fund lower-cost products, and/or taxi, et cetera, that are lower margin gives us the benefit of having essentially very strong top line growth for our Mobility segment, well over 20% trip growth and, at the same time, having margins that are quite attractive. And then when you move to the delivery product, really what we're benefiting from is the advertising business, that's very high margin. We are still able to algorithmically to drive cost per transaction down, as we get higher liquidity in marketplaces, more stores, more eaters, et cetera. Cost per transaction has come down pretty significantly in the U.S. and continues to come down internationally as well. And then the industry generally in a world where capital is there, the industry has pulled back on some of the speculative marketing investments, promo incentives, that made sense for a top line but didn't make sense economically. As the largest player out there with real scale, we -- the industry pulling back, we've been able to pull back as well without suffering at all on the top line. And then you add to that, I think, the very healthy discipline that we've had in terms of overheads. And I think the industry has had in terms of overheads, we think when I sit here, this is the best I have felt in terms of both the top line prospects and the bottom line prospects and those bottom line translate to the bottom bottom line, real profit, and our competitive position out there in the marketplace. Like this is -- there's never been a better time for Uber at this point.

Okay. If I can get one more in before we run out of time. The other big topic I always get asked about is capital allocation. We obviously have a balance sheet, a lot of cash on it. You've got equity stakes in some businesses. You're increasingly generating free cash flow, how should investors be thinking about your capital allocation priorities and how they might evolve in the years ahead?

Well, I think what's becoming clear, we had over $1 billion of free cash flow just this last quarter for the business. Is that -- this is a business that's going to throw off substantial sums of cash over the foreseeable future. Our capital allocation as a company, becomes increasingly important over a period of time, especially when you're throwing off this cash. And we have the typical priorities. We'll look at acquisitions, we'll look at buybacks, et cetera. Generally, I would say that the cash flow profile of the company is going to improve, and we don't see the -- we're investing at very strong levels, so that we think we can have very healthy top line. We talked about the incremental margins that the business can throw off. So I do think that we're now entering the phase where we're increasingly thinking about returning capital to shareholders either through dividends or buybacks, more likely with buybacks. We do want to get the investor grade in terms of our debt profile. I think we're on a good path there. But I do think over the next couple of years, I think shareholders should expect some kind of investor return in the form of buybacks.

Okay. Dara, I really appreciate your time. Please join me in thanking Uber and Dara for being part of the conference this year.

Thank you very much.