Uber has published its latest results, for Q4 2019. Growth in users and revenue is significant and continuing, adding 8 million users to reach a total of 111 million. However, net losses continued to grow, reaching $1.1 billion for the quarter, a decrease of 5.7% quarter-over-quarter (q/q) but an increase of 23.6% year-over-year (y/y).
Despite this context, Uber’s management maintains that the company will move to a positive adjusted EBITDA, the company’s preferred reporting measure, by the end of this year. That measure is down from a negative $817 million in Q4 2018 to a loss of $615 million in Q4 2019. Significantly, user growth has slowed compared to the prior year, even as costs appreciate. Marketing costs, which should directly help to drive user growth, accounted for 24.8% of all costs in Q4, and have risen by 27.9% y/y to $1.25 billion.
Overall, annual net losses amounted to $8.5 billion. That sum included non-controlling interests that Uber had gained in recent years, as well as stock-based compensation that ballooned in Q2 to $4.6 billion due to the successful completion of the company’s IPO in May.
Overall, Uber’s global Eats business accounted for 18% of GAAP revenue in Q4 2019, up from 15% a year earlier. The ride business has fallen from 81% to 75%, while other bets rose from 4.6% to 6.8% of revenue. This was mainly due to the freight business, which grew from $125 million to $219 million y/y. “New mobility” (bike and scooter sharing) and other bets including mass transit, a gig/shift work matcher called UberWorks and other startups, accounted for the remaining 1.5% of revenue in Q4 2019.
The Eats business has continued to grow rapidly, with 68% y/y growth in GAAP revenue to $734 million, and 152% y/y growth in adjusted revenues, which exclude excess driver incentives, to $415 million. Excess driver incentives, in which payments to drivers outstrip the revenues they generate and are recorded as a cost of revenue, had risen to $319 million in Q4 2019, compared to $272 million in Q4 2018 and to $253 million in Q3 2019. These excess incentive payments are indicative of the high levels of driver incentives and promotional offers being made available to consumers, which are cutting heavily into the company’s revenue in a highly competitive, though rapidly consolidating, food delivery market.
The disposal of the Uber Eats India business to local food delivery competitor Zomato was announced in January 2020, and on the evidence presented in the Q4 results, looks to have been a wise move. The unit somehow posted net negative revenue of $4 million in Q4, likely as a result of promotions and driver incentives that did not fall under the excess incentives definition. While revenue amounted to $24 million for the year, operating loss in 2019 came to $288 million. That is a similar level to the $294 million loss posted in 2019 by Zomato, whose base of 70 million monthly users dwarfs the 2 million—and declining—monthly active users reported by Uber.
Uber also withdrew from the South Korean market in October last year, which it attributed to high levels of competition. In December, local Korean operator Baedal Minjok likewise exited the market through a sale—backed by South African tech investor Naspers—to Berlin-based Delivery Hero, which now operates delivery services under a range of brands in over 40 countries. This reflects a broad international restructuring of food delivery apps, well-illustrated by the merger of the UK’s Just Eat and Dutch company Takeaway.com, announced in January 2020.
After concluding the acquisition of Dubai-based transportation network company Careem on January 2, Uber is now listed as present in 70 countries and 830 cities across the world. That should begin to swing results away from Uber’s reliance on the US and Canada as key revenue sources. The two countries’ share of Uber’s total revenue, as measured by geographical market, peaked at 63% in Q3 2019, then dialed back to 62% in Q4.
Uber is ultimately looking to position its app after the “super-apps” that have been an effective strategy for Tencent and Meituan in China, Gojeck in Indonesia, Paytm in India, and to some extent the recently acquired Careem in the Middle East. After integrating the Eats app into the main Uber app in the middle of 2019, Uber continues to build on the range of services able to leverage their local logistics faculties, made accessible through the main app. To that end, Uber last October announced the acquisition of a majority stake in grocery service entity Cornershop, active in Chile, Mexico, Peru, and Toronto in Canada. However, in markets with developed online grocery retail services, the likes of Cornershop can be expected to face resistance from companies with well-developed brand equity that have firmly embedded with the consumer in the grocery sector.
A key factor for the effectiveness of the super app strategy will be building the user base and then driving increased use of a broadening range of services that integrate well with the location-based, online-to-offline nature of the core services. With an active platform base of 111 million monthly active platform consumers, Uber added 8 million new users in Q4 2019 to achieve total growth of 20 million for the year. While an improvement on the rest of the year, that growth in the October to December period was down by 1 million compared to Q4 2018, and down by 3 million for the year.
Uber CEO Dara Khosrowshahi appears sensitive to investor concerns that have clarified since the IPO launched into a more price-sensitive market, stating, “We recognize that the era of growth at all costs is over.” Instead, Uber will look to turn performance toward profitability, with a positive, if adjusted, EBITDA targeted by the end of 2019 rather than by the following year. While that will undoubtedly be welcome news to some, it is difficult to square with the continuing increases in costs seen over the course of 2019.
That strategic direction may entail further disposals, which as in India have been used to consolidate hyper-competitive markets while also taking a minority stake in the market leader; see table below for details. However, with a range of companies vying to compete in similar markets—often backed by Naspers, Tencent, key Uber investor Softbank, and Alibaba—that strategy may see some turbulence ahead. Softbank may be behind some of the change in Uber’s direction with reports that it sought to promote merger talks last year between Uber and its investee companies—the food delivery firm Doordash and the ridesharing entity Ola. However, those talks did not lead anywhere, and that picture of potential accord among investees is contradicted by the entry of Ola into the London rideshare market, a significant location for Uber.
Such a turn in developments may be indicative of the longer-term outlook that remains—one where it is difficult for a market leader with a price-sensitive product to retain dominance while raising prices to profitable levels. There is little to lock in the network of drivers and riders to a specific service. Moreover, with Google Maps, along with ridesharing aggregators such as Bellhop or Ride Guru providing price comparisons across providers, app loyalty is likely to be low.
If that is the case, then the initial pursuit of “growth at all costs” will prove to be exactly the wrong strategy for long-term sustainability. While a super-app strategy may help to drive loyalty, or at least leverage a combination of user trust and user inertia effectively to sell a broader range of services, it may not prove effective in markets with more established and fragmented app and retail ecosystems. While the apparent broader turn in global investor attitudes will rationalize markets that should have inculcated online-to-offline behaviors through this period of investor subsidy-driven expansion, a nuanced and localized approach is necessary.