On an investor earnings call this week Uber has reported bumper Q2 results coming in at the upper end of previous guidance to investors. It was the same story with growing revenue surpassed by even faster growing profits with workers being squeezed harder than ever. The recent dramatic improvement is attributable to Uber's roll out of dynamic pricing. This is a controversial and predatory technology which FTC perhaps more aptly calls 'surveillance pricing'. Between the lines of the investor PR pitch though, there are some interesting insights to glean.
Driver growth and pay decline
Trips and bookings gross revenue were up 21% on last year while the margin remains phenomenally high at 29.8% for mobility. Does that mean that drivers keep 70.2% of fares and that the actual take rate is 29.8%? Not quite. Uber disclosed that driver pay was $17.9 billion for the quarter out of total bookings of $39.9 billion which suggests that drivers are taking home only 45% of the value of total bookings. Uber says driver payroll increased 19% year on year but trips have grown by 21% over the same period and there are many more drivers. So, in reality, driver income per trip is down 2% and income per driver has likely decreased significantly more. Given the strategic importance of driver pay to Uber's growth and profitability, the company is shockingly opaque to investors about these costs.
Uber continues to work hard to recruit as many drivers as possible to keep worker bargaining power, pay and ETAs down. The company reported that there were 7.4 million drivers and couriers on the platform delivering 1 million trips per hour. Compared to 6.8 million at the end of 2023, that is a 9% expansion of the workforce in just six months which must surely make Uber the single largest employer in the world today.
Recession proof Uber?
In the wake of turbulence on global financial markets, Uber CEO Dara Khosrowshahi wanted to reassure investors that Uber was cushioned from the downside yet was primed to take an upside advantage from everyone else's misfortune. Uber customers "tend to be higher income" with enough resilience to weather an economic storm but any deterioration in the overall job market would lead to many more drivers looking for work thus allowing Uber to lower pay rates and reduce prices.
But when there's a weaker job market, typically, our driver supply on the mobility side significantly improves.......what we see is improvement in driver supply. As driver supply improves, surge comes down, ETAs improve, the service itself becomes more compelling...... So we think that we can thrive in upturns and downturns.
While our consumers tend to be higher income, we're not seeing any softness or trading down across any income cohort. Where the current macroeconomic fears materialize, we're confident that Uber can perform well because of the countercyclical nature of our platform. On the mobility side, more driver supply brings down prices for riders and improves reliability.
Massachusetts employment legal challenge
Last month Uber settled employment litigation brought by the state of Massachusetts against them and Lyft. It was a tawdry and profoundly anti-democratic deal, with Uber threatening to fund a referendum/ballot campaign to overturn state law if they did not get their way just as they have so successfully done previously in California. So, in the end, the Massachusetts Attorney General backed down and in return Uber offered some additional driver benefit trinkets and dropped the threat of a ballot initiative. As Uber CFO Prashanth Mahendra-Rajah brazenly admitted on the call:
......in Massachusetts, we reached a deal with the attorney general that settled on a set of standards for earners. That includes how we measure or how we define time on the platform; certain healthcare, family, and medical leave benefits as well. As a consequence for that, the attorney general dropped their action against Uber, and we're no longer in pursuit of a ballot issue in Massachusetts, like we had very successfully done in California.
The investors on the call were worried that the deal in Massachusetts might come out of their end of the profits but Mahendra-Rajah reassured them that Uber was capable of 'grinding' those costs back out of their workforce one way or another:
So while this will be built into the cost structure that we push to the market, we continue to believe that there's plenty of runway ahead for us to continue to drive down our operating costs through the support costs and payments and a variety of other measures that we continue to sort of grind out those basis points that will continue to make Uber an affordable option for all.
Lacklustre US penetration compared to overwhelming UK market dominance
Mahendra-Rajah returned to a now recurrent theme about the seemingly unlimited potential for Uber to grow revenues through deeper penetration into existing markets. As on previous calls, the CFO specifically called out the lack of penetration into the total addressable US market (TAM) compared with Uber's absolute dominance of the UK market.
I think a good frame of reference or an example to help you with that TAM, if the United States was to move to the TAM penetration that we're seeing in the U.K., that's worth another $13 billion in gross bookings, so call it 8% or so of our current run rate, just by moving the U.S. to the U.K.
Dire delivery
Uber continues to struggle to make money on delivery with bookings up 16% but overall margins were reduced from 19.6% at the same time last year to 18.2% for the current quarter. Food delivery appears to be a lower margin and higher loss market than Uber would prefer with problematic costs for "refunds and appeasement, which are still a bit of a drag on the delivery segment."
Grocery and retail is the preferred future for Uber which is a much larger addressable market compared to fast food delivery.
So what we're seeing in terms of delivery is the long-term growth is incredibly promising and especially our ability to expand into the adjacent category of grocer and retail. The grocery and retail TAM is actually bigger than the online food delivery TAM. So not only do we believe we've got a long runway in online food delivery, but we're just getting started as it relates to grocery and retail.
Until then, food retailers are going to have to stump up more money to advertise on Uber Eats, fund their own promotions and then pay commission on all orders.
For Uber profitability, the sponsored listings business is more profitable for Uber, but we think merchant-funded offers are a very important strategic part of our drive to improve the affordability of the overall marketplace. And increasingly, we're working with merchants to be able to move money from sponsored listings to merchant-funded offers in a back-and-forth and a targeted way to achieve what their goals are.
Autonomous dreams
Beyond the earnings data, there were two messages CEO Dara Khosrowshahi wanted to hammer home: (i) Uber is immune from any weakening of consumer sentiment and (ii) Uber is not under threat from the rise of the robo-taxi via Waymo, Tesla and others. For the latter, it is hard to escape the feeling that they doth protest too much. Never mind that Uber sold off its autonomous driving division years ago, they think their future is bright in the space as the go to market partner for the emerging manufacturer and tech fleet operators but investors wanted to know if there was a plan B?
First, Dara seeks to paint the emergent AV market as already commoditized with Uber as the only true value player unlocking the path to market and driving up utilisation. No need then for Uber to have a plan B lest they be left behind by Waymo and Tesla.
So we think there are going to be many, many AV providers. If there are many, many AV providers, the marketplace -- and our marketplace is, by far, the largest marketplace, global marketplace, both for mobility, delivery, and then freight as well. The marketplace will have a very, very strong position. So at this point, we don't see any signal that a plan B will be necessary.
We also know that a key factor in AV commercialization will be asset utilization.
Next, Uber is talking up their Chinese partner BYD who are investing 'billions' in AV manufacturing and tech.
But the investment that they're making in AV is in the billions, and we're very much looking forward to partnering with them on both EVs and AVs.
And then there is Dara's gamble that on the prospect of cheaper derivative technologies coming to the fore in the future.
based on the conversations that we're having, we are highly, highly confident of being able to acquire AV content, if you want to call it that, on a global basis. The fact is this is not turning out to be a winner-take-all market. Originally, I think that was a concept why Uber wanted to develop the technology itself, but every single OEM is investing in some L2 or L3 technology. If you look at some of the newer tech coming in terms of imitation learning technologies that have taken kind of the imagination of folks through LLMs, that same technology, we believe, can potentially introduce a new wave of AV through imitation learning at substantially lower capital cost that was necessary historically.
On the one hand, it seems desperate denial - that Uber can compete on tech with Google and Tesla to control access to markets, that AV tech is already commoditized while maturation is still a distant dream, that native AV firms will tolerate Uber acting as an inter-mediator to their markets (especially not Google who already have the global consumer market at their fingertips). On the other hand, distribution really is everything. Maybe it is not quite yet the time to abandon plan B.
Comments