Uber. BS earnings. Tech journalists didn’t do forensics. So I did

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Uber knows propaganda. Their narrative is that their valuation is justified by a powerful business model based on cutting-edge technological innovation; it has created a totally new product category (“ridesharing”) an industry (the “on-demand” ) and startup losses will soon be strong profits, ‘just like Amazon’
It’s a narrative that exploits the myopia of tech journalists embedded in a Silicon Valley tribal culture and focused on the wealth and status of Uber’s venture capital allies.
The presumption “they must know what they are doing” eliminates a need to investigate.
Uber knew that reporters on deadlines would not do forensics. But…
…I’ve got time
Uber released new financial data this week, showing full year 2017 GAAP operating losses of $4.5 billion, and an operating margin of negative 61%.
Uber’s financial releases have never used consistent definitions of “losses,” often using EBIDTAR or EBIT contributions instead of true GAAP Operating or Net Income.
2017 results cannot be compared with 2016 because Uber has never supplied 2016 GAAP numbers
“[t]here are few historical precedents for the scale of its loss”  – Eric Newcomer of Bloomberg, kudos to the only reporter who highlighted the magnitude of total GAAP losses.  
Meet those tech journalists…
Emir Efrati of The Information “Uber is moving toward profitability” (even though losses are actually increasing) and “[t]he results suggest Uber is getting more efficient as it scales up, allowing it to improve profit margins” (without any attempt to document evidence of meaningful scale economies)
The New York Times Uber’s numbers “reflect a steady improvement in the company’s financial position, with revenues growing and losses narrowing” (but never mentioned the $4.5 billion annual loss, except to say that losses were “big”.)
The Financial Times reported the smaller EBIDTAR contribution numbers as “losses” only mentions GAAP in one sentence at the end, and emphasized a “profit” measure that excluded $2.3 billion in costs.
Did Uber’s 4th Quarter cost cuts reflect improved efficiency or major progress towards profitability?
Between the 2nd and 3rd quarter of 2016, Uber operating expenses rose 3-4 times faster than Uber’s revenue (the portion of passenger payments that Uber retained)
Between the 2nd and 3rd quarter of 2017, revenue growth rates slowed but operating expenses were still growing just as fast. An improvement over 2016, but unit costs are still not declining
In the 4th quarter of 2017, Uber suddenly improved unit operating costs, but, without noting any underlying operational efficiency actually improved.
After years of steady cost increases, Uber froze spending on Operations, Sales, Marketing, R&D, and General and Administration. Insurance, an entirely variable cost, continued to increase in line with revenue.
4th quarter costs would have been $210-220 million higher ($800-900 million annualized) if they had continued to grow in line with revenue.
The budget freeze cannot be said to have seriously improved efficiency unless Uber can demonstrate that it can continue to produce 10-15% quarterly revenue growth on the frozen 3rd quarter 2017 cost base.
Is Uber artificially inflating its top-line revenue growth claims?
Previous releases of Uber revenue data were limited to the top-line “Gross passenger payments” and “Uber revenue”, the 20-30% of that total retained by Uber
In 2017, roughly $3 billion of this revenue was “Refunds, Taxes and Fees” or “Rider Promotions.” Government charges and fares that are refunded should not have been included in the original gross revenue number. The “Rider Promotions” item is more problematic
If Uber offered discounts, the higher fare (that the passenger did not pay) appears to be included in gross revenue, while the promotional discount is a separate offset. These numbers do not affect bottom line P&L calculations, but inflating the top-line gross revenue number directly supports Uber’s desire to show the strongest possible passenger demand numbers.
Uber refuses to release numbers (such as market-specific fare and yield trends) that document whether (or where) its revenue performance might actually be improving.
Uber cut driver compensation by $2.2 billion in 2017
In the 2nd and 3rd quarter of 2016, 78% of gross passenger revenue went to “Driver earnings and bonuses”
By the 3rd and 4th quarters of 2017, Uber unilaterally imposed driver compensation cuts that reduced this to 72%
If the higher 2016 rates had remained in force, drivers would have gotten $2.2 billion more in 2017, Uber’s revenue would have been $2.2 billion lower, and Uber’s GAAP losses would have been much higher than $4.5 billion
Uber still needs $4.5 billion in profit improvement, but it is unclear that it has much scope to reduce driver compensation much further
Uber’s narrative in 2018
Everything bad about Uber was the fault of the former CEO, he’s gone and problems solved
New Ceo is doing great things to restore the financial promise Uber always had
Business is growing strongly and marching steadily towards profitability
But those pesky numbers again: The P&L data simply doesn’t support the “major progress towards profitability”.
Improvements have been made at the margin, but sustainable profits will require a combination of much bigger cuts to driver compensation, to Uber’s own costs, and getting passengers to pay much higher fares.
The end?

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