Uber: Will the business growth remain strong?

The following is the summary of Uber's 1Q23 conference call, for detailed financial analysis please refer to ""International Didi" Uber: Will the sturdy financial report be the last highlight?""

I. Business Review

1) Ride-hailing Business

The total booking and travel volume of the United States, Canada, and Latin America have exceeded typical seasonal growth, with Brazil hitting a historic high of 7.7 times/MAPC in March. After recovering behind other regions until 2021 and 2022, the growth rate of carpooling categories in the United States and Canada is faster in 2023. In the first quarter, ride-hailing trips in the United States and Canada increased by 40% year-on-year, exceeding the overall growth of the ride-hailing industry.

In the United States and Canada, we continue to maintain a strong competitive position. Although the single ride incentive for drivers and riders in the United States and Canada decreased by 42% year-on-year and 12% month-on-month respectively in the first quarter, the profit margin hit a historic high.

In the first quarter, the number of active ride-hail drivers increased by more than one million, a year-on-year increase of 35%. Compared with 2019, the participation of drivers in the United States and Canada (or the monthly supply hours per active driver) increased by more than 15%, a year-on-year increase of nearly 10%, while the driver churn rate decreased significantly. The weekly income of active drivers in the United States and Canada increased by more than 40% compared to 2019.

Internationally, recently, the UK, France, Brazil, Australia, India, and other places have set new monthly records for active drivers. Early predictions of post-epidemic supply growth enabled strong recovery trends to become possible. Our driver-centric approach, including product and technology innovations in the Uber driver application, has sustained and strengthened the supply growth.

The increase in consumer engagement also benefits from our continuously growing new ride-hailing product portfolio beyond UberX. The year-on-year growth rate of the new ride-hailing product portfolio continues to exceed 100%, with an annual total booking amount exceeding $6 billion. We are expanding Uber Reserve to other markets in Europe, the Middle East, and Africa, and the product is now available in more than 50 countries/regions. Uber Reserve continues to demonstrate strong market adaptability. We continue to work towards our goal of having every taxi use Uber by 2025.

We launched our taxi product in Munich and Sao Paulo and expanded it to 100% of taxis in New York City. Finally, we made progress in expanding our new ride-sharing product UberX Share, which aims to provide Uber with positive unit economics while offering consumers a lower-cost alternative. We expect UberX Share to be the latest $1 billion total booking product in the coming quarters.

2) Delivery Business The delivery business continued to grow at a healthy pace, with its category positioning improving in most markets and profitability significantly enhancing. The total delivery booking amount increased by 12% YoY based on fixed exchange rates, with acceleration in February and March and a YoY growth rate of 14% at the end of the quarter. Delivery trips, MAPC, and order frequency all remained at or near historic highs throughout the quarter.

Thanks to improved network efficiency, increased advertising contribution, and continual marketing and incentive optimization, the delivery business profit margin has expanded to nearly 2% of total booking amount. In 2022, benefits from technological and operational improvements significantly reduced single-trip cost in the US and Canada. We are now extending these improvements to other markets.

Last year, we also launched R&A to significantly reduce the order problems on the platform. (R&A) is one of the largest components of delivery business operating costs, and in the long term, the cost of lost customers due to problematic orders may be even higher. With a 10 bp reduction in issue rate, more than $15 million in R&A expenditure can be saved annually. Considering opportunity cost and incentive expenditure required to retain dissatisfied customers, actual savings are even greater.

Looking to the future, the US and Canada have particularly outstanding business performance. The active merchants in the US and Canada increased by 10% YoY in Q1. We also tilted towards Uber One to help reduce the total cost of consumers, with the adoption rate of Uber One reaching a historic high in the US and Canada this quarter.

We have also seen a trend towards optimized category positioning in key markets in EMEA and APAC, primarily driven by the adoption of Uber One and our investment advantage over regional competitors on a global scale. We achieved multiple category status points in the UK with a significant YoY increase. In Japan, our category status increased by more than 10 ppt YoY, and our lead advantage continued to rise.

We have also made strategic investments in new verticals such as grocery, convenience, and liquor. These verticals will be profitable in the future and enhance the value of our platform. In Q1, the total annualized booking amount of the new verticals exceeded $5 billion, with a YoY growth rate of nearly 35% based on fixed exchange rates. These new categories also bring new profit opportunities for couriers. We continue to make strong progress in selecting new verticals, including our collaboration with Coles, Australia's second-largest grocery retailer, last month. We have also added partners such as the Liquor Control Board of Ontario (LCBO) in Canada, PetSmart in the US, and Benavides Pharmacy in Mexico.

3) Freight business

Freight continues to be adversely affected by the entire category. Even considering seasonal factors, freight demand is weak, leading to lower-than-expected revenue and profit. Despite a macro market full of challenges, the freight business continues to expand solutions to better serve shippers throughout the freight cycle and provide stable and reliable partnership to shippers who are increasingly turning to outsourcing services to deal with market complexity. We continue to actively manage our business, accelerating the streamlining of our business areas and implementing structural cost optimization. Over time, the technology, platform, and market flywheel of the freight business will drive long-term cost advantages and profit growth.

4) Advertising Business

The advertising business continues to expand, with over 345,000 advertising clients, a year-on-year increase of more than 70%. In the first quarter, many new advertisers came to Uber to place ads due to the Super Bowl. To attract more advertisers, we continue to invest in new products and tools, such as checkout ads on Uber Eats, which allows non-restaurant businesses to advertise within the Eats app. In addition, we have launched a self-service platform for Cartop Ads. We will share more products at the annual GO-GET showcase on Wednesday, May 17th in New York. Later this summer, we will host GO-GET Zero in London, our first sustainable development and electrification product event.

Part Two: Performance Outlook

Based on quarterly trends to date, we expect the following for the second quarter:

Total bookings are expected to be in the range of $33 billion to $34 billion, up 18% to 22% year-on-year (excluding freight and based on fixed exchange rates), and up 15% to 19% year-on-year (including freight and based on fixed exchange rates). Trip volume is expected to increase by at least 20% year-on-year. Exchange rates are estimated to have a 2ppt adverse impact. Freight order volume is expected to remain flat quarter-over-quarter.

Adjusted EBITDA is expected to be between $800 million and $850 million.

As we gradually achieve GAAP profitability, we provide more visibility into GAAP P&L:

We expect legal, tax, and regulatory costs to decrease, with a slight increase in SBC.

D&A: In the first quarter, D&A included $91 million in depreciation and $116 million in amortization, a 19% year-on-year decrease overall, and is expected to continue to decline over the next few quarters, mainly due to the impact of real estate and data center occupancy management, as well as the gradual reduction in acquisition-related amortization expenses in previous years.

SBC: We expect SBC to be less than $2 billion in 2023, continuing to decline year-on-year in 2024; headcount is expected to remain flat or decrease in 2023 and remain relatively stable in 2024.

Part Three: Q&A

Q: Do you need to tighten your cost structure, and how do you balance cost with product growth? What is your view on AI's impact on consumer experiences?

A: We will strictly manage our cost structure according to future opportunities.

AI's impact ranges from productivity to costs to user experience. The earliest and most significant impact of AI on our company is the productivity of developers. Coplot's tools allow our developers to innovate more and achieve innovation across our entire platform.

In terms of costs, chatbots will see improved quality, more human-like voices, and more complex interaction under the influence of AI. Finally, AI will help understand customer needs, bring better experiences to customers, and bring happiness. Q: In the US, looking to the future, how much room do you think there is to continue the trend of reducing incentives while maintaining market share?

A: Last year we did a lot of work to get drivers back on the platform, and we will continue to invest in incentives on a regular basis to drive demand. In addition, we are still working to grow our scale, with total bookings continuing to grow by 22% and mobile business growing even higher.

Our focus is really on continuing to drive our company at scale on the revenue side, and delivering on our commitments on the profit side.

The commission rate growth from Q4 to Q1 on our ridesharing business was seasonal.

Demand is often very busy in Q4, so we invested more funds in incentives to ensure supply balance. Q1 demand is usually a bit lower and supply increases, so we can cancel incentives, which has the effect of increasing our commission rates.

Q: Which products have driven the growth of new users? Which products or regions have driven the growth of the business? How do you view the past year's growth?

A: Strong supply has led to higher conversion rates. At the same time, we have added new products and options for passengers, such as Reserve, which now makes up 20% of our trips to and from airports.

We've found that passengers are using bookings to ensure they have guaranteed reliability.

In the delivery area, we saw slower volume in January, but accelerated in February and March, and we expect strong growth for the rest of the year. Another factor is that our membership is growing, and the spend from members is four times that of non-members.

Q: Looking at the medium to long term, how do you view the return on investment? Second, how should we think about the market share of the delivery business, and what is the best competitive position to take?

A: 1) First, we have the power of the platform, because we can drive Mobility customers to other products. As for our ridesharing competitors, our audience on the ridesharing business is the largest in the world, with a low-cost source of traffic, and we have more ridesharing customers than we get from Facebook and Google. This is a structural advantage for us relative to our competitors in the entire market.

1. The algorithm is performing particularly well as it relates to improving market efficiency in delivery, increasing the percentage of batched orders, and using deep learning to reduce the cost per transaction for delivery.

2. In addition, our advertising product continues to grow rapidly, with our platform advertisers growing 70% year-over-year, which has far exceeded our expectations, and we dominate the category in nine of the top ten markets globally.

Q: Is EBITDA driven by network efficiency, marketing spend, or leverage? How do you view the role of the taxi business in liquidity growth? A: In fact, we're optimizing every aspect of our income stream, in some markets it's the taxi business, which is already a billion-dollar business. When all the new product growth is added up, it's about $6 billion, with a 100% YoY growth.

Of that growth, 50% comes from our core business, 35% from new businesses, and 15% from international expansion.

The growth of our new business is about 10% of our transaction volume in the first quarter. It accounts for about 20% of our growth in the first quarter and 20% of new passengers on the platform.

Q: Any updates on the international market? How much of the market share is due to product improvement rather than overall environmental factors?

A: Starting with the international market, I'll talk about Spain, Germany, and Turkey.

Spain is a highly regulated market, but we've succeeded in increasing market supply. Revenue is strong, demand is strong, Spain is growing very significantly, and we believe we're gaining a leadership position in Spain.

Germany is a market we started roughly four years ago and has grown very well. It's a very large market, and we see hope in both ride-hailing and delivery.

Turkey is a taxi market, and innovating with taxi products has allowed us to penetrate this market.

Argentina also has great potential.

We see slower market development than we would like in Korea and Japan, partly due to regulatory issues, as it involves dynamic pricing.

What's important is that we generated a 2% EBITDA margin across the first 20 delivery markets we entered, with 15 of those markets profitable, which has already surpassed our long-term targets in six of those markets in Q1 this year.

Q: Two questions about advertising, firstly the attractiveness of ride-hailing ads, and secondly the Uber One project. You've already mentioned record-level attractiveness in North America, what more attractive areas is Uber One inclined to expand in other parts of the world?

A: The number of advertisers using our products has grown 70% to 345,000 enterprises, with most of the revenue coming from ride-hailing services. In the Middle East, we're seeing continued growth of Journey Ads at relatively high CPMs. Uber passengers are often young, more likely to embrace top brands and advertising,

Also, we're launching new products such as taxi ads in cities like New York and tablet ads launched in certain cities to help boost revenue. For example, drivers with taxi ads can earn an average of $100 more per week, earn more, and have higher retention rates, so we're very optimistic about the ad profit of ride-hailing.

Uber One aims to increase revenue by increasing customer loyalty. Uber One members spend four times more than non-members, and have a 50% higher retention rate than non-members. Q:

Regarding Uber One, it currently accounts for about 27% of our bookings, and our goal is to increase this ratio to 50-60%.

In certain markets outside of the US, Uber One's penetration rate is significantly higher than the target of 50%. So Uber One's goal is not just talk, but an achievable goal.

Q: I want to learn about the business data in the United States and Canada. Why is the booking frequency of core business lower than that of new business before the 2020 epidemic? And I want to know if the usage rate of booking Uber One will be improved in old businesses?

Regarding the second question, the overall freight industry is facing headwinds and has not met expectations. How does Uber view the performance of the full-year business trend and consider ROIC and capital allocation to establish a business related to your core ride-hailing and delivery businesses? Are you looking for opportunities to cut costs, or even monetize the business to help accelerate profitability and improve investment ratings?

A:

As for the first question, compared to 2019, Uber has a wider range of products this year, leading to higher frequency. If you look at each business in 2021, you will find a corresponding frequency increase. We have healthy pricing and availability.

In addition, the membership plan as a whole drives higher frequency because the frequency of takeout is higher than that of ride-hailing. We will continue to innovate around new products and have industry-leading capabilities, especially as we are able to do cross-promotion across each platform.

As for the second question, we are currently in a cyclical low, and supply chain problems caused by the epidemic are gradually being resolved, but the market is currently in a state of oversupply. Other freight companies are also in difficult times, and Uber provides separate funding support for freight businesses, as well as external financing, and freight company employees are also getting a lot of equity incentives. We still believe that progress can be made in the freight business.

It is undeniable that we are in a difficult period, but the reason we are very positive is that if we look at the business portfolio in 2019, Uberpool was actually a high-frequency but highly unprofitable product, but now UberX Shares has become an important part of the portfolio. We are now launching new sharing products in the right way, making the economic benefits achievable. We are adjusting the incentive measures between riders, drivers and ourselves to reach a consensus on pricing. As the share of Uber X Shares continues to expand, I believe this will be an additional driving force for future frequency increases.

Q: Regarding Uber One, it currently accounts for 27% of total bookings. I want to know about the investment in grocery convenience and the issues related to the emerging vertical delivery businesses.

A:

Regarding new investment plans, we are more focused on retention rates. Whenever a membership program is established, it is easy to get a good initial number, but retention rates may not meet expectations. The team is now doing everything possible to ensure that the experience of Uber One members is first-class, with priority scheduling, subsidies and discounts during certain periods, and minimizing the probability of issues such as consecutive orders and payment failures.

Once the retention rate improves, we are confident that our business will develop in the right direction, with overall membership numbers increasing and retention rates improving. Currently, Uber One's advantage is based on discounts, which are very high, allowing members to save a lot of money. These advantages are not offered by other competitors.

The progress of new verticals is optimistic, with an annual total reservation rate exceeding $5 billion, and this business has grown by 30% year-on-year. We can see that some of Uber Eats' customers are ordering in new vertical areas and gradually increasing. Our partners include Coles, and we are also increasing the range of optional merchants to make every customer who orders in vertical areas happy and thus form a positive cycle of repurchase. We still have a long way to go, and we hope to double our current income of five million dollars.

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