Earnings Call Transcript - UBER Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Uber Second Quarter 2022 Earnings Conference Call. It's now my pleasure to turn today's call over to Mr. Balaji Krishnamurthy, Head of Investor Relations. Please go ahead.

Balaji Krishnamurthy, Head of Investor Relations

Thank you, Brent. Thank you for joining us today, and welcome to Uber's second quarter 2020 earnings presentation. On the call today, we have Uber's CEO, Dara Khosrowshahi; and CFO, Nelson Chai. During today's call, we will present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including reconciliation of GAAP to non-GAAP measures, are included in the press release, supplemental slides and our filings with the SEC, each of which is posted to investor.uber.com. As a reminder, these numbers are unaudited and may be subject to change. Certain statements in this presentation and on this call are forward-looking statements. Such statements can be identified by terms such as believe, expect, intend and may. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today, except as required by law. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks and uncertainties described in our most recent annual report on Form 10-K for the year ended December 31, 2021, and in other filings made with the SEC when available. We published our quarterly earnings press release, prepared remarks and supplemental slides to our Investor Relations website earlier today, and we ask you to review those documents if you haven't already. We will open the call to questions following brief opening remarks from Dara. With that, let me hand it over to Dara.

Dara Khosrowshahi, CEO

Thanks, Balaji. Uber delivered another strong quarter with gross bookings and an annualized run rate of $116 billion, an all-time high; EBITDA of $364 million, another all-time high and well above our guidance range; and positive free cash flow for the first time ever of $382 million. Despite the uncertain global economic environment and considerable foreign exchange headwinds, we've issued Q3 EBITDA guidance that shows strong incremental progression, and we remain confident in our ability to deliver healthy top and bottom line growth, strong margin improvement and free cash flow, all while continuing to responsibly invest in technical innovation, earner satisfaction and durable long-term growth. As I've said before, we continue to benefit from a secular increase in the on-demand transportation of people and things, as well as a shift back from retail spend to services spend, and we intend to capitalize on these growth tailwinds in a profitable manner. With that, let's open the call to questions.

Operator, Operator

First question is from the line of Ross Sandler with Barclays.

Ross Sandler, Analyst

Just two questions. First, Dara, how would you characterize the overall operating environment today versus pre-pandemic? You seem to be gaining category share, and a lot of the smaller competitors from private markets are retrenching, even some of your larger competitors are struggling a bit. So is life getting easier for Uber to be successful? That would be the first question. And then the second question, Nelson, the Q3 guide assumes another solid incremental margin. Can you just flesh out where that's coming from? Is that just fixed cost leverage that you expect to see over time? Or are you seeing more markets kind of reach that top 20 above target margin level that you had talked about at the Analyst Day?

Nelson Chai, CFO

Ross, thank you for the question. So it's Nelson. I'll go first in terms of the guidance. So what we're seeing is, first of all, from a revenue margin perspective, a real uptick on the delivery side as we're just doing a really good job as a team in terms of creating efficiencies there. We're seeing gross profit improvement across both mobility and delivery. And then we are getting the fixed cost leverage that you referenced. So again, the business is operating really well right now. And again, we're really proud of the performance that we had in the second quarter. And so we expect to keep it up on the balance of the year regardless of the operating environment.

Dara Khosrowshahi, CEO

All right. And Ross, as far as the operating environment goes, listen, no one wishes for a tough economic environment or elevated inflation that's affecting so many of us including Uber drivers. But at the same time, from a competitive standpoint, there's no question that this operating environment is stronger for us. We are able to, in this environment, show our capital discipline, as you've seen in terms of the margin increase and free cash flow generation. At the same time, because of our scale and because we've been making these investments for years, we are able to continue to invest in our new vertical business and relaunching UberX Share and investing in hirable, et cetera. We also continue to invest in top line so that our top line growth continues to be durable. So when we look at the competitive environment, this is the strongest we felt competitively globally since Nelson and I have probably started here. And hopefully, the overall environment will get better and the competitive environment will continue as is.

Operator, Operator

Your next question is from the line of Doug Anmuth with JPMorgan.

Doug Anmuth, Analyst

Dara, there's obviously been a lot of discussion about increased incentives in the market, but it seems like you've been able to improve the driver experience and exercise discipline on incentives. So hope you could talk more about how you're doing that. And then, Nelson, perhaps you can just talk about some of the interplay here in driving the free cash flow above EBITDA in 2Q and just how you're thinking about the relationship of the two over the next couple of years.

Dara Khosrowshahi, CEO

Sure. As far as incentives, et cetera, go, you're absolutely right, which is we've been able to apply discipline here. Listen, you can't spend your way to glory in any business. But we've really started to focus on our 3 things. One is, what are the overall earnings of drivers going to be. The second is what is the driver onboarding experience because we're adding drivers very quickly to the platform. And then what does the driver experience look like once they're on platform, can we retain them for longer, et cetera. I think the combination of all 3, our onboarding process has improved significantly, including our being able to bring on new drivers to deliver for Eats first and then essentially move them over to driving people and working for Mobility where earnings levels are higher. So our onboarding flows are much more efficient than they have been in the past, allowing us to bring on more drivers at lower cost, converting a higher percentage of drivers who have shown an interest in earning on the platform. Then you've seen us invest in our driver experience chiefly with a number of new innovations, including showing your destination upfront, showing your full fare upfront, and new innovations like Trip Radar. Now we're rolling out a new Uber Pro loyalty program that gets drivers up to 2% to 6% off when they use our debit card for buying gas. That's all about the driver experience as well. And then on the incentive side, as a result of just onboarding experience getting better, drivers being able to earn multiple ways on Uber and overall utilization being at very high levels, that has resulted in high driver earnings. So drivers in the U.S. who are cross-dispatching are earning about $30 an hour, which is very attractive earnings. And drivers who are in Mobility only that tends to pay higher are making $37 per utilized hour as a result of the strong economics. This is all while our taking driver incentives down as a percentage of overall bookings as we drive more efficiency through the system. So right now, the machine is working, and we're a very competitive place to earn, and it's showing in the driver retention numbers.

Nelson Chai, CFO

Doug, on the question on cash flow. So if you recall back on Investor Day, I made the commentary that free cash flow trails adjusted EBITDA by about $1 billion annually. I'm not updating the number for you, but I would say that we do expect that we will outperform as you see just the EBITDA margin as a percentage of gross booking improved, which obviously helps in terms of what flows through to the bottom line. We are spending time looking a little bit more at our working capital and managing it. It's also important to note that it's not a direct correlation from EBITDA to cash flow because there are different financial statements, but cash flow is much more of an annual thing. You'll see us continue to do it. I do expect that we'll do better than the $1 billion target. Free cash flow is actually a GAAP number. So it's not adjusted in and out. We will continue to update this over time when it makes sense, but we're really proud. We knew we would get there because of all the steps we took during the pandemic if you think about all the platform moves now to be asset light. Most of the build-out on real estate is behind us now. And the current operating platform should be a really strong cash flow generator.

Operator, Operator

Your next question is from the line of Brian Nowak with Morgan Stanley.

Brian Nowak, Analyst

I have a couple of questions. Dara and Nelson, can you update us on where you are in the U.S. regarding average rider wait times versus where you have been in the past and what you targeted? Any updates on conversion rates? And what's going on with the Uber One membership users?

Dara Khosrowshahi, CEO

Sure. As far as the experience, the metrics in terms of surge wait times continue to move in the right direction. We're not where we want to be, but they're certainly moving in the right direction. Surge trips in the U.S. in July are now at about 14%, coming down from the 20s. U.S. wait times are running at an average of 4.5 minutes now, down from the 5- to 6-minute time frame, which is a very nice improvement. We have more work to do ahead of us, but all of the experience metrics are moving positively. Conversion is stable now, and we're looking to increase it over time. The supply situation continues to improve, with the number of new driver sign-ups in the U.S. up 76% year-on-year. Over 70% of them say that inflation has played a part in their decision to come onto the platform. Uber is an unrivaled platform in terms of flexibility, allowing them to earn when and where they want. So the marketplace looks strong, especially with September being a significant month for us. During the summer months, demand remains stable, but it really picks up in September and Q4. Regarding membership, we're very positive about the trends we're seeing. We're now at about 10 million members. Uber One has launched in 7 markets globally. About 23% of our overall gross bookings come from members, and that's 32% for delivery. Membership is primarily focused on delivery at this point, but we're seeing increased engagement as a result. Members have about 2.7 times the gross bookings on Uber compared to nonmembers. The strategic ability to cross-sell customers and drive gross bookings per audience is a structural advantage for us. Membership is a key piece of that strategy, and we're optimistic about our progress.

Operator, Operator

Your next question comes from the line of Mark Mahaney with Evercore ISI.

Mark Mahaney, Analyst

Can you talk about the markets that are still lagging and if there's anything you can do to get them back up? And are there any signs that you see in your businesses, particularly in delivery, that indicate economic sensitivity?

Dara Khosrowshahi, CEO

In terms of mobility markets lagging, the only ones I would point out in the U.S. are San Francisco, Los Angeles, and Seattle, which are lagging nationwide recovery. The recovery for us has been pretty broad, and we've been pleased. Use cases like travel are back strongly, and Uber for Business has doubled on a year-on-year basis. The recovery is pretty broad, but a couple of West Coast cities are still trailing. We expect trends to improve in the second half.

Nelson Chai, CFO

In terms of your second question, we actually haven't seen economic sensitivity. We look at trade down across major countries and cohorts depending on income levels, and we haven't discerned any trends. We've seen more spikes based on COVID activity. For example, recently in Japan, COVID spiked and demand for delivery spiked as well. So it's more about COVID trade recovery than inflation impacting our business.

Dara Khosrowshahi, CEO

Moreover, we might be seeing inflation aiding our driver onboarding, as over 70% of drivers cite inflation as a factor in their decision to join the platform.

Operator, Operator

Your next question is from the line of Justin Post with Bank of America.

Justin Post, Analyst

Nelson, regarding the margin improvements, have you pulled forward some improvements versus your $5 billion outlook? And on delivery, has there been a change in outlook for acceleration in the second half?

Nelson Chai, CFO

Regarding the 2024 targets, we had a lot of confidence in our ability to hit them. The performance should give confidence that we're on track. We expect to see improvements in gross margins and the bottom line. We're operating well, and there is no delivery slowdown anticipated in the back half. We have a high degree of confidence that our margins and EBITDA will hold.

Dara Khosrowshahi, CEO

The delivery growth is also impacted by foreign exchange, which has moved against us since our last guidance. For example, Uber Eats grew 25% in the U.S, while overall growth stood at 21%. Some of the perceived slowdown is a function of foreign exchange, especially in European markets where competitors are pulling back. However, our delivery team is executing well.

Operator, Operator

Your next question is from the line of Eric Sheridan with Goldman Sachs.

Eric Sheridan, Analyst

On Uber for Business, can you give us some ideas on the funnel of activity and how it might capitalize on a return to work or business travel? And regarding Eats, can you talk about how the diversification into new categories has changed the shopping velocity or user LTV?

Dara Khosrowshahi, CEO

We're hugely optimistic about Uber for Business. We're investing in our sales force and seeing attractive LTV to CAC ratios. The majority of enterprises are returning to growth, leading to increased business travel. Our U4B clients are sending their teams out on the road again, which helps our business. We're also upselling Eats products into U4B, underscoring our strategic advantages. Regarding diversification, our new verticals are at about a $4.5 billion run rate for gross bookings. Customers who order from new verticals tend to have higher frequency and stay with us longer. This diversification enhances our relationship with customers, positioning us as a daily part of their life. The membership program further strengthens this relationship.

Operator, Operator

Your next question is from the line of Lloyd Walmsley with UBS.

Lloyd Walmsley, Analyst

Could you still project Mobility bookings growth for 2023? Also, what sources contributed to the increased delivery margins?

Nelson Chai, CFO

Yes, we can't control the macro world, so I don't want to give you guidance for delivery for next year. The business continues to grow well, and we are making investments. The team feels confident about our ability to grow next year. In terms of delivery margins, we are working hard on courier efficiency, managing growth and finding efficiencies in capital allocation. We've also seen private and public competitors adjust, which has positively impacted our delivery margin and profitability going forward.

Dara Khosrowshahi, CEO

There’s a lot of algorithmic work that goes into pricing, batch trips, and recalculating efficient routes. These investments enable us to improve profitability without sacrificing top-line growth. The effort behind algorithms is underappreciated and hard to duplicate. Our teams are focused on long-term profitability, balancing all key metrics, including EBITDA margins. We're gearing up for a strong Q4—expecting increased demand. We're committed to ensuring drivers stay on the platform.

Operator, Operator

Your next question comes from Deepak Mathivanan with Wolfe Research.

Deepak Mathivanan, Analyst

Dara, I wanted to ask about Uber Reserve and its penetration in available markets. Can you also discuss margins regarding this product? And Nelson, can you comment on the Mobility take rates and how they are trending now?

Nelson Chai, CFO

The take rate was down in the quarter, mainly due to the surcharge impact and less surge. These are two major factors affecting our take rate. Historically, we haven't seen a big shift in take rates going forward, as we're focused on annual numbers.

Dara Khosrowshahi, CEO

Regarding Reserve, we're super excited about the product, which is one of our fastest growing and margin-accretive offerings. Currently, it represents a single-digit percentage of our total trips in available markets. We continue to expand Reserve's availability and drivers appreciate it because they can anchor their day, leading to increased earnings. This growth strategy is in line with our goal of enhancing the driver and customer experience.

Operator, Operator

Your next question comes from the line of James Lee with Mizuho.

James Lee, Analyst

Can you talk about regulatory conversations in Massachusetts and the U.K. regarding worker class and settlements?

Dara Khosrowshahi, CEO

As far as Massachusetts goes, we're constantly in dialogue with legislature and labor representatives in many states. Polling indicated driver preference for the flexibility of independent contractor status along with benefits, which we call the IC+ model. We're happy to negotiate and seek a settlement, but we're confident in our chances if it goes to ballot. In the U.K., we're properly charging VAT, and we believe competitors will have to adapt to worker classification standards as well. We're focused on maintaining a balanced marketplace and ensuring strong driver presence.

Operator, Operator

Your final question comes from the line of Brad Erickson with RBC Capital Markets.

Brad Erickson, Analyst

With incentives for drivers decreasing, do you anticipate this trend continuing, and how could this affect pricing moving forward?

Nelson Chai, CFO

Making broad statements is difficult as we are in multiple markets. In the U.S. in Q2, we saw decreasing incentives. We do an excellent job of improving driver experience and rolling out new product enhancements. While we may have incentives in cities that are lagging, pricing generally improves for users when incentives decrease. Effective management of supply leads to a more balanced marketplace overall.

Dara Khosrowshahi, CEO

We manage incentives based on various metrics, not just outputs. Our focus is on gross bookings growth and marketplace experience, with healthy EBITDA margins going forward. The trend for incentives remains positive. We're preparing for the significant demand increase in September and Q4, ensuring drivers are engaged and ready.

Operator, Operator

Ladies and gentlemen, thank you for participating. This concludes today's call. You may now disconnect.