Here's why business experts
think Uber's 'profitability' pledge is misleading and meaningless
Uber's stock surged last week after CEO Dara
Khosrowshahi announced it plans hit a certain kind of
"profitability" by the end of this year. But Uber's definition
of "profitability" leaves out a whole host of expenses. Photo
by Amy Harris/Invision/AP
Uber excited investors and analysts last week
when it predicted it would hit "profitability" by the end of this
But the company's definition of "profitability"
doesn't accord with standard accounting and leaves out a whole mess of
The company's preferred profitability measure —
adjusted EBITDA — is problematic, because while it is improving, its
outflow of actual cash is actually worsening.
It wouldn't be a surprise if
the company hits its "profitability" target, business experts say, but
investors shouldn't consider that a huge achievement.
Uber finally gave
its investors a reason to cheer — the longtime money-losing company
announced last week it
expects to finally hit "profitability" by the end of this year.
But the company's
promise wasn't all that it might have seemed. Uber's executives
weren't actually promising that it would be profitable by the end of
the year, at least not on standard-accounting basis. Nor were they
necessarily promising that it would start generating cash by then.
Instead, they were
promising that the company would be profitable on a basis the company
itself has created and defined.
That basis — which
the company called adjusted earnings before interest, taxes,
depreciation, and amortization, or adjusted EBITDA — leaves out a
whole host of expenses, as its name implies, even more so than EBITDA,
a somewhat standardized term.
It wouldn't be a big
surprise if Uber does post a profit on that basis, business experts
told Business Insider. But because the company itself can define what
expenses it includes and leaves out in adjusted EBITDA, investors
shouldn't be overly impressed if it does become profitable on that
"I think it's likely
that they will" hit the profitability target, said Phillip Braun a
finance professor at Northwestern's Kellogg School of Management,
said. "But I don't think it's meaningful."
He continued: "I
view it as a vacuous statement."
Uber is under pressure to improve
its bottom line
Like many other
unprofitable tech companies, Uber has been under increasing pressure
from public investors to show that it can be a cash-generating
business. Under standard accounting rules, the company lost $8.5
billion last year on $14.1 billion in revenue. It saw a $4.9 billion
outflow of cash from its operations and investments in property and
Thanks in part to
such numbers, the company's stock has fared poorly since it went
public last year, consistently trading below its $45 offering price
and the company's $72 billion peak private valuation.
Khosrowshahi and his team have been trying to assure investors that
they have the situation in hand. They previously committed to reaching
profitability on their adjusted EBITDA basis by next year. On their
call with investors and analysts following the company's
fourth-quarter report, they pushed that target forward by a quarter.
"While we've already
started demonstrating strong profitability improvements, we view 2020
as a truly transformational year," Nelson Chai, Uber's chief financial
officer, said on the call.
Analysts that cover
the company largely
cheered its report and its profit prediction.
Wedbush analyst Ygal Arounian called the announcement of impending
positive adjusted EBITDA a "shocker" in a research note.
"This was a giant
step forward for Dara and team and shows the business model is
starting to hit another gear," he said in the note.
At least on the
surface, Uber officials already had something to crow about. On its
adjusted EBITDA basis, its loss shrank from $817 million in the fourth
quarter of 2018 to $615 million in the just-completed period.
But those numbers
illustrated the flaws in the company's preferred way of reporting its
Uber's 'profitability' figure
isn't actual profitability
Many tech companies
report or point to their EBITDA numbers. EBITDA is typically thought
of as a proxy for the profitability or cash flow generated by a
company's core operations, since it eliminates certain non-cash
charges and income or expenses that don't come from those operations.
But Uber's adjusted
EBITDA figure goes far beyond typical EBITDA. Because the company
touts numerous non-standard accounting figures and measures, its
earnings releases include a glossary to define just what its bespoke
According to that glossary, adjusted EBITDA excludes not only what's
left out of standard EBITDA, but also earnings or losses from
discontinued operations, earnings or losses that can be assigned to
minority investors in its subsidiaries, and earnings or losses from
companies it has invested in.
But that's not all.
It leaves out stock-based compensation — a big expense at tech
companies including Uber, which saw $243 million of such costs in the
fourth-quarter alone. It excludes restructuring charges, $12 million
of which Uber recorded in the fourth quarter. It omits impairments of
or losses on the sale of assets and any acquisition costs.
On top of all that,
it excludes "other items not indicative of our ongoing operating
performance," a catch-all phrase that Uber could, in theory, use to
leave out just about any expense.
Given all that Uber
already leaves out of the adjusted EBITDA and what it could, it
wouldn't be at all surprising if the company meets its goal of
becoming "profitable" on that basis, the business experts said.
"Do I think that
it's possible they will hit the profitability target as they defined
it?" said Rob Siegel, a lecturer in management at Stanford Graduate
School of Business. "Sure."
Uber's report is reminiscent of
those from the dot-com days
The question is
whether anyone should pay attention to that, he and other business
EBITDA and other proprietary financial terms triggered dčjá vu among
some business experts.
Twenty years ago
during the dot-com boom, many startup companies touted their own
custom-created financial and performance metrics instead of
emphasizing how they were doing under standard accounting principles.
Many of those companies touted "pro-forma" profits that were derided
as excluding everything but the kitchen sink. Many of those companies
ended up going out of business or seeing their share prices plunge
when investors and creditors refocused on their actual bottom lines —
expenses and all.
"I think it's very
similar to the dot-com days, when they're kind of pushing out all
these metrics and all of these financial figures for us to try to grab
on to, when the bottom line is they're just not making money," said
Dan Morgan, a senior portfolio manager at Synovus Trust and a longtime
tech investor. Synovus owns 7,450 shares of Uber, a relatively small
position for the firm.
But Uber's focus on
adjusted EBITDA is problematic in another important way, experts said.
While standard EBITDA is supposed to be an indicator of a company's
operating profitability, Uber's adjusted figure looks increasingly out
of sync with its own operating performance. While the company's
adjusted EBIDTA loss shrank in the fourth quarter from the
year-earlier period, it's operating cash outflow actually worsened
considerably and was much worse than its adjusted EBITDA figure would
In the fourth
quarter, Uber's operations burned through nearly $1.8 billion in cash
— or about three times more than its adjusted EBITDA loss. In the
year-ago period, the company's operations consumed $837 million, only
$20 million more than its adjusted EBITDA loss.
"Their cash flow is
a real issue and a real concern," said Stanford's Siegel.
Yet despite their
forecasts of adjusted EBITDA profits, Uber's executives had little to
say about when the company might start generating positive cash flow
or become profitable on a standard accounting basis.
Uber's figure may be more than
just 'noise' — but maybe not
Companies tend to
promote non-standard accounting measures for two main reasons, said
Robert Hendershott, an associate finance professor at Santa Clara
University's Leavey School of Business. In some cases, their
executives truly believe such figures offer investors insights into
their business that investors couldn't get from standard metrics. In
other cases, companies use them to try to distract from their real
dubious that the latter strategy works.
When "companies come
out with adjusted numbers that are just creating nonsense and noise,
investors ignore them," Hendershott said.
But some experts are
worried that the heavy promotion of such figures can confuse
investors. Uber's forecast was widely reported as a prediction of
actual profits — not adjusted EBITDA. And even its own executives,
when making the forecast, said they expected the company to post
positive EBIDTA — leaving out the "adjusted" part. A company
representative clarified to Business Insider that they did in fact
mean adjusted EBITDA.
"You really have to
ask whether the company's management actually wants investors to
understand what's going on," said Gary Lutin, a former investment
banker and chairman of The Shareholder Forum, an advocate for investor
To be sure, Uber's
focus on turning its adjusted EBITDA figure positive isn't necessarily
meaningless, some of the experts said. It's a potentially a sign that
the company is focusing on reducing its costs and improving its actual
bottom line, they said.
"I think it's really
a directional momentum question," said Hendershott. "If they can turn
the ship and they can start improving profitability, given their
business model, whatever they're doing to do that in 2020, they should
be able do more of it."
But many believe
that Uber's claims to an improving bottom line shouldn't be believed
until it can actually show them on a standard accounting basis.
"I'm personally in a
wait-and-see mode," said Synovus' Morgan. "I'm still in the camp that
I'm not quite sure these models are ever going to work."
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