Ride-hailing company shocked investors with bigger losses than initially expected, potentially lessening the enthusiasm around Uber's eventual IPO.
As Uber is still privately-held, the company is not obliged to report on its earnings publicly and therefore, the information regarding its Q3 performance was mostly a subject of rumours. Yet yesterday, the tech media source The Information finally disclosed Uber's third quarter earnings figures based on data leaked by people having access to this private information. According to the anonymous sources, the ride-hailing company lost over $800 million during the last quarter excluding taxes, interest and stock-based compensations. However, next to the huge losses, the company has managed to grow its revenue numbers from the second quarter. How is that possible?
In total, Uber's losses over the first nine months of 2016 add up to quite an eye-popping number of $2.2 billion while the total annual losses have all the chances to reach $3 billion by year-end, adds Bloomberg. The analysts say that the company's losses for the third quarter were expected to be considerably lower than in the previous quarters since Uber finished its two-year long struggle with local rivals in China in summer.
In August, one of Uber's Chinese rivals, a ride-hailing company Didi Chuxing announced its plans to buy Uber's Chinese operations in exchange for a 5.89% stake in the combined company, reported CNBC. As part of the deal, Didi got access to Uber's Chinese brand, all operations and data whereas Uber got a 17.7% stake in the company thanks to the condition of the "preferred equity interest". As a result of the deal, Didi's valuation jumped from $28 billion to $35 billion as it included that of Uber China. Didi also invested $1 billion in Uber's global operations.
“The battle in China had become global. We had sovereign wealth of China being invested in our competition globally. We had American tech companies that were being to compelled to invest in our competitor in China. And so China battle had become a global battle,” Uber CEO Kalanick said during a summit last week, as reported by the Business Standard.
As the acquisition was completed back in August, the experts believed that Uber's losses would scale back because its Chinese operations were constantly holding the company back at the time. During the two years of Uber working in China, the American start-up lost more than $2 billion as it tried to compete with Chinese rivals. Several people familiar with the matter told Bloomberg back in August that Uber's huge business losses in China were the main reason why Kalanick was postponing the IPO.
“The biggest existential threat to Uber over the last two months was that in China they were losing capital in a way that potentially threatened the rest of their worldwide operations. The fact is that in the short term it may seen as a loss, but in the long run it’s a good move. Now they can focus on the rest of the world,” an NYU professor Arun Sundararajan told Bloomberg.
However, even after Uber's Chinese business was handed over to Didi Chuxing in the mid-quarter, the ride-hailing company continued losing money. The experts comment that the major third quarter losses could be partially attributed to Uber's busy spending schedule of the last 3 months. The company has reportedly invested in its self-driving project as well as the development of the the food delivery via UberEats, among other smaller projects. The Wall Street Journal adds that on top of that Uber has been heavily focusing on various promotions that also included cash payments needed to recruit new drivers. As it was already mentioned, the losses come on top of at least $1.2 billion lost during the first half of the year.
Just as interestingly, Uber's profits have continued to grow even after it left China, the world's most populated country and the biggest market. In the third quarter, the big losses came hand in hand with quite attractive revenues, people familiar with the matter said. According to the Wall Street Journal, Uber's gross revenues in Q3 amounted to $5.4 billion as compared to the result of $5 billion in the second quarter. Next to that, net revenues, including the money Uber is left with after it pays the drivers, amounted to $1.7 billion in this quarter, rising from $1.1 billion in Q2 and $960 million in Q1.
Still, the main highlight of the third quarter was Uber's decision to leave China after two years of doing business there, which significantly impacted both the revenues and the losses of the quarter. During last week's TiE Global Summit, Kalanick opened up about his decision to leave such a promising market as China and said that the company had a "bunch of things" to focus on instead:
"At some point we realised that we can't do everything ourselves. So we partnered in China so that we can focus on other interesting things we are doing worldwide like Ubereats, what is going on in India, driverless cars. There are whole bunch of things that we needed to focus on. We could not do everything ourselves, so it is emotional. We did put our heart and soul in that effort," he said.
As a final note, regardless of the growing revenues and Kalanick's exciting plans for the next year, the company will need to find a way to cut on its ever growing losses if it doesn't want to spook the potential investors.