- Uber excited investors and analysts last week when it predicted it would hit "profitability" by the end of this year.
- But the company's definition of "profitability" doesn't accord with standard accounting and leaves out a whole mess of expenses.
- 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.
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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 basis.
"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 equipment.
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.
CEO Dara 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 bottom line.
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 terms mean. 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 experts said.
Uber's adjusted EBITDA and other proprietary financial terms triggered dèjá 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 have suggested.
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 performance.
Hendershott is 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 rights.
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."
Got a tip about Uber or another tech company? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
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