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With Layoffs, Uber Seeks to Trim Its Way to Profitability

By Jeremy Bowman - May 23, 2020 at 10:06AM

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The pandemic has forced an abrupt shift in the ridesharing company's strategy.

There's no question that Uber (UBER -1.85%) has been hit hard by the coronavirus pandemic.

The ridesharing giant said that rides were down 80% globally in April as many of its markets were shut down, and it took $2.1 billion in impairment charges, mostly related to its investments in Didi and Grab, two ridesharing services in Asia. Uber finished the quarter with an adjusted EBITDA loss of $612 million, which is expected to be worse in the second quarter, given that shutdowns in most areas didn't begin until March. 

Last year, Uber had set a goal of reaching adjusted EBITDA profitability by the fourth quarter of 2020, but the company pushed that back to 2021 due to the pandemic. Despite the recent setbacks, CEO Dara Khosrowshahi and his team remain squarely focused on the bottom line.

Three different images of the Uber app on smartphones

Image source: Uber.

Back-to-back layoffs

In the last two weeks, Uber has issued two rounds of layoffs, first slashing 3,700 jobs in customer service and recruiting, and then cutting another 3,000 jobs in areas including freight and autonomous vehicles. With the two rounds of layoffs, Uber cut approximately a quarter of its headcount.

The first round of layoffs will result in $35 million to $40 million in severance and related charges, while the second round will incur about $110 million to $140 million in those costs, indicating that the second round of layoffs cut higher-paid employees, which makes sense given the decision to scale back in areas like freight and autonomous vehicles. 

According to The Information, Uber managers asked Khosrowshahi for a blanket pay cut instead of layoffs, but the CEO refused as he saw layoffs as the best ways to permanently cut costs and make the company stronger over the long run. 

Assuming each of those jobs cost an average of $100,000 in salary and benefits, Uber eliminated $670 million in annual expenses, despite the upfront severance charges. With other moves, including shutting down 45 offices around the world, layoffs at its Middle Eastern ridesharing business Careem, and merging its Jump micromobility division with Lime, Uber expects to trim annual costs by at least $1 billion.   It finished last year with adjusted EBITDA loss of $2.7 billion, though it had an adjusted EBITDA profit of $2 billion in its rides segment, up 34% from the year before, showing strong profitability and growth in its core segment. Still, without a recovery in rides, it's going to need more than $1 billion in cuts.

Eyeing Grubhub

The other area where Uber has focused on cutbacks is realigning its portfolio for profitability in Uber Eats. The company has pulled Eats out of nine markets in recent months, including India and South Korea, as Khosrowshahi said the food delivery business would only compete in markets where it was #1 or #2. That may explain why Uber is in talks to acquire Grubhub (GRUB), as Uber Eats is actually the #3 food delivery app in the U.S. behind Grubhub and DoorDash. 

A market share war among the trio has crushed profitability and led to losses at Uber Eats, which had an adjusted EBITDA loss of $313 million in the first quarter. Whether or not a deal will go through remains to be seen, as the two parties are dueling over price in what's reported to be an all-stock deal, but with Grubhub's market cap close to $6 billion, Uber runs the risk of overpaying for a flailing competitor as Grubhub's financials have weakened substantially in recent quarters. There's also the possibility that regulators would block the deal, as it would give Uber approximately 50% of market share of an industry that's already been criticized for squeezing restaurants during a difficult time.

Uber's next stop

Investors have generally cheered the layoffs and the potential deal with Grubhub, as Uber stock is now trading at its highest point since it bottomed in March. Cutting costs to move toward profitability is probably the best move for the company, but it also sacrifices its larger goal of being the "Amazon of transportation," or a far-reaching company with growth businesses like Uber Freight and autonomous vehicles, which the company now seems to be pulling back on. 

Focusing on rides and eats may be the best way to deliver profitability, but it also sacrifices some of the potential growth that led Uber to be valued at $120 billion at one point. In the meantime, the pandemic shows little sign of fading, meaning Uber's rides business will continue to take a hit. That could force further cost cuts, or simply make the goal of turning a profit next year unrealistic. Uber's path to profitability still isn't clear.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Uber Technologies and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
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Amazon.com, Inc.
AMZN
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GrubHub Inc. Stock Quote
GrubHub Inc.
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