Uber Technologies Inc. posted disappointing quarterly results Thursday, sparking a sell-off in after-hours trading. Its ride-hailing rival Lyft Inc. beat analysts’ expectations the day before, but Uber’s second-quarter adjusted sales fell short of estimates and the company posted a net loss of $5.24 billion.
Most of that loss was attributed to stock-based compensation associated with the initial public offering in May, a routine expense for newly public companies. The adjusted loss — a more commonly used metric for ride-hailing companies, which excludes interest, tax and other expenses — more than doubled to $656 million but wasn’t as large as the $979.1-million average of analyst estimates compiled by Bloomberg.
Uber generated $2.87 billion in adjusted revenue in the second quarter, up 12% from a year earlier and below the $3.05 billion that analysts had expected for the quarter. Gross bookings, an important number used to track ride-hailing demand, rose 31% to $15.76 billion.
In its filing, Uber also acknowledged the creation of a $6.1 billion Dutch tax deduction that will help the company reduce a chunk of its global tax bill for years to come. The deduction, which came through an increase in the value of intellectual property that Uber transferred between its offshore subsidiaries, will be a cushion should the company ever turn a profit.
“It’s safe to say that Uber will not be paying any taxes for the foreseeable future,” said Robert Willens, an independent tax and accounting expert in New York. The windfall is only applicable to the company’s tax bill in the Netherlands, a tax-reducing hub favored by multinational corporations.
On Wednesday, Lyft reported loss and revenue figures that both exceeded estimates and boosted its annual forecast. Lyft also indicated that its price war with Uber is abating and that it expects to lose less this year than in 2018, which was welcome news to investors. Both stocks saw a bump as a result, with Uber up 8.2% to $42.97 a share at the close of trading Thursday.
Uber’s gains were wiped out in extended trading Thursday. The stock fell as much as 13% after the report.
Dara Khosrowshahi, Uber’s chief executive, said investors should expect to see losses decline next year. “We think that 2019 will be our peak investment year,” he said on a call with reporters Thursday. “In 2020, 2021, you’ll see losses come down.”
Uber didn’t provide a forecast in its report, nor did it do so in its first financial report in May. But Khosrowshahi confirmed that the battle for ride-hailing market share was easing. “We’re definitely seeing the competitive environment improve,” he said.
Uber has been public for less than three months, but investors are already wondering how long it can keep growing. The San Francisco-based company said last week that it’s cutting about 400 employees in marketing, and Khosrowshahi suggested the business had a broader problem with bloat.
On the call Thursday, Khosrowshahi acknowledged those questions while defending Uber as a business with “growth rates that companies at our scale would kill for.” However, he said, “the law of large numbers at some point will catch up with you.”
If and when Uber becomes profitable, it will benefit greatly from the $6.1 billion deduction generated when it moved some of its offshore subsidiaries to different countries as a result of new European Union rules governing multinational companies.
Uber isn’t the only U.S. company that has moved operating units around the world in response to Organization for Economic Cooperation and Development rules. The OECD requires multinational companies to justify the business purpose of their offshore operations. Low-tax countries like Singapore, Ireland and the Netherlands are becoming more desirable than no-tax Caribbean havens such as Bermuda.
Uber’s windfall was created last March when it pulled intellectual property out of a paper entity in Bermuda with no employees and put it into a Dutch entity that’s ultimately controlled by a holding company in Singapore. The Dutch entity has dozens of other Uber entities under it, according to Netherlands Chamber of Commerce documents.
But the size of the tax savings took experts by surprise.
Willens, the tax expert, called the $6.1 billion deduction “unusual” relative to Uber’s roughly $73 billion market value. Another independent tax and accounting expert, Frank Vari in Boston, said he was “surprised” that the deduction was “that large.” The benefit reflected the lofty value that Uber had given its IP when it moved its subsidiaries to new locations.
An Uber spokesman said the shuffle was made to “meet the demands” of “the new global tax environment.” He referred to the OECD rules that aim to prevent technology and pharmaceutical companies from using paper companies to whisk profits earned in high-tax countries to low-tax and no-tax ones.
The spokesman, who asked not to be named, citing company policy, added that the shuffle also marked an end to Uber’s use of a different tax strategy, known as “Double Dutch.” That structure, which involves Dutch entities with no employees that funnel profits to havens, has been popular with multinationals in recent years and is now in the crosshairs of European regulators.
Technology companies have always worked hard to keep their tax bills low. Amazon.com Inc.’s relatively small annual profits have allowed the e-commerce giant to shrink its tax payments while reinvesting in new projects. That strategy has been a recipe for high growth and low tax payments.