Uber Technologies, Inc. (NYSE:UBER) Goldman Sachs Communacopia + Technology Conference 2022 September 12, 2022 12:15 PM ET
Company Participants
Dara Khosrowshahi – CEO
Conference Call Participants
Eric Sheridan – Goldman Sachs
Eric Sheridan
Okay. So we’re going to get started. So for those who don’t know me, my name is Eric Sheridan. I’m Goldman Sachs’ U.S. Internet Equity Research Analyst. Welcome to Goldman Sachs Communacopia + Technology Conference. This is our first combination of the TMT and Communacopia conference here in San Francisco, and we’re super happy to have everyone here, including the person next to me – that got really loud, Dara Khosrowshahi, CEO of Uber. Dara, thanks for being here.
Dara Khosrowshahi
Thank you for having me. I am very happy to see everyone in person and hopefully, you all took Ubers to this meeting. So if you didn’t, you’re in trouble.
Question-and-Answer Session
Q – Eric Sheridan
On that note, Dara, maybe just taking a step back, I think, it would be super helpful – I don’t know if we can lower this just a little bit, this seems really loud. But in terms of taking a step back, obviously, you’ve been through a number of years of operational challenges as we’ve gone through the pandemic. You’ve made decisions about capital allocation, about investing for growth, but also rationalizing the cost base. Maybe just level set for investors on where the company sits now after what you’ve had to go through over the last couple of years.
Dara Khosrowshahi
Yes. Hopefully, we’ll never have to go through a pandemic again. But I do think in hindsight, we’re coming out of this pandemic in unquestionably stronger position than we were going into the pandemic. We pivoted, as everyone knows, from mobility to delivery. Our delivery business and mobility business are now at scale, at about the same size. We’re now in a position where we’re not only delivering high growth rates on the deliver side but now it’s driving profitability as well on the delivery side, which we can talk about later.
We decided we have to focus on the core of the business. So we exited some other businesses, Autonomous, which we merged with Aurora and a few other noncore businesses as well and generally drove much higher cost discipline as it relates to the business. And I think that certainly showed this year. Over the last quarter, we drove 12% incremental EBITDA margins well above the target that we put forward of 7%.
And I think the pandemic also put us in a position where we had to really invest in the power of the platform. What are the advantages of Uber and Uber Eats being together in the same family? And what you’re seeing now is the power of the platform in terms of Uber users, our driving Uber users over to Uber Eats, and then our onboarding earners from Uber Eats onto Uber Mobility, we kind of have this positive circle going on in terms of the Uber business and the Uber Eats business working together. And then we’re locking in our users with a membership program on the rider side and then a pro loyalty program on the driver side as well.
So when I look big picture at the company, while the environment certainly is uncertain in terms of inflation, in terms of rates, et cetera, from an operating standpoint, the business is operating on all cylinders. We’re in a position where we’re the only global player, so we have a lot of diversification. We’re the only player that is multiplatform, so there are business model advantages over that.
And we’re at scale. We’re the biggest player in most of the markets in which we operate, certainly on mobility in many markets on delivery as well, all within the environment of capital becoming much more dear, so to speak, which we think should help us competitively because we’re certainly seeing consolidation in the marketplaces and a competitive environment that is – that’s a pretty positive competitive moat for us.
Eric Sheridan
Okay. So there’s a lot to follow up in mind in there. Maybe sticking with the mobility business first. Obviously, you saw the type of travel we saw in the summer. Now we’re getting into back to work, back-to-school. Maybe give us a quick update on how you’re thinking about the demand trends you’re seeing in the business. We’re still talking about demand relative to 2019. But then increasingly, I noticed investors are also asking where are we going beyond the comparisons to 2019 to grow the business over the medium to long term?
Dara Khosrowshahi
Yes, absolutely. I’d say on the demand side on mobility, so far so good, which is the business is coming back into a situation where it’s relatively predictable. So for example, we expected August trip volume to be pretty consistent with July trip volume. We’ve seen exactly what we expected there. And now we’re seeing a Labor Day bump that looks, from a seasonal standpoint, exactly like we did in 2019 as well.
So seasonality looks like it’s reverted to 2019. Post Labor Day, we expect to see strong volume. We think we’ll have our best week ever coming up, and we’ll have a number of best weeks ever coming up.
Kids are back in school. I think CEOs are now serious about requiring workers to come back to the office. You were sharing with me that you guys are already back in the office. That’s true for us increasingly as well. And then I think when we look at occasions like fun and restaurants, going out, et cetera, people are absolutely starting to get out there again. So I think we’re going to see – we expect constructive trends coming up in Q4 and the signal that we see is consistent with 2019, which is exactly what we want to see.
Eric Sheridan
Maybe I’ll take a different twist here. When we went back to the Analyst Day in February earlier this year, you talked a lot about product offerings evolving on the platform. How much do you think about product being unlocked of additional demand, supply-demand imbalance and pricing being the unlock of demand? What do you see as unlocks of demand that you’re the most focused on executing against?
Dara Khosrowshahi
Yes. So I think there are three big buckets as it relates to mobility. First thing I would say is that about 50% of our growth going forward, if you look at Investor Day, we expect to come from our core UberX business. And that’s benefiting from, one is we’ve all seen now the shift from retail spend going back to services spend. Services spend is quite robust in the U.S. and all over the world. And the UberX business is benefiting from that, along with just an increase of secular demand for all things on demand and especially in urban destinations as well. So we see a very robust growth rate for our base UberX business.
Then on the product side, about 35% of our growth, we see coming from new products that we’re innovating against. Those will be – there are probably four categories: the hailable category, 2-wheelers, 3-wheelers, taxis, which is a new category that we’re leaning into and is coming on to the platform; second for us is the enterprise U4B, we’re penetrating into enterprises much more investing quite aggressively in U4B; third is low cost, this is UberX shared or high-capacity vehicles; and then fourth for us is segmenting our audiences into products that are specifically built for them.
So examples of that could be Uber Comfort, if you’re looking for a more comfortable ride. It could be EVs, right, Comfort Electric. You want a Tesla here, you’re going to get – use Comfort Electric or, for example, Reserve, which is a pre-reserved product where the driver is waiting for you typically five to 15 minutes before the ride, and you get a much higher reliability rate et cetera. All of those are premium products. And for example, our Reserve product is already running at a $2 billion-plus annual run rate. So they’re big segments out there that are highly profitable.
So that’s about 35% of our growth there and about 15% of growth is going to come from geographic expansion in geographies where the business is at a much lower penetration rate. So example of that is Germany, Spain, Japan, South Korea, Argentina, Turkey. All of these are relatively new markets. They’re are markets in which we’re established. We have teams on the ground.
It’s not theoretical whether we want to be in those markets or not. We’ve adjusted our model to be compliant from a regulatory standpoint. And those markets, it’s just mass. It’s like we know how to grow in those markets. We’ve done it 50 times before, we’re going to do it in these markets as well. So we think that balance of 50% base business, 35% innovation and new products and then 15% geography is a good balanced portfolio for us to grow.
Eric Sheridan
Okay. I wanted to turn to the supply side because I think even above and beyond demand, there’s been more debate on driver supply. There’s been commentary that’s come out of your largest competitor in the U.S. that’s been very noisy over the last six months and you’ve had incentive programs just sort of in a tight labor environment to sort of solve for a lot of these issues. What’s the latest update on where driver supply sits now against the broader macro backdrop? And more importantly, the demand environment you’re seeing because, as you called that on the last earnings call that demand would pick up and you hope to have supply to meet that demand?
Dara Khosrowshahi
Yes, absolutely. So the supply environment, it’s a constructive environment. We hit on mobility post-pandemic highs in terms of drivers last month. And in August, September, kind of week after week, we were hitting highs in terms of active drivers onto the platform. So while I would say, generally, if you look at our major markets, we’re still undersupplied by 5% to 10% versus where we need to be.
The number of earners we have on the platform is an all-time high. The number of drivers we have on our mobility platform is very close to kind of pre-pandemic highs as well and the number of active drivers continues to increase as well.
The reason behind that, we identified our supply as being an incredibly important part of our growth. Really last year, Q2 of last year, you saw us lean in with incentives. We leaned in with incentives to kind of jolt the system to get drivers back onto the platform. But then we’ve really followed up with product innovation.
And there are two big innovations that are at play here. One is what we call modular onboarding. Modular onboarding is the ability for a driver to onboard on to Uber, not to – not for – to drive on Uber or to deliver for Uber Eats, but to onboard onto the platform. And because typically, you need less requirements for Uber Eats in terms of your car or background checks, et cetera, we can onboard drivers much faster to Uber Eats.
And then essentially, once all of the work is done in terms of making sure that you’re background checked, et cetera, we’ll onboard you on rides where you can earn more. But that essentially has radically improved the funnel from driver sign-up to driver activation and then driver first trip. It’s a structural advantage that we have, especially in the U.S. versus other competitors and Lyft who has only one line of business.
We’ve now followed up that innovation with driver upfront pricing and upfront destination. And if you step back for a second and in terms of innovations in our marketplace, one of the most significant innovations that we had with Uber probably seven years ago or so was decoupling rider-side pricing from driver-side pricing because driver-side pricing was based on time and distance, and it’s variable based on the actual trip.
And so early on with Uber as a rider, you get a range of where your prices are. You don’t know exactly what the price was, it was kind of like getting into a cab. You don’t know the absolute price. When we decouple pricing, we could give a fixed price for the rider while continuing to give variable prices for drivers as well. That was a huge unlock in terms of conversion on our app and drove a ton of growth for the business when it was introduced.
Now what we’ve done with driver upfront pricing and upfront destination is we decoupled driver side pricing from time and distance. Time and distance is how price – taxis have been pricing a trip for years and years and years. Now pricing is algorithmic. It’s based on time and distance, but then what’s your destination, what’s the probability that you’re going to get a trip once you drop off your rider. What’s traffic going to be like?
How long is the pickup, et cetera? There are many more – what time of day is it? There are many other considerations that go into pricing and now we have algorithms pricing drivers – pricing versus time and distance. That allows us to show the upfront destination for the driver because we’re getting the price right.
The reason why drivers didn’t see upfront destination is because time and distance often misprice trips. And so because of mispriced trips, a rider might get caught in a particular area, so we would only show the destination after the driver accepted, which sometimes will result in cancellations, which is a terrible rider experience as well. Now we show upfront destination for the drivers. It’s a huge win. Drivers love it.
And we show upfront price. And that should allow us to drive more throughput in the marketplace at essentially the same average margins in terms of revenue margins as it relates to riders and drivers. So this has been a very significant innovation that we’re driving and the signal that we see in terms of the marketplace throughput, and more importantly, driver reaction to this innovation has been pretty phenomenal. We’re seeing our competitor now try to match us. We’ll see where that goes.
Eric Sheridan
Got it. One of the things you’ve alluded to in a few of your answers is sort of broader competitive intensity. If you rewind 6, 9, 12 months ago, we were talking about new entrants in some market, a lot of capital intensity and VC money going into the sector. There was a lot of competition on the supply side. What’s the current state, maybe to put a ribbon around it, of competition, when you think about competing for rider demand and competing for driver supply?
Dara Khosrowshahi
I think generally, the competitive environment in both mobility and delivery that we’re seeing now has been probably the best competitive environment that I’ve seen in the five years that I’ve been at the company, right? So on the mobility side, our category position in the U.S. is – continues to be constructive at very significant levels.
And outside of the U.S., when we look at, for example, competitors like DiDi, they’re going through huge growing pains as it relates to China, which has caused them generally to pull back, exit some markets like South America, and I described that competitor as being relatively stable.
We see some competitors like Bolt who have been funded by enormous amounts of private capital at economics that in hindsight, made no sense whatsoever, now having to be a lot more disciplined in terms of capital allocation as well, which makes the mobility competitive environment, I think, quite constructive. And then we have the advantage, a platform advantage that we’ve got, the advantage in terms of driver acquisition as well.
On the delivery side, I’d say the same, which is it’s not news that the capital is a lot more dear. Most of our delivery competitors still aren’t cash flow positive. They’re still not EBITDA profitable, so I think those competitors are moving to get to EBITDA profitability pretty quickly. And I think you see the results in our results, which is we’re growing at industry plus growth rates as it relates to delivery, and we’re delivering very significant incremental EBITDA profitability. I think our incremental EBITDA margins last quarter were 20% for delivery.
Now I don’t expect to see that forever, but it’s a combination of innovations on the product front and the competitive environment being constructive that allows us to drive those kinds of incremental EBITDA margins.
Eric Sheridan
When we – let’s turn to the delivery business for a minute. You and I had this conversation a year ago over Zoom when we had to do this conference on Zoom a year ago.
Dara Khosrowshahi
It was a very sad conference.
Eric Sheridan
Yes. Well, you were quite bullish actually, for the record. So if we go to the delivery side, I think if you rewind a year ago, everyone was worried that there eventually would be a pandemic normalization – post-pandemic normalization around food delivery, but at the same time, you’ve also widened out the offering. You offer additional SKUs, you’ve gotten into new areas. Maybe update us broadly about what you’re seeing on the demand side in the delivery business as the world does hopefully continue this normalization trend.
Dara Khosrowshahi
Yes. So for perspective, for the group, we grew our gross bookings on a constant currency basis about 12% last quarter as it relates to delivery, which was essentially as expected. We – I think there was a lot of fear going in as to what the comps are – a bunch of the pandemic darlings slowed down a ton.
Delivery was a pandemic darling, but what we’re seeing is that the half delivery habits are – look like they’re sticky. So when we look at audience growth, when we look at basket size, frequency, retention, all of those rates essentially are coming in as expected or consistent with the past that is helping us drive that 12% gross bookings growth as it relates to delivery.
And when you look at delivery, first, I’ll start on the margin front and then we’ll go into the top line, which is deliveries are really benefiting from three big drivers of margins. One is, generally, as our marketplace densifies, as we have more restaurants, more eaters, more couriers on the platform as well, we’re able to drive cost per transaction down.
We have seen, as we have combined our mobility and delivery marketplace tech and teams, we’re seeing more efficiency on the cost per transaction side based on some algorithmic improvements that I can get into at some other point. So the CPT, cost per transaction improvement has been very substantial, especially in the U.S. We’re going to drive some of those improvements globally as well. So I think that’s one. Second is, as marketplaces mature, our newer cohorts in delivery are always less profitable than our older cohorts.
Mathematically, you just have more older cohorts out there, so marketing is coming down as a percentage of gross bookings pretty substantially. Within a competitive environment that’s rationalizing, that’s happening faster that we thought it was going to.
So that’s a positive as well. And then there’s advertising business that we talked about, is advertising on delivery, but then it’s advertising on different delivery categories. Grocery, Cornershop now is at about 2% to 3% of advertising as a percentage of GBs. Liquor, Drizly is at about 8% advertising as a percentage of GBs. We put out a target of $1 billion in gross bookings by 2024 run rate.
We are at now a $350 million run rate for our ad business which puts us at or ahead of the target that we put forward there. So all of those are driving really strong delivery profitability as well. That allows us to lean into the new products on the delivery side, new verticals, which is groceries, pharmacy, alcohol, et cetera, and our Direct business, which is essentially delivering for third-party providers, Walmart, Apple and many, many other partners as well.
Our new vertical business now is at $4.5 billion run rate, growing at very healthy growth rates. About 10% of new verticals – if a delivery active consumer who buys food, about 10% of them are also buying new verticals as well now on a monthly basis. That’s up about 3% on a year-on-year basis.
So we’re showing our new verticals business to a higher and higher audience, and our new vertical business just got to essentially variable contribution breakeven as well. So the formula for us there is like the food business continues to grow. It’s something that’s sticky. It’s a habit. That continues to grow.
It benefits from free traffic that we’re throwing from mobility. And because of the margin improvements, we’re able to invest in a disciplined way in new verticals and Direct to fund these new businesses while at the same time driving bottom line growth well.
So when we look at the delivery category, both internally, both in terms of platform benefits, the membership program that we can talk about on the competitive environment, it’s a pretty good environment for us, and it’s just like, let’s keep executing, let’s keep pushing.
Eric Sheridan
Got it. Okay. Let’s stick with these new verticals for a minute. In terms of the individual verticals you’ve decided to move into, are there any in particular, where you think they dramatically move the needle either for the platform’s ROI or velocity of shopping behavior or raising utility for the consumer? Which are you the most excited about? And not that it’s scarce, but if you could put all the capital behind it, which one are you the most excited about?
Dara Khosrowshahi
I think the biggest opportunity for us is grocery, right? And I would – the convenience category with just smaller basket sizes, more frequent. And there’s grocery that tends to be higher basket sizes and tend to be appointment dealing. And I think we have, obviously – the convenience category is a great category to upsell. If you order food, do you want alcohol with that? Do you want Coke with that? Do you want ice cream with that, et cetera?
But the grocery category for us, which we have really leaned into through the application of Cornershop, gives us that appointment viewing with very, very healthy basket sizes. So what you’re seeing now is we’re integrating the Cornershop functionality into the Uber-native Eats app.
If you went to Albertsons on Uber Eats six months ago, you would be kicked off to the Cornershop app, which is a really good app, but it’s a bit of a shock. You’re not used to using Cornershop, et cetera. Now you can shop natively with all of the feature sets or close to all the features that the team keeps building, that you would see on Cornershop, which is a specialized app, essentially built on Eats.
The way forward for grocery for us, which is grocery full-function native both in terms of shopping, in terms of delivery, in terms of the shoppers themselves. And we think the growth there can be enormous.
The grocery category in terms of TAM, it’s a larger category than food. And while there’s a very large incumbent in the U.S., there aren’t large incumbents outside of the U.S., and I think we’re probably number 1 or number 2 in the grocery category in eight out of our 10 international countries right now. So you’ll see us expand kind of outside of the U.S. first and then over further in the U.S., we’ll continue to grow our grocery footprint. Albertsons is a big partner that we just brought on board.
And then the U.S. advantage that we have is obviously we have a very, very big audience, both in mobility and delivery, and we’ll lock them with membership. And we think we’ll get a higher and higher percentage of people coming – shopping with us as well.
Eric Sheridan
Maybe just sticking with one of the points you made there. It seems like there’s still a fair bit of work – probably always going to be work to do on the tech integration side. What do you see as some of the mission-critical products of integrating across verticals, implementing measurement attribution and connectivity on the advertising side? If we were to look out over the next three years, what do you see as the most mission-critical tech investments to capitalize on the delivery opportunity broadly to make?
Dara Khosrowshahi
There are so many. But the one that I would say that I talked about is building full featured shopping functionality on the Uber Eats app, and that encompasses hundreds of different benefits that we’re shipping. But really what we’re looking for, the most important factor that we’re looking for is shoppers who shop on new verticals, do they come back to new verticals and then do they come back to Eats generally? Generally, they tend to engage more with Eats and have higher retention rates as well. And then the second that we’re looking at is the fill rate, which is, if you have 20 things in your basket, 20 items of your basket, what percentage of those actually get filled. So that’s really the big factor in – on the grocery side.
The second, we think, substantial improvement that we can see in grocery is on the advertising side. So the vast majority of our advertising revenue now is essentially restaurants, restaurant listing and paying for increased listings. And the ROI that those restaurants see are very high, 7x to 8x their advertising spend. That business is working very well.
We do not yet have sophisticated advertising tools for CPG advertisers, the Coca-Cola, PepsiCos of the world or sometimes brands, Starbucks, McDonald’s, et cetera, that are looking for more measurement and tooling in terms of incrementality or different kinds of media, video, et cetera. And that tooling is something that we continue to build. That will help us get from our $350 million run rate in advertising to the $1 billion plus.
Eric Sheridan
Got it. Okay. So bringing it all together, I mean, we’ve written it as sort of this super app strategy. I think you’ve corrected me on public earnings calls and called that family of apps or elements of an app ecosystem. And I think at the end of the day, what we’re really talking about is sort of rising consumer utility, right, creating daily habits. How far along are you in that strategy? And you’ve started to give more disclosure about people who start on one app and how they move into Uber Eats and vice versa. Maybe just help us understand what path you think you’re on and how we should think about it evolving in the next couple years.
Dara Khosrowshahi
I think we’re actually very, very early as it relates to our super app strategy or family-of-apps strategy. And whatever you want to call it, the question is of functionality. And on the consumer side, there are two significant activities. One is upsell, the second one is membership, right? So in terms of upsell, essentially, there’s a science behind their algorithmic and design kind of optimizations that we’re going through all the time to get you from using one of our products to two of our products.
About 45% of our gross bookings now come from Uber users who use multiple products. We think that there’s very substantial upside ahead in terms of our gross bookings. It’s only, I believe, about 17% of our customers, so there’s a ton of upside there. And that is just – if you look at Uber Eats, for example, Uber Eats gets twice the number of customers from rides compared to Google, Facebook, Instagram, TikTok combined, at one-fourth of the cost.
So it’s a huge economic advantage in terms of Eats acquiring these customers. And they usually – when they come to Eats, we’ll upsell them to new verticals, we’ll upsell them to Drizly, we’ll upsell them into a membership. And by the way, now more and more, we’re upselling them back into rides as well.
So all of this activity allows us to just have a cost of customer acquisition advantage over our competitors. And this advantage, it compounds over a period of time. But to some extent, you would say it’s been hidden a little bit because of the lack of capital discipline. In a capital disciplined world, the compounding effect of this cost of customer acquisition benefit starts adding and starts becoming more apparent in the financials, which it is right now.
The second part, once we get customers to use – to multi-app, then we drive membership. And so our membership program has a content advantage over any other membership program out there in that you get savings on delivery, but you also get savings on mobility, which none of the other programs have. That’s an advantage, both in terms of our program itself, but it’s also an advantage in terms of going out to strategic partners, going out to Disney and say, “Hey, let’s do a deal together. We’re global, and we’re multiproduct. So we’ve got the best product out there.”
So I think even the strategic deals that we – that you see, the relationships with a Disney and an Amex, a Rakuten in Japan, a Prime in Japan, et cetera, show the advantages that we have with membership. Members spend over 2.5x more than nonmembers. The retention rates for members is 20% higher than nonmembers. And while the discounts that we give to members early on is negative in year one in terms of membership, then it becomes positive years two through 10 as well.
So membership, we’re pretty early. We now have Uber 1 in seven markets globally. It’s all about continuing to launch in more markets and then driving penetration. About close to 25% of our bookings now come from members. It’s about one-third of total bookings for delivery. It’s less than that in mobility as well. That percentage is going come back up. So that allows us to have a cost of – a CAC advantage in terms of acquisition of customers and then a retention advantage in terms of those customers sticking with us.
And then on the delivery side, Uber has really gone from one business, which is like mobility-only business, biggest one in the world, best tech out there. We talked about upfront destination prices to now Uber Eats and now shopping as well and Direct jobs as well. So it’s almost like if you’re an earner on the Uber app, you’re getting opportunities for two or three different companies.
And the amalgamation of the opportunities increases retention, it increases engagement and we get a higher percentage of that earner’s time, in terms of their spending time earning on our platform because it’s consistent, it’s easy to use, and they get to choose what they want on our platform. And our algorithms tend to get to know what you want and then show you more of what you want as well. So the platform becomes more familiar and more – provides more utility for those owners as well. So you’ve got this CAC advantage, LTV advantage, supply advantage.
And everything is under one roof. About 75% of our engineers work on products that benefit both mobility and delivery. It sometimes shows up in innovations like upfront destination. It will show up in savings, cost per transaction savings that we’re seeing in delivery, really comes from having one team work on those areas. And then it will also come on the cost side, customer service costs, cloud costs, et cetera. That’s another benefit as well.
So when we look at our competitive position, we think we’re in a great position. We talked about delivering $5 billion of EBITDA by 2024. That would translate into about $4 billion of free cash flow, which is almost $2 a share. Even in a difficult environment, even with foreign exchange headwinds, we’re pretty confident of being able to deliver that and hopefully more.
Eric Sheridan
So with that in mind, and we’ll talk a little bit about the profitability in a minute or 2, when you lay out that case, it’s a direct traffic, LTV, lower CAC, I mean, these are the holy grails of Internet investing that you go after when you try to build a 2-sided platform, why not go faster on subscriptions? What’s the right balance to strike between the short-term investments, which could be dilutive to the platform today, but clearly, increasingly, it sounds like you have a higher conviction level in the longer-term yield from those investments?
Dara Khosrowshahi
I think that we’re going, first of all, as fast as we can getting the fundamentals right. I think to some extent, the market has now moved back to where the fundamentals matter. Like I think the question that you asked, a lot of start-ups would ask, and they just throw money at the problem. And throwing money at the problem is relatively easy, but ultimately, your lifetime returns are not what they – what you’re going to have. Any incremental investment that you make is going to be less efficient than the last investment. So we just want to do it the right way.
And for me, spending money may be a tactic, right, like letting me gain share in the market, but spending money doesn’t – isn’t a strategy. And I think a lot of companies were like using – spending money as a strategy versus a tactic. And I think you saw, for example, for us with earners, yes, we spent a lot of money in Q2 of last year in terms of incentives.
But then you have the machine takeover, the engineers take over, the algorithms take over, you really start optimizing. You have teams who are really focused on what earners want. And then you’re able to pull capital away, which is driver incentives are coming down. But the fundamentals remain positive because you’re actually getting a return on capital on this stuff.
So we could grow our membership base faster if, for example, we targeted highly loyal Uber users who actually aren’t going to be that incremental, right? So when you’re looking at membership and the benefit of membership, the big benefit is incrementality. If you’re using us 10 times a month and you become a member and you use us 10 times a month, all I did was give you discounts, right? There was no benefit to that. I’m looking for the Disney+ consumer who may use us once a month, becomes a member and then start using us five times a month, starts using us 10 times a month. That takes longer, but ultimately, economically is the right way to grow the business.
Eric Sheridan
Well, I’m going to say I use you more than 10 times a month –
Dara Khosrowshahi
Thank you.
Eric Sheridan
Please don’t take my discounts away under my subscription. So I want to talk about one more big topic as we sort of wind down on the conversation. There’s been so much investor focus since the Analyst Day on your profitability goals and how you allocate capital and how you align capital versus growth against those profitability goals. So I know it’s a big question. And the team’s answer always is there’s sort of multiple avenues or paths to get to what you laid out. But can you just refresh for investors what you see as a critical pieces to building towards those probability goals that you laid out back in February?
Dara Khosrowshahi
Yes. And just to review for folks here, we talked about a growth – top line growth rate, gross bookings growth rate of about 22% to 25% over the next couple of years, with a 7% incremental EBITDA margin. We’ve delivered more than that, it was 12% in the last quarter, but we really look at it on an annual basis and a multiyear basis. So quarters may go up and down. And really, when you look at that 7%, it’s about the mobility business, the base mobility business, UberX business, which is more than 10% in terms of incremental profit margins and the balance of growth there versus some of the new opportunities. So structurally payables or growing in Germany is going to have a lower structural margin than the base business.
And really what we’re doing is allocating capital between the two to drive an overall growth for mobility that we’re comfortable with. If the base business is growing faster or for some reason, base margins are higher, we’ll reinvest those margins and the growth element. And the goal here is not in – is to emerge in 2024, a business that is growing at 20-plus percent growth rate, continuing to deliver 7-plus percent EBITDA margins to the bottom line.
On the delivery side, we talked about 5% incremental EBITDA. We’ve seen upside to that chiefly because of the cost per transaction savings that we’re seeing here. And it really is about the three elements that I talked about: marketing efficiency, which is a competitive environment and the platform, we just have a structural advantage in terms of that; cost per transaction benefits as well; and then advertising. Against all of that, overheads that are going to be quite disciplined, so we think our overhead growth is going to be much lower than our gross bookings growth.
You put that mobility, incremental margin delivery and really disciplined overhead growth, we think we’re pretty confident in the path ahead at this point.
Eric Sheridan
Okay. Maybe just a subset question that we get a fair bit. Within that broader landscape of capturing growth and incremental margins, how should we think about allocating capital? You have a lot of assets on your balance sheet, including cash. Increasingly, you’re showing more and more profitability with each quarter. How should investors think about you capitalizing on those assets and generating ROI for equity investors going forward?
Dara Khosrowshahi
Yes. So I think starting with the balance sheet, we have a bunch of investments in different companies. There are some that we consider strategic. Aurora, for example, was a great self-driving partner, incredible team. And I think we view that as a strategic investment. Same thing in Grab. And then some investments like our stake in DiDi, that’s not strategic, or Yandex where we put a $1 billion of our delivery will look at both mobility as well.
So we will monetize those stakes over a period of time. We’re in no particular hurry because we’re in a great place in terms of balance sheet and cash flow. But we don’t think we’re adding a bunch of value holding stock in these companies that you could recommend to your clients to invest in directly. So we’ll look to monetize those stakes and we’ll do what we do with capital.
As far as capital allocation going forward, we had $382 million in free cash flow, which was a big moment for the company. We’ll continue to be free cash flow positive ad infinitum, I’m hoping, if there’s no other pandemic. And there, we’re not looking to just put a bunch of cash on the balance sheet. One element that’s important for us is to get to investment grade as it relates to our debt. I think we have a good road map to get to investment grade.
But then we’ll look to invest our incremental capital. And I think there’s going to be a lot of incremental capital over the next couple of years. And at this point, at these prices, we think buying back our stock is a pretty great use of incremental capital. But I think, first, we want to have that road map to get to investment grade. And then we’ll allocate our capital wisely.
And I think myself, Nelson has been around the block, my CFO, I think we’ve been – we’ve shown to be pretty disciplined operators, but I think, hopefully, you’ve seen us be pretty disciplined capital allocators as well.
Eric Sheridan
Understood. Okay. In the last minute before we lose you, we’re asking everyone here at the conference, whether it’s about your company or just the broader landscape at all. Any outside-the-box thoughts or predictions you want to make about how the environment evolves in the next three to five years?
Dara Khosrowshahi
As it relates to Uber?
Eric Sheridan
Or broaden it out, whatever you feel comfortable sharing with the –
Dara Khosrowshahi
I think for Uber, just if I look in the 3- to 5-year category, there are two pictures that I have in my mind. One is just always on, right, which is we want to be that everyday use case utility. You can use us to get some place, shop, food, like we want to be that always-on utility for you. And hopefully, we’ll have that prime kind of membership program where just when in doubt, come to Uber. So – and I really think we’re going to get there in the next three to five years.
Second, that you’ll see us do a bit more on and you see this with our Uber Direct businesses, more and more, we’ll look to separate our fulfillment staff. As we take the tech and communize the tech for both mobility and delivery, we’re rearchitecting our technical architecture to be able to separate it from our marketplace.
So just as we provide on-demand delivery for the Apples of the world or the Walmarts of the world, you’ll see that part of our business extend and probably more of our capabilities being provided for – so I think that’s something that’s pretty exciting too, especially –
Eric Sheridan
Thanks, Dara, again for giving part of your time.
Dara Khosrowshahi
Thank you.
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