We’re deep in IPO news, and last week was no different. When this happens, Equity’s Kate Clark and Alex Wilhelm fire up their mics and wax financial about the news we can’t possibly fit into the regular episode of the popular TechCrunch podcast.
Last week the duo discussed Uber’s IPO pricing and Slack’s S-1.
On Uber:
Kate: And before we jump into Uber’s Q1 financials, what do you think of Uber is most recent private valuation of 72 billion. Do you think that’s a wildly inflated valuation or do you think that’s a reasonable price tag?
Alex: So I have absolutely no idea. And we’re going to get into this a bit with the Q1 numbers, but I don’t know how to price this company. I really don’t. We talk a lot about SaaS IPOs and there’s a lot of really solid metrics out there about those companies and what they’re worth and what makes them work more or less than competitors. Uber’s a strange beast. It’s got these enormous losses. It’s got slowing growth. It is a global brand. It’s got an enormous amount of revenue. But where to put a price on it for me is a really big struggle. And this is why I’m glad that I’m a journalist and not an analyst because I don’t have to make that call.
On Slack:
Kate: I thought they were closer to profitability than they actually are and Slack is still losing a lot of money. So really it’s just like all the other unicorns who you’ve been covering who are not profitable and who are losing a lot of money, but Slack is a great business. So I think we’re going to see that play out. Actually. I kind of wish it was doing an IPO because it’s a lot more fun to speculate and criticize when we’re covering, direct listings yeah, they are so simple in so many ways and I think that’s what has appealed Spotify and Slack to that method of exit just because it does cut out a lot of that kind of especially unnecessary prices those companies have to pay, you save a lot of money doing it this way.
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Kate: Hello and welcome back to Equity. Actually, it’s Equity Shot and no, this is not a permanent thing. We won’t be doing two episodes per week forever, but as long as there are these major unicorn IPOs, it’s Alex a nice job to sit down and talk about it. So Alex from Crunchbase News is back with me again this week and we’re here to talk about two major IPO developments. Alex, how are you?
Alex: I am tired but I am very excited. I’ve been covering these two companies for so long now. It is almost like a birthday party to get their numbers. And so today with Uber and Slack really making news I’ve been super caffeinated since I woke up and I’m pretty jacked to be here. So let’s talk about it. So I think Uber is first, right Kate?
Kate: Yeah, let’s talk about Uber First. Of course Uber is the most buzzworthy company that there is in Silicon Valley. So it always generates a lot of headlines no matter what. But today really was some very major news relating to its IPO, which is now only days away. And like you just mentioned, we’ve been talking about this for months and we’ve been covering this for years, kind of waiting for Uber to do this. So today they made the decision to price their shares at between 44 dollars and 50 dollars per share. They plan to sell 180 million shares at their common stock and their existing stake holders plan to sell an additional 27 million shares. So that means Uber is going to be generating a fully diluted market cap of up to 91.5 billion
Alex: And that’s a diluted number. The other one people might have seen is 84 billion, which is a non diluted number. Is that right?
Kate: Yeah, you’re right. And also another key figure that people have been seeing, and we’ll want to know, is that that means Uber can raise at that price up to 9 billion dollars in its upcoming IPO.
Alex: That is so much money. We’re kind of anured to these dollar amounts in the SoftBank Vision Fund era. But an IPO that values a company at nearly 100 billion dollars is going to raise 9 billion dollars is just staggering. We shouldn’t lose a sense of the scale of this. It’s an enormous moment in technology and also in the financial world alone, it’s huge.
Kate: And I think another interesting thing people may not have known if didn’t actually read the S-1 is that PayPal is now saying they’re going to invest 500 million dollars in Uber as part of a private placement. This deal extends a partnership that already existed between the two companies that’s going to help them develop a new digital wallet service. So it’s a little bit of an interesting development in the Uber IPO situation.
Alex: So my read of that was if you really want to work with someone more, you buy a bunch of their equity. And if you want to do your friend a favor, you do a really big private placement in the IPO because now you know Uber gets to say, and PayPal who everyone thinks is smart, it’s putting a half billion dollars into this and they’re smart money. So why don’t you, so it’s a brand boost, right?
Kate: And we just saw the exact same thing happen actually with Salesforce and Zoom.
Alex: So nice moment for them. But the question was, and we were talking about this before the show, the 84 billion dollar numbers only up 16% from Uber’s last private valuation of 72 billion. So Kate I’m curious were you expecting Uber to shoot a little bit higher from its last private evaluation we think now about its IPO a range.
Kate: Yeah, I was definitely expecting Uber to shoot higher. I think where these tech Unicorns, especially those with these consumer facing and mobile apps or whatever it may be, I expect them to shoot really high, but then you think about Uber and this is a company that’s always gone up far beyond kind of what was reasonable at the time. So I think I was expecting just given this company’s personality that they’ve built over all these years, I was expecting them to really kind of have an outrageous IPO and I actually still think that that’s what we’ll see.
Kate: As you all know you, you set these price ranges, but they can often mean nothing when a company prices the top range, which is exactly what happened with both Zoom and Pinterest, which were the most recent IPOs that we’ve talked about. So I think it’s going to be pretty likely that Uber prices above that 50 dollars a share and that that was just a modest range that sort of put it on the same revenue multiple as far as that 84 billion dollar evaluation as Lyft. And Alex, we were talking about this before the show, but can you explain a little bit of that lift Uber comparison?
Alex: Yeah. So if you’re not into a boring financial arcana skip ahead about 30 seconds in the show right now, but if you’re still here, hi, thank you. So we did a little math for you and here Friday at roughly market close today, end of the week Lyft is worth about 16 billion dollars. And if you divide that number by its 2018 revenue, you get a revenue multiple of about 7.42. Now that’s just kind of the metric in the wild without context it means nothing. So here’s another one. At 84 billion dollars, Uber has a 7.45 X revenue multiple using it’s 2018 revenue again as the comparison point.
Alex: So right now at 84 billion for Uber, it’s priced almost exactly the same as Lyft is using 2018 degenerate revenue multiples. Now, is Uber worth more per dollar of revenue than Lyft? Maybe, maybe not. We presume that Uber is going to make that point because they own shares in a number of other ride hailing companies around the world and maybe that means they’re worth more in terms revenue, I don’t know, but we were kind of surprised to see how close they are currently trading, but it’s almost not surprising given that Lyft is liquid and Uber is setting some kind of market benchmarks so to see them kind of in sync isn’t a huge shock. That’s my read Kate, but I agree with you. I think they’re going to shoot for a higher valuation and they’re going to raise this range.
Kate: And before we jump into Uber’s Q1 financials, what do you think of Uber is most recent private valuation of 72 billion. Do you think that’s a wildly inflated valuation or do you think that’s a reasonable price tag?
Alex: So I have absolutely no idea. And we’re going to get into this a bit with the Q1 numbers, but I don’t know how to price this company. I really don’t. We talk a lot about SaaS IPOs and there’s a lot of really solid metrics out there about those companies and what they’re worth and what makes them work more or less than competitors. Uber’s a strange beast. It’s got these enormous losses. It’s got slowing growth. It is a global brand. It’s got an enormous amount of revenue. But where to put a price on it for me is a really big struggle. And this is why I’m glad that I’m a journalist and not an analyst because I don’t have to make that call.
Kate: Certainly when we were discussing the Lyft IPO a few weeks ago, I think we often brought up the fact that it was such a historical IPO because there had never been a ride hailing company go public or even a company remotely similar to Lyft. Now that we have Uber, we do have Lyft to compare it to though Lyft hasn’t exactly performed well. It’s just an interesting mix of events to try to predict what will happen with Uber when you’re looking at only really one comparison.
Kate: Another thing about Lyft though was it was growing very rapidly and you could see that in its S-1, but with Uber and this is what we’re about to get into, but it’s actually, you’re not seeing that path to profitability. You’re actually seeing stagnant growth and actually shrinking growth which is not what I think a lot of people were necessarily expecting to see.
Alex: No. Do you want me to walk us through a couple of those numbers now?
Kate: Yeah.
Alex: Okay. So we did some in the quarterly math here because one thing that you’ve seen a lot of out there in the media as people looking to Uber’s 2018 revenue compared to the 2017 revenue and using that revenue growth to kind of talk about how fast the company is expanding, that’s a bit simplistic. And so what we wanted to do was dig into the quarterly results to see how fast the company is growing on a sequential basis. So kind of from one quarter to the next, how much does it grow? And it only kind of grew about a percent from Q3 to Q4 of 2018 and given the revenue range that Uber has put up for its Q1, it hasn’t locked the number in yet, but Uber grew between 2.2 and 4.2 percent from the fourth quarter of 2018 to the first quarter of 2019.
Alex: So faster growth than it saw at the end of last year, but still relatively modest expansion for a company that’s trying to value itself as a growth business. And that’s kind of where we got a bit stuck in what’s its worth because if Uber is a growth company and its growth has slowed. How do you value it? I don’t know. But Kate, can you talk us a little about the other quarterly numbers that we saw?
Kate: Okay. So in Uber’s latest S-1, they do provide a range, an estimation of what kind of revenues they plan on seeing Q1 2019. So on the low end they’re expecting just over 3 billion, in the high end they’re expecting 3.1 billion. So that would be the largest revenues for any quarter to date. But they also provided some interesting new metrics surrounding adjusted EBITDA. So Alex why don’t you dive into your favorite metric for us?
Alex: I love them but my least favorite metric is not my favorite metric, but on the adjusted EBITDA front what we’ve seen in this new quarter from Uber is a deterioration in profitability. So in Q1 2018, Uber had adjusted EBITDA of negative 280 million dollars, which is a lot. But in Q1 2019, the company had the tween negative 954 million and negative 847 million in adjusted EBITDA. And the reason there’s a gap is that the company has yet to fully kind of figure out what happened in Q1. So we’ll be talking about a range in these metrics, but certainly a deeply unprofitable quarter for the company, even on an adjusted basis.
Alex: And Kate there’s some more metrics in here that I might just throw out just for a second. One thing that really caught my eye was this core platform contribution margin. And for people out there who are following along in the S1 you’ll note that in Q1 of 18 Uber’s core platform had a contribution margin of 18% of it’s a adjusted net revenue if you’re doing the math. But in Q1 of this year, Kate, it was between negative seven negative four and to me that feels like a pretty material deterioration in the quality of Uber’s core business. Is that your read of the situation as well?
Kate: So this stands out to me the most out of anything that came out of the amended S1 is that we’re seeing Uber’s core business actually become less profitable. Not that it ever was particularly profitable, but it’s actually moving the wrong direction. So, yeah I think that stands out, I think that is a really bad sign. And it seems like that would be something if I was a public market investor or an analyst that I would see and red light Uber as opposed to giving it a green light reading and being like this is something I should buy stock in.
Alex: Well, a little context around Kate’s point there is that the core platform that Uber operates has a two sided marketplace of drivers and riders. And so you often have incentives that are used to kind of make sure both at the marketplace are functioning and those can eat into the profitability of the marketplace itself. So you think about a price war or you’re kind of a incentive war. This is what you’d expect to see. And I don’t know if this is exact same thing Kate, but there’s a lot of discussion on Twitter in Q1 about Uber and Lyft kind of bashing each other with incentives and discounts and so forth. So I’m curious if this number is part of that and that we’re seeing that kind of play out in numerical form. But certainly not great is my impression of this quarter. I thought it was going to be better, honestly.
Kate: I think we’ll have to wait and see how the rest of the year goes. Because like you just mentioned, there was kind of, Uber and Lyft were competing very aggressively in the last three months in order to increase market share ahead of their respective IPOs. And it hurt both of them like. Yeah, sure it did give Lyft, help them build their market share. But take a look at Uber as amended S1 you can see how it impacted their financials. So once those games and now that we don’t really need to play those games so much that they’re both public, at least will be in the next week or so. We may see those numbers improve a bit over time.
Alex: Yup. Certainly the investors in these companies hope so. But I want to turn our eyes up to the horizon and talk about some long-term things really quick Kate before I move over to Slack. And you have not watched the road show yet, is that correct?
Kate: I have not. Not yet.
Alex: Okay. Well, if you do get a chance, it’s a lot of very soft music and people walking slowly while talking to the camera. It is exactly like Lyft’s roadshow but with a different brand. So it’s kind of the same field. But what I was excited about was at the end of the road show, there is a slide that comes up that says long term target model. And what this does is kind of telling you what Uber did in 2018, and what it kind of hopes to do in the long-term some time off in the future. So if you kind of want like a crystal ball look at Uber’s long-term business, this gives you some kind of ways to understand that.
Alex: So the long-term target for adjusted EBITDA, which is a very adjusted profit metric, is 25%. So that means Uber expects roughly 25% of its adjusted net revenue to end up becoming adjusted EBITDA. So that’s not saying that net income divided by revenue will be 25% but adjusted EBITDA of adjusted net revenue.
Alex: Here’s the problem with that. The company kind of put a 2018 number next to it to show a contrast, but they said negative 18% adjusted EBITDA margin in 2018, 25% down the road. So we recalculated the adjusted EBITDA margin before the show of the company’s Q1 range. And it was actually negative 35 to negative 30% so the company is far further away from that 25% than it’s kind of long-term target model shows if he use the most recent numbers.
Alex: So I again, I don’t know how to value this company, I don’t know what to do about it. It’s not my business but certainly a long way off from that long-term target and maybe a bit further off than it’s a documents kind of show when you look at a full year result and Kate, that’s my kind of my last point on this.
Kate: Yeah, definitely. I think we’re both glad that we’re not in positions where we actually have to value Uber because as people have said, it’s a strange and very unique beast and it’s a very challenging company to not only predict its future but just to give it any sort of price tag right now. But let’s talk about Slack. I know you’re excited to talk about Slack and Slack is a business that we can compare it to those who have gone before. Yeah, sure. It’s very unique and it’s become this very ubiquitous communications platform that we’re using like right now as we record. But it’s easier to judge than Uber. So let’s talk about that. Tell us what the news is with Slack.
Alex: Slack is a high-quality business that is slightly less profitable than we expected. So kind of what you just said, here’s some telling numbers. In the year ending January, 2017 105 million in revenue, in the year ending January, 2018 220.5 million in revenue and then in the year ending January, 2019 just over 400 million in revenue. So very solid growth like we expected. That’s super killer going up I think 82, 84% of whatever it was in the last year to 400 million is an insane growth rate at scale. So very impressive. But Kate, probably a good point which is that the company lost 147 million, give or take in the year ending January, 2017, 140 million give or take in the year ending January, 2018 and 138 give or take in the year ending January, 2019. So not at all close to profitable on a GAAP basis. And Kate, I think you were also a little taken aback by that, right?
Kate: Right. Like I mentioned I thought they were closer to profitability than they actually are and Slack is still losing a lot of money. So really it’s just like all the other unicorns who you’ve been covering who are not profitable and who are losing a lot of money, but Slack is a great business. So I think we’re going to see that play out. Actually. I kind of wish it was doing an IPO because it’s a lot more fun to speculate and criticize when we’re covering, direct listings yeah, they are so simple in so many ways and I think that’s what has appealed Spotify and Slack to that method of exit just because it does cut out a lot of that kind of especially unnecessary prices those companies have to pay, you save a lot of money doing it this way.
Kate: But it is interesting. When I woke up this morning, I went to your Twitter feeds. Yeah. Alex tweets a lot. But I was catching up with the news through your Twitter feed and I liked what you said about Zoom and Slack. So tell us what you think about the comparison there?
Alex: Here’s the thing. Everyone thought that that Slack was growing very quickly, had very high gross margins and was going to be in great shape. That’s all correct. We just thought it was closer to kind of break even. But Zoom, which earlier this year came out of nowhere left field, right field center field, who cares, one of the fields and actually put up insane growth and GAAP profits. And so I really think that in a sense, Zoom was the Slack that we were waiting for was the joke that I made on Twitter.
Alex: And it kind of is true. But at the same time though, I don’t want to denigrate Slack because what they built is a great company. They have gross margins of, I think in their last fiscal year, 87.2% which is insane and so good. And they’ve been in the high 80s for the last three fiscal years. I can’t knock that with that growth and that gross margin, super great business. It’s not as probably we thought the world will still spin. It’s a very valuable company. And I honestly, I’m on like six Slacks right now. I have to mute them before we record so I don’t get distracted. Like that’s how ingrained it is to my work life.
Kate: I think my Slack messages have often appeared in our episodes.
Alex: Last week there was some of your text message beings in the recording. But we will move past that. And I want to throw on a couple of sassy metrics for people out there who are into this kind of company, Slack’s billings in its most recent quarter were by far the highest ever, I think by almost $50 million. That implies some really good future growth. It’s got a very, very strong net dollar retention rate and I’m not going to go ahead and talk through exactly how they calculate that because that would take too long, but it’s been above 140% for his last fiscal year and then in the 150 before that. That’s super great.
Alex: And the number of customers that pay over 100K a year to Slack grew from, in the most recent quarter it was 575 and in the year before it was 298. So big accounts, big retention, it looks really solid. It’s not a lot to critique and this company except for sales and marketing costs, Kate and I think that’s because Slacks competing with Microsoft Teams, which is trying to push back against a growth of Slack and the enterprise, which makes a lot of sense to me.
Kate: Slack is competing with Microsoft but not only Microsoft, since Slack has grown and become such a monumental company that has become, there’s been a lot of startups that have cropped up in the space that have tried to compete. I’m sure the market share that they have doesn’t compare, but I think we will see over time that competition in that space is going to really heat up.
Alex: Yeah, I agree with that entirely. And I think we wanted to kind of cap off with some notes about acquisitions and the question becomes, Kate, do you think that someone’s going to try to swoop in here and snag Slack away before it direct lists or will it actually make it out and not go the way of AppDynamics and Qualtrics?
Kate: I kind of hope that happens because it’s very fun to those final hour acquisitions are very exciting. But my gut says no, price tag’s big, Slack for 7 billion dollars, more than 7 billion dollars. And of course it’s going to want to see a premium in any kind of transactions. So I think that’s very unlikely. But I was looking back just this morning at some of my Slack coverage from years ago and I remember thinking, oh, Amazon might swoop in and buy Slack. What would that look like? And I don’t think that could happen. But Amazon, Microsoft, there are some acquirers who could afford to buy a Slack. It’s just whether or not that really makes sense. What do you think?
Alex: It’s not going to be Microsoft, right? Because they put too much money into Teams and Yammer to pull the trigger on this. And they almost bought it years ago for a lot of money and didn’t. Amazon, I don’t see them fighting for the enterprise. Google? No, it doesn’t make sense to me. I don’t see that. IBM, they already bought Red Hat. They can’t digest more than two things at once. Alibaba already has DingTalk. I think it’s what’s called. Who else is out there? I don’t know. I don’t see this happening. How you think it’s going to go public.
Kate: Do you think Microsoft should have acquired Slack when it had the chance?
Alex: No, I think it did the right thing. Because they didn’t properly invest in Yammer after they bought it, which I think Yammer won Tech Crunch Disrupt like a million years ago we should point that out. So Disrupt’s cool. Go ahead, sorry.
Kate: I was just going to say, and I also think I’m Stuart Butterfield wants to take his company public. I think that’s been one of his goals for a long time, as that it’s often a goal for these entrepreneurs. So, I doubt that he would at this point even consider that unless it was just going to be an offer he really couldn’t refuse.
Alex: 12 billion, 13 billion, 14 billion. But then you’re paying so much for revenue because the company’s grown so fast. It’s hard to see. I think Slack makes a kick butt company on its own and I’m excited to see it build ads platform as an independent company. If it gets absorbed into a bigger firm it’ll just become a feature or a small product line. I think it should go on its own two feet and see what it can do on its own.
Kate: Yeah, I agree and well, if that does happen, I’m sure you and I will be here to podcast about it.
Alex: God no, let’s take a break. It’s been a fun few weeks. I will say.
Kate: All right, well I think that’s great. Let’s talk again next week and I have a good weekend, Alex.
Alex: You too Kate, bye.