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Tech companies now targeting cash flow

Uber has finally posted positive free cash flow after pulling back on its R&D spending
Tech companies now targeting cash flow
  • Netflix forecasting positive annual free cash flow
  • Facebook increases prices of VR headsets

Uber (US:UBER) has posted the first positive free cash flow quarter in its history, a further sign that tech companies are increasingly targeting cash rather than growth at all costs. The ride-hailing app generated free cash flow of $382mn (£313mn) in the second quarter of the year, up from an outflow of $398mn last year.

Rising interest rates mean raising debt or capital has become more expensive. For lossmaking businesses, there is now a greater need to fund themselves internally.  “Last quarter I challenged our team to meet our profitability commitments even faster than planned – and they delivered,” said Uber chief executive Dara Khosrowshahi.

Uber made a paper net loss for the period because of a $1.7bn unrealised loss on equity investments. This was primarily due to revaluations in its stakes in delivery companies Aurora, Grab and Zamato. Cash flow from operations was $439mn, up from an outflow of $342mn last year.

Reach and the ability to cross-sell between Uber’s delivery and mobility services has enabled it to benefit from economies of scale. Once a customer has been added to the app it is not incrementally more expensive to market them more services. Khosrowshahi praised the functionality of the app on the analyst call. “We have the greatest front end in terms of both rides and eats, so we can bring on more new customers than other model line platforms,” he said. 

Any user of the app will also have noticed the price of Uber journeys rising and this can be seen in the results. Revenue as a percentage of gross bookings was 28 per cent in the June quarter compared with 18 per cent in 2021. In the mobility business, the take rate was 26.6 per cent, up from 18.7 per cent last year. This figure would have been 19.2 per cent if it wasn’t for “business model changes in the UK”. 

As well as increasing prices, Uber also decreased its relative spending on research and development. R&D as a percentage of revenue dropped from 12 per cent last year to 6 per cent this year. Increasing prices and cutting investment in research helps cash flow, but is another departure from the hyper-growth-orientated focus of the past decade.

Similar trends have been seen at other tech companies this year. Meta Platforms (US:META) has halted hiring and increased the price of its Oculus Quest VR headset by $100 as it responds to its first quarter of negative revenue growth. Initially, it planned to subsidise its VR products with cash from the Facebook business – but a slowdown in the advertising sector has prompted a rethink. 

The same thing is happening at Netflix (US:NFLX), which has historically invested billions in content to attract users. Now, for the first time, Netflix is selling advertising space on its platform to create new revenue streams. It has also raised the prices of its subscriptions and stated it will focus more on profitability. The company expects free cash flow for 2022 to be around $1bn. Last year, it posted a free cash outflow of $159mn.

For years, tech companies have been subsided by cheap capital which has flowed through to consumers in the form of free food delivery, free social media accounts and endless customer perks. Investors used to expect scale at all costs; now they expect real cash today. Those Saturday night pizzas delivered to the door are another thing that is becoming more expensive.