Comment by eldavido | Hacker News Reader

Comment by eldavido | Hacker News Reader

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You're just missing some terminology. This stuff is surprisingly complex -- which gives technical people used to worrying about mind-numbing levels of complexity an edge ;)

"Revenue" is confusing for business like this. More precise reporting usually reports either "GMV" (gross marketplace value, all the payments Uber took in) or "net revenue", which would deduct the amounts paid to drivers. If an article said "revenue" without further qualification and it was a marketplace business, I'd probably assume they were talking about GMV.

"Profit" is to some extent a fiction of the accounting department -- the relevant question is actually cashflow. Money in, money out. When you need to make a payment for loan service/payroll/etc and don't have the cash, you're headed for bankruptcy; that's pretty easy to understand. By way of comparison, whether or not a firm is "profitable" requires making a bunch of complicated judgments about whether you've actually "earned" the cash you've collected (e.g. gift cards, multi-year software contracts) and on the expense side, how to spread the cost of large, long-term, fixed assets (like code development, PCs, etc) against what they productively delivered (revenue-wise) over long timescales, potentially decades. That's called depreciation and amortization and it's a big topic in accounting school.

One thing many developers forget is that customer acquisition, especially in marketplace businesses like Uber, DEVOURS cash. Uber spends like crazy on everything from conventional advertising (digital, TV, radio), referral/sign-up credits, rider incentives, cross-promotions with other brands (stay at X hotel and get uber for 10% off), etc.

Uber is uniquely complex because it's sort of an aggregated conglomerate of a bunch of markets with differing stages of maturity and profitability. Think of each of these as different businesses, where the older, more developed (e.g. Chicago, New York) ones are putting cash into the business, subsidizing the spend (investment) on developing a good competitive position in later markets.

And yes, there is absolutely truckloads of money available if you can show you can reliably acquire customers on a business with good economics.

Profit is not a fiction, it's just a different thing that cash flow.

Cash flows ultimately reconcile with profit. Or they should.

It’s difficult to show how much profit you had in Q2 2018, let’s say. Hence the fiction qualifier.

"It’s difficult to show how much profit you had in Q2 2018,"

? It's right on their public statements.

The components of it are not known, but then again, same thing applies to their cash flow.

It's fiction in that it can be whatever they want it to be.

Like Amazon was known for years to intentionally not make a profit. They arranged their business so that all the money they made got plowed back into the business in such a way that they could claim a slight loss.

That was in their control to some degree.

"It's fiction in that it can be whatever they want it to be."

No, absolutely not. There are well accepted accounting principles.

If a company wants to re-invest, then they can do that - but 'profit' is a material, objective thing, of course it changes profit, but it also would change 'cash flow'.

Financial accounting is a real thing, not any kind of fiction.

It gets to be fiction when there are things that are difficult to account for, or intangible things like goodwill.

But if they book a sale on Dec 1 - then that's revenue, even if the money doesn't come in until 3 months later.

Goodwill is simply the difference between book value and price paid for an acquired company. For instance when Google bought YouTube for a billion it was almost all recorded as a Goodwill asset. Each year, Google must decide if YouTube continues to be worth at least a billion dollars, otherwise they may need to write down the goodwill, much like any other impaired asset. Buying companies are like buying other assets except they don't depreciate on the books and are called goodwill. Writedowns of goodwill are the same as any other asset impairment.

I really wish goodwill was called "acquisition premium" and everyone would get it.

" Writedowns of goodwill are the same as any other asset impairment."

Technically yes, but really no.

Most other assets have an objective value.

When companies buy others, they are buying brand, talent, future revenues, often at crazy massive premiums. That's where the inherent intangibility comes in.

There's just no way for investors to really nail down why a given acquisition might be had for this or that much.

Companies are bought for often nebulous reasons, so these writedowns often skew the earnings in weird ways.

So it's the inherent intangibility in that price ... that drives the ambiguity of a lot of goodwill.

But I get what you are saying, technically it's not rocket science.

Yes and no.

While you're technically correct that there are well-accepted principles, they don't always have much bearing on whether a company will be solvent, or easy to finance.

Example 1: Amazon's core retail business. Not very "profitable". Yet, it provides a massive amount of float through their ability to get inventory quickly from suppliers on long payment terms (30-60 days), that's sold to customers in something like 7-14 days with immediate collection. That means Amazon has something like 2-6 weeks cash, at hundreds of billions/revenue per year (8-40 billion in interest-free cash), as effectively an interest-free loan. That might not be profitable but it's very easy to see how that allows cheap financing of capital-intensive investment. Amazon is explicitly run with emphasis on cashflow dynamics (less on profit). It's worked exceedingly well for them.

Example 2: A hotel might run very profitably on a unit basis but require so much upfront capital to finance that it's practically impossible to build.

My point isn't that accounting isn't "real". Money is also in some sense a "shared fiction" [1] and yet it's quite real. It's just that looking merely at accounting profit/loss doesn't really tell you much about the operational dynamics of a company. It took me a really long time to understand this.

[1] From "Sapiens", a great book, explaining the role of fiction in real-world decision-making and beliefs.

Yes, that's the difference between profit and cash flow, basically working capital.

I think most people get this, this isn't really one of those magic things.

In both cases you've described 'profit' is still 'profit' in the generally accepted sense, and we have cash flow statements to help us understand that.

> "Revenue" is confusing for business like this. More precise reporting usually reports either "GMV" (gross marketplace value, all the payments Uber took in)

Your description is confusing itself.

GMV is total retail value of transactions through a C2C type of business. eg ebay GMV would be the gross dollar value of all transactions. ebay revenue would represent ebay's total commissions, listing fees, and other income from being an agent in the sale.

So, while GMV is truly, quoting you, "all the payments Uber took in", because for Uber (unlike ebay) you don't pay the driver directly but rather all transactions are brokered by Uber, it is more clear to say that GMV is the total value of all rides. While stating that it's money taken in by Uber is true, it isn't as clear a description when you're trying to explain GMV.

> If an article said "revenue" without further qualification and it was a marketplace business, I'd probably assume they were talking about GMV.

I'd assume revenue, because GMV is not revenue. If only 1 number is reported, revenue, or net revenue if you will, is what we care about so that's what I'd assume is being reported. GMV without take rate is not that interesting.

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