So I saw this post on the Slack backchannel for The Information (a tech news site) just after Uber reported its second quarter results:
“Can someone explain Uber’s extraordinary charge for stock-based compensation? How come this didn’t have to be disclosed in the S1?”
That question rather caught the mood around Uber following their less-than-stellar second quarter where the $3.9 billion compensation charge contributed to their $5.2 billion reported loss.
Clearly the scale of the total loss was a surprise to most observers and became fodder for news headline editors around the world. The negative surprise was amplified as Lyft had announced better-than-expected results the day before, triggering an over 8% one-day rally in Uber’s shares from the bullish “read across.”
Those driving the rally in Uber that day apparently weren’t aware that a rather large compensation charge was coming in the second quarter. And that’s what is so interesting here. The compensation charge was “known” and had been disclosed. At least in the narrow legal sense as buried towards the bottom of page 116 of the Beowolf-like S1 was a single paragraph of Stock Based Compensation for Equity Awards, which included the following:
“We estimate that as of May 1, 2019, unrecognized stock-based compensation expense relating to outstanding RSU awards will be $6.0 billion. Of this amount, $3.5 billion relates to awards for which the service-based condition will be satisfied or partially satisfied on that date, and the remaining $2.5 billion relates to awards for which the service-based vesting condition will not yet be satisfied as of May 1, 2019.”
And in case you missed that, a few months later at the bottom of page 30 in the first-quarter 10Q
“The total unrecognized stock-based compensation expense relating to these awards as of March 31, 2019 was $6.2 billion. Of this amount, $3.4 billion relates to awards for which the time-based vesting condition had been satisfied or partially satisfied on that date, calculated using the accelerated attribution method and the grant date fair value of the awards.”
SEC lawyers? Check!
Ostrich. Head. Sand. Check!
The ostrich metaphor is relevant as it was obvious that the market and media were not fully aware of this expense. Furthermore, Uber did not make any effort to highlight that this charge was coming. For example, they made no mention of the compensation charge in their maiden first-quarter earnings release. And on the first-quarter analyst call the CFO merely offered some brief outlook commentary that included:
“As a reminder and from the language in our prospectus, we expect a large stock-based compensation charge in Q2 associated with restricted stock units vested in conjunction with our IPO.”
Right then he could have hung a proverbial lantern on the compensation expense and explicitly highlighted the size of the number to everyone. When a CFO says things like “over $3 billion one-time expense,” people take notice. Generic language referring to the S1 generally doesn’t get noticed.
Ostrich. Sand. Head.
And to firmly screw the ostrich’s head into the sand, the eventual $3.9 billion total stock compensation charge was reported in the second quarter earnings release, but it was relegated to a footnote under the earnings table (and it didn’t even make the first footnote, but was the second!) That was in comparison to Lyft who were upfront about their IPO compensation expense and gave it prominence in their first post-IPO earnings release.
While doubts about Uber’s model and path to profitability weighed significantly on the shares after the second-quarter results, the handling of the stock-compensation expense was an exercise in self-harm that damaged management credibility and contributed to the weaker share price.
The willingness of a management team to openly confront challenging results and metrics is critical to credibility in the eyes of investors. Investors do not want to be surprised, and even those who knew about Uber’s compensation charge were nonetheless damaged by the broader market’s surprise reaction that drove the shares lower.
Uber would have been wise to highlight this charge on their first-quarter earnings call in the immediate aftermath of the IPO. That would have likely lessened the negative reaction to their second quarter results as the market (and media) would have been prepared for the compensation expense.
But they didn’t.
The moral of the story is the ostrich strategy just doesn’t work.
Companies cannot escape the gravitational pull of their facts. Uber’s $3.9 billion compensation charge was not going to disappear and certainly would not pass unnoticed. While burying this charge in an SEC filing might protect the company from legal risk, it is not an effective way to ensure the broad market understands it.
Management must appreciate what it means to be public and have a continual understanding of the market’s concerns and expectations. A management team that does that will take its medicine, own up to their numbers and protect and even enhance their credibility with the market. Uber didn’t do that in the second quarter. We will have to see in coming quarters if that lesson has been learned.