CIMA SCS Aug 2019: Zoom
The CIMA August 2019 strategic case study is based around a company called Uber, sorry I mean Zoom! Having read the pre-seen materials as I am sitting the exam myself, it’s clear the company is based around the real life company Uber.
Which makes it very interesting and relevant as I am sure we have all used the Uber platform when taking a taxi.
So from a personal point of view, I am pleased with the subject of the CIMA August 2019 SCS case study!
You can find the official pre-seen materials from CIMA here.
SCS Astranti August 2019 Course
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Having gone through the pre-seen materials, what really caught my eye was the fact why aren’t this tech companies making any money? Where is the profit!!??
The financials for the Zoom case study paint a grim picture in terms of profit.
- 2018: Loss for the year was 331m (up 93% from 2017)
- 2017: Loss for the year was 171m
And this was amid a backdrop of huge revenue growth in the same period.
To give it more context I looked into the financials and industry news of Uber to see what the real life situation is. Here is what I found.
Here is a great article from Crunchbase explaining why Uber loses money in terms of the facts and figures.
Uber Q2 2018 Income Statement
Much like the situation with the CIMA SCS case study Zoom, the income statements of Uber paints a picture of a cash burning business. Uber had a staggering $2.2bn worth of operating expenses in Q2 last year – just a three month period!!
The below chart taken from the crunchbase news article linked above gives an overview on what Uber’s operating expenses are.
Sales and Marketing – 33% of OPEX
33% of their operating expenses are funneled into sales and marketing activities, which is not surprising in the tech industry. Remember that Uber (and Zoom) are tech companies and not transport companies.
It’s a highly competitive industry with low barriers to entry, to maintain (and increase) their market share a lot of cash will be spent on marketing activities and trying to generate sales.
Research and Development – 16% of OPEX
This is a crucial area for tech companies to invest and spend in. Especially the likes of Uber and Zoom who are connected to the transport industry, where there is a big push on self driving drives.
The pre-seen materials mention a lot about Zoom investing in self driving cars and that’s it’s future strategy, so spending wisely in this areas will be key to long term sustainable growth.
Turning Loss into Profit
For Tech companies, this hinges on the future developments and success of their R&D department. For example, if Uber were to make a significant breakthrough in the world of self driving cars it wouldn’t need to have drivers on contract and would give them 100% of revenue generated by each trip.
It would have the potential to turn this loss making income statement into a very healthy financial statement firmly in the black. Very much like the case study in question.
A Driving Problem
One of the strengths of Uber is also it’s weakness. The fact it doesn’t employ the drivers directly and own the cars on the balance sheet, means it’s a very lean business model and very light on assets.
However, the so-called gig economy brings it’s own problems.
There is a brilliant article here from Salon.com about the issues the drivers from Uber face, and while despite this being in Uber’s favour they still fail to turn a profit.
A 2017 report found that only 4% of Uber’s drivers continue to work for the company after 12 months. Meaning that Uber constantly have to recruit and offer incentives and competitive rates to attract drivers.
This in itself will have a drain on the income statement and partly explains why the company fails to turn a profit.
Good Luck to SCS students.
I will be posting more content on this exam in the coming weeks!