Lyft, Inc. (NASDAQ:LYFT) Q4 2022 Earnings Call Transcript

Lyft, Inc. (NASDAQ:LYFT) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good afternoon, and welcome to the Lyft Fourth Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode to prevent any background noise. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Sonya Banerjee, Head of Investor Relations. You may begin.

Sonya Banerjee: Thank you. Welcome to the Lyft earnings call for the quarter and fiscal year ended December 31, 2022. Joining me to discuss Lyft’s results and key business initiatives are our Co-Founder and CEO, Logan Green; Co-Founder and President, John Zimmer; and Chief Financial Officer, Elaine Paul. A recording of this conference call will be available on our Investor Relations website at investor.lyft.com, shortly after this call has ended. I’d like to take this opportunity to remind you that during the call, we will be making forward-looking statements. This includes statements relating to macroeconomic factors, the performance of our business, future financial results, and guidance, the impact of our cost reduction initiative strategy, long-term growth, and overall future prospects.

We may also make statements regarding regulatory matters. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our Form 10-Q for the third quarter of 2022 filed on November 8, 2022, and in our Form 10-K for full year 2022 that will be filed by March 1, 2022, as well as risks related to the current uncertainty in the markets and economy. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and Lyft disclaims any obligation to update any forward-looking statements, except as required by law.

Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results, may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC, as well as in our earnings slide deck. These materials may also be found on our Investor Relations website. I would now like to turn the conference call over to Lyft’s Co-Founder and Chief Executive Officer, Logan Green. Logan?

Logan Green: Thanks Sonya and good afternoon. Today, I’m going to cover the team’s Q4 performance, important updates to our non-GAAP financial measures as well as our Q1 expectations. But first, I want to reflect on the progress we made in 2022. I’m appreciative initiative of the team’s execution in a challenging year, we took important steps to strengthen our business and deliver significant value to our customers. We connected more than 1 million drivers with nearly 40 million riders. We supported hundreds of millions of rideshare rides and more than 50 million bike and scooter rides which was a new record for us. Millions of people used Lyft to take trips, to get to work, vote, attend events, and connect with friends and family.

The team worked incredibly hard and delivered significant value. We also introduced high impact product improvements. Upfront information is a major advancement to the driver experience, and our work in other areas, including with Lyft maps, is competitively, differentiating and delivers value valuable marketplace efficiencies. We’ve also expanded our market reach by relaunching our Lyft Pink membership program with new benefits and a lower price point. Additionally, by integrating services for car owners into the Lyft App like roadside assistance, parking and maintenance, we can deliver even more value to the roughly 75% of Lyft riders who have a car. With innovations like these, we can capture more of consumer transportation spend. Before I move on to our financial results, I want to highlight two items from the press release.

First, we’ve updated our definitions of contribution and adjusted EBITDA to include reserve adjustments for prior periods. And in Q4, we took action to strengthen our insurance reserves by $375 million which given the definition change, affected our reported results. Elaine will discuss this in more detail. Now, let me talk about Q4. We saw important tailwinds in rideshare, including strong demand and more drivers organically using Lyft. Revenue was the highest in our company’s history, and our results beat our outlook on every metric excluding the action we took to strengthen our insurance reserves. Rideshare demand was strong. We had 20.4 million active riders, which was the highest level in nearly three years, and revenue per active rider reached a new record.

In particular, the airport use case reached another new high at just over 10.4% of rideshare rides with the absolute number up 25% versus Q4 of 2021. Additionally, on the enterprise side, managed bookings grew by more than 60% year-over-year and set a new record with continued strong adoption of our B2B offerings, particularly in the healthcare and retail verticals. In Q4, we are the most active drivers on our network in nearly three years, reflecting healthy organic tailwinds. Bookings per active driver were more than 50% higher than they were in Q4 of 2019 and near our all-time high. Drivers spent more time driving than they did in Q3 of 2022 or in Q4 of 2021. And across the US, our average rideshare ETAs improved. Even with these tailwinds, our marketplace was running hot in Q4, demand outstripped supply, and prime time went into effect more often than we would have liked.

As a result, our conversion rates, meaning the share of ride intents that convert to rides taken, came down quarter-over-quarter. This dynamic contributed to revenue and adjusted EBITDA, exceeding the high end of our outlook, excluding the increased insurance reserves. But we know high prime time can hurt conversion and is not healthy over time. Going forward, we’re prioritizing competitive service levels to maximize long-term growth and retention. Next, I’m going to address our Q1 guidance. There are three factors putting pressure on both revenue and adjusted EBITDA relative to Q4. First, seasonality. As we’ve shared before, our business faces pressures in the first quarter of the year, both in terms of ride share as well as bikes and scooters related to colder weather.

Second, prime time is coming down dramatically quarter-over-quarter because of increased driver supply. This reduction in prime time is good for our service levels, but will reduce our Q1 revenue and adjusted EBITDA. Third, base price. In January, we slightly reduced base pricing to remain competitive with the industry. Given the combination of these factors, we anticipate Q1 revenues of roughly $975 million, relative to Q4, this is a decline of approximately $200 million. About one third of the sequential decline is due to seasonality, while the remainder is due to less prime time and lower base prices. We expect this will result in Q1 adjusted EBITDA between $5 million and $15 million. This is obviously not the level of growth or profitability we are aiming for or capable of, and we are laser focused on driving additional growth and managing costs.

Relative to three months ago, the competitive dynamics changed. And the better marketplace balance we see today creates significant opportunities for long term growth. To take advantage of this opportunity and grow the market, we must prioritize competitive service levels. This will impact our 2024 adjusted EBITDA and free cash flow targets. We are assessing the impacts of these changes and are actively reviewing adjustments to the business, including cost cutting measures. We will share additional long term margin targets in the near future. Stepping back, the fundamentals of the business are strong. We’re seeing healthy rider demand, and our driver supply position has significantly improved. We believe these conditions, paired with cost cuts, will ultimately enable us to build of a larger healthier business.

Now let me turn the call over to Elaine Paul to share the details on our financials.

Elaine Paul: Thank you, Logan, and good afternoon, everybody. To begin, I want to note that unless otherwise indicated, all income statement measures are non-GAAP and exclude stock-based compensation and other select items as detailed in our earnings release. A reconciliation of historical GAAP to non-GAAP results is available on our Investor Relations website and may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC. Excluding the action we took to strengthen our insurance reserves, our Q4 financial results beat our guidance. This reflects a combination of strong ride share demand, improving supply, and good early progress on our cost reduction. In Q4, we reported record revenue of $1,175 million, up 12% sequentially and 21% year-over-year.

This was the highest quarterly revenue in Lyft’s history, and it exceeded the top end of guidance of $1,165 million. As Logan mentioned, our Q4 results reflect our marketplace dynamics, including elevated prime time. For full year 2022, our revenue reached a new high of $4,095 million, up 28% versus full year 2021. We had 20.4 million active riders in Q4. Active riders grew slightly quarter-over-quarter and 9% versus Q4 of 2021. Within active riders, the sequential increase in rideshare riders more than offset reduced use of our bikes and scooters in the colder weather, and revenue per active rider reached a new high of $57.72, up 11% sequentially and year-over-year reflecting more prime time and longer rides. As Logan mentioned, we are now including insurance reserve adjustments for prior periods in our definition of contribution and adjusted EBITDA.

Let me talk about why we are making this change and the impact. In December, the SEC updated its guidance related to non-GAAP measures, which applies to all public companies. Subsequent to this change and following consultation with the SEC, we have aligned our disclosures. To be clear, we are not required to restate our historical financials. We’ve already disclosed when we’ve had reserve adjustments for prior periods and the amounts. These disclosures are not changing. What is changing is we are now including these figures in our non-GAAP financial measures. We will also speak to past periods on a comparable basis. In Q4, we strengthened our insurance reserves by $375 million. This is at the high end of management’s estimate of our potential exposure to past claims in light of past volatility, we believe this action will have the benefit of reducing the risk of insurance related volatility going forward.

We reported Q4 contribution of $414.7 million, including $225 million of the reserve increase just discussed. Excluding this item and relative to our guidance, Q4 contribution was $639.7 million and contribution margin as a percentage of revenue was 54.4%, which is 290 basis points better than our outlook. Outperformance versus guidance was driven by rideshare. Let’s move to non-GAAP operating expenses below cost of revenue in Q4. Each line reflects savings from the cost reduction initiatives we began implementing in November in addition to leverage from a higher top line. Operations and support expense was $95.1 million. As a percentage of revenue, operations and support was 8.1%, down roughly 250 basis points from Q3 and 260 basis points from Q4 ’21.

Sequentially, in addition to the impact of cost savings initiatives, the decline in operations and support expense reflects seasonally less bike and scooter support. These modes typically have peak usage and support in Q3, which declines in Q4 and further in Q1 along with winter weather. R&D expense was $103.5 million, as a percentage of revenue, R&D was 8.8%, down roughly 140 basis points sequentially and 150 basis points year-over-year. Sales and marketing were $114.4 million, as a percentage of revenue, sales and marketing was 9.7%, down 150 basis points from Q3 and 190 basis points from Q4 of €˜21. Within sales and marketing, incentives were 2% of revenue. We reported G&A expense of $379 million, this includes $150 million of the $375 million insurance reserve increase that I discussed earlier, and it’s related to certain insurance costs that are generally not required under T&C regulations.

Excluding the impact of this action and relative to our outlook, G&A was $229 million in Q4, which is 19.5% of revenue, down 110 basis points from Q3 and 280 basis points from Q4 of €˜21. Let me provide an update on our cost reduction initiatives. In November, we spoke to this work in detail and shared our expectation that it would result in roughly $350 million of annualized savings when fully in place. We achieved $50 million of these savings between Q2 and Q3 of 2022 related to OpEx. In Q4, these initiatives resulted in incremental OpEx savings of roughly $20 million, sequentially reflective of a partial quarter impact of the reduction in force. In Q1, we expect to realize an additional $40 million in savings versus Q4 ’22. In Q4, we reported an adjusted EBITDA loss of $248.3 million, including the $375 million insurance reserve adjustment.

Excluding this impact, we generated positive adjusted EBITDA of $126.7 million, which beat the top end of guidance of $100 million. We ended Q4 €˜22 with unrestricted cash, cash equivalents and short-term investments of $1.8 billion, in line with the level at the end of Q3 €˜22. Before I move to our outlook, it’s important to note that macroeconomic factors are impossible to predict with any certainty. Future conditions can change rapidly and affect our results. Now, let me talk about Q1. As Logan mentioned, there are three key factors affecting our outlook relative to Q4. First, seasonality, we tend to see a different mix of rideshare. For example, shorter rides and fewer airport trips. And cold weather means bike and scooter usage is always lowest in Q 1.

Second, rapidly improving supply conditions are resulting in less prime time. This is ultimately good for our service levels, but will reduce our revenue and adjusted EBITDA in Q1. And third, base price. We slightly reduced base pricing to remain competitive with the industry. Given these factors, we expect Q1 revenue of approximately $975 million which is down 17% sequentially. We anticipate roughly six percentage points of the decline will be driven seasonality with the remainder related to decreased prime time and pricing. Our Q1 revenue guidance implies year-over-year growth of 11%, driven by growth in rideshare rides. In terms of profitability, we expect contribution margin of roughly 47%, reflecting lower prime time in prices. We therefore expect adjusted EBITDA will be between $5 million and $15 million.

The sequential revenue decline of $200 million translates into a sequential adjusted EBITDA decline of roughly $157 million at a midpoint of our guidance range. The decline in prime time and base prices flows directly to the bottom line, with the remainder driven by the seasonal component. This impact is partly offset by $40 million in incremental OpEx savings in Q1 from the cost reduction initiatives we began implementing last quarter. As Logan mentioned, and I want to reiterate, our profitability in Q1 is a consequence of the dynamics we are facing, and we are taking immediate action to improve our future financial results. We are looking very closely at our fixed and variable costs to ensure we are operating a durable and profitable model.

We are looking for opportunities to significantly cut costs and drive efficiencies. As one example, let me speak to stock-based compensation expense. Our current plans are to reduce this expense to approximately $400 million in fiscal year 2024 through measures such as our previously announced headcount reduction and shifting more of our employee base to international locations. We expect stock-based compensation will vary, but generally come down quarter-to-quarter as we progress towards this target. To conclude, we are facing near term financial headwinds driven by current market conditions. However, with more demand and better supply and a healthier marketplace overall, we can build a much larger business. This, in combination with the cost actions we are taking, will position us to deliver strong shareholder returns.

With that, let me turn it over to John.

John Zimmer: Thanks, Elaine. We have three key business initiatives this year, each of which aligns with our strategy to deliver our competitive service levels and capture more demand. First, strengthen our marketplace technology to drive improvements in price and ETA. Second, deliver more value to a growing population of Lyft loyal riders and third, create more opportunities for consistent and transparent driver earnings. I’m going to speak to some of the work we’ve done to execute on these initiatives already. Lyft Maps continues to be a great example of how we’re differentiating and strengthening our marketplace technology. Today, over 60% of our rideshare rides are powered by our in-house mapping and navigation, which is up from less than 1% a year ago.

With this foundational work in place, we can accelerate the pace of innovation across our network. It’s the reason why we were the first to market to integrate our driver app with CarPlay and with Android Auto, which has been incredibly well received by the driver community. I got to drive on New Year’s, and I can see why almost two thirds of drivers who Lyft Maps through Apple’s CarPlay stick with it as their primary navigation experience. It’s a big win for the driver to have turn by turn directions on the in car or display, and also creates nice route visibility for the rider. Next, I’m going to touch on our partnerships, which give riders more reasons to use Lyft and directly impacts their loyalty and frequency. Our Chase partnership is important.

In Q4, we expanded our relationship with Chase, giving their millions of card members access to Lyft Pink and to accelerated points or cashback when they use Lyft through 2024. With this partnership, we can introduce millions of people to Pink, increase our touch points with business travelers, and capture more high value rides. We’ve also expanded our travel loyalty integrations with the addition of Alaska Airlines. We’re thrilled to offer Lyft riders an easy way to earn miles when they link their Alaska loyalty accounts. Based on our experience with similar relationships, riders with linked accounts take on average up to 20% more rideshare rides with Lyft than those with non-linked accounts. For drivers, we’re doubling down on initiatives that increase preference.

As Logan mentioned, upfront info is now available on 100% of rideshare rides on our network. This is one of the biggest changes we’ve ever made to the driver experience, and it has been incredibly well received, resulting in a meaningful increase in the time drivers spend using Lyft. In addition, last fall we began rolling out our Stay Nearby filter, which gives drivers the ability to stay in a particular region, and the feedback has been incredibly positive. Innovations like these can have a significant impact on drivers’ satisfaction and engagement. We are also working to make owning an AV and driving it on Lyft more affordable and convenient. Lyft drivers can now access charging discounts at EVgo stations, with gold and platinum drivers getting as much as 45% off in certain markets.

We’ve also made it much easier to install a level two in-home charger by partnering with Wallbox to offer a Lyft specific discount on the hardware, along with pre-negotiated rates on installation. Given the high utilization Lyft drivers have of their vehicle, driving an electric vehicle can help increase their take home earnings. We’ll continue building on this work to support drivers as they shift to electric vehicles. The team’s various innovations and partnerships enhance the value of the Lyft network, position us to deliver better service levels, and ultimately capture a larger portion of consumers transportation spend. I’m grateful to the entire team for their continued hard work and look forward to the road ahead in 2023. Operator, we’re now ready to take questions.

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Q&A Session

Operator: Your first question comes from the line of Doug Anmuth with JPMorgan.

Doug Anmuth: Thanks so much for taking the questions. I was hoping you could just talk a little bit more about how the competitive environment has changed in the past three months. And just when you talk about 1Q dynamics and current market conditions, isn’t this more of a return to normalcy in a healthier marketplace? Trying to understand the impact on prime time and base prices. And perhaps, I guess, a return to normalcy in that healthier marketplace maybe was not anticipated in your 2024 targets. If you could just flesh that out more. And then on the 1Q EBITDA of $5 million to $15 million, is there anything contemplated there in terms of reserves that we should be thinking about, or is that a clean number? Thanks.

John Zimmer: Sure. Thanks for the question. I’ll pass the second part of the reserves Q1 EBITDA to Elaine after. But, yes, as you mentioned, the marketplace is much healthier, much more imbalance than it’s been for several years. And this is a very good thing. The primary thing that has changed, and I will say it happened more rapidly than expected, is the supply side. So the supply side has come back in a very meaningful way, as we talked about already on the call, some top metrics on the supply side in nearly three years. So this is very good for our riders. This is a good thing. What is happening with the guidance, obviously, seasonality, which is expected in our business, both rideshare and bikes, but also price with that extreme improvement in supply, you have a lot less prime time.

And so therefore, for price comes down. And then the last point I want to make is that there is a difference in timing with insurance renewals, and it’s important to us to not wait for any of that to rationalize and to be smart about ensuring competitive service levels. Elaine, do you want to take the second portion?

Elaine Paul : Yes. In terms of your question about adverse, we believe that having taken the reserve that we took in Q4, we are very well reserved and that reserve is appropriate. We are not anticipating any incremental adverse development at this stage, and we do not have any forecasted in Q1. We feel like the reserve we have is ample.

Operator: Your next question comes from the line of Stephen Ju with Credit Suisse.

Stephen Ju: Okay, thank you. I guess similar question to Doug’s. In terms of the first quarter guidance, I guess the sequential decline that’s implied here seems to be much larger than last year and even the step down in volume due to the pandemic. So is there sort of any other, I guess, accentuated seasonality factors that we should be thinking about? And can you help reconcile, I don’t know, you’re talking about sort of extreme improvement in price, and so I would be hoping that you would see an extreme improvement in demand also, because I think you’re calling out sort of a healthy demand environment. So I guess what is happening from a ride frequency perspective, from an active rider perspective. Thanks.