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

Lyft, Inc. (NASDAQ:LYFT) Q4 2023 Earnings Call Transcript February 13, 2024

Lyft, Inc. beats earnings expectations. Reported EPS is $0.18, expectations were $0.08. Lyft, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Lyft Fourth Quarter and Full Year 2023 Earnings Call. At this time, all participants are in listen mode only to prevent any background noise. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator instructions]. As a reminder, this conference call is being recorded. I’d now like to turn the conference over to Sonya Banerjee, Head of Investor Relations. Sonya, you may begin.

Sonya Banerjee: Thank you. Welcome to the Lyft earnings call for the fourth quarter and full year 2023. On the call today, we have our CEO, David Risher; and our CFO, Erin Brewer. In addition, our President, Kristin Sverchek is here for the Q&A session. We’ll make forward-looking statements on today’s call relating to our business strategy and performance, future financial results, and guidance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied during this call. These factors and risks are described in our earnings materials and our recent SEC filings. All of the forward-looking statements that we make on today’s call are based on our beliefs as of today, and we disclaim any obligation to update any forward-looking statements, except as required by law.

Our discussion will include non-GAAP financial measures, which are not a substitute for our GAAP results. Reconciliations of our historical GAAP to non-GAAP results can be found in our earnings materials, which are available on our IR website. And with that, I’ll pass the call to David. David?

David Risher: Thanks Sonya. And good afternoon, everyone. Thank you for joining us. I am really proud of what Lyft accomplished in 2023. We supported more than 700 million rides and gross bookings reached an all-time high. Ride growth accelerated every quarter, ending the year up 26% in Q4 versus last year. More than 1 million drivers collectively earned over $8 billion using Lyft. We also had the highest annual ridership in our company’s history, and ride frequency growth was the strongest it’s been since 2018 prior to our IPO. Our team came together with a vision for how customer obsession can drive profitable growth. We set clear goals, and then we achieved them. So we’re entering the year with a lot of momentum. We’re competing and executing really well, and we’re giving drivers and riders great reasons to choose Lyft every day.

Again, our thesis is that customer obsession drives profitable growth, and we’re keeping our foot on the pedal to prove it this year. To that end, we have three focus areas for 2024, and here they are. Continuous innovation, ride share perfection, and partnership-driven growth. I’m going to walk through each of these and share a few examples to demonstrate how we’re going about each. First, continuous innovation. One enormous advantage we have at Lyft is our focus on ride share and on specifically creating the absolute best ride share experience. Continuous innovation gives riders and drivers differentiated reasons to choose Lyft and increases their preference for using Lyft over our competitor. Women+ Connect is one great example. Since the launch back at the September, roughly two thirds of eligible riders, excuse me, drivers, and millions of active riders are using the feature, and their feedback has been outstanding.

Women+ Connect resonates with a lot of people. In fact, we have seen double digit increases in driver referrals in markets where that feature has gone live. That’s a great sign of strong product market fit. I’ll also point out we’re the only rideshare company that offers this feature in the US. So if you’re a woman, or if you have a woman in your life who prefers to ride or drive with another woman, download the Lyft app. We’re the only game in town. And some news. We’re thrilled to announce that as of today, Women+ Connect is now available in every market across the United States, over 295 cities, including Atlanta, Boston, Chicago, DC, LA, and of course, New York City. In fact, if you’re in New York and out of the snow, check out our billboard in Times Square, if you can.

Huge thank you to Christina Aguilera for being such a great advocate. Another great example of how we’re innovating is our new pay standard for drivers. We have made a commitment that Lyft drivers will earn at least 70% of rider payments each week after external fees. Most of the riders earn more than that already but there are instances where that’s not the case. The rideshare industry talks a lot about driver earnings often in terms of averages but with averages some people walk away unhappy. That’s why we’ve designed this as a guaranteed floor. Our intention is to set a standard for transparency, raise the earnings bar for our sector and further increase driver’s preference for Lyft. In term that reduces prime time which riders strongly dislike, it shortens ETAs and results in higher rider preference and usage of Lyft.

That’s what continuous innovation looks like. Our second focus area relates to the way we execute what we call rideshare perfection. You’ve heard us talk a lot about customer recession. Drivers and riders have very high standards so we put an enormous amount of effort into perfecting the rideshare experience and we’ll do even more in 2024. Let me give you an example of this kind of perfection and how it drives our business. In mid-November, we launched our on-time pickup promise as part of our scheduled ride product. The idea was simple but ambitious. If your ride to the airport didn’t arrive within 10 minutes of your scheduled pickup time, we would pay you up to $100, no questions asked. When we launched this product, we set an extraordinary almost unreasonably high expectation or excuse me standard for ourselves to deliver.

So high that we were even willing to cover the cost of a competitor’s ride if we failed to deliver. The results have been remarkable. Of the more than half a million rides that have fallen directly under this guarantee we have had to cover just 2% at a cost of less than 0.01% of gross bookings. Helped by this guarantee, scheduled rides to the airport grew 37% year-on-year during Thanksgiving week. And remember that remediation statistic of 2% over half of those riders took another Lyft ride in the following 30 days. Outcomes like these particularly at our scale are testament to the level of operational excellence we are capable of and what the growth impact can be. The rideshare perfection is central to our plans to drive profitable growth in 2024 and beyond.

Finally, partnership driven growth. Last year, approximately 20% of our rides had a direct connection to one of our partners. Lyft’s ability to partner in mutually beneficial ways with other organizations is an underappreciated superpower that can unlock long lasting new revenue streams and often with very attractive margins. This becomes clear when you look at the relationships we’ve established and how they’ve expanded over time. For instance, our Delta Airlines partnership began with riders rewards where you can get points. But we now also support their flight crews with our Lyft pass commute solution. Universal Pictures bought media on our platform in Q4 to support the launch of Trolls 3. And now they’re coming back to do even more in 2024.

Our list of deep partnerships goes on and on and includes world-class brands like Starbucks, Disney, Amazon, Apple, and we’ve seen similar expansion across all of those. Partnering is rarely easy, but we’ve proven that we can be world-class at it. The work we’re doing in each of these focus areas I just outlined, continuous innovation, rideshare perfection and partnership driven growth will underpin our top line growth and margin expansion in 2024 and set the same for strong financial performance beyond. Now, before I turn the call over to Erin, we have two important pieces of news to share. The first is we’re hosting our first Investor Day in early June. It’s going to be a great opportunity to see the incredible work we’re doing and the amazing team behind it.

And second, as lead-ins to that event, we are providing directional commentary for our full year performance this year. The headline is that in 2024, we expect Lyft to generate positive free cash flow on a full year basis for the first time in our company’s history. It’s a huge milestone for us. I am very proud of all Lyft has achieved in 2023 and the first few weeks of 2024. As I said at the beginning, this will be the year that we prove customer obsession leads to profitable growth. Over to you, Erin.

Erin Brewer : Thanks, David. Good afternoon, everyone. And thanks for joining us today. I’m going to review our Q4 results as well as our Q1 outlook. I’ll also share some directional commentary for the full year 2024. As a reminder, unless otherwise indicated, all income statement measures are non-GAAP and exclude select items which are detailed in our earnings materials. As David mentioned, 2023 was a year with some strong accomplishments at Lyft. And we continued to build on that momentum in Q4. We are prioritizing operational excellence and seeing great results. Driver hours grew 47% year-over-year in Q4. This reflects strong engagement by existing drivers and meaningful growth in new drivers. So even while rider demand continued to increase, we were able to convert more ride intents into completed rides.

The combination of these factors supported our accelerating rides growth along with improving service levels, including significantly less prime time year-over-year and faster ETAs. We ended the year healthier and stronger, which is reflected in our financial performance. And now to our fourth quarter results, which are consistent with the outlook we provided on our Q3 earnings call on November 8th. We supported 191 million rides and 22.4 million active riders. Total rides grew 26% year-over-year, accelerating for the fourth quarter in a row with strength across use cases, particularly commute and nights out. Ride frequency, referring to the average number of rides per active rider, grew double digits year-over-year with ride share only frequency growing even faster.

Gross bookings exceeded $3.7 billion, up 17% year-over-year. This reflects strong ride growth, partially offset by lower prices year-over-year given our competitive focus and improving health of our marketplace. Revenue exceeded $1.2 billion, up 4% year-over-year reflecting those same dynamics. Cost of revenue was $736 million down 3% year-over-year as we lapped the insurance reserve charge, we took in the fourth quarter of 2022 that affected cost of revenue as well as G&A. Operating expenses were $450 million, down 35% year-over-year. As a percentage of gross bookings, operating expenses were 12% reflecting an improvement of roughly 10 percentage points versus Q4 of 2022 as we lapped the charge, I just mentioned along with savings from our recent cost restructuring actions.

Adjusted EBITDA was $67 million which as a percentage of gross bookings was 1.8%. I will remind you that our updated third party insurance agreements went into effect at the beginning of Q4. The combination of higher rates along with slightly higher ride volumes quarter-over-quarter increased cost of revenue by approximately $100 million sequentially from the third quarter to the fourth quarter. However, we were able to offset around $75 million of these costs with savings largely generated through our healthier, more efficient marketplace. For the full year 2023, we generated $13.8 billion in gross bookings, up 14% year-over-year. Our adjusted EBITDA was $222 million, which as a percentage of gross bookings was 1.6%. We entered 2024 with a solid cash position with unrestricted cash, cash equivalents, and short-term investments of approximately $1.7 billion.

And in the fourth quarter, we generated positive free cash flow for the second time in our company’s history. Now, let me talk about what we expect in the first quarter. We expect gross bookings of $3.5 billion to $3.6 billion, up 15% to 18% year-over-year. We expect total ride growth of approximately 20% percent year-on-year. Consistent with the performance we saw in January, we expect healthy marketplace trends will result in a slight increase in the ratio of total revenue to total gross bookings in Q1. As we move through the remainder of the quarter, our plan assumes continued operational excellence and focused execution, particularly related to key events like spring break and St. Patrick’s Day. For the first quarter, we expect adjusted EBITDA of approximately $50 million to $55 million, and an adjusted EBITDA margin as a percentage of gross bookings of roughly 1.4% to 1.5%.

Next, I’m going to provide some directional commentary for full year 2024 to help you understand what we’re working toward longer term. What we’ve seen over the past three quarters is people are getting out more and connecting with the world around them. They’re commuting, traveling, heading to events, and gathering with family and friends. Based on what we’re seeing and hearing, our expectation is that these trends will continue, and as a result of the rideshare backdrop will remain healthy. As David discussed, we’re working to give drivers and riders more great reasons to choose Lyft. We believe this work will result in more efficient driver and rider acquisition, higher levels of retention and engagement, and incremental revenue streams with attractive margins.

With these factors in mind for the full year 2024, we expect total ride growth year-over-year to be in the mid-teens. Additionally, we expect modest growth in the ratio of gross bookings per ride as we continue to operate competitively with the market. As a result, we expect gross bookings in absolute terms will grow slightly faster than rides on a year-over-year basis. The combination of top line growth, operational excellence and continued cost discipline with the full year impact of our more efficient cost structure is expected to drive approximately 50 basis points of expansion and our adjusted EBITDA margin as a percentage of gross bookings to 2.1%. In 2024, we also expect to generate positive free cash flow for the full year for the first time.

This is an important milestone for Lyft. Relative to 2023, there are three key drivers that support our free cash flow plan. Higher levels of adjusted EBITDA, reduced capital expenditures since our planned bike share fleet electrification upgrades are now mostly complete. And finally, reduced cash outflows related to the change in working capital, largely reflecting the maturity of our insurance program. Let me spend just one more moment on that last point. Our current insurance risk transfer structure is entering its fifth year and we’ve now worked down the vast majority of our legacy exposure to periods where we were largely self-insured. As a result, we are now in a place where our insurance-related accruals and our insurance-related cash payments are expected to be more balanced than they’ve been over the past few years.

I would note that our quarterly free cash flow trends will vary, so I’d encourage you to focus on the full year. To give you some sense of the level of free cash flow we anticipate for the full year 2024, we expect that roughly half of adjusted EBITDA dollars will convert to free cash flow. With that, I’ll bring our prepared remarks to a close. Our team did incredible work last year to establish a strong foundation for profitable growth. In 2024, our priorities are clear. We’re focused on drivers and riders, and we’re excited to continue to build and innovate. It all adds up to one theme. We’re building a customer-obsessed, financially strong business. I look forward to introducing you all to more of our management team and to having a more in-depth discussion at our Investor Day in June.

Operator, we’re now ready to take questions.

See also 20 Cheapest Places to Retire with Good Healthcare and 15 Most Unfriendly Countries in Asia.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Mark Mahaney from Evercore ISI.

Mark Mahaney: Okay, I’d like to ask two product questions, please. This on-time pickup promise, that sounds very promising, if you will. Sorry about that, but talk about the adoption of scheduled rides, the proliferation of scheduled rides, how big that is, and to what extent you want to try to push that broader, because I think the economics are usually better for you and there are good benefits in there for riders and for drivers. So talk about that. And then also on the ad side, I know that’s very early stage for you, but do you want to help us think about how big, given the testing and the learning you’ve had so far, how big you think that could be for Lyft over time? Thank you very much.

David Risher: Sure. I’ll take it, Mark. And Erin and I will tag team on this. But this I’ll be taking. So scheduled rides, it’s an amazing product and it’s one we’ve invested in a ton. And as you heard me say, the fact that we can guarantee to sort of the 98% plus reliability level at scheduled ride, I think speaks really well both to our operational excellence but also to the potential of the product. So right now, only about 5% of our rides are scheduled. Great upside, because as you mentioned, it has nice economics. This proportion of those are to the airport. But if you think about it, Monday morning comes around, you got to get to the office. There’s really no reason for you to be doing on-demand ride share at that minute if the night before you have to get to the office.

Bad weather comes around. We can forecast that just like you can. There’s really no reason for you not to schedule a ride up front there. So we actually see there are a lot more use cases building on this infrastructure we built. And there’s a lot of upsides, again, for riders, but also for drivers because drivers do get paid more. In fact, just click aside, we just did a release last week and we’re now paying drivers to wait as well, which is something that drivers really care about. So it’s a good win-win. On our second question on media, again, so much opportunity. I think if I’m not mistaken, I think our Q4 media business was bigger than what it was in all of the prior year, 2022. And the reason for that is brands are hungry for new ways to connect with their customers.

And if in the moment a person asks for a Lyft, you get sort of this matching screen. And if you’ve used Lyft recently, which of course I hope you have, you may well have seen an ad. We actually had almost sold out, I think, ad run around Super Bowl and so on and so forth. So anyway, you get an ad there. And then if you’re in the car, you’re in the car for some 7 to 10 to 12 minutes and people tend to check their app, actually, to be more precise, the average ride, the typically ride more like 15 minutes. And people look at their phone about nine times during that 15 minute. They’re very sort of open and receptive to high quality content. And so we’re working really closely with the Disney’s of the world, the Universal of the world, the Apple computers of the world and so on and so on, to produce very, very high quality content.

We’ve actually just released a video ad unit, as an example. But we thought it was going to be captivating, engaging, interesting to riders, and obviously has good margin characteristics. By the way, we hope to be able to share some of those economics back with drivers as well, particularly for the in tablet or their in car tablet, in this case, which we got about 9,000 tablets out there. So anyway, a lot more to talk about here, but we’re super excited about it. Just the numbers are fairly small now, but we’ve got big aspirations.

Operator: Your next question comes from the line of Nikhil Devnani from Bernstein.

Nikhil Devnani: Hi there. Thank you for taking the question. Thanks for the directional ‘24 commentary as well. Could we just please clarify the EBITDA margin expansion? I think the slide say 500 basis points, but Erin, you mentioned 50, so I think it is 50, but if you could just clarify that again, please. And then can you talk about the underlying assumptions, even if it is 50, between kind of the gross margin and the OpEx levers at your disposal? Where do you kind of see the most room for that leverage to come through?

Erin Brewer : Thanks Nikhil. This is Erin, and this is actually a correction from the press release. You’re correct. In my prepared remarks, I referenced 50 basis points of margin expansion. So if you look at your performance 2023 at 1.6%. You can translate that into approximately 2.1% in terms of our directional commentary in 2024. And so I think your second question was more about growth levers as we see them for 2024. And I’m happy to talk about that, but I might also turn it over to David just to start and set the stage.

David Risher: Yes, why don’t we tag team on this for you, Nikhil. By the way, I read your report last week. Yes, so anyway, I’m going to zoom out for a second because it sort of gives us the opportunity to speak a little big picture of where we’re going, what we’ve seen and where we’re going. And I’ll talk about growth broadly speaking. So at the top line, first of all, we see actually super healthy industry dynamics and frankly good sector growth, back to work is definitely a thing, travel is definitely a thing, all the macro trends that you see, and we look pretty closely and try to detect any reasons to worry and really just can’t again, not your question, but just to sort of set the stage, I really can’t find much to worry about there.

A lot of sorts of growth that’s just coming, some from post COVID and some from just the fact that we’ve got a great service and people are adopting it. So then we sort of go down a level. And again, of course, I talked about the continuous innovation and rider perfection and the partnership driven growth. And each of those both individually and collectively really add to a very, very strong growth story on the side. Now, I think, Nikhil, and you capture, refresh my memory because it’s been a while already since you asked the question, we’ve been blabbing here, maybe just rephrase the end of that question, and we’ll sort of try to try hit up with more directly.

Nikhil Devnani: Yes, thanks, David, for the top line color. Yes, I was just trying to get a better sense of the core margin drivers at your disposal and really how you’re thinking about the evolution of gross margin, as well as OpEx leverage to kind of get you that 50 basis points of expansion as the year goes on.

David Risher: Yes, love it. Yes, Erin will grab it now.

Erin Brewer : Yes, thanks, Nikhil. So first and foremost, to reiterate a little bit of what David said, as we came through the back half of 2023, we saw real health building in the US rideshare market with trends I mentioned related to travel commute, et cetera. And against that backdrop we executed really well and so as we look into 2024, we see the same healthy backdrop as we think about rides growth and David touched on some of the pillars and the way that we think about that overall So we not only see those rides and gross bookings growth. But we see that growing in an efficient way. so I touched in some of my remarks on some of the trends we’re seeing both on the driver side, right drivers choosing to drive more with Lyft spending more hours with Lyft.

That really contributes to the efficiency the way that we efficiently run our marketplace and David touched on things like partners expanding with Lyft and so those are areas that we continue to see growth overall and then as you think about leverage as we engage in a much more efficient way that creates an opportunity. And then to your point as we think about operating expenses, we obviously took the significant cost reductions in 2023 and our directional comments for 2024 really are grounded in continued operating expense discipline. So even as we are able to grow the top line engage more efficiently with the market, et cetera. We retain that operating expense discipline and our plan does contemplate on the insurance side. We have great visibility into the first nine months given our renewals at the beginning of the fourth quarter of last year but we are contemplating some increases in the back part of the year that is fully contemplated in the directional guide that we’ve provided.

But we think we have a number of different levers upon which we can continue to expand EBITDA margins into the full year.

David Risher: Yes, sorry. We’re just going to; I’m going to go in a little wilder on this one. So, because there’s a lot of interesting opportunities. So, Mark asked a question about priority pickup and actually not priority pickup, first schedule ride, which is a slightly higher margin product. Priority pickup is another. Extra comfort is another. We’ve talked about that a couple of times. We launched that in October. It’s a slightly premium priced product, a buck or two, call it. But our costs are not significantly different. So, if you look at mix, lots of opportunity there. And then, again, back to the point of media, that’s a very high margin business for us, as well as a lot of our partner originated ride. So I’d say a lot of our focus so far has really been on that growing top line in a very efficient way and in a sort of structured, financially strong way.

I think we’ve got real opportunity on the margin side, which is reflected in the remarks that Erin just made.

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

Unidentified Analyst: Hey, this is Wes on for Doug. Thanks for taking the question. The guiding to ride growth mid-teens in ‘24, how should we think about kind of the pace of deceleration from 20% from here?

Erin Brewer : So, Wes, thanks for the question. We’re not in a position really to talk about the quarterly sequencing, but we’ve talked about our assumption in terms of rides growth for the full year in the mid-teens. And we’ve also provided guidance for Q1 that ride will grow approximately 20% year-over-year. And just as a reminder, we are lapping that 20% assumes lapping of the prior year where we weren’t fully operating in sort of the more competitive way that really started for the full quarter in the second quarter of 2023. So hopefully that gives you some context for how we guided to Q1 and maybe how to think about that in the context for the full year of 2024.

Unidentified Analyst: Thanks. If I could have just one more on Women+ Connect. You’ve seen a lot of success there. Great to see. Are you seeing kind of any incremental like share gains like whether that be on the driver’s side or rider’s side kind of as a result or maybe is that voluntarily detail?