Lyft, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good afternoon, and welcome to the Lyft Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a 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 Shawn Woodhull, Head of Investor Relations. You may begin.

[Shawn Woodhull:]

Thank you. Good afternoon, and welcome to the Lyft earnings call for the quarter ended December 31, 2020.

[Logan Green:]

Thanks, Shawn. Good afternoon, everyone, and thank you for joining our call today. Despite the difficult backdrop in 2020, we focused on improving our business for the long-term. The progress we’ve made has been significant and I believe we are now in a stronger position than at any time in our past. Given the improvements we’ve made to our unit economics and our overall cost structure, we’re like a tightly coiled spring, positioned to drive strong organic growth and margin expansion as the recovery takes hold.

[Brian Roberts:]

Thanks, Logan, and good afternoon, everyone. The COVID-19 pandemic and its far-reaching effects remain unparalleled. As case counts surged in the fourth quarter, cities and states reinstituted shelter-in-place orders, curfews and other measures to help slow the spread. Now, while our recovery advanced in the fourth quarter as rideshare rides improved to a year-over-year decline of 49.6% versus 51.8% in the third quarter, monthly trends worsened, with December down 52% versus 50% in November. Given the uncertainty and decline in demand, Lyft cut expenses and significantly reduced driver acquisition and engagement programs in the month of December. The reductions in incentives classified as contra revenue helped drive upside of revenue. In fact, fourth quarter revenue of $570 million approached the top end of our initial range of $555 million to $575 million. This compares with our updated outlook provided in early December that revenue may be at the lower end of the range. Given the uncertain operating environment in Q4, we further reduced expenses. The cost reductions combined with the revenue outperformance drove a significant improvement in our adjusted EBITDA loss.

[John Zimmer:]

Thanks, Brian. I’m proud of the team’s resilience and of the significant progress we’ve made over the past year. Even as we continue to navigate the pandemic, I am very confident that we are extremely well positioned to deliver strong organic growth as the recovery takes hold. To start, I’d like to build on Logan’s comments about why we’ll be the partner of choice among AV programs, which will fuel long-term growth. There are three key elements

[Operator:]

Thank you, sir. I show our first question comes from the line of Doug Anmuth from JPMorgan. Please go ahead.

[Doug Anmuth:]

Great. Thank you. One for Logan or John, and then one for Brian. First, just we often get the question of how will rideshare be different, when it comes back. So, if you think about hopefully late 2021 or into 2022, just curious on your view on what the key differences in the business will be beyond the changes in the cost structure. And then, Brian, I just wanted to clarify on your long-term margin comments. Are you quantifying long-term margin at all relative to the 70% gross margins and I think 20% EBITDA margins over the last couple of years or really just pointing to versus competitors in their numbers? Thanks.

[Logan Green:]

Hey, Doug. All right. I’ll take that first part. So, first of all, there’s a lot of talk out there about how the world may or may not change. One thing I -- just talking about cities, I think there’s a lot of hype that’s kind of hogwash about how cities are dead and everybody is going to leave cities. I think, when some people decide to leave, it makes room for other people, and you’ll see an influx of younger folks, creative folks, ambitious people moving to cities. If you look at the broader arc of history, the world has been on a steady march towards urbanization. There have been economic disasters, wars, pandemics in the past. And after each one, cities come back stronger than ever. So, I don’t foresee that kind of change having an impact on our business long-term. The second piece is on the work-from-home trend, I definitely think, elements of that are here to stay. But I think one key thing to understand about our business is even pre-COVID, the commute business was never demand-constrained, right? We talked about in the kind of opening remarks about how our demand patterns are more like a heartbeat than a flat line. And when demand is high, we are often supply-constrained, not demand-constrained. So, if things even out a little bit, I think that could kind of net-net be a positive for the business. But those are a couple of kind of I think modest things. When you really look at the opportunity we’re going after, it’s a $1.2 trillion consumer transportation market with the vast majority of that being spent on the car ownership ecosystem. And that fragmented ultimately broken ecosystem is what we’re setting out to fix and to move the world towards a transportation-as-a-service model. And while the pandemic obviously has large near-term impacts on our business, long-term, I think, all of the sort of structural factors that are going to move people away from this fragmented car ownership model to transportation-as-a-service will remain intact, and that’s what we’re going to continue to focus on going after. So, I’ll let Brian jump in on the margin.

[Brian Roberts:]

Sure. Thanks, Doug, for the question. Look, we continue to believe that we will lead the industry on long-term margins. In terms of our North Star, we share the same financial objective as Amazon, which is to maximize long-term free cash flow growth per share, and free cash flow is operating cash flow less CapEx. And we believe this is the metric most aligned with how to generate long-term shareholder value. Near-term, we expect margins to increase. As I said in my prepared remarks, we expect we will achieve an all-time record contribution margin later this year, which would obviously translate to record adjusted EBITDA margins as well. And what I would say is because of COVID, we’re just -- we’re in an uncertain operating environment, but our results demonstrate the improving leverage of our model. So, while we are confident that we will lead the industry in terms of long-term margins, we’re not speculating on the timeframe or what the ultimate margins could reach.

[Doug Anmuth:]

Okay. Thank you, both.

[Operator:]

Thank you. I show our next question comes from the line of Eric Sheridan from UBS. Please go ahead.

[Eric Sheridan:]

Thanks for taking the question and Happy New Year and hope everyone on the team is well. Maybe just taking a step back from all the commentary you had during the prepared remarks. As you look out to 2021, what are the investments you feel you need to make in the business that are sort of quasi fixed or necessary irrespective of how the end-demand environment evolves? And then the second part of the question would be, how should we think about some of the investments you want to make that are more tied to end demand improving and how variable are those costs and investments against the broader recovery that you would expect to see in 2021? Thanks so much.

[Brian Roberts:]

Sure. So, Eric, let me start, and then Logan, feel free to add on. When I look at what we did between Q3 and Q4, we took operating expenses below cost of revenue down by $25 million. And now, as we just disclosed, we expect to take the same OpEx below cost of revenue down a further $35 million in Q1. And a lot of this -- obviously, there was elevated policy spend in Q3 and Q4 related to Prop 22 in California. But, it really goes to our philosophy around how we budgeted the company for 2021 and how we approach planning. And it’s this zero-based budgeting mindset that we’ve mentioned, it is unlocking lots of opportunities, and it’s where you have to justify every single dollar you find unlocks. And this is across the board in terms of headcount growth, in terms of facility spend, T&Es, et cetera. And we did this across all cost centers. So, we still see opportunities in terms of just managing the business. The fact that we’re taking out another $35 million in Q1, I think, speaks volumes to that. In terms of the rebound, look, we want to be opportunistic. We want to remain flexible. And as conditions warrant, we will invest in growth. And so, in terms of Q1, we want to make sure we’re investing in supply in advance of the rebound that we expect will really begin -- again, we expect demand will strengthen over the course of Q1, but we expect to see more of an inflection point in Q2 and then a much stronger recovery in Q3 and Q4. And we just want to remain super flexible to be in a strong position strategically to win the rebound.

[Logan Green:]

Yes. I’ll jump in with a little bit more color. Just to what Brian was talking about, our top priority is navigating the recovery. And one of the biggest challenges in ridesharing is creating marketplace balance, making sure you have enough drivers for every rider. And the two, respond on very different time lines. So, supply and bringing more drivers onto the system takes time. It’s a little more like steering -- turning the Titanic, whereas demand can move much faster. And that’s the real challenge. We don’t know when that demand will come back. And so, we need to invest a little bit ahead of the curve. We expect to see some of that demand pick up in Q2, and we could be wrong, but we’d rather be prepared for that than not. Back to the kind of always-on investments and always-on opportunities to -- we are investing and spending a lot of our time and R&D work just energy on driving down unit costs. And we think that’s going to pay dividends for years to come. We’ve already made really dramatic improvements on a lot of our variable costs, but there’s still huge opportunities. So, when you look at defects in the product experience, what do folks file support tickets for and ask for refunds around, those experiences not only add hard cost to the business, but they deteriorate the customer experience. And by investing a lot in the perfection of the experience and removing these defects, we can make dramatic improvements for the bottom line and for our riders and drivers. And kind of along with that, we’re investing in a really big way around the precision and accuracy of all of our systems. So, from things like mapping to dispatch and pricing, there is a lot of leverage in the business in terms of the improvements we can make there. Every second that we can get a driver to get to a rider faster, that is a huge amount of value to the system. And so, we will invest quite heavily to be able to deliver that. And then, there’s a few longer term investments that we’re making as well, like our B2B delivery and some sort of more future-looking work. But hopefully, that gives you some good color as to what we’re looking at.

[Brian Roberts:]

And I’m going to provide -- sorry, maybe an even longer extended answer. But, the leverage that Logan is describing is what is allowing us to say there is a chance we can be profitable in Q3. Now, obviously profitability is not tied to a single scenario. But, achieving profitability does require more absolute contribution, which is impacted by ride volume. One illustrative data point that we would share is, we believe we could be profitable in Q3 if rides grew at a high single-digit month-over-month growth rate, beginning at the start of the second quarter, based on current expectations for Q1. Now, obviously, the actual recovery won’t be this straight line. We also expect the second half of the year to be stronger than the first half. But, in terms of just trying to capture the leverage that Logan was describing in terms of some of the benchmarks we’ve shared previously, we now see an opportunity to achieve adjusted EBITDA profitability with a ride volume of 80% to 85% of Q4 of 2019. This is a full 10 percentage-point improvement for the last quarter, when we estimated that we needed at least 90% to 95% of the Q4 2019 ride volume. And just relative to the original ride level when we discussed breakeven back in October of 2019, we see a path to profitability with 35% to 40% fewer rides. That’s how much leverage we’ve created.

[Operator:]

Thank you. I show our next question comes from the line of Stephen Ju from Credit Suisse. Please go ahead.

[Stephen Ju:]

Okay. Thank you. So, Logan, building on your answer to, I guess, Eric’s question, is there anything on the incremental cost reductions you’re rolling through in the first quarter that cannot be easily undone? I guess, can you spend things up very quickly if you are seeing more rapid unit recovery? And Brian, I was wondering if you can weigh in on the future impact your new insurance agreements will have toward contribution margin improvements as it seems like, at least kind of going by the wording on the deck, you’ve already transferred primary insurance risk on the majority of the units, which seems to match the wording around what you announced at the time you announced the new insurance deals. Thanks.

[Logan Green:]

Yes. Just to dig in on the first part of your question about cost reductions, I think, most of the cost reductions that we’re working on are going to build a stronger business for the long haul. So, the type of cost savings we’re looking at drive long-term value, drive a better rider experience, a better driver experience. They are not the types of sort of cost cutting that attracts from the business or that we would look to unwind. So, I’m not sure if that helps answer the question. I think, the kind of biggest change overall that we’ve commented on a little bit where we may invest more than we did in Q4 is on the driver side. So, we pulled back on our driver engagement spend in Q4, which we’re likely to lean into, especially as we see demand return. And that is something that is much more kind of dynamic in nature and needs to respond to market conditions. But, as far as the rest of the work, there’s nothing kind of top of mind that I can think of that we would consider unwinding.

[Brian Roberts:]

Sure. And Stephen, let me just expand on that, and then I’ll address your question around insurance. Yes. I think, it’s important to keep in mind that this Company went through nonlinear growth for a period of years. We had 19 straight quarters of 100%-plus year-over-year ride growth. When you grow that fast, you sometimes throw people at problems. And last year, when COVID hit, it forced us to reexamine the business. We took it down to the studs, and we created some new muscles. We found opportunities to merge teams, create new efficiencies, tap emerging leaders and make investments that increase our unit economics, and these are lasting changes. And so, again, in Q1, we’re further reducing expenses below cost of revenue by $35 million relative to Q4, even as we increase R&D investments to tap the areas that Logan described. And this is primarily through G&A reduction. So, that’s where the cuts are in. And keep in mind, this is not a one quarter move. G&A will grow in absolute dollars as ride volume grows, but we expect to drive further expense leverage. So, G&A as a percentage of revenue should decline. Now, in terms of the insurance question, it’s important to understand that, again, we transferred, starting on October 1st, a slight majority of primary auto insurance risk to partners. And the rates are fixed on a per mile basis through Q3 of 2021. Now, in terms of the financial impact, if we can continue to increase monetization per ride, we can increase margins. Now, the Q1 contra revenue impact from the driver supply investment will create slight headwind. But again, we expect to report all-time record contribution margin later this year. And so, I hope that gives a little more context there.

[Operator:]

I show our next question comes from the line of Brent Thill from Jefferies. Please go ahead.

[Brent Thill:]

For Logan or John, you mentioned the B2B delivery investments. I’m curious if you could just drill in and expand a little more around what you’re doing and the opportunities that you see over the next year?

[John Zimmer:]

Sure. Thanks, Brad. So, we’re quite excited about the inbound interest we’re getting. And on the tiger team we’ve put together on delivery, we’re excited about their performance. We have a handful of pilot market lives. We’re not planning to disclose specifics. So, I’m going to focus on the strategy. So, for clarity, as you mentioned, it is a B2B opportunity that we’re focused on. The good part about this is it leverages our existing tech and community of drivers for what we see as the best use case, same day local delivery. What we’re hearing from these businesses is that they want to focus on their organic traffic and customer loyalty and that they need a broadly scaled logistics capability that doesn’t compete with them for the direct-to-consumer relationship. So, in terms of timing for when we’re likely to talk more about it more around midyear, I think what COVID taught everyone is that the world is moving, obviously, even faster to e-commerce and local delivery. Many of these retailers didn’t have time to set up their own systems and form these type of partnerships, like the ones that we’re forming with them and instead had to jump on these third-party marketplaces. But, once they’ve had the time to breathe a bit and made their investments on their tech platform, we’re quite excited about what this could mean for us and them going forward.

[Brent Thill:]

And just a quick follow-up for Brian. To Logan’s comment about being a tightly coiled spring, it sounds like what you’re seeing on your expense structure, as demand comes back, you can support this on this leaner muscle structure as you called it down to the studs, that that can support the snapback. You’re not going to have to fuel the investments back in to support that return to growth?

[Brian Roberts:]

Yes, I think that you captured it well. Again, we expect to achieve an all-time record contribution margin later this year. The current record is 57%. So, we’re saying in excess of 57%. And then, given the success we’ve had in terms of expenses below cost of revenue, again, we went through 2021 planning, very-focused in terms of this zero-based budgeting mindset. So, we feel very good in terms of the overall leverage for the business.

[Operator:]

Thank you. Our next question comes from the line of Benjamin Black from Evercore ISI. Please go ahead.

[Benjamin Black:]

Great. Thanks for the questions. Just going back on your decision to invest in driver supply ahead of the second quarter, can you maybe talk about the competitive environment as it pertains to both, drivers and riders at the moment? And, how you think that evolves throughout the year? And then, also going back to insurance, how are you thinking about the remainder of your self-insurance exposure? Should we expect that over time you transfer the remaining risk to insurance partners? Thank you.

[Logan Green:]

Sure. So, just on the first part of the question, overall, the competitive environment has been quite stable on incentives specifically. Keep in mind that incentives classified as sales and marketing declined 80% year-over-year and were 3.5% of revenue in Q4. So, as far as how we compete goes, we’re going to continue to focus on differentiating our platform through product innovations and providing a better experience, not competing on incentives. And Brian, if you want to take the second part?

[Brian Roberts:]

Sure. So, I think, it’s important when you look at our go-forward. So, again, we’re locked through September, technically October 1st of this year. When we bid this out, we have an annual RFP effectively that starts over the summer each year. We were very pleased with demand for our business amongst leading auto insurers who really see our progress to date on a number of different key safety initiatives and sort of the changes we’re making, operational changes as well as just how we’re leveraging the platform to try to make sure we have the safest drivers on the platform. So, I think, on a go-forward basis, we’re going to assess it every year. I don’t see a world where it’s 100%, but I do like, again, having world-class insurance partners can provide significant value. And it’s just helpful having -- again, they bring in their own claims administration organizations that tend to be more local. So, you sort of get -- you can create sort of a network across the United States as sort of the best claims teams. And it’s great to have these partners here with skin in the game, helping us close out claims as professionally and efficiently as possible.

[Operator:]

Our next question comes from the line of Itay Michaeli from Citi. Please go ahead.

[Itay Michaeli:]

Just going back to the AV discussion, thank you for all that color earlier. A couple of questions there. First, it’s interesting to see in your announcement that you expect to deploy in multiple cities in 2023 as opposed to maybe one city at a time. I was hoping you could talk about that decision as well as maybe roughly what percentage of your routes you think could be covered by AV as you deploy? And then, secondly, maybe for Brian, if you could talk a little bit about the financial impacts from the Motional arrangement, maybe how we think about layering and kind of the impact from AV on the financial model kind of medium term?

[Logan Green:]

Yes, thanks. I’ll take the first part of that question. We have run pilots in multiple cities, and we’ve analyzed the data from our ridesharing network and the billions of miles traveled by ridesharing drivers. And certain cities have easier weather. They have easier streets and grids to navigate. And we will be targeting kind of the most favorable conditions initially, start where it’s easy and scale up from there. So, we’re not saying that we expect multiple cities to launch on the same day. But, we think we’ll go together with Motional, have the capability to launch multiple cities in 2023. So, we’re quite excited about that. Again, this is going to start very small. It’s going to be about the learning that we’re doing together. And the technology will have to approve itself, and win the trust of consumers and regulators, of course, before we’re able to scale it up. So, at this point, we’re not able to forecast or predict the kind of impact in terms of our financials and revenue. But, long term, of course, we are very-bullish that this is going to be an incredibly large part of our business over time. So, I’ll leave it at that.

[Operator:]

Thank you. Our next question comes from the line of Edward Yruma from KeyBanc Capital Markets.

[Edward Yruma:]

Really two just on the driver promotions again. As it relates to Prop 22, I know there was some concern that drivers may kind of stick to one network as they’re trying to aggregate enough hours to get the subsidy. I know, it’s still early days, but have you seen any learning in terms of whether drivers are still on two networks or opting on one? And then second, I know when COVID hit, there was some tough trends on supply because of the extended unemployment insurance. I guess, are you thinking about that as a headwind if, in fact, that happens again? Thank you.

[John Zimmer:]

Sure. Thanks for the question. This is John. As Logan mentioned, the balance of supply and demand is always critical. One thing to note, wasn’t necessarily part of your question, as it relates to Prop 22, but somewhat related because people ask similar things about drivers doing delivery and then coming back in. Typically, rideshare drivers are more than delivery drivers. So, we feel quite good about all the new drivers that have come on these various platforms as kind of lead gen for what we’re about to see coming out of COVID and going to higher earning rideshare opportunities. As it relates to Prop 22, we’re not concerned. We’re quite happy with the benefits that are coming in as part of Prop 22 that include a health care subsidy and other benefits that actually bring we believe more drivers into the platform holistically. And having loyalty from certain drivers, means that you can focus your incentives on the highest value drivers that are driving the most value to the platform.

[Shawn Woodhull:]

All right. With that, we’ll call it a wrap. So, thank you, everybody, for joining the call today. We hope everyone is staying safe and healthy. And we look forward to talking with everybody again soon.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Good day.