Lyft, Inc. (NASDAQ:LYFT) Q1 2023 Earnings Call Transcript

Lyft, Inc. (NASDAQ:LYFT) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good afternoon, and welcome to the Lyft First Quarter 2023 Earnings 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 Sonya Banerjee, Head of Investor Relations. You may begin.

Sonya Banerjee: Thank you. Welcome to the Lyft earnings call for the first quarter of 2023. On the call today we have our CEO, David Risher; our CFO, Elaine Paul; and our Co-Founder and Board Chair, Logan Green. In addition, John Zimmer; our Co-Founder, President and Vice Chair; and Kristin Sverchek, our President of Business Affairs are here for the Q&A session. We will 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 actual results to differ materially from those projected or implied during this call. These factors and risks are described in our earnings slide deck and our recent SEC filings.

All forward-looking statements that we make on today’s call are based on our beliefs as of today and 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 may be found in our earnings material, which are available on our IR website. And with that, I will pass the call to Logan.

Logan Green: Thanks, Sonya. Good afternoon, everyone and thank you for joining us. The team is going to address a few big developments on today’s call. I’m going to kick things off by talking about our leadership transition. I’m excited to pass the baton to David Risher, who is now Lyft’s second ever CEO. That change was effective on April 17. John will also be transitioning from his role as President early this summer. David is an incredible proven leader and he’s going to be great for Lyft. His experience on our Board, give him a strong appreciation for the incredible opportunities ahead of us and a clear view of the challenges. He brings the right energy, ambition and experience to lead Lyft to the next chapter. David’s customer obsession, purpose driven mindset and competitive spirit are exactly what Lyft needs.

With the transition, this will be the last earnings call that John and I join. I’m now the Chair of Lyft’s Board. John will continue to serve as President of Lyft until the end of June, at which time he will continue to serve as Lyft’s Vice Chair. We’re excited for David to be leading the company on the day to day basis, and look forward to continuing to serve as Board members and to supporting the company on the next leg of its journey. Finally, I want to say thank you to the Lyft investor community. John and I are incredibly grateful to have had the opportunity to build this company with your support. Lyft is our life’s work, and we are confident it’s in great hands. Now I’m going to turn the call over to David.

David Risher: Thanks, Logan. I’m so grateful to you and John for pioneering a new industry, establishing a defining company and building an iconic brand. Lyft has had a profound impact on the lives of millions of riders, and drivers have earned billions of dollars. That is an extraordinary legacy. To everyone who has joined us on today’s call, if you haven’t — we haven’t yet met, you should know that I’m an extremely results driven leader, and I’m a builder at heart. At Microsoft, I learned the power of scale and competitive focus. At Amazon, I help the company be insanely customer focused. And at Worldreader, I learned how to do more with less. That’s what I bring to Lyft. So here’s my perspective. Lyft addresses two basic and very durable needs.

We get riders out and about so they can live their lives together. We are a social species. And we provide drivers away to work that gives them control over their money and time. As one driver told me driving with Lyft means I will never go broke. These needs aren’t going to go away. And they’re the basics — the basis of what will be a large, durable and profitable business. But today Lyft is at an inflection point. People are getting back out to work and play. And we have renewed focus on delivering a great rideshare experience. Near-term, we are prioritizing strong execution for riders and drivers. This pure play approach will help us build a growing profitable business over the long-term. So here’s what we’ve been doing and here’s what you can expect next.

First, over the last 10 weeks, we’ve been pricing rideshare competitively, which is what riders expect and want. This is key and really important to remember, every year millions of riders choose Lyft over Uber. We don’t want to give them a reason to go the other direction. The results have been an acceleration in our year-on-year rideshare growth for the first time in nearly 2 years, and a smaller percentage of rides with primetime pricing. In this way, we have strengthened our category position on both bookings and ride basis. Second, to fund these services improvements, we’ve cut costs and restructured our organization. We didn’t make these decisions to cut costs and headcount lightly, but it is critical to consistently being able to offer good prices and fast pickup times.

Collectively, we expect the changes we announced last week to deliver about $330 million in annual savings when in full effect. And Elaine will review the financial impact of those in greater detail. Even more importantly, we have restructured the organization and nearly halved the number of management layers from eight to five, flattening teams, and enabling for faster decision making. Our new structure gives me direct contact with our rideshare leads, removing layers, so we can innovate faster. Third, we need to drive awareness that Lyft is a great choice, so that more people open our app and see our improved pricing and service levels. We’ve been too quiet for too long. So you’ll see us use low cost, high visibility ways to remind folks of who we are and point out real differences between us and Uber.

I hope you’ve gotten a chance to see our collaboration we launched just yesterday with TikTok influencer, Delaney Rowe, it’s funny, it’s smart, and it’s designed to get people to consider us. And finally, it’s time to grow again. Riders and drivers both want a healthy competitive rideshare market with Lyft as a strong player. I can’t yet share our long-term growth plans, but I can tell you, I’m spending the majority of my time on projects to top line and margin. In fact, this was the topic of the very first meeting I had as my first day of CEO 3 weeks ago. I am super excited about what I believe is the significant untapped opportunity to innovate and grow North American rideshare. So let me finish by saying this, I am very aware of our current levels of growth and profitability are not acceptable.

I also know that investors are waiting for long-term — updated long-term targets. I’m new in the job, I want to wait to provide those targets until I’m sure we can deliver on them. So here’s the recap. Here’s the game plan. First, at a time when demand is increasing, we are all about execution. We’re focusing on the basics of what riders and drivers want and demand, and in particular on competitive pricing that increases our ride volumes. Second, we have clear objectives and we are executing in a disciplined way. We’ve structurally removed costs from our business, and we organize to increase the velocity of execution and — excuse me, bring real innovation to the sector. And third, my focus is on building a great business over the long-term by focusing on riders and drivers.

That’s what I learned from my time building Amazon’s retail business and we’re off to a very strong start. I am committed to growing Lyft into a large, durable, profitable business that our riders, drivers and shareholders love. And I look forward to keeping you informed on our progress. Elaine, I’ll turn it over to you.

Elaine Paul: Thanks, David. To start, I want to say a big thank you to Logan and John for building Lyft and for having the vision to pioneer this industry. I’m also excited to welcome David. He’s already bringing a lot of energy and vision to the team and I’m energized about the path forward. Before I review our financial results. I want to remind everyone that unless otherwise indicated, all income statement measures are non-GAAP and exclude select items which are detailed in our earnings release. Turning to Q1. Our focus on pricing competitively produced solid early results. Our year-over-year rideshare ride growth rate accelerated in Q1 for the first time in nearly 2 years. Q1 was a partial quarter of operating with this renewed focus.

And with a full quarter impact in Q2, we expect rideshare ride growth to accelerate further. Our Q1 financial results were better than guidance driven by rideshare strength. Q1 revenue was roughly $1 billion, up 14% year-over-year, and was $26 million better than our guidance. We had $19.6 million active riders in Q1, up 10% year-over-year, which represents an acceleration from 9% year-over-year growth in Q4. Revenue per active rider was $51.17 in Q1, up 4% year-over-year versus a 11% year-over-year growth in Q4 ’22. The decelerating growth rate was primarily driven by our pricing changes. Contribution was $465 million in Q1, down 7% year-over-year. As a percentage of revenue, contribution margin was 47% in line with guidance and down 11 percentage points from Q1 of 2022.

The decrease versus last year is primarily due to higher insurance costs as well as lower per ride units economic. Operating expenses were $465 million in Q1, down 2% year-over-year. As a result of our cost cutting efforts to date, operating expenses were 46% of revenue and improvement of 8 percentage points from Q1 of ’22. Q1 adjusted EBITDA was $23 million, exceeding the high-end of guidance of $15 million. Our adjusted EBITDA margin in Q1 was 2%. We ended Q1 with a strong cash balance. Unrestricted cash, cash equivalents and short-term investments were $1.8 billion, flat with the level at the end of 2022. Next, I’m going to address the financial impact of our latest cost saving initiatives. When our headcount and operating cost savings are in full effect, we expect to generate approximately $330 million in annual savings.

This is made up of approximately $215 million related to headcount and $115 million of operating costs reduction. We expect to realize roughly $40 million, $50 million and $70 million of savings in each of Q2, Q3, and Q4, respectively. As David explained, in the near-term, we expect to use these savings to pay for our continued service improvements. So the savings will not materially flow to adjusted EBITDA. Over time, the lower operating costs will position us well for improved long-term profitability. We are also further bringing down our stock-based comp expense. We’ve changed our compensation plans and when combined with the impact of the staff reductions, we expect our stock-based compensation costs will be roughly $550 million in 2023 and $350 million in 2024, down from approximately $750 million in 2022.

Our reduction in force will result in a one-time charge of approximately $41 million to $47 million in Q2, which we are excluding from adjusted EBITDA. Before I share our Q2 outlook, let me provide some framing. Q1 was a partial quarter of adjusting our prices to be competitive with the market. Q2 will be a full quarter with this continued focus, and we expect our rideshare ride growth to accelerate further. While this will result in lower per ride unit economics in the quarter, we are actively offsetting the impact with our cost savings initiatives. As a result, we expect our Q2 adjusted EBITDA and adjusted EBITDA margin will be roughly flat with Q1. With that, let me share our Q2 guidance. We expect revenues of between $1 billion and $1.02 billion, which is up 1% to 3% year-over-year.

This assumes rideshare ride growth accelerates to at least 15% year-over-year in Q2. We anticipate contribution margin will be approximately 42%, reflecting the full quarter impact of lower per ride unit economics. We expect operating expenses as a percentage of revenue will be between 42% and 43%, which includes roughly $40 million of restructuring related savings. Finally, we expect adjusted EBITDA of between $20 million to $30 million, and an adjusted EBITDA margin of 2% to 3%. At the midpoint, both would be roughly flat with Q1. Before I open the call up to Q&A, let me share three closing thoughts. First, we have a renewed focus on the basics of what riders and drivers expect. This is accelerating our ride growth. Second, we’re executing in a disciplined way.

We’ve moved decisively to cut our operating costs and we’ll use the savings to pay for continued service level improvements in the near-term. Third, over time, with higher ride volume, and as we mix in higher margin opportunities, our economics can improve, and we can achieve greater operating leverage. As David mentioned, we expect to provide an update on our long-term financial targets in the coming months. Operator, we’re ready for questions.

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Q&A Session

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

Doug Anmuth: Thanks so much for taking the questions. One for David and one for Elaine. David, you talked about pricing more competitively and providing great service and both of those being big focus areas going forward. But can you just talk about how you think Lyft can really differentiate in the market over time. And then also provide when you talk about pricing more competitively, is that pricing kind of in line with the market and with parity. And then Elaine on contribution margin, reflecting the lower levels of revenue per ride, how does that play out across both insurance and pricing and can we expect it around that low 40s level going forward that you have talked about for 2Q? Thanks.

David Risher: Hey, Doug, it’s David. Thanks for the question. So on differentiation, it’s a great issue. Right now our real focus is on execution on the basics. And as you said, it’s really on pricing and getting service levels in line with where the market is and where the competition is. And it’s just table stakes. Now, when you start to zoom out, then you have to start to tell people who you are. And in our case, I think we’ve been a little quiet on that. So even before significant differentiation, I think just reminding people of who we are is really important. Now we get to differentiation, we do have different models. And again, I don’t know if you’ve seen the TikTok ad, but that gives you a little bit of an indication of one way we can differentiate in the short-term.

But medium and long-term there’s so many ways where I think this category has sort of treated all drivers and all rides, more similarly than different. And we’ve got a lot of ideas on how we can create products and services that our riders and drivers both like that are really differentiated against Ubers. And maybe we can talk later in the conversation about some of the approaches we’ve taken around shared ride versus Wait & Save as an example. But that’ll be for the future. Let me turn it over to Elaine for the second part of the question.

Elaine Paul: Hi, Doug. Thanks for the question. With respect to your question on contribution margin and lower revenue per ride versus what’s driving things in terms of insurance versus pricing. So year-on-year, the increase in insurance rates that we experienced in Q4, that’s impacting the contribution margin year-on-year, as is with pricing. From Q4 to Q1 and Q1 to our Q2 guide, the deterioration and contribution margin is driven entirely by our lower revenue per ride driven by pricing and operating competitively. To be specific, with lower prices on average, we’re generating less revenue per ride. Our cost per ride have not changed materially subsequent to Q4. And thus our per unit economics are compressing, which is driving the change in contribution margin.

In terms of long-term margin, we are not giving go-forward guidance at this point. But as we alluded to on the call, we’ll be providing long-term guidance at a future time this year. Thanks for the question, Doug.

Doug Anmuth: Great. Thank you both.

David Risher: Sure.

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

Stephen Ju: Okay. Thank you so much. So, David, and Elaine, if we could dig in a little bit on your commentary in regards to the accelerating unit growth. Does this imply that we have been decelerating, I guess, pretty much linearly since the peak in early 2021 and we are starting to see, I guess what is an inflection point. And secondarily, I think you guys have been talking about closing the service gap versus Uber. So as you are doing that, are you finding that consumers are coming back straight away given the affinity with the Lyft brand? Or are you finding that you have to go back and rewind your business? Thank you.

David Risher: Yes, good question. Stephen. Thanks for it. So, on the first, yes, we’re absolutely — I like your characterization of it as an inflection point. I think that’s exactly what we’re seeing. We’ve been really on this sort of focused execution strategy for about 10 weeks. You’ve seen some of the results that we’ve talked about that 30% overall share we’re enjoying up from sort of that mid to high 20s. I can give you a little bit more color there. In some of our markets, we’re actually seeing even stronger growth, Portland, Oregon being an interesting example where we’re running just about neck and neck, Phoenix, Arizona being another example, running pre-post neck and neck and there are other. So what does that tell us? That tells us that when we execute well, share can move fast and riders vote with their apps. So that’s what we’re seeing in the short-term. Maybe I’ll just stop there and we can talk about it more detail after.

Operator: Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Eric Sheridan: Thanks. Thanks so much for taking the questions. Maybe I can follow-up on some of the topics that were touched upon already. In terms of driving incremental rider growth, what are you sort of investing behind to continue to build riders scale, where maybe there’s an ability to have a differentiated market share dynamic among newer riders or riders coming back to the product versus a pre-pandemic period as opposed to possible market share dynamics among existing riders? I’m curious your sort of framework around that. And then I know we’re going to wait for a period on longer term guidance. But I did want to understand a little bit better philosophically how you think about the pricing lever versus the margin lever in terms of striking the right balance in the business over the medium to long-term and how you think about sort of striking that balance against the broader goals? Thank you.

David Risher: Yes, great question. And my apologies I didn’t catch the name at the beginning.

Eric Sheridan: It’s Eric Sheridan from Goldman Sachs.