Lyft, Inc. (NASDAQ:LYFT) Q3 2023 Earnings Call Transcript

Lyft, Inc. (NASDAQ:LYFT) Q3 2023 Earnings Call Transcript November 8, 2023

Lyft, Inc. beats earnings expectations. Reported EPS is $0.24, expectations were $0.09.

Operator: Good afternoon. And welcome to the Lyft Third Quarter 2023 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. [Operator Instructions] As a reminder, this conference call maybe being recorded. I would now like to hand over the call to Sonya Banerjee, Head of Investor Relations. You may now begin the conference.

Sonya Banerjee: Thank you. Welcome to the Lyft earnings call for the third quarter of 2023. On the call today, we have our CEO, David Risher, and our CFO, Erin Brewer. In addition, Kristin Sverchek, our President is 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 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 may be found in our earnings materials which are available on our IR website. Also, please be aware that today we have announced changes to our key business metrics. These changes are described in our press release and our supplemental slide deck, which are also available on our Investor Relations website. And with that, I will pass the call to David. David?

David Risher: Thank you, Sonya. Hey, and good afternoon, everyone. Thanks for joining us. I am thrilled with our progress, creating a customer-obsessed and financially strong Lyft. More drivers and riders are choosing Lyft every day. In fact, this is post Q3. It’s just in the past few weeks, our gross bookings have been the highest in our history. The actions we have taken over this year to refocus our business on drivers and riders including pricing more competitively and improving the customer experience are producing incredible results. In the first nine months of 2023, we supported over 0.5 billion rides and generated more than $10 billion in gross bookings. Ride growth has accelerated each quarter this year, up 10% year-on-year in Q1, 17% in Q2, 20% in Q3.

With better balance in our markets — marketplace, primetime is at the lowest level, it’s been in years and driver’s pickup times have gotten faster across our regions. These factors underpin a very solid Q3 performance. Big headline this quarter is that more drivers are choosing Lyft and are driving more often. In Q3, this resulted in an almost 45% year-over-year increase in the number of hours’ drivers spent using Lyft with not incentivize driver hours gone even faster. Our focus for drivers is on making Lyft the simplest way to earn and it’s paying off. So even while rider demand accelerated, our conversion rate, which means the share ride intents that converts to rides taken was stable and that translates to a higher volume of completed rides.

Overall, our execution was impressive. Our team has worked in lockstep to prepare for back-to-school and return to office and delivered very strong results. For example, over the roughly 70 regions we targeted for back-to-school and here we are really referring to university towns. Rideshare rides grew by 25% year-on-year, reflecting a surge in new and returning riders and drivers. And with return-to-office morning commute rides grew even faster, up more than 30% year-on-year the last week in September. This means more after look activity too. We are seeing a pickup in weekday even rides particularly Thursday and Friday all this great execution. Bottomline, we are happening more people get out and get connected which is our purpose and something we are really excited to see.

And we will continue to listen to customers and act on what we are learning to create differentiated experiences. Women+ Connect, which we introduced in early September is a great example. It’s a feature that prioritizes matching women and non-binary drivers and riders, giving them more comfort, more camaraderie and more control when they use Lyft. In our early access cities, we have seeing great results, more than half of eligible drivers have opted into this feature, very unusual, and are keeping the future turned on nearly been hires time they are online. Actually want to give you a little color just on this. The feedback we have gotten has been amazing. Ambrosia one of the drivers in Chicago told us, quote, having Women+ Connect actually encourages me to drive more, and Amy a driver in Phoenix said, I find myself driving more night with Women+ Connect, which has allowed new opportunities for me to earn money.

So listen carefully to what the drivers are saying, both examples speak to how customer obsessed features can directly improve their experience, but also our business metrics. In this case increasing driver hours, which of course leads to more rides on the platform. Last thing, let’s say about this, right now as customers and city officials have taken notice and they are asking us Women+ Connect will be available in their market. That’s why we accelerated the rollout of Women+ Connect to an additional 50 cities and town last week and we expect it to be available nationwide early next year. Women+ Connect is a great example of the type of innovation the customers want and they can reinforce our brand, expand our addressable market and help drive preference in growth over time.

As we move into the holiday season we will continue to deliver new customer obsessed features targeted to driver and rider needs. As one example, we want to make getting to and from airports stress free. We have already done a ton of work this year to make scheduled rides highly reliable. We actually have a big announcement coming tomorrow that will provide even more peace of mind rider is going to the airport this holiday season. So please stay tuned for that. Finally, I wanted to touch on the small, but growing part of our business that can improve our margins over time. Lyft Media, we have a great opportunity to connect brands with our millions of riders in ways that deliver differentiated relevant messages and experiences. In Q3 our Lyft Media unit launched in app advertising, which adds to our in-car, on-car and on-street offerings you have probably seen if you have been in Manhattan recently.

We can tailor ads to where a rider is heading and to their lifestyle. So imagine you on the way to the movies and getting an ad that allows you to preorder your drinks and your popcorn. Great experience means you are even ready to go by the time you get there. This is what’s opening up conversations with partners like Universal Pictures. We want to help design and co launch new ad products including in app video advertising, which will roll out this quarter. It’s still early days. And this is a small business now, but we see a ton of potential to be creative and how we enable brands to engage with riders and relevant moment and build a meaningful, and of course, very high margin business. Now before I turn the call over to Erin. It’s worth taking just a moment to reflect on the road we have traveled over this year and really over my first seven months or so.

We have refocused our business, we have streamlined our cost structure and we are operating in a healthy and competitive way. We are also building a culture of true customer obsession and operational excellence. These are all foundational to our ability to deliver profitable growth. In fact, the phrase, you will hear me say several times this customer obsession drives profitable growth and that’s what we are seeing. So as we move on 2024 we got our foot on the pedal. I want to say a huge thanks to the entire Lyft team for their unbelievable work. We have got a lot more to do but we are super excited about the road ahead. Erin, over to you.

Erin Brewer: Thanks, David. Good afternoon, everyone, and thanks for joining us today. I am going to kick things off by addressing the changes we are making to our key business metrics. Then I will review our Q3 results, as well as our Q4 guidance. Before I dive in, 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 materials. Starting with new metrics. Today we introduced gross bookings, rides and adjusted EBITDA margin as a percentage of gross bookings. If you haven’t seen our supplemental slides, please take a look at them as they contain detailed information including seven quarters and two fiscal years of historical data.

We hope you find this information useful. Overall, our expanded disclosures better align our reporting with our strategic priorities and how we are managing the business. Let’s start with rides, which represent how much our platform is used across Rideshare, as well as bikes and scooters. At a high level, when we grow rides, it shows that drivers and riders are choosing Lyft. Our objective is to grow rides within the construct of building a durable, healthy and profitable business. Next gross bookings, which reflect the aggregate size and impact of our business. On the Rideshare side, gross bookings includes, applicable fees, tolls and taxes invoice to riders but excludes tips to drivers. This is consistent with our largest competitor. Gross bookings also include amounts that are invoiced to our non- Rideshare operations.

For example, related to bikes, scooters, Express Drive, data licensing and advertising. We are also moving to reporting adjusted EBITDA margin as a percentage of gross bookings. Please note that our definition of adjusted EBITDA as described in our earnings materials and SEC filings is not changing. As a reminder, in connection with our IPO, we disclosed rides and bookings metrics I am going to touch on how these new metrics compare. Our definition of rides is consistent with the prior metric. However, our S1 disclosure would have reflected a significant volume of shared rides, which as a reminder was largely sunset earlier this year. Next, the gross bookings metrics we have released today is largely consistent with the definitions of bookings included in our S1.

However, in our S1 pass-through fees, like, tolls and taxes were excluded, and today, we have included those pass-through fees in our definition of gross bookings, again, which is consistent with our largest competitor. Given our focus on gross bookings we are shifting away from formally providing metrics that anchor to revenue. Of course, you will still be able — will still continue to disclose revenue, cost of revenue, adjusted EBITDA and Active Riders, so you will still be able to calculate revenue based metrics. However, beginning in Q4 of 2023, we will no longer present as key metrics, revenue per Active Rider, contribution, contribution margin or adjusted EBITDA margin as a percentage of revenue. With that, let’s now move to our third quarter performance.

We came together as a team with purpose to deliver a great experience for drivers and riders, and saw strong results consistent with our outlook. Driver and rider demand and engagement increased and our rides growth accelerated. Let me share a few operational and financial highlights for the third quarter. We supported 187 million rides and 22.4 million Active Riders. Total rides grew 20% year-over-year. Within this, Rideshare rides grew 22%. Ride frequency referring to the average number of rides per Active Rider was the strongest it’s been in more than three years, but remains a significant growth opportunity. We saw continued momentum in travel with airport trips growing by nearly 15% year-over-year. And regionally, the West Coast showed the biggest sequential improvement in Q3 with nights out and commute leading the way.

Gross bookings were $3.554 billion, up 15% 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 was $1.158 billion, up 10% year-over-year and slightly above the high end of our outlook, driven by Rideshare strength. Cost of revenue was $638 million, up 15% year-over-year, driven by higher ride volumes along with higher per ride insurance costs, reflecting last year’s third-party insurance renewals. Operating expenses were $455 million, down 18% year-over-year. As a percentage of gross bookings, operating expenses were 13%, reflecting an improvement of 5 percentage points versus Q3 of 2022, primarily driven by our recent cost restructuring actions.

Relative to Q2 of 2023, operating costs increased by $45 million sequentially, reflecting targeted marketing investments, along with volume driven costs related to bikes and scooters. Adjusted EBITDA was $92 million, which as a percentage of gross bookings was 2.6% and reflects momentum across the business. We ended the quarter with a solid cash position with unrestricted cash, cash equivalents and short-term investments of approximately $1.7 billion. Now turning to Q4. We are off to a great start. Our teams are executing extremely well and demand was strong for the month of October. Driver hours maintain their 45% year-over-year growth and our Rideshare ride growth accelerated above the 22% we achieved in Q3. We also delivered a great Halloween week experience for drivers and riders with driver hours, ride intents and rides, each reaching new multiyear highs.

With that, let me review our Q4 guidance. I will highlight that our outlook is consistent with our previous directional comments on the fourth quarter. We expect gross bookings of $3,600 billion to $3,700 billion, up 13% to 16% year-over-year. We expect total rides growth year-on-year will accelerate slightly from the 20% year-on-year growth rate we saw in Q3 driven by Rideshare. If you are doing comparisons on a sequential basis, note that our outlook implies a slight decline in total rides, again sequentially and due to bike and scooter seasonality. We expect adjusted EBITDA of approximately $50 million to $60 million and an adjusted EBITDA margin as a percentage of gross bookings of roughly 1.4% to 1.6%. This reflects a full quarter impact of our third-party insurance contract renewals that went into effect on October 1st.

As you may recall, last quarter, we provided directional Q4 outlook in terms of revenue. So just to sync that up for you, here’s how our formal guidance compares. We now expect our fourth quarter revenue will grow mid-single digits quarter-over-quarter, which is at the high end of our prior directional comments. On a year-over-year basis, our outlook implies revenue growth in low to mid-single digits, reflecting our competitive focus and greatly improved marketplace health versus Q4 of last year. We expect fourth quarter adjusted EBITDA margin as a percentage of revenue will also be at the high end of prior directional comments and roughly in line with the 4% we achieved in Q2 2023. Again, this refers to adjusted EBITDA margin as a percentage of revenue.

And finally, as we make the transition in reporting, consistent with our updated key metrics, I thought it would also be helpful this quarter to share some comments on cost of revenue and operating expenses. We expect our fourth quarter cost of revenue will increase by approximately $100 million quarter-over-quarter, reflecting the impact of our third-party insurance contract renewals, along with higher Rideshare ride volumes. We expect operating expenses will be roughly flat quarter over quarter. With that, I will bring our prepared remarks to a close. Our team is focused on building a business that is both customer obsessed and financially strong. I have been impressed with the team’s solid execution and focus on delivering great experiences for drivers and riders.

We have had a really great start to our fourth quarter and I am excited about the road ahead. Operator, we are now ready for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Mark Mahaney from Evercore. Your line is now open.

Mark Mahaney: Okay. Thanks. I make it a point ever to congratulate management teams, but congratulations on the much greater disclosure. I think it’s a huge win for investors and for you. So thanks for doing that. Two questions I had. One is you talked about the long-term drivers. If we think about the long-term drivers of the company in terms of riders, rides provider, bookings provide, take rate, et cetera. I think, Erin, you mentioned a particular confidence about increasing the rides per rider. But just long-term, as you think about those drivers, which do you think you have the most power to move, where would be the biggest driver of growth going forward? And then secondly, just a small question on scheduled rides, what’s the kind of penetration rate you are seeing with that now and just talk about the benefit that has to the model. I assume that’s higher margin rides for you? Thank you

David Risher: Hey, Mark. It’s David. I will start and then Erin and I will kind of tag team on this. First, by the way, thanks for the congratulations on the increased transparency. It’s something that Erin has been focused on since day one and it’s just wonderful to see the team to be able to deliver on it. So I am glad you like it and I hope it helps. On growth, here’s how we think about it. It’s not going to surprise you to hear customer obsession what drives our focus here. And let’s just start and I am going to zoom out for just a second, so forgive me for a little bit of a long answer, but let’s just start with doing the basics right. Now you do the basics right, every full day, day in and day at 365 days a year and customers really notice that and that’s where you see things like pricing in line with the market come take rate in line with the market and so on and so forth.

Then on top of that, you really build execution excellence. And if you look at a couple of examples that we have had, I mentioned back-to-school in my remarks, that didn’t just happen, right? Back-to-school getting 25% year-on-year growth in 70 markets requires a lot of work. We did the same around Halloween, and as we alluded to, those are not just recent year highs. Those are all-time highs that we achieved in two weeks in the first couple of weeks of October in terms of gross bookings. So really exceptional performance there. And it just speaks to the importance of just ongoing operational excellence, which is a real focus. And then we add on top of that, you can start to look at differentiated products and services. I mentioned Women+ Connect.

That’s not a small market. We are talking about 50% of the population are women, of course, only 23% of our drivers are women. By the way, only 15% of driver hours are driven by women, 15%. So that shows there’s a huge upside in focusing on making women fill more comfortable driving and riding obviously, which can really generate all kinds of growth over the long-term. Let’s take another use case, mode, you probably saw, I think, 100 articles have been written in the paper over the last couple of months about return-to-office. So we read those articles. We are participating ourselves. People are back in the office here at Lyft and we are out there selling to companies. We have got relationships with Amazon, with Netflix, with LinkedIn, where we are trying to take the worst part of community, which is the non-productive kind of high stress time and make that into a better time for employees, which obviously works well for Lyft as well.

So that’s a big deal. And so differentiated products, they give people a reason to choose Lyft over Uber, but they also give us a way just to accelerate our growth. And then the end on scheduled drives. Scheduled rides is so interesting. Right now, it only makes up about 5% of our Rideshare rides, which is actually sort of surprising, right? It’s actually a little bit less, because — and if you think about it, just using the airport use case, you are going to go to the airport, right? And by the way, it’s so to weak, because oftentimes you linked up your calendar and so we can remind you about that. So since you know, we can start to get ready, right? We can remind you when you make your scheduled ride and then we can really double down on making sure that, that is a great experience and we are actually going to be talking more about this tomorrow.

We have got a pretty exciting product launch to come to tomorrow around this, but it really is around de-stressing your life, particularly around the holiday. By the way, scheduled rides it’s obvious when you are talking about airport rides, but I am looking at Kristin, our President here, and she revealed the she occasionally goes to apply these class or yoga, right, I forgot the word, and she is going to start to schedule that, because she knows what is going to happen. It’s easier than doing it on demand and reliable. To your margin question, yeah, it is a little bit of a higher margin product, it’s a higher reliability product, and so as a result, we can charge a little bit more, we can pay drivers a little bit more, which encourages them to be there on time and it’s a better experience for both rider and drivers.

So lots of upside there, and it’s just, I think, one example of one of our modes that as we lean more into, we can really drive growth product. So I know that was a long answer, but I just wanted to kind of cover a bunch of bases. Erin, anything you want to add to that?

Erin Brewer: Yeah. No. Mark, the only thing that I would say is, David, I think, you covered many of the levers and so I think it’s important to understand that, we really do have multiple growth levers across the business. But you also talked about frequency as you think about active riders, and it’s really gratifying to see that frequency, as I think about that year-over-year, even sequentially quarter-over-quarter is increasing. I am sure some of that is again getting out and about after the pandemic or returning to office. But we still think there’s obviously more opportunity there in addition to all of the other levers that David mentioned.

Mark Mahaney: Thank you, Erin. Thank you, David.

David Risher: Sure.

Operator: Our next question comes from Doug Anmuth from JPMorgan. Your line is now open.

Doug Anmuth: Thanks for taking the questions. David, after a couple of years of price inflation, it feels like we are starting to see some moderation on a like-for-like basis and then combined with the mix shift, perhaps, into more affordable ride options for consumers. Just curious how you are thinking about pricing exiting the year and into 2024? And also just wanted to ask about another ride mode in terms of Wait & Save. I think you have talked about that as around 30% of rides in the past. Can you give us an update there on how that product is doing? Thanks