Lyft, Inc. (LYFT) Earnings Call Transcript & Summary

My name is Tom Mazzucco. I'm a Managing Director here at KeyBanc. I run our tech -- our internet investment banking effort, and it's my pleasure to be here today with Brian Roberts, the CFO of Lyft. Before we get started, I wanted to note that Brian may make statements today about Lyft's future performance and expectations or forward-looking statements. Those statements are subject to risks, with a full list available on Lyft's latest filed 10-K. In addition, Brian may reference certain non-GAAP financial metrics and reconciliations are available on the Lyft Investor Relations website. Okay. So again, thank you. Brian, how are you?

Great. Thank you for asking.

In the middle of this exciting time that we're in right now. Let me kick things off by asking perhaps one simple question. How do you feel about the business today?

Sure. So I have been Lyft's CFO now for 5 years. And the reason I mentioned this is I have a lot of perspective. I've seen where the industry was, originally. I see where we are growing today, and I really have a good sense of, I think, where the future is for this industry. And so I have never been more confident, confident for the industry and really confident, especially for Lyft in terms of our momentum and the profitable growth we're driving. So I think some folks have noticed since the IPO, I've not sold a single share for cash proceeds. Now as I look at the opportunities ahead of us, I saw how the markets reacted after Q4. So I took another step. I do believe the market undervalued the performance we put up in Q4 in terms of our momentum as well as our 2020 guidance. And so 1.5 weeks ago, I actually used $1 million of my own cash to go in the open market and buy shares of Lyft at $45.25. Now clearly, my timing was off about a week, but I think it still underscores just the level of conviction and confidence I have. And I think one important element on the Section 16, [ an officer of Lyft ] and the way our program works, if I buy a single share in the open market, I cannot sell any shares for an entire year from the purchase date. I think that should give you a sense of just how confident I am with where we are today and just the momentum we have. And so when I look at the sell-off, obviously, last week and I would argue today, we are at an irrational valuation. I think right now, we're trading at about a $10 billion enterprise value. I think I can make some pretty convincing arguments that the autonomous call option built into Lyft is worth well north of $10 billion. So just from a strategic value perspective, I think we are at a truly irrational valuation. We've put up 4 very solid quarters as a public company. We're going to keep putting up quarters. I'm confident the stock will take care of itself. So not worried about that. And I really feel great about the health of the business today.

Great. If you look at the business, where it was at the time of the IPO and where it is today, what are the big surprises as you kind of reflect on that?

Sure. So there's a lot of things I'm pretty confident we would do. I was confident we would innovate. I was confident we're going to drive profitable growth and drive expense leverage. I think the biggest surprise was just how quickly this market rationalized. I mean if you go back a year, we're not even a year from our IPO, it was growth, growth, growth. And then this pendulum swung really hard and fast to the right, which is profitability, free cash flow and profitability. And I would say, fortunately, both companies went public around the same time. And the message from Wall Street was very clear and consistent to both of us. And so when I look at what happened last year, in my wildest dreams, the market has improved beyond what I would have expected. And so the reason why I say it's probably the biggest surprise, I mean do your homework. Pull out the original models that were published before we reported Q1 last year. If you look at what analysts estimated for adjusted EBITDA for 2019 and then look at what we actually put up, most models we beat by $500 million in terms of adjusted EBITDA. I mean it's certainly unheard of and just look at the percent. And so I think that is a good tailwind in terms of how quickly the market is rationalized. And I think probably more importantly, the amount of leverage that we have in our platform.

Thank you. Let's turn to a topic that's on a lot of people's minds in general and at this conference, as we all use elbows and feet to greet each other. The coronavirus, what can you say about that as it relates to your business today?

Sure. So first and foremost, our thoughts and prayers are with families around the world that are dealing with the situation. And we, at Lyft, are closely monitoring the situation, especially in North America. We want to take care of our community in terms of riders and drivers and team members. I think we probably all read a lot this weekend. I personally found what Bill Gates wrote to be the most informative and so you can look at it, Gates Notes. And so looking at this virus, he estimates that the fatality rate will be about 1%, which is several times worse than the typical seasonal flu. I think you put it between the 1918 flu and the 1957 flu. I think the one bright spot, which makes me feel better as a parent, is kids can get sick but kids seem somewhat impervious to this virus. I think if you look around the world, at least the last time I check, there has not been a single fatality for anyone under the age of 10. And I think under the age of either 19 or 20, it's 1. So in terms of how it's impacting Lyft, we filed our 10-K last Friday. And in it, we did list in our risk factors that there are supply chain impact, which I think a number of companies have reported out. So for us, it's bikes and scooters and parts there too as well as vehicles. We're going to do our best to try to mitigate any sort of impact from it, but there could be impacts. But for Lyft, our P&L is really driven by ridesharing and demand in ridesharing remains extremely strong. But I think there's a couple of things to understand. First of all, it's our operating footprint. We operate in the U.S. and Canada. And these are regions that have been impacted less to date than other regions around the world. I also think these regions have some of the best health care systems in the world. Second, we did a lot of reading this week and I'm sure you have as well in terms of just the decline in international travel. You have to remember where we operate. We're sort of a domestic player. We're competing against a more international player. And so when international travelers come in, we under index in those types of users and so we've had less, less of an impact. I think users and people around the United States are reevaluating their daily routines in light of all the media attention. And I will say anecdotally, talking to a number of friends and colleagues. People are using more Lyft. I think when you turn on the TV or watch any sort of media channel right now, and all you hear about is coronavirus. If you have to get from point A to point B, you begin to second think any sort of situation where you're going to be crammed into a bus or crammed into a train or subway. And when you're pack against people and you hear distant coughing, I think there's nothing worse in terms of the human psyche right now because there's just so much fear. And so what I can tell you to date, we have not seen a demand impact. Quarter-to-date, we feel great about the quarter. We are reaffirming Q1, both in terms of revenue and adjusted EBITDA. And I think one important data point, which will probably be a big surprise for a lot of investors. Last week, it was markets in free fall, fear, paranoia about coronavirus in the United States. Last week was our single biggest week in our history in terms of both revenue and rides. And so again, I don't want that to get lost. It was literally our all-time best, with -- even weeks with New Years, it was last week. So it's impossible to predict. There are so many different scenarios where we can go from here, but I do think there's some mitigating factors from Lyft, especially what's priced into our stock at this point. Again, we feel good about the quarter, and we're just going to keep putting up numbers.

Okay. Well, significant, both in terms of recent trends and the reaffirmation of the quarter. So there's been some attention on AB5 and its potential impact on your business and concerns around similar legislation being adopted in other jurisdictions. So assuming that there are varying degrees of understanding around what AB5 is because it sounds like another virus or something, can you briefly explain what it is? And how it might affect your business?

Sure. For the record, I want to say Tom said it was a virus.

No.

So AB5 is a law that was rushed last year by the California-based legislature. And exceptions to this law were granted and denied without a lot of clear reasons or a very transparent process. And so I think there a number of onlookers, who just sort of see it for the mess that it is. I think there is growing awareness that not only is AB5 broken but it's broken beyond repair. And so I think there are many Californians right now who are angry. Angry for their politicians who really trying to rush on a very complicated matter. And this includes drivers. Drivers, by and large, do not want to be employees of Lyft, Inc. They really value their freedom, their flexibility to drive when they want, where they want and how they want. And so I think it's important to remember on the Lyft platform, 1% of drivers drive more than 40 hours a week. This is a really important stat to remember. And so we are 100% focused on a ballot initiative. We are standing by our drivers. Through the ballot initiative, we can guarantee a baseline hourly earnings with no upper limit as well as benefits. And we're also standing by our drivers to protect their flexibility. And so in terms of where we are right now, we just started collecting signatures not that long ago. We've already exceeded 1 million signatures in the state of California. There is incredible momentum behind this ballot initiative. What's important to call out, there's also over 50,000 drivers in support of the ballot initiative for the reasons I outlined. So when you look at the coalition, there was $110 million raised to win in November. And so I think just based on the momentum, the strong support, we feel confident we're going to be able to get the word out and to win in November.

Can you talk about your trends in revenue per rider and the importance of that metric?

Yes. So revenue per active rider, I would argue, I think The Street has us wrong. I think often, investors use heuristics. And when you hear revenue per active rider, it sure sounds like ARPU. And so I think a lot -- it's very easy to default the industries with ARPU, so you have mobile phone companies and you think of cable companies, where ARPU is pretty flattish, right? And the only change is when there's a price adjustment. And so I think both companies have talked about having pricing power. But we see -- we believe there is significant upside in revenue per active rider that has nothing to do with pricing. So I'll just call out quickly 401. It's growing the right ride mix on our platform. And so looking for opportunities to better segment and to create more value on the platform. And so I think the best example we recently launched something called Lyft Preferred. Think of Lyft Preferred as sort of economy plus, where we're taking our best drivers who have slightly larger cars charging a little bit more. We give some to the drivers, and we keep some for ourselves. Second, really focused in terms of the mix of active riders on our platform. We're looking for those power users who just use more ridesharing, who are more valuable and that's why Lyft business is so important to us. Third, this is an enormous opportunity in terms of transportation. And so we're calling after how do we drive frequency and really go after more of the transportation wallet. Our true competitor is not Uber. Our real competitor is car ownership. I think both of us think of car ownership as the true competitor. And so recently, we launched something with Chase, and I think some people are making a mistake that that program is really about to get new users. Most people who have achieved Sapphire Reserve already have both apps. This is about how do we go deeper into the transportation wallet. The average American household spending between like $9,000 and $9,500 per year on transportation. And so with this program, how do we capture more of that? Maybe they -- when their car lease comes up, they get rid of that car lease. Maybe we get more -- less rentals, right, with some of our competitors. So we're just going deeper and deeper. We recently launched Lyft Rentals. And we see an opportunity to just keep driving frequency and capturing more of that wallet share from our users. And then finally, shared ride. I don't think people understand like when we match and drive more efficiency that drives more revenue per active riders. So again, even without any sort of price adjustment, we think there's significant upside in revenue per active rider. And I don't think most investor models are right on this.

Okay. Why are you so -- you've been very excited about shared rides, what drives that excitement?

Sure. So our mission is to improve people's lives with the world's best transportation. And I would say Shared is fundamental to that, right? With Shared, you can reduce congestion, it's better for the planet. And so we have been -- we pioneered Shared rides. We've been at this for over 5 years. And so last year, we basically rewrote our platform. We've almost started from scratch in terms of just realizing we could just build some fundamental unlocks. We built what we call a global matching platform. We built Shared Saver on top of it. And we've been very pleased with the types of efficiencies we're driving. I know we have a competitor who's saying, Shared, those are empty calories. I don't know the type of efficiency they're driving. I would argue if maybe they have a legacy platform. I can tell you today, when we match on a Shared ride, the margin percent of those -- the matched rides are generally higher than private rides. So we feel really good about that. We're focused on continuing to drive innovation. We think there's more opportunities to drive matching. And what I'd say, when you think of a future, with autonomous, Shared is fundamental to that. And so we're going to be focused on both. How do we innovate to drive more matching, more driver efficiencies? We will be smart. And look, if someone is taking -- if they're in a very wealthy suburb at 2:00 in the morning, taking a ride to middle of nowhere. Yes, Shared probably should not be an option or the discount should be 0, right? So I think those opportunities as well. So it's a -- we think about how do we drive profitable growth, Shared is a key lever in that equation.

So it's good financially, and it's also written in your DNA.

Absolutely.

Yes. Uber has pulled in its EBITDA profitability on their last conference call. What are the levers you have to continue on the path of profitability? And what factors could accelerate that for Lyft?

I'm sure this is a question near and dear to a lot of people in this room. Yes. As we've talked about, we are trying to increase revenue per active rider. I outlined 4 different ways we're trying to do that, again, without even touching price. If you distill that strategy, what we're trying to do is increase revenue per mile on our platform, right? At the same time, we have large tech teams and operational teams that are looking at our costs and trying to do the same thing, reduce cost per mile. And so if you can increase revenue per mile and decrease cost per mile -- sorry, for anyone on the webcast who can't see my hands. That's the true part, that's how you really drive true unlocks in terms of margins. Now in terms of the path we're on, I've clearly voted with my wallet. I'm very confident. What -- I said this on the call. I remain -- in terms of when I get asked around the path of profitability and our target date, I said, I am truly, truly confident in our original targets and stay tuned. And so I encourage everyone in this room to stay tuned. We will report likely on or around May 6.

Okay. Does scale matter in ridesharing? Will it -- does it drive higher margins over time?

Sure. So I may give a long-winded answer here, because I think investors have made this mistake for years and years and years in ridesharing. It's a unique industry. So it's very easy. Here's something that sounds super logical. It's something you probably heard in business school. Yes, scale margins, yes, that makes sense. But let me to go back in time. So again, I've been CFO for over 5 years. When I joined Lyft, the narrative out of Uber was it is a winner take all. I'm sure folks in this room will remember that, and it's one of those things, it sounds sort of logical. And I will tell you there are investors that made big mistakes because they assumed, they just listened to it, didn't do their own diligence and just made a mistake. And so the way investors made a mistake was, it's very easy. So think of similar -- what you think are similar industries, Internet. So you think Facebook, LinkedIn. And those industries, the more friends you have on a single platform or the more professional context on a single platform, it's a demand-side network effect. It turns out, those are generally winner-take-all market. And so I think that's the heuristic that a lot of investors use and made a mistake. Ridesharing is a supply-side network effect. You have to build scale in every local market. It is very expensive, don't get me wrong, to build that scale. But once you have scale, you can compete. And I think the example I would tell folks, think of mobile phone companies, it's probably the best example, right? If you're launching in a city, you're building cell towers. Ultimately, though, once you saturate a city, I could -- if you use Verizon, I used AT&T, no one really cares what service anyone else uses because you're pretty selfish. You just care about your own signal strength. That's the only thing that matters. In ridesharing, it's very similar. It's around ETA. That's the level of -- you need a competitive ETA once you hit that, you can compete. And so the reason I mentioned this and, of course, fast forward 5 years later, of course, every single region, it was never a winner take all. Every single region, there's multiple players now. And so when you hear this argument that the player with the greatest scale will have the highest margins. So on my P&L, the single largest expense is insurance. So just think about that for a second. I'm just going to make up numbers, so these are fake numbers to keep it simple. So imagine if we have 30 million drivers on our platform. And they have 40 million or 50 million drivers on their platform. Do you think they would necessarily have a lower cost of insurance? Insurance is per mile. It has nothing to do with scale. Again, it's like -- the supply-side network like you need sufficient scale to compete. But once you're there, it's about quality, right? And it's how do you reduce accidents on your platform, how do you increase safety. And I think you could argue, the player with a smaller driver population, you probably curate more. You don't need the full -- so you just really curate on potentially the safest and best drivers. I will argue and I'll probably pound the table that we have probably the best insurance team now in ridesharing. And we did something very unconventional last year. We moved our risk solutions team, which houses insurance, we moved it underneath our EVP of Engineering. And I will tell you, when you have actuaries sitting next to data scientists, sitting next to software engineers, you find some unlocks. There's so much innovation left. And so we're very focused on how do we find and retain the best, safest drivers. That's how you drive down the cost of insurance. So let's just zoom out now. Lyft is 100% concentrated in the U.S. and Canada, which I think time will tell, are the profit pool capitals of the world, and we're just doing transportation. Our competitors doing ridesharing around the world. So yes, we overlap in the U.S. and Canada. I will argue, there are other places in the world, where ridesharing is less profitable. You can look at queues and you can see in certain regions, they actually had negative growth because of price wars. In addition, we're not doing flying cars. We're not in food. And I'm not going to make any judgments on food, but I don't think there's anyone who'd made any argument that food will have higher margins than ridesharing. Ridesharing is a double-sided marketplace. There's 2 players, you have to take care of. Food, there's 3 different players. And so again, I'll let everyone do their own math. But food, based on every single model I've seen will have lower take rates than ridesharing. And so when you compare the 2, our margin pure-play against a competitor that really is diversified in a lot of areas that, quite frankly, will likely have lower margins. And so again, I voted with my wallet, I think we should trade at a premium, and we'll just -- we'll watch how margins in this industry, when you look at both companies on a consolidated basis, mark your calendars for a few years and call me.

All right. We're starting to run out of time here. Do you think the market value, Brian, the autonomous investments, I mean at the outset here, you said you felt the value of the company could just be based on that. But how -- are they valuing it? How should they value it?

The very short answer is no. I think -- and similar to --- I'm not going there with food. I'm not going to debate when autonomous will fully roll out. I'm sure every single person in this room and on the phone has a different view when we'll hit true full rollout of autonomous. So let's just imagine the world when we get there because I think then there's actually less disagreement. In that world, our TAM for active riders is basically mobile phone penetration. Everyone is going to be using apps to request transportation. So we're very excited about this future. We have a two-pronged strategy. We have an open platform. We're working with Waymo. We're working with Aptiv. We recently announced or Aptiv announced that there's been over 100,000 rides on the Lyft platform in Aptiv cars in Las Vegas. So we're starting to hit some important scale there. We also have the Level 5 engineering center. And so we're building our own self-driving system. And I think it's really important to understand, we have some really interesting proprietary data. For every single city across the United States, we know the exact mix of rides. And so as you're trying to develop, and it's all about different restrictions on the self-driving system. We know exactly the right priority that will allow us to hit 10% of rides, 20% of rides, 30% of rides. So it's really important information. And as I think about the future, I don't think there's anyone in this room that expect some sort of magical car that's going to come next year that does all rides in all cities in all-weather conditions and yet at an economic price as well. Like, that future is not here yet. And so when investors talk to me and ask, what about an autonomous-only network. I'll go back to my mobile phone analogy. It's the equivalent of launching a 5G network without 4G fallback. And so you imagine that situation that we use on a mobile phone. Like in certain parts of the city, wow, it's crystal clear. Other parts of the city, it doesn't work at all. And then it gets harder for transportation. Ride volume in a city over a 24-hour clock is not a flat line. You have huge spikes. You have a morning commute. You have an evening commute. And so the -- when people most need to make a phone call, 60%, 80% of the time, you don't only get a dial tone. And so I think an autonomous-only network is going to have a really tough time competing with a hybrid network. And so I think that's really what's important to understand about the Lyft Hub, that we're building a hybrid platform. When it's really busy, we can [ bid ] first with humans and yet we can get all the benefits out of autonomous on our network as well. So I would argue today, we probably have a negative value in our stock because we are spending R&D dollars on autonomous or every dollar we spend, we're trying to make sure we can get some value on the core ridesharing platform as well. But I do believe that for the future state, and I will -- you'll see in years from now, and I'll hopefully say I told you so. There is so much strategic value in Lyft as 1 of basically 2 networks in the United States for autonomous.

All right. I think we're out of time. I'm going to ask one last question just to end this, you got a lot of publicity on this. Is it really true that everybody in your company flies coach?

So it's true for everyone, and it also applies for international. So I'll tell maybe one quick funny story about one of our private runs. We're trying to raise $1 billion. I'm with the 2 founders who were all at the very back of the plane, and it's even worse. We're all in middle seats on the right side of the plane like one row apart from each other. And our schedule is set, like when we landed, we had to get to our first meeting. And we're at the back of the bus and it's taking forever to get everyone off this plane. And then of course, customs is a disaster. So we're like looking at watches, so eventually we realized, we have to still get in our suits. And so we run into this public bathroom, I won't mention the airport, and we're all in stalls like literally doing gymnastic moves to get into our suits without touching any surface, and we did make the meeting on time. But the reason we mentioned it on the call is really important. When I joined Lyft, Uber just were close to around, I think they had 30x the amount of capital we did, right? And so in your DNA, you learn to stretch every single dollar. And at the time [ they were ] flying everyone in the company to go to Vegas or Miami to party. And we literally had teams just 100% focused on how do we deliver the right solutions to riders and drivers. And I think this DNA, you see it in our focus. That's why I talked about it in terms of margins. All we do is think about transportation in the U.S. and Canada. And I think it does create a competitive advantage for us.

Outstanding. A lot of great information. Thank you, Brian.