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

All right. Great. I think we are live. So good afternoon, everybody. This is Stephen Ju from the Crédit Suisse Internet and Equity Research team. Before we get started, I will share the safe harbor statement here from Lyft. So bear with us for a second. And while we are doing that, so we have with us John Zimmer, who is one of the Co-founders and currently serves as the President of Lyft. He's been the President since 2013, and Vice Chair since January of 2019. So before that, he served as Lyft's COO for about 5 years. So with that, welcome, John, and thanks for joining us.

Thanks for having me.

Awesome. So let's start off with some of the big picture questions that we're getting from investors. It seems like the common consensus is that the health crisis helped to accelerate the digital transition in nearly just about everything. But for rideshare, we're going to have a year that possibly unwind some of the progress that Lyft has made toward helping consumers get rid of their cars. Folks are moving onto cities and into suburbs. They're buying houses and cars instead of choosing to live an apartment. So how's the addressable market shrink for Lyft and the rideshare industry?

Sure. Yes, good to be here. And for us, obviously, we've been in this -- we've been focused on this mission of improving people's lives with the world's best transportation of building an entirely new transportation platform for over a decade, Logan, and I, my Co-Founder. And so we've seen -- we actually got started in 2007, 2008 in a big recession. And so we've seen a lot of things. Obviously, the pandemic is new. But I don't think it fundamentally changes the theme for transportation-as-a-service. People are going to be thinking about their economics coming out of this. Also, there's only so much you can grow at peak times. It's actually better for us to spread our demand over nonpeak hours. And so at 9:00 a.m., for example, there's only so many cars you can get on the road, and only so many drivers you can incentivize to come out. So some changes, both moving out of cities and commute times, are beneficial. I think also the ability for households to go from 2 to 1 car, if some people do work out of the house, can also be beneficial because there's -- we're really going after so many use cases of when people are going out on the weekends, are going out at night, or using a rental car. That, fundamentally, I don't see there being a big change. I also think there's just a massive millennial shift or generational shift of people that no longer want to own assets and want to stream their services, whether that's music, whether that's entertainment, and I think we'll be able to demonstrate with transportation. There's over $1 trillion spent every year on owning and operating vehicles, at which people use their car, only 4% of the time. We've only tapped into that 1% or 2% as an industry. And so there's a massive opportunity ahead. And lastly, I'd just say, I feel strongly that if I'm back in 1 year talking to, you're not going to be asking that question. Coming out of the pandemic, having the vaccines and seeing the growth that we expect over the next year, I think that will answer the question.

Sounds great. But as we sit here and wring our hands about the TAM shrinking, for the moment, at least, you have been working to expand Lyft's -- the use cases, right? There is the university transportation to replace the shuttle, from what I would call back in my undergrad days, the shuttle never seems to show up. And then there is the ride to the doctors' appointments for the health care industry. So what else is there -- out there that you're thinking about to make sure rideshare becomes more useful to a greater portion of our population?

Yes. One thing that's come out through the pandemic as differentiated and unique to Lyft is our portfolio approach to transportation. So we not only have the ridesharing service that everyone knows and uses, but we also have bikes, bikeshare systems. And we have exclusive operating permits in cities like New York, where we own Citi Bike. And Citi Bike year-over-year has not lost. And in certain months is actually higher than it was the year previously. And so our belief is that by providing a portfolio of options, we also have car rentals that people are using in the pandemic, where they want to be alone, just like on a bike, where they can be alone is our important use cases. As you mentioned, Lyft business, we're doing multiple things. We launched during the pandemic Lyft Pass, which makes it easier for companies to provide either free rides or discounted rides to their employees. They can pick the geographies that they want to offer those to say, "Hey, during these hours and to these locations, the ride is 50% off or free." So we're seeing a really nice uptake from companies as they try to get safe transportation for individuals who maybe were taking transit previously and are now no longer comfortable with that and want a ride with Lyft, where we do have a health safety certification, where both drivers and riders are using masks. So that's -- and you mentioned health care as well. We recently announced an integration with Epic, one of the largest providers of health care software within hospitals. Now making it really easy for various hospitals to request Lyft rides for their patients, which is a huge opportunity for nonemergency medical transportation. So as you look through transportation, there's a lot of kind of old systems that were reliant on taxis or other non-software-based systems that are large opportunities to fill in the gap. The one area that we've seen continue to lag has been the airport ride, given the pandemic and given the fact that people are traveling less. But we expect that to rebound coming out of -- or having the vaccines.

Got you. I thought so, Mike, a lot of the incremental use cases, as you mentioned earlier, are away from the morning and the afternoon commute use cases. So it will hopefully spread out the demand throughout the course of the day.

Yes. Right.

Yes. Right. I think on the last earnings call, and as a potential incremental use case, you guys brought up delivery. How does it potentially work? Will this be a white label delivery service offering? Are you going to be setting up drivers to potentially pick up on multiple locations and orders to decrease the unit cost of delivery? And I guess, from a development standpoint, engineering standpoint, is most of the work on this done already? Or do you have to invest additional resources there?

Yes. So coming into the pandemic, one, we wanted to find ways to continue to create rides as obviously, demand decreased, especially in the first part in kind of Q1, Q2. And so we started doing deliveries for local governments that needed to get food to individuals that had previously been picking it up at schools and things like that. And we saw -- and so we call that our essential delivery program. And we saw a lot of success with that using existing technology, not needing to build a lot of new infrastructure. One of the best examples of that is the shared ride technology that we built. That's basically taking multiple people and trying to bring them together and match them along a similar route to save money for those individuals. Well with the pandemic, we turned off shared rides, and we had that team take a look at delivery and not a consumer delivery platform, but as you mentioned, a more B2B white label system. And we talked to a lot of retailers, and what they told us is, "Hey, during the pandemic, we had to quickly get on board with these new platforms, whether it's for grocery delivery, food delivery or package delivery." But coming out of it, we're -- and currently, we're building our own systems so that we do not have to be reliant on it because we do not want to pay the 10% to 30% commission on a parcel that we don't think we should have if the organic traffic comes directly to our store or website. And so we want to be there for those retailers and provide the white label system for delivery. So we're quite excited. It's still very early, but we think that is differentiated and that we are focused on being a partner to the retailer as opposed to taxing them the 10% to 30% on the package and giving them the muscle that they need to compete in this digital economy.

Got you. Let's switch gears a little bit to some of your Level 5 technology and AI-driven efforts. If the reports in the media are to be believed, I think, your competitor has been reportedly looking to sell its autonomous effort. And I think at the time of the IPO, I believe, Lyft had about 300 employees dedicated to your own effort. Has their mandate changed since then?

No. We've been, from the beginning, very efficient with our investment in autonomy, very partner-oriented, which has paid off. For example, for 2 years, we co-funded efforts with Magna, a great Tier 1 supplier. And we continue to have great conversations with partners that see the value that Lyft brings. A couple of key things. Number one, most people believe that autonomy will first happen on a rideshare network for a few reasons: One, there's existing demand. And two is that it will likely be a hybrid of drivers -- human drivers as well as autonomous vehicles that enable you to provide a full transportation solution. The knowledge we use is kind of going from 4G coverage to 5G coverage. A wireless carrier doesn't just roll out 5G and say that's the only thing we have, they have 4G or 3G to drop down when they're unable to make a 5G call. The same will be true within transportation, because an autonomous vehicle from day 1 is not going to be able to do 100% of trip types. But even if it does 10% or 20% or 30% of trip types, it's valuable on a ridesharing network. So we're in a great position where we're going to continue to make efficient and smart investments in the space as well as talk to partners about how we can move more quickly and be even more efficient.

Got you. And you do have a time line to profitability that you've given guidance on and have reiterated recently? Does that time line to profitability, assume that you still carry the cost of this entire effort?

Yes. It reflects our continuous investments in R&D, including autonomous. And we are confident, as we've said before, in our path to profitability by Q4 of next year.

Got you. Now let's switch gears like once again to the regulatory environment and what the government has been trying to do. So I think since inception, I think, Lyft's management has been very conscientious of the intersection between consumers, drivers as well as the government. Clearly, it felt like to me the ballot initiative with Prop 22 was a measure of last resort. Because it seemed like you guys wanted to negotiate to come to some sort of a term with a benefits package with labor. So where are we now at this point in terms of your conversations with administrations outside of the state of California?

Yes. So Prop 22 was a clear turning point in the dialogue. As you mentioned, we didn't think it was the top choice to go out and put a full ballot proposition and run a full campaign. We always take the approach and have from the beginning. When we started in 2012 with Lyft, we got multiple cease and desist letter saying, "Oh, this peer-to-peer ridesharing category that you started, there's no regulatory category or you fall within another regulatory category and you have to do X, Y and Z." And we always took the approach of saying, "Hey, first, we want to communicate, try to have a respectful conversation with regulators." In that case, we said, "Hey, we're already doing, exceeding your safety standards for limos and taxis in terms of insurance, in terms of background checks." And eventually, over a year, it wasn't easy, but we did create a new category with the state of California that then spread across the country. And that was led by our policy team. More recently, we brought in former Secretary of Transportation for President Obama, Anthony Fox. He's been with us for the last 2 years. He's phenomenal. As well as Jeremy Bird, who is the national kind of Field Director for the Obama team. And Jeremy led this effort on Prop 22. And in the state, like California, where Joe Biden won by, I believe, about 30 points. We won this. I think it's getting close to now 60-40. And so again, we will stand up for our beliefs. We will stand up for our drivers, our riders, our business. And we will try to have things negotiated upfront. But in the case that people weren't willing to kind of come to the table and agree on something, we will fight for what we believe is right. And in this case, we were very successful in doing that.

Got you. President elect, Biden; and Vice President elect, Harris, have both come out and publicly stated that they are in favor of AB5. So should we be bringing our hands once again about this happening at the federal level?

I hope something happens at the federal level. I do not think AB5 will happen at the federal level. I think what I've heard from federal lawmakers is that what we did in California was very helpful not only in that we created a model, but also that it demonstrated where voters stood. A lot of times, policies are made after politicians are elected, and it's not clear where voters stand. You do polling on issues, but this is very clear. Voters stood very strongly on the side of independence, plus benefits. And the federal lawmakers that I spoke to said, we've taken note of what you did in a very progressive state, and that is very meaningful. And at the base of it, the debate is around how to help drivers. Drivers want 6 to 1 to remain independent contractors. And so I believe that, that will continue to carry the day. We've created a model. It could be used in other places. So there's still more work to be done, just like in the early days when we created the category, Transportation Network Company. We created a new category in a way of work now. And our policy team will go to work as they have in the past to bring it across the country. And I'd love a federal policy that makes -- so we don't have to go state by state and creates uniformity. But I'm confident that it will be close to the model we've already created, either existing in other states where drivers can be independent contractors, or hopefully, like in California, where you can add the right size of benefits and portable benefits to independents.

Got it. Now I will ask you to put your COO hat back on for a second here. From a practical perspective, do you have anything differently that you need to do from an operations perspective? And are we closer to figuring out how much this will cost?

It's going to take a few quarters to get exacts because there are part -- or exact costs. There are portions that are fixed like occupational accident insurance that all the drivers will get going forward. So we can predict that. But then on the health care subsidy, it really depends on how much drivers are driving. And obviously, that's going to change with the pandemic and post-vaccine. So we'll be able to better answer that in a few quarters. But we're going to be able to continue to operate as we have been in California, while adding those incremental benefits for drivers. Yes.

Let's switch gears once again to the competitive environment. So I think let us always talked about product innovation as a route to gain greater consumer acceptance and usage. So talk about some of these that have put you in a position to pick up market share over the years?

Yes. I go back to, again, 2012, Logan and I started working together before that on our long-distance carpooling company. But in 2012, with the launch of Lyft, the first year, everyone was like, this is a crazy idea. And there were a lot of cease and desist, and there were these punky pink mustaches on the cars. And so it was really that kind of -- that type of question, will this survive? Then we got through kind of the first year or 2 of that. Uber copied the model. They had been focused on black cars. They said, oh, this peer-to-peer model works well. Let's do that. And then they raised $3 billion, and they had 30x more cash than us. I think there was a point where we had about 5 months left of runway. And that point was when they had raised $3 billion. And everyone said -- everyone counted us out and said, "We wouldn't be able to survive that." And not only have we survived that, based on industry data, we've more than doubled our market share since that point. And I believe we'll continue to be able to do that by -- we are the leaders in this peer-to-peer transportation in the transportation network or in this kind of portfolio approach to transportation by having the right strategic moves year after year. Incrementally, that leads to more and more share. And that has played out over time. If people are patient, you can throw a pandemic at us, you can throw $3 billion at us, but we are on a mission. And Logan and I expect to win, but win the right way, by treating people well and win by making the right strategic decisions and the right innovations that move the industry forward.

Got you. Now some of your users probably had less reason versus prior to open a Lyft app for some time, especially during the worst parts of shelter in place. But they did have all kinds of reasons to open up the Uber Eats app. So there is a perception out there that this brand exposure has placed your competitor in a position to pick up additional market share. So what would be your response to that?

Yes. I'd say like perception meet reality, that hasn't played out. So it's a fair guess. But if you look at industry data, it has not played up. And so I think that should tell people something about the focus on transportation, especially coming out of a pandemic with the vaccine when people are coming back to rideshare, the kind of inflation that's happened on the food delivery side will moderate. And I think that focus we've had on consumer transportation, yes, we're going to do B2B delivery, but not consumer delivery. And that focus and that diligent approach is going to continue to pay off. I'd also say that we've answered that not only and just look at the data, but also on pink, which is our subscription service. We added a great benefit for riders with a great partnership with Grubhub and Seamless, if you're in New York, where you get free access to their delivery membership. So meaning free delivery -- free food delivery. And so we can provide those benefits where they are helpful and where they are beneficial to our riders. But we're really confident in our approach on transportation. Again, by having bikes, by having consumer rentals, something that our competitor doesn't have, we're able to provide a full end-to-end transportation solution for our customers.

Okay. And as economies begin to reopen and ride return to the platform, do you foresee the need to increase the promotional activity for either drivers or riders?

No. As I said, a couple of questions ago, we want to win on innovation. We don't want to win on coupons. That was a tactic maybe in the early days where when we had a smaller portion of share where we could -- you could spend $1 and they'd have to spend $5, right? And that was one of the ways that we got up to kind of the sustainable share levels that would be our base to build off of. But that's no longer interesting. And that type of investment is not the most efficient investment. I'd rather spend a dollar on new products, on new services on our engineering to get us there. So I don't see that. You can look at our financials, incentives that are classified as sales and marketing. We're down 86% year-over-year in Q3. And so we'll continue to be prudent and be focused on winning, but not winning on coupons.

Got it. So let us talk about some of these recent trends. Because I think at the time of the third quarter earnings call, you said that rideshare rise, I think this is units or volume fell 48% in the first week of November. And you have provided the market this morning with an update down 50%, I think, for the recent weeks. So any color that you can share in terms of how widespread the decline might be? Or are you seeing different rates to deploy in different regions?

Yes, I mean it's really not perfectly, but it is correlated to pretty closely to COVID cases, case count and local lockdown or regulations around the virus. We saw a couple of points changed in the month of November from 48 to 50. But as part of the update, what we said, which I think the market reacted to positively, is that one, there's a pretty large rise in case counts and not a massive change in what we're seeing on ride volume. And two, we're guiding to the higher range on our contribution margin and adjusted EBITDA being slightly better than what we had guided to previously. So the team is making incredible strides on cost reductions, on having the right lean business such that as COVID -- as we get out of COVID, as we get the vaccines as we go into next year, we are primed to take advantage of that.

Got you. Now I think you guys hit bottom in basically April, and there was a big step up in the recovery rates from April to May. And then things settle down into the more slow and steady recovery. So within that, is there anything to call out in terms of which use cases are recovering? I think you mentioned the weekend use case before, but anything to call out in terms of what the consumer is doing right now?

Just as a reminder, in our last earnings call, we saw revenue grow 47% quarter-over-quarter. So quite a nice rebound. Use case specific, as I mentioned, airports has been the one lagging the most. Off-peak times, we actually like the distribution, as I mentioned. We can make more money on off-peak rides because it costs less to incentivize drivers because we're not -- don't have this massive spike in demand. So that's good to see on the off-peak times in the business cases that I highlighted before, we'd Lyft pass have been very helpful. And then just on having consumer rentals, again, it's a big unlock for people. Maybe that 2-car household, maybe we can go to 1 car or even 1 to 0, where it's like, "Okay, I can get my weekend car. If I go on a trip, a 2-, 3-hour drive, I can get my weekend car from Lyft. And then all my within-town needs, within-city needs, I can take Lyft's rideshare service." So nothing beyond that.

Got you. There's not much you can do about the demand profile right now, given where we are. But -- so setting aside the cost cuts, have any of your investment priorities really changed throughout the crisis? Have some projects been pulled forward? Have other projects been pushed back?

Our message to the team and our focus, for Logan and I, has been control what we can control. And primarily, the things that we've been working on have been what we can control in terms of costs. And we expect to hit about $300 million in reductions on an annual basis by the end of this year from what we had originally estimated from a cost perspective. That is massive. That means we will be structurally more profitable on a per ride basis as we move forward. That is incredibly valuable. That has been the focus. In terms of projects, we have always been long-term minded. We've been in transportation for over 10 years, Lyft for over 8 years. And so we have a long-term strategic plan to provide the best transportation for our customers to build the best business. And so no material changes. Yes, of course, like some smart shifts in allocation of budget, given there's a pandemic. But again, the focus has been on costs.

Got you. How has your desire to invest into micro mobility change for the other side of the health crisis now for full recovery?

Yes. I think, again, this is a proof point that we are making the right strategic decisions. So we -- when everyone was going crazy about dockless bikes and scooters, we said there is a dock-based bike care company that has exclusive contracts with the major cities in the United States. That company is called Motivate. We bought them -- we just had our 2-year anniversary this week. We bought them 2 years ago, when everyone was looking one way at dockless as this is wow, this is amazing technology. It doesn't need a station. We said, "Well, as you get to scale, the station is actually incredibly valuable. It's valuable real estate." As you get to electric, we're going to be charging bikes and scooters in those stations, which lowers the cost of operation. And then it allows us to have a partnership with the city for that real estate. And in the case of New York City, the Bay Area, Chicago, Boston and a few other areas, we have exclusive rights to be the only bikeshare operator in those locations. And so I think we've demonstrated that this strategy does pay off. Again, it's part of the portfolio idea of maybe for a customer rider, it's 5% of their rides or 10% of their rides, but it's content or service that they can exclusively and only get on Lyft. So if you're a New Yorker and you want to use Citi Bike, Citi Bike is incredibly popular in New York. It's on every few blocks. And we have a subscription service like Pink, where you get benefits on Citi Bike, you're not going to sign up for Uber and other service because you can't get that value. You can't get that content. And so we feel great about the investments. We will continue to invest again prudently, like we've done in other areas like autonomous. And again, I think, our -- the strategy will continue to pay off.

Got you. Tell us a little bit more about your strategy with fleet? Why does it make sense for you to be investing here, both in terms of XD and consumer rentals?

Yes. Again, this is an area where we have differentiated. It's a little more under the hood. Something we don't talk about as much because it's just part of the operations. And I think we still have a few tricks up our sleeve, like we -- recently launching of consumer rentals. But we are in a technology and software heavy, but transportation business. And when you have drivers that need access to vehicles, we want to be there for them. We think we can improve their economics and our economics by doing so. We think we can put ourselves at a structural and strategic advantage by doing so. So we started -- and again, we do these investments carefully. We don't scale up too much, and then shut them down, which, I think, we've seen our competitor do twice, once with fleet and once with bikes. We go at the right pace. We prove that the economics work. We prove to ourselves and then to the market, and then we scale from there. And that's what we've done with fleet. The team has done a phenomenal job, first with Express Drive, which is the vehicles that through partners, we can provide to our drivers. And then turning that muscle we've built for consumer rentals. And we have 2 approaches on the consumer rental side, one is first-party where we use vehicles that we have more access to, to create a Lyft rental experience where there's no desk that you have to go to, you reserve the car in the Lyft app. You get a Lyft to the lot, you get a Lyft ride to the lot. And then you can take your car and go. It's really simple. It's a really elegant and nice experience. And then third-party, we partnered with SIXT, the European leader in car rentals, to offer a similar, extremely easy experience where you can actually pick your specific vehicle as well as get a Lyft to their lot. So that's what that fleet muscle gives us. I think as you look to both bikeshare and autonomous in the future, having a know-how, whether or not we do it all ourselves or it's more economically efficient to have partners. But having the know-how, having the software that powers it and optimizes for revenue utilization, is going to give us a big advantage.

Got you. Zooming out a little bit. How has your thinking evolved in terms of operating only in the U.S. and Canada? Do you see yourselves expanding into additional markets at this point?

Yes, again, I think it's been -- I mean, one was a constraint that as the -- we were the second player to kind of do an app with transportation. We were the first to do it with peer-to-peer. But as that second kind of with an app, we had constraints on saying, "Hey, we're going to be focused, we're going to be diligent and be -- again, focused on North America." And we want to continue to increase share and provide value to our customers while we do that. I'm happy with the pace we've gone after that. Adding Canada has been helpful because it adds the complexity of currencies and languages to give us the attack platform we need to go international. So we're going to be probably pretty focused again for at least the next year coming out of COVID. And when we prove to the market, the profitability of the model, we'll look at international as a growth opportunity. And where there are just one strong player in a certain geography, I think, that would be interesting place for us to look at.

Got you. We are coming up on time. So to close this out, let's zoom up a little bit further. So can you talk about the long-term vision of how rideshare will change the local cities as the need for parking and other infrastructure to accommodate all these cars get rationalized?

Yes. We imagine a world where car ownership, first, is optional and then is financially stupid. The average American household spends $9,000 every year owning and operating a car that they use 4% of the time, and they have to deal with maintenance and they have to deal with fuel and all those things that they pay retail for, insurance, everything. And you have 10 or more companies that you're getting all these parts and services and insurance from. We imagine a future where you, as a customer, come to one place, you come to a Lyft. And just like you've done for your streaming of music or entertainment, we provide you with everything you need for a monthly or annual subscription. And then car ownership becomes less necessary. Parking becomes less necessary. Cities can be designed around people, not cars. That's the vision that we have. That's the vision we've been executing for now over 10 years. We are making progress on it, but we are still in the very early stages, and I'm incredibly excited to continue, especially as we get a bit more oxygen into the business coming out of the pandemic.

And with that, we'll wrap it up here. Thank you very much, John, for speaking to us. And best of luck in the coming year, with lots of oxygen.

Thank you.

All right. Take care.

Bye.