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

All right. We're going to go ahead and get started. My name is Doug Anmuth. I'm the Internet analyst here at JPMorgan. It's our pleasure to have with us John Zimmer, President, Co-Founder and Vice Chairman of Lyft. So Lyft is a leading multimodal technology platform for personal consumer transportation, operating the consumer ridesharing marketplace at scale and building out networks of alternate transportation options, including bikes and scooters. As of 1Q, the company had approximately 18 million active riders on its platform. So John, priority to his current role, he spent nearly 5 years as COO. And before founding -- co-founding Lyft, he cofounded Zimride. So welcome, John.

Thanks for having me.

So we're now more than 2 years since the start of the pandemic and hopefully seeing a sustainable recovery in rideshare. What's changed most about the rideshare industry and about Lyft during this time?

I'd say, first off, we built a better business. So if you go back to 2019 full year and then fast forward 2 years to last year full year, we improved adjusted EBITDA profit by $800 million on $400 million less in revenue. So that was a lot of important work and doing that amidst a pandemic was critically important. The other thing I'd say more on the rider and driver side or the product side is we had to manage through some pretty wide swings in demand. So obviously, the dynamic of a pandemic was there were waves of COVID cases, and that really forced us to build better marketplace tools. Two examples I'd highlight. One on the driver side at the start of the pandemic, hard to remember, but demand was obviously down quite substantially, down about 70%. And we actually had a lot of drivers looking for work at that time before they decided to ride less or drive less because of rides. And we built a product called priority mode for drivers. And that was super effective in giving our most valuable drivers rides more frequently than any other driver to preserve those most loyal and most valuable drivers on the platform. That increased their earnings, and at the same time, we were able to take a larger take for providing them with that product. That's an example of innovation that came out of these wild swings. On the rider side, the opposite has been true as we've started to grow again, and we created priority mode for -- or priority pickup on the rider side. And this is an example of revenue management, where we can charge more for a faster ETA. Both of those products did not exist before. There's many others on the rider side, there's kind of the opposite of priority pickup, which is wait and save. So if you're willing to wait, you can save money and we can better optimize the marketplace. So the 2 big changes, we're operating a better business and we're building tools to better manage the marketplace.

Okay. Great. You talked about 1Q volumes as about 70% recovered versus 4Q of '19. But San Francisco, for example, is less than 50% recovered. What are the other areas where you're seeing recovery lag? And how does that just influence your view of growth going forward?

Sure. So as you said, yes, about 50% in San Francisco. If you look at the entire West Coast, our top 10 markets, still at about just 55% recovered compared to the East Coast, which is 10-plus percentage points higher. In fact, you have markets like New York, Miami that are close to -- or actually above 90% recovered. So different trends on recovery across the country. The other thing I'd highlight are specific use cases. So there's a lot of questions over the last month or 2 about concern about the commute. Obviously, those of us in the room that are able to work from home, a question whether -- how is ridesharing going to do in this new work environment. The commute as a percent of rides today is about 30% and pre-COVID was about 30%. So actually, there hasn't been a massive change in commute. The demographics of those that are using the product has changed. So we're seeing more kind of -- as we saw at the beginning of the pandemic frontline workers or blue-collar workers compared to those of us that can work in front of a screen. But I thought that was like a really important thing to highlight is that the community is still 30%. If you look at kind of where are the areas within the rides use cases for improvement, I'd highlight airports. They were about slightly over 9% pre-pandemic of rides now at about 8%. That has recovered over the last couple of quarters, but I'd say there's still room. And then kind of party time rides or nights and weekends is actually the largest area left for improvement, meaning it's -- it was about 25% of rides pre-pandemic and is now lower 20s. So those are where there's improvement. If you're adding those numbers up, there's a bunch of off-peak times, which is the other major segment. So those are some of the shifts.

Okay. Great. So even Logan kind of framed the stages of Lyft in an interesting way, I think on the recent earnings call. And you talked about the company being 10 years old, chapter 1 being about kind of pioneering the industry, chapter 2 about becoming adjusted EBITDA profitable during the pandemic. What does chapter 3 really look like for Lyft?

Yes. Before we get to 3, I want to just remind folks of what we went through in chapters 1 and 2 and what we accomplished. Chapter 1, we fought against the odds of a much better capitalized competitor, Uber, at the height, had raised $3 billion. I think it was the most ever by a private company from the Saudi government. And we -- at that moment, we had about 5 months left of cash and single-digit market share. So in chapter 1, we established the peer-to-peer ride industry, but also fought against the odds and got up to market share in the 30s. So chapter 2, we were struck with a pandemic that killed about 70% of our rides for a period of time. We were pre-adjusted profit and we had Prop 22 looming over us. So that was a lot of fun. And during that period, we got to adjusted profit. We passed Prop 22 and started to rebound from the pandemic. So -- and now, as you said, we're in chapter 3. I'd summarize it and say, our goal is to become the most impactful transportation network with GAAP profitability and free cash flow. From a product perspective, we think about being the one-stop app for you to get all your ground transportation needs. This differs from an Expedia-like approach where you just link out to Hertz rental car and other things. I'm talking about going deep in each vertical, providing true value to our riders and by providing that true value, creating better margin.

How does that singular focus on transportation enable you to create those differentiated experiences for consumers and drivers?

Yes. I think the best way to understand that is to take specific examples. So on the driver side, you can provide drivers with links out to other people who rent vehicles. Having vehicle access for drivers is quite important. But we're doing it from our own program, Express Drive. And so if you think about a big part of our business is finding obviously drivers to drive on the platform, and if you limit that audience to the size of people who can afford a new car that qualifies on the platform, that's quite limited. And so by having our own rental car program for drivers, we opened that pool of drivers quite significantly. And we don't pass the margin or kind of the know-how to a third party to get that done. So Express Drive now, we can operate with positive economics and drive material driver hours through that program. That's an example of us going deep versus saying, "Oh, we're in transportation, "Hey, drivers, here's a link out." That also has -- if we talk about AVs later, autonomous vehicles, by operating and doing fleet management, we believe that helps better set us up for lowering operating costs in an autonomous future. So that was a specific example of going deep on transportation on the driver side. On the rider side, an example just riffing off of that point on our rental car program for drivers, we've also pointed that at riders with first-party rental experience. So this is still relatively new in San Francisco, L.A., but our first-party rental experience, imagine skipping the desk and it's quite easy to out-innovate the current rental car experience. Our Net Promoter Score, which is a score we used to measure the customer feedback is twice that of industry average in car rentals. That's another example of going deep. Now we don't need to scale that all first party. We actually are bringing on third-party partners. We currently have 6 and we'll have more to announce that then can use some of the technology we built and create not just again, a speedy experience where you link out to them, but actually a holistic experience where the Lyft ride takes you to the sixth lot and you can select your exact vehicle in the Lyft app. So those are a couple of examples of going deeper. Maybe one more on bikes. We own the blue bike system here in Boston, Citi Bike in New York and several others. At the time, a few years ago, everyone was kind of throwing scooters all over the cities and buying or investing in bikes that were dockless. We saw an opportunity to purchase a company that had exclusivity, meaning that Citi Bike is the only company that can operate bikes in New York City. And it has become material. There's about -- last year, I believe it was about 30% of our commute rides were if you just total up bikes and rideshare rides that were actually on bikes. Those are a few examples of going deeper.

Okay. Great. So let's shift gears a little bit. The big topic, clearly coming out of 1Q earnings was your decision to kick start growth just coming out of the pandemic and increasing investments. So why are you doing that? Why is now the right time for that?

Yes. Well, first off, we've absolutely heard from the market and from investors with pretty direct feedback about that decision. So we've taken that to heart and seriously, obviously, making adjustments as we move forward. The rationale going into the quarter was we were coming off Omicron. And Lyft historically over-indexed on the West Coast and with shared rides, meaning we had more share of shared rides volume than kind of nonshared rides. And those 2 things are starting to return, shared rides in the West Coast. And so the belief, particularly on the driver side, is that we have a typical ROI on our investment in driver engagement of about 12 weeks. That's the goal we set for investments on the driver engagement side. And so the idea was leaning into those coming off Omicron, West Coast and shared rides pieces to make a smart investment. As I just said, the market is shifting rapidly. The expectations around near-term profit are very clear and we'll continue to adjust from here.

So maybe to expand on that a little bit more. How do you think about investing in driver supply? You mentioned a little bit on the 12-week ROI. What other metrics are you thinking about? And how do you think about the impact of incentives on driver earnings?

Yes, the main thing that we're solving for on the kind of rider-driver experience and the kind of measure of balance in the marketplace is service levels or ETA is the best way to understand it. So what is the availability of a driver when you open the app. And there's kind of an optimal point at which the marketplace and the unit economics are the best. And over the last year, we've improved our ETAs on average by about 3 minutes, but believe there is, on average, 1 to 2 minutes more to get to those optimal service levels. And so therefore, by investing correctly on the supply side or the driver side, we can move towards those ideal conditions in the market and unit economics. You asked about how we think about kind of driver investment as a whole. And I think it's important to understand how driver pay works. I think we could have done and can continue to do a better job of articulating and explaining this. There's basically 2 components of driver pay. And that driver pay is decoupled, meaning it is like a different equation than what you pay. And that allows us to, again, optimize both sides independently of the marketplace and take any surplus and apply it to the right peak hours. But zooming in on the driver side, there's the 2 components. There's the base pay and variable pay. Base pay is pretty self-explanatory. Variable pay is used to shape driver hours, meaning to encourage drivers to drive at the times where they're most needed. And that shows up primarily in contra revenue and is what many of you are referring to as the incentives. Contra revenue in this variable pay component will never go away completely. It can continue to come down. We can continue to get more and more efficient. But it is part of how the business operates. Contra revenue incentives on a per ride basis in the guidance that we just provided are down 15%, so on a unit basis from the prior year. So there is improvement being made. Those are some of the things to understand. As I mentioned, when we make those driver incentive investments, we are guiding ourselves with a goal of a 12-month -- 12-week payback.

And just to clarify on the down 15% year-over-year per ride, you're saying 2Q '22 from 2Q '20?

That's correct.

So let's hit that more. You've been spending at these elevated levels now for several quarters, right? I mean this isn't new. If we look back at the pace, it's really been like 2x what you spent in 2019 kind of pre-COVID, the 1Q number, I think it was $350 million. How do you think about that level in kind of like absolute dollars, for example, in 2Q?

Yes. The other thing to think about is how that 2x correlates to your experience as a rider with prime time, right? So pre pandemic, we had less prime time, which is our dynamic pricing or surge pricing. There was less before the pandemic. There is more in the midst of the -- or after the pandemic. That's what primarily funds the contra revenue incentives and pays for that variable pay that shapes those peaks. So it's important to not think about this driver incentive spend in isolation from what is higher prime time, which again primarily funds that. And then I would just rearticulate what I said about contra revenue per rides coming down 15% year-on-year.

Okay. On their earnings call, Uber talked about drivers in the last quarter who drove more than 20 hours, earning about $39 per hour, including tips. How does Lyft compare?

Actually better from a driver earnings perspective. So if we look across all our drivers and you include, I believe, the equation they did with tips, et cetera, we get to that $39. That's all drivers for us. They qualified theirs as, I believe, what was it, drivers over 20 hours. If we were to do that, it would actually be higher than the $39. So I think there was -- again, I'll take the blame. There was some misunderstanding about are there structural disadvantages. I would strongly state there are not. Our ETAs are comparable when we look across the market. Our driver earnings are as good or better, which is a form of marketplace efficiency.

Okay. So driver incentive has clearly been getting a lot of the attention, but you're also making a lot of other investments through your operating costs as well and other line items. Can you talk about those?

Sure there are the 3 main, I say, tech investments we're making. One is continued marketplace efficiency. There still is quite a bit of opportunity to optimize the for example, contra revenue incentive spend or variable pay. We believe we can make $1 go -- that is spent on that, go 20% further between now and the end of the year by building better tech. An example would be when do you decide on what variable pay program to send to a driver. And what signals are you getting from the market? Are they signals from last week? Or are they signals from a minute ago. There's an opportunity for us to make this more and more real time, which should result in much more efficiency. So that's just one example of kind of the marketplace tech investment we're making. I'd highlight 2 others. One on the driver side, upfront driver pay is something that we have out in a couple of markets. And it's something that will be scalled further throughout this year. This means that just like your experience is a rider, you know the price upfront. Drivers actually historically haven't had that type of information when they make a decision to accept a ride or not. And so in these markets where we're slowly rolling it out, they do get to see that. We do believe that long term leads to better driver hours. But you have to do it very intelligently because if you do not motivate drivers correctly for each ride type, you could have cherry picking and you could have certain types of rides that drivers aren't interested in. So again, with this, we'll roll out over the year, long term is something drivers are quite excited about, which we've seen can lead to higher driver hours. It just has to be done with both sides of the marketplace in mind. And the last thing I'd just say is we're investing in the return of shared rides from a tech perspective and doing so in a more intelligent way. So previously shared rides, you would tap the button in within a minute, just like regular classic ride share, you would get a match. That doesn't give us a lot of time to create a match, which -- when there's a match, there are better unit economics for us to retain and/or to pass to the rider. And now there's a several minute kind of prebook experience, you indicate you want a shared ride, you're looking for a more affordable option. We have more time to make better unit economics and better value for the rider. And so those are examples of areas we're investing in.

Okay. Great. A frequent discussion, I'd say, with investors is just kind of this question of whether there's a pure-play advantage or an advantage for a more diversified model and obviously, Uber. Just how do you think about that? How do you compete versus Uber 1, for example?

Yes. So I'd say a global pandemic where 70% of rideshare is basically shut down and a lot of people are ordering food is the time to demonstrate that, that's a better model. Our market share stayed basically the same before and after the pandemic. So they did not execute or demonstrate an advantage with that model. As we move out of that environment and as the West Coast recovers and as the shared rides come back, I think we can further demonstrate the value of focus and the value of going deeper on transportation. And you mentioned Uber 1 and like the subscription model versus Pink, which is continuing to roll out with better and better metrics. They really focused their program. It's called one, and it's joining both sides, rideshare and food delivery. But all the economics or kind of value that they're passing to the customer are focused on the food side because DoorDash is beating them quite handily on that side. And so what that means is that I believe that their main rideshare benefit is 5% off and the majority of the economics they've passed through to the free delivery side gives us a pretty wide open space to provide more value for transportation.

Okay. Macro environment, obviously, a key focus here for investors. How is inflation impacting your business right now? What is it doing for demand?

When we saw -- when we put the -- we put a $0.55 gas subsidy in place and did not see a change. I still believe there's pricing power in the industry. And look, if there is more of a kind of downturn or recession that could provide more opportunity on the supply side, where more people are needing supplemental income. And it will just also be important to have multiple ride options at different price points, which is exactly the type of work we've been investing in over the last 2 years. So if people have less buying power, having things like shared rides, even having a bike option, having the wait and save option are going to continue to be important.

So I mean just to pulling that a little more, just you kind of mentioned the recession, some ways could be an opportunity in terms of bringing out more drivers, increasing supply. And then the idea is there's that would balance the marketplace potentially more?

Yes. I mean hard to predict. Again, the important thing of dealing with something like a pandemic or a looming potential recession is just having all the tools to adapt and respond quickly. Something that we have seen, if there is an economic downturn and people need more money that could release pressure on the driver side of the equation, which currently is the main pressure point in the marketplace going.

Okay. You've talked about revenue growth accelerating in 2022. Do you need a full recovery for revenue growth to get above that 36% growth level of '21?

You don't need rides to recover to pre-pandemic or 2019 levels. But you do need a strong continued recovery. So we're continuing to look at the operating environment, what's happening in the market and what we're hearing in terms of feedback from investors on how to best navigate it. But again, we don't need it to be at those pre-pandemic levels but do need continued recovery.

Okay. So we'll take some questions from the audience in a minute or 2, if there are. And I think there should be a mic coming around. But maybe you can -- and I have a few more certainly, but can you just talk about the progress you're making with Lyft maps and why it's important for you to actually develop that in-house?

Yes. So point of clarification, is that we are not building these from scratch. So there's quite a bit of amazing open-source software, open street maps that we're building off of. And the motivation -- and we've been working on this for many years. This is not new. This is not a massive expense. This is something that's been part of our technical team for quite some time. The reason we started talking about it more recently is because it's really starting to bear fruit, and the work is coming to fruition. The reason to invest in maps is it is quite important part of the foundation of what we do to have accurate routing, accurate ETAs, the value of having more accurate ETAs and better routing can pay off in the tune of tens of millions of dollars in marketplace efficiency. Additionally, we're relying less and less on third parties. And when you rely on third parties, you pay them for their maps. So there is cost benefits to having our own platform. And we're seeing great success building off of this open-source software. An example being that we've just scaled up now, I believe, about over 10 million rides on the driver side are with drivers using our own navigation product and nearly 50% of drivers say that Lyft navigation is as good or better than the Google Maps experience they were having, and they're choosing to stick with Lyft. That's quite profound after just a few years of investment that we can do that. And the reason why we can do that -- Google Maps is a phenomenal product. We're not trying to beat them at that product. But because our use case is quite specific, it is rideshare. We can do more for drivers than a generalized product like Google Maps can do. For example, we can demonstrate what door someone is likely to exit added a venue based on all the data and information we have, and this can lead to a better pickup experience, more efficiencies, so people aren't searching for each other and therefore a higher driver earnings. So it is a long-term investment, not a change and actually is already driving cost savings.

Okay. Do we have any questions in the audience? I think there's one upfront. Mic is just coming to you.

First question is just to clarify. The $39 you mentioned to the drivers. So that's really to sort of pass it through to the drivers, not on the revenue side per -- on the ride? And the second, you mentioned the B2B initiatives before. If you could give us some updates on that, how that's going to help in terms of creating more earnings opportunities for drivers?

Sure. So the first one, I think your question was about the $39. That is what goes to the driver. And as mentioned, the kind of rate -- like what the rider pays us and what we pay the driver are decoupled. Now the driver has -- that's the gross amount that we're sending to the driver. The driver has expenses, could be $5 an hour. It was like one of our more recent -- it's like $3 to $5 an hour with gas prices, it's leaning more towards the $5 an hour. So the $39 is gross. And again, it's independent of what the rider is paying. The second question was on B2B delivery. Yes. So scaling -- the last year, we were -- I don't know, early in the pandemic, we launched this initiative. This is around not doing any -- we promised not to do any consumer delivery, no consumer food delivery, not a consumer app where you can order from us. But what we've heard from a lot of, call it, large retailers, is the need to get multiple packages throughout a city in a day and not pushing their consumers to others services like a DoorDash or Uber Eats. And that has scaled up, I'd say, from very small pilots to about 10x to where we were last year. Still small when you compare it to our rideshare business, but still an opportunity to provide more earnings opportunities to drivers.

Could you talk to -- earlier, you said you want to get ETA times down 1 to 2 more minutes. I think they're still above 5. And in the past, you guys have talked about 3 was like a magic number. And so it doesn't sound like you're targeting getting back to those levels. Can you talk about why and where conversion rates stand today versus what the trend has been in pre-pandemic?

I'd say we're still working towards that kind of 3 to 4 level, 3 to 4 minutes. 3 minutes is that ideal point, as you said, where we see conversion optimal. But we've also created products for those that are more ETA or price-sensitive. So priority pickup is an experience where you can get, I believe, on average, right now, it's about 40% faster than a non-priority pickup ride. And so this, again, speaks to better revenue management. There are people that are less price-sensitive. Actually, we're seeing more and more divide between those that are price-sensitive and not price-sensitive on the platform, which makes these products really pay off. So one, overall, on average, I do think we can get back to those similar levels. But even more importantly is we can do better revenue management by saying, "Hey, this is really important to you right now, even in this high demand moment then -- and it's okay for you to pay for it, then we'll provide you with that option. Whereas if you're more price-sensitive, you can wait and save money.

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Yes, I'd say because industry-wide, it -- our ETAs are comparable to Ubers. Conversion rates are still strong at these levels. That said, our marketplace does operate more efficiently and you see better retentive behavior from the rider when you hit that 3- to 4-minute ETA.

John, I just want to circle back on your comments when we were talking about chapter 3 for Lyft, you talked about -- or you mentioned GAAP and free cash flow profit. So how do you think about the profitability of the business going forward and the path to those kind of milestones?

Yes. I mean 1 is -- we understand it's table stakes. It's our right to play and move towards the bigger opportunity. I'd point to again like we have a track record. We -- in light of a pandemic that took out 70% of our business, we improved adjusted EBITDA by $800 million on $400 million less revenue. So I'm quite confident in our ability to continue to move the ball on this. We continue to develop our constraints in muscles on being prudent around cost. And I just -- I think there's a great amount of opportunity left. And so we'll put -- it's on us to put numbers on the board in the -- over the next few quarters. We are prioritizing it. And it's on us, as I said, to demonstrate it.

I had a couple of questions on the taxi effort by Uber, what's your view of that? And then a larger question is just this move by cities to reduce congestion by coordinating some of the ridesharing and trying to make it more efficient.

So on the second one, can you say a little more?

If there's concern about drivers just driving around in a city and increasing congestions.

Got it. Got it. On taxis, it is not something we are planning to do right now. This is not a new idea when it was tried and I guess, turned off by Uber a few years ago. One of the main reasons that we haven't done it, and I believe why their past team turned it off is because the experience is quite bad. So meaning a taxi driver is incentivized to pick up a street hail. And so the cancellation rate on a taxi is quite high, and we don't think it overall helps the marketplace enough where it would make sense for us to put it on the platform. None of those deals are exclusive. So if it, for some reason, has changed dramatically, we can take a look at it. But that's why we're not prioritizing it. We don't think it pays off. The second around congestion in cities, I can just tell you that on the regulatory front, that type of pressure specific and pointed at the rideshare industry has gone down. We haven't heard it nearly as much as prior. I would say, traffic in certain places is less of what's front and center on politicians' minds. We are totally fine with congestion pricing tied to any car on the road. We are totally against congestion pricing pointed singularly at rideshare drivers.

I know we're over time. John, any real quick closing thoughts?

I'd just say I'm super aligned with investors in this moment. I haven't sold shares except for tax and charitable reasons since the IPO, I didn't sell shares at $60, and I'm all in. As I mentioned, we've gone through some serious challenges with the pandemic being the most recent and knocked those down pre-adjusted profit, Prop 22 and we're going to take this moment and execute and appreciate everyone's support along the way.

Great. Thank you, John.

Thanks.