Woven by Toyota, Inc. (LYFT) Earnings Call Transcript & Summary

Good afternoon. Thank you for standing by, and welcome to Lyft's conference call regarding the sale of its Level 5 self-driving division. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Sonya Banerjee, Head of Investor Relations. You may begin.

Thank you. Welcome to today's conference call regarding Lyft's announced sale of our self-driving division to Woven Planet Holdings, a subsidiary of Toyota. On the call today, we have our Co-Founder and CEO, Logan Green; Co-Founder and President, John Zimmer; and Chief Financial Officer, Brian Roberts. We'll start with remarks from John and Brian and then host a brief Q&A session. A recording of this conference call will be available on our Investor Relations website at investor.lyft.com shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will be making forward-looking statements. This includes statements relating to the sale of our Level 5 self-driving division announced today, our expectations for the transaction, the expected timing for closing and the financial impact. We will also make statements relating to our expectations regarding profitability, autonomous vehicles, AV technology, our platform and our strategies and vision as well as our expectations for long-term growth and our overall future prospects. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our Form 10-K for the full year 2020 filed on March 1, 2021 as well as risks related to the closing of the transaction and the current uncertainty and unpredictability in our business, the markets and economy. You should not rely on our forward-looking statements with predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and Lyft disclaims any obligations to update any forward-looking statements, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP financial measures. A reconciliation of our historical GAAP to non-GAAP metrics may be found on our Investor Relations website at investor.lyft.com. I would now like to turn the conference call over to Lyft's Co-Founder and President, John Zimmer. John?

Thanks, Sonya, and thank you all for joining us on short notice to share news that we're quite excited about. We have signed a definitive agreement with Woven Planet Holdings, a subsidiary of Toyota, to acquire our Level 5 self-driving division. Lyft and Woven Planet will also enter into commercial agreements that allow Woven Planet to help advance the safety and commercialization of automated driving vehicles. Lyft will receive in total approximately $550 million in cash with this transaction, $200 million paid upfront, subject to certain closing conditions, as well as $350 million in additional payments over a 5-year period. We are also excited to announce that our Open Platform team, the engineers, product managers and data scientists at Lyft focused on integrating self-driving cars into Lyft's network, has been renamed Lyft Autonomous. The Lyft Autonomous team will continue to focus on the self-driving user experience, marketplace and fleet services that ensure Lyft riders have access to the safest, most advanced self-driving technology on the market and that our AV partners have access to the power of Lyft's network. Not only will the sale allow Lyft to focus on advancing our leading autonomous platform, this transaction will help pull in our profitability time line. Including the financial impact of the transaction, we now expect we will achieve adjusted EBITDA profitability in the third quarter of this year. Now I'd like to walk through the strategic rationale for this transaction. There are a number of companies interested in the Level 5 team and technology, and Woven Planet stood up. Toyota is the largest automobile manufacturer in the world based on 2020 unit sales and has led with a strong vision over the course of its history. Woven Planet is the Toyota subsidiary dedicated to developing connected, automated, shared and electrified technologies and smart cities. Together, we share a common belief in the importance of our team and technology and the critical role that Lyft's network can play in helping to advance their automated driving technologies. When the transaction closes, Level 5 will become Woven Planet's dedicated team focused on developing automated driving technology. When we opened our Level 5 engineering center in 2017, the main goal is to make sure we have access to affordable and reliable autonomous technology. At that time, it wasn't certain that there would be multiple well-funded autonomous vehicle programs. In just 4 years, we built a world-class team and made remarkable progress developing a leading self-driving system. Level 5's differentiated approach to advancing autonomy, which was leaning into heavily -- we leaned in heavily on simulations and state-of-the-art machine learning techniques and the data collected from fleet vehicles at large scale, and this helps speed up the development process and drove step changes in terms of capability. The team's rapid progress in industry-leading positioning are reflected in the California DMV's most recent disengagement reports. Relative to when we launched Level 5, the market for AV technology is in a very different place. There are now many more well-funded participants with a number of incredibly promising systems being developed. This means achieving our vision of integrating autonomous vehicles into our network and having access to a competitive market of providers no longer means we need to develop the technology ourselves. Today's announcement further sets up another scaled, differentiated and extremely well-funded participant. On our last earnings call, we began to discuss how AVs come to market on an existing transportation network. Going forward, we believe our approach puts us in the best position to win the AV transition. This is based on 3 foundational pillars: first, the need for a hybrid network that includes human drivers; second, our marketplace engine powered by our network technology; and third, our highly efficient fleet management capabilities. I'd like to provide a bit of background on each of these. First, with a hybrid network of human drivers and AVs, we can help partners maximize vehicle utilization, all while we introduce millions of riders to autonomous vehicles. Daily travel patterns don't resemble a static horizontal line. They're closer to a heartbeat with large spikes around morning and evening commutes and a mix of peaks and valleys during other parts of the day. A scaled transportation network that combines AVs with human drivers is the best way to meet dynamic demand peaks while maximizing utilization. In fact, we don't see any way you could manage this demand for transportation without both drivers and AVs. Second, our marketplace engine can help maximize an autonomous vehicle's revenue per mile. Our data science product and engineering teams have been doing incredible work over nearly a decade to drive massive efficiency around demand prediction, vehicle positioning, routing and other critical marketplace functions. While we work hard to give people an incredibly simple experience with a ride that shows up at the top of a button, there's a lot going on below the surface. Our systems dynamically determine pricing, matching, dispatching and optimal routing to riders at scale in real time. We are able to do this in a way that maximizes returns by taking into account a multitude of complex inputs like conversion rate and unit economics. Third, you can't run an optimal AV operations without deeply understanding how to manage a fleet at scale. By offering a comprehensive set of tech-enabled fleet management services to AV partners, we will further maximize our economic returns by reducing operating costs. Each one of the elements I've outlined reflects the fundamental value of all the work we do across our network. And collectively, these factors differentiate Lyft from our competition. Our focus is clear, and we will continue to solve the most critical aspects and the critical business aspects of bringing AVs to market, maximizing revenue per mile and minimizing cost per mile. Additionally, Lyft has aligned ourselves with our partners. We will not have significant ownership in a competing autonomous vehicle program. Lyft is committed to being a trusted partner that can be relied on to help self-driving providers improve the capabilities, safety and success of their autonomous vehicles. Today, we already are the leading network for autonomous vehicles with more than 100,000 paid AV rides on our network since 2018. We've announced our plans to deploy fully autonomous motional vehicles on our network in multiple cities beginning in 2023, and we look forward to continuing to work with additional AV partners. I'll now turn it over to Brian to provide more details on the deal and an update on our business.

Thanks, John. Let me discuss some of the financial details. Lyft will receive approximately $550 million in cash in the aggregate with $200 million paid upfront, subject to certain closing adjustments. In terms of the financial impact of the transaction, there are 2 key results. First, this transaction will reduce Lyft's non-GAAP operating expenses. After closing, we expect to remove $100 million of annualized operating expenses on a net basis or roughly $25 million per quarter primarily from reduced R&D spend. Second, there will be revenue related to the transaction. Revenue recognition will be determined after closing. Now on our last earnings call, we shared that we could be adjusted EBITDA profitable with 80% to 85% of the ride volume achieved in Q4 of 2019. Including the financial impact of the transaction, Lyft can now generate adjusted EBITDA profitability with 2/3 of the Q4 2019 rideshare ride volume. So as John shared, we are pulling in our profitability target by a full quarter. Assuming a continued COVID recovery, we now expect to achieve adjusted EBITDA profitability in the third quarter of this year. With that, I'll hand it back to John to close.

Thanks, Brian. Logan and I have been planning for and building a deep understanding of the transition from car ownership to transportation as a service since 2007. The transition where trillions of dollars of value will be created and where we have an opportunity to dramatically improve people's quality of life. AVs will be a key inflection point and one that we are very ready for. Operator, with that, we're now ready to take questions.

[Operator Instructions] Our first question comes from the line of Stephen Ju of Credit Suisse.

Okay. So congratulations on the deal. So can you update us on what else this team was working on? Because our recollection is that they were working on not only Level 5 but also other technologies and products that might have helped Lyft in other ways sooner versus the time line of when Level 5 becomes more mainstream. So we're just wondering if we're giving up any sort of core engineering competencies or products that -- and setting ourselves up to be dependent on an external party at some point down the line.

Yes, I'll jump in and take that. This is Logan. No, there was a decent amount of technology transfer, but all that technology transfer has been sort of fully transferred into Lyft infrastructure teams and Lyft product teams. So there's not a dependency going forward, and those teams have picked up and run with the areas where we were able to unlock those synergies. And then the key piece that John mentioned is, yes, we're rebranding the Open Platform team to Lyft Autonomous team, and we're keeping all of that within Lyft. So the group that's responsible for the rider experience within an autonomous vehicle and the whole experience of hailing one going through the pickup and drop-off flow, that team will remain within Lyft, and they'll be working with all of our partners.

Our next question comes from [ Spencer Tan ] of Evercore ISI.

Just really quickly, have you guys done any internal estimates on what autonomous can do to the cost per mile and how that might be brought down over time, say, over the next 3 to 5 to 10 years?

Sure. We have done that work, and there's definitely opportunity to bring the cost down over the next, let's say, I think it would be more like 5 years. The next 3 years is going to be bringing this to market. And the other important point. So Brian, if you want to add anything to those economics, I'll let you do that. But I think the other important point we wanted to make sure is understood are the 3 elements we said that are critical to operating AVs. You can't operate AVs any time into the near future, successfully, in our opinion, without complementary other cars with drivers in them because the economics that you're talking about will go out the window when it's -- if an all AV provider tried to have how many vehicles you need at 9 a.m. when there's rush hour versus how many vehicles you need at noon when people are eating lunch and not moving around would create really bad utilization and therefore high cost. So we've done that work. I don't know, Brian, if you want to give any high-level view on it, but also want to emphasize that it is also important to have drivers as well.

Yes. No, John, I think you captured it well. I mean, I think it's really important for investors to understand it's about how you maximize revenue per mile as well as leverage the cost per mile, and that's why we're so excited about our transportation network and what the underpinnings allow us to do for partners.

Our next question comes from the line of Brian Fitzgerald of Wells Fargo.

A couple of quick ones. Brian, I know you mentioned after the close, we'll get more information on timing. Any initial thoughts on how that 350 phases in? And then I'll try a quick one. Are you seeing any -- are you seeing the business pick up as vacs rollout continues on the demand side? And then what can we see on the supply side on the driver side? And did this predicate any of your decisioning in terms of, hey, it's time to make this move?

Sure. So let me take the first piece, and then I'll hand it over to John and Logan to give you an update in terms of the business as well as on driver supply. In terms of the transaction, we will determine, and as I mentioned, the revenue recognition after close, and so we have to allocate the payments between the asset sale and the commercial agreements. And we just can't speculate on the financial impact of revenue until it's finalized with our auditors.

All right. So on to the second part of the question, we have seen increases in demand. So as vaccinations rollout, as cities have opened up, people are getting more and more comfortable. And we're seeing that show up in the data, and ride intents are increasing. This is led on the driver side to some of the highest earnings in some markets that are hitting all-time records, way up higher utilization. And because of the sort of broad-based undersupply situation, that translates to higher prices many times on the rider side, and that's generating a surplus that we then reinvest in bringing drivers back on to the market. So we are working quite hard to reinvest all that money to bring drivers on and serve as many riders as we can, and we'll go into more detail on that in our Q1 update.

[Operator Instructions] Our next question comes from the line of Youssef Squali of Truist Securities.

Congrats on the move. Two quick ones for me. One, does this change in any way the timing or scale? I think on the time end, it didn't seem like it, based on what you said, but of your plans of having AVs in your network starting in 2023. And do you know whose technology, ultimately, you'll be launching with? And second, maybe Robert, you're taking another $100 million in annual expenses out of the cost basis. How do you think we should -- or how should we think about the long-term profitability of the business relative to how you guys looked at it maybe a couple of years ago before you start making some of these big moves? I think initially, you had talked about margins in the mid-20s or higher. Just wanted to see where you guys are at this point.

Thanks, Youssef. I'll take the first part. So no major change because the -- what we've announced. As you mentioned, 2023 was with a partner, and we always had what we used to call Open Platform and now Lyft Autonomous as the main strategy for deployment being that we would work with multiple partners to bring that to market. I actually think this puts us in an even better position with partners because there's always that question, well, what about -- are you going to be biased towards your own technology? And so this clarifies that we won't be, and so I expect those conversations to be even easier going forward. Brian, do you want to take the other piece?

Sure. So for context, our long-term targets, which you mentioned at the time of our IPO, I didn't assume top line contribution from AV, but we did assume continued investments in AV across both Level 5 as well as Open Platform, now Lyft Autonomous. Because as we've been saying, autonomous is the breakthrough and really a key way that we will serve more of our $1 trillion plus TAM. We continue to believe that we will lead the industry on long-term margins. In terms of our North Star, we share the same financial objective as Amazon, which is to maximize long-term free cash flow growth per share, and free cash flow is operating cash flow less CapEx. We believe this is the metric most aligned with how to generate long-term shareholder value. And look, near term, we expect margins to increase. We shared on our last earnings call that we expect to achieve record contribution margin later this year.

Our next question comes from Deepak Mathivanan of Wolfe Research.

Just a couple of quick ones. So first, the AV industry, obviously, is still evolving. Can you talk about how comfortable you are in entering these agreements at this point from economic standpoint? Maybe qualitatively, perhaps give some color on how you approach the agreements. Do you care about rev share? Or is it a nonexclusivity? What matters when you enter into these agreements? And then the second question, I wanted to follow-up on the driver incentive side. You mentioned that it's being funded by consumer prices. It makes a lot of sense. But can you talk about how long do you expect these constraints to persist?

Thanks, Deepak. So on the -- I'll take the first part. So on the AV industry evolving, the whole reason that we are doing this is because we feel extremely comfortable entering into these agreements and in our position. As I outlined those 3, we'll be talking about it more and more. I think it has been underappreciated what it's going to take and how AVs will come to market, and we are very confident in our position with the marketplace, with the hybrid network of AVs and human drivers and with the fleet management, something that we have been quietly building capability around. But it's critical when you get into an autonomous vehicle world, you have to operate the maximum efficiency per mile. And so again, Logan and I have been focused on solving this problem together for over a decade. We're the founders of the company, the only founders leading in the U.S. rideshare business, and so we've been thinking about this in building this for a long time. We feel very confident about going into those agreements. You mentioned a couple of aspects. I'm not going to probably get into the economic. We have a very specific view on how the economics should work, but I don't think it's, to my benefit, to talk about it. I do have -- on exclusivity, yes, it's important that we do not at this point, when things are evolving, get into an exclusive relationship, and we are not doing that, and we don't have any Board positions or anything like that with one of the players. So I feel extremely well positioned, better positioned than anyone else and very confident in the value we're going to bring to these partners.

And then, this is Logan, on the second piece regarding driver supply, we are extremely focused on it, doing everything we can to take care of the drivers that are on the road today and to get new drivers on the road, encourage former drivers to come back out. So again, like I said, it is a great time to be driving now. It's impossible to -- for us to accurately predict exactly when a larger portion of supply will come back on the road. Obviously, the government stimulus program is probably having some impact, but it's hard for us to isolate that or to know the kind of shape of that. So we aren't able to accurately kind of predict the timing, but we're doing everything possible, and we'll get into some more details when we do our Q1 update.

Our next question comes from Lloyd Walmsley of Deutsche Bank.

All right. I've kind of got 2 that are closely related. I guess for starters, consensus -- the Street consensus is about a loss of $18 million in 3Q. You're now firmly committed to profitability on what seems like a $25 million a quarter kind of lower expense base. So the question is kind of like, is there anything else that's giving you that increased comfort for 3Q, whether that's the demand environment or other cost cuts? And I guess the kind of the other way of asking the question would be, can you just help bridge us between the delta of the kind of 80% to 85% of 4Q '19 volume to the 2/3? Like the math I'm doing is like the delta is about 16.5%. If you apply that to your 4Q '19 contribution number, it's like a $90 billion-ish lower threshold versus like $25 million a quarter. So like, am I thinking about it right? Is there other math I should be doing? Help us kind of understand this pull forward and impact to profitability?

Sure. Thanks, Lloyd. So I think, again, we'll be reporting Q1 next Tuesday. So the 66% is based on our current view in terms of the progress we made in Q1. And again, when you think about Q4 2019, we're talking about 66% of the ride volume. Remember, in Q4 of 2019, we lost $131 million. So now it's -- basically, 2/3 of that ride volume are actually going to be profitable, and it goes back to what we've been talking about in terms of driving progress both in terms of how do we create more revenue for every single ride as well as how do we take out costs on our platform and then just drive more scale. And so I think we're going to just continue to deliver this year. We'll report next week, which will give the investors another data point, but we are confident with the continued COVID recovery and closing this transaction, we will be adjusted EBITDA profitable in Q3.

All right. Well, congrats.

[Operator Instructions] Next question comes from the line of Steven Fox of Fox Advisors.

I was just -- I understand why, near term, you would have multiple partners given the early days of autonomous vehicle development. Can you talk about how you think that shakes out maybe over a 5-plus year period? Do you think it's more efficient to have one partner? Or do you envision an environment where different parts and networks would be optimized with uses of different technology?

I think it's hard to predict. I mean if the terms were right, I'm sure it could make sense to go deeper with a partner. But back to what I said, I think at this point, there's a lot unknown, and it makes sense to not be singularly focused or put up any walls to working with multiple parties. I'd just say like we're -- again, we're in such a great position. There are 2 networks in North America. We're the only one with fleet management, and there are several other factors that differentiate us and make us what we believe is the best partner. And there's greater -- there's 4, 5, 6 extremely well-funded AV players. And so that dynamic is one we feel great about, again, which led us to this decision. And beyond that, I think it'll continue to play out, but we've put all the right pieces in place. And again, Logan and I have think about this all the time. This is our lives' work. We have belief with how this will play out for a while, and there's a lot we're doing under the surface to prepare to be in the best position. So with that, I think that is our last question today. I just want to thank everyone for joining the call and just say that we really look forward to talking again with many of you next Tuesday on our earnings call. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.