Lyft’s Positive Earnings May Bolster Unprofitable Ride-Hailing Startups

Morning Markets: Lyft reported its Q2 results yesterday. Uber reports today. While we’re private-company focused here at Crunchbase News, let’s take a peek at Lyft’s results. After all, how Lyft and Uber do will impact private ride-hailing companies’ valuation and fundraising prospects. 

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Lyft’s shares were worth about $60 apiece before the company reported its Q2 2019 results yesterday. From an IPO price of $72 and a 52 week high of $88.60, Lyft was in the doldrums. Concerns about its ability to grow and cut losses were easy to understand.

But Lyft’s Q2 results showed two important things, each positive. Namely that the company could grow more quickly than expected, and that it could lose less money while doing so. In more colloquial terms, Lyft showed investors that it may have a path to profitability after all.

It’s a shot in the arm for companies like Didi, Grab, Go-Jek, and others (more on their fundraising here). The ride-hailing business was once the hottest game on the planet. Now, after Lyft and Uber each went public and quickly slipped from their IPO prices, market sentiment is more muted.

Lyft’s results, however, could help turn the tide.

Positive Results

Lyft beat on revenue and profit in the second quarter. The ride-hailing company generated revenue of $867.3 million (+72 percent year-over-year) against an expected $809 million. The firm’s adjusted profit of -$0.68 per share was also ahead of an expected loss of $1.74 per share in the quarter.

Beating on both top and bottom lines is good. Doing so while raising your forecast is even better. As part of its Q2 results, Lyft raised its forecast for its full-year 2019 results and more. Here are its new performance expectations:

• 2019 revenue: $3.47 billion to $3.5 billion, up from a range of $3.275 billion to $3.3 billion. (The company’s expected year-over-year growth rate is now in the low 60s, instead of the low 50s.)
• 2019 adjusted EBITDA: -$850 million to -$875 million, about $300 million lower than its previously expected -$1.15 billion to -$1.175 billion in adjusted losses. (Adjusted EBITDA is a profit-adjacent metric that many young companies prefer to more rigorous profit metrics, like GAAP net income.)

Faster growth? Check. Slimming losses? Check. Lyft even managed to grow its “active rider” count by 44 percent in Q2 2019 compared to the year-ago quarter, while driving “revenue per active rider” up 22 percent over the same timeframe.

What’s not to like? Well, a few things. Let’s talk about the other side of the coin.

Negative Results

We’ll start our discussion of negatives by looking at the company’s costs.

Three out of four of Lyft’s main expense categories saw their cost as a percent of revenue rise compared to the year-ago quarter. Indeed, Lyft spent more as a percent of revenue on “Operations and Support” (17 percent of revenue in Q2 2019), “Research and Development” (14 percent of revenue in Q2 2019), and “General and Administrative” (22 percent of revenue in Q2 2019) than it did in Q2 2018.

Lyft did cut its “Sales and Marketing” line item sharply, from 35 percent of revenue in Q2 2018 to 19 percent in Q2 2019. However, it seems that Lyft wasn’t able to curtail cost expansion in revenue-percentage terms in other areas, casting doubt on its ability to lower losses in ratio terms in the near future.

And the impact of that is Lyft’s deficits, while falling, are still wide and persistent. The firm’s adjusted losses should reach $200 million in Q3 2019 according to the company’s own projections, for example. The unadjusted number will be worse.  In Q2 2019 the company also generated an adjusted profit of around -$200 million, a figure tucked inside of a sharper $644.2 million net loss.

So, we can expect Lyft’s fully-loaded Q3 loss to be far higher than the $200 million adjusted mark.

The same principle applies to the firm’s full-year results. Yes, Lyft’s expected adjusted losses are now under $1 billion for the year. Its GAAP losses (results calculated using regular accounting rules) will be larger.

Finally, Lyft’s gross margins appear to be getting worse over time. In the first half of 2019, Lyft’s cost of revenue clocked in at 66.5 percent of top line. That gave the firm a gross margin of 33.5 percent. In the first half of 2018, the firm’s cost of revenue was just 61.3 percent. The firm’s 2018 and 2019 Q2 gross margin of about 42 percent and 27 percent tell a similar story.

There’s nuance to the figures, however. The company’s share-based compensation costs and “[c]hanges to the
liabilities for insurance required” make the resulting figures hard to fully grok. So I suspect that you can read Lyft’s gross margin results several different ways.

The figure that came up most on Lyft’s earnings call, notably, was “contribution margin,” not “gross margin.” You can check page 17 of Lyft’s supplemental results for more on how the firm lowers its effective cost of revenue to show a higher contribution margin. Investors are more focused on the adjusted metric than the GAAP-based gross margin percentage.

So, you can read Lyft’s numbers any way you please. You can find lots to like, and you can also find a bucket of red ink and some key performance metrics that don’t look very good.

So What?

Lyft’s shares are up. That’s good for other companies in the space. To that point, when Lyft’s shares first took off after reporting its figures, Uber’s shares rose as well. Something similar, if invisible, happened to Lyft’s private-market comps.

Let’s close by talking about Lyft’s future, and the related futures of its rivals.

Tucked into Lyft’s earnings call were notes about price that are worth understanding. Lyft and Uber probably need to charge more for rides, and capture a larger share of total ride revenue, to reach real profitability. Happily at Lyft, at least, progress on that front is being made.

From the earnings call, quotes from Lyft folks:

We exited the quarter with tremendous momentum and we’re making a substantial increase in our guidance as a result. Our guidance incorporates modest price adjustments that went live toward the end of June. More specifically, we began to adjust prices on select routes and in select cities based on costs and demand elasticities. We expect that these changes will accelerate Lyft’s path to profitability, and further, we believe these price adjustments reflect an industry trend. […]

The price adjustments are modest, but we anticipate that these changes will increase revenue per active rider on both a quarter-over-quarter and year-over-year basis, and we expect that these changes will accelerate our path to profitability and further as I mentioned, we believe these price adjustments are an industry trend. In terms of active riders, we’ve enjoyed a huge benefit in the first half of 2019 related to the publicity from our IPO.

The price changes could provide Lyft with revenue and profit lift in the coming quarters. That’s good, and it means that Uber may also enjoy the ability to raise prices. If they can each drive up per-ride rates, perhaps they can lose less money more quickly.

And grow more quickly to boot. That would help their valuations and the values attached to the tens of billions of dollars in equity currently tied to the fate of their yet-private competitors.

Lyft’s IPO was a downer for similar companies. Now, the company is pushing its market cohort in the opposite direction. That’s welcome chance, we’re sure.

Illustration: Dom Guzman.