Lyft, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Lyft operates multimodal transportation networks in the United States and Canada, primarily connecting rideshare drivers and riders through its platform. Other offerings include bikes and scooters, Flexdrive and Lyft Rentals, Lyft Business, delivery pilots and autonomous-vehicle initiatives. The filing covers the quarter and nine months ended September 30, 2020; results were materially affected by the COVID-19 pandemic.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $499.7 million | $955.6 million | Down 48% |
| Cost of revenue | $261.6 million | $580.7 million | Down 55% |
| Operating loss | $453.4 million | $490.9 million | Improved $37.5 million |
| Net loss | $459.5 million | $463.5 million | Improved $4.0 million |
| Net loss per share | $1.46 | $1.57 | Improved |
| Adjusted EBITDA | $(239.7) million | $(128.1) million | Worsened $111.6 million |
| Adjusted EBITDA margin | (48.0)% | (13.4)% | Down 34.6 percentage points |
| Contribution margin | 49.8% | 50.1% | Down 0.3 percentage points |
| Active Riders | 12.5 million | 22.3 million | Down 43.9% |
| Revenue per Active Rider | $39.94 | $42.82 | Down 6.7% |
Revenue was $1.795 billion for the nine months ended September 30, 2020, down 31% from $2.599 billion in the comparable 2019 period. Nine-month net loss was $1.295 billion versus $2.246 billion in 2019, while nine-month Adjusted EBITDA was $(605.2) million versus $(548.2) million.
Q3 total costs and expenses were $953.1 million, or 190.7% of revenue, compared with 151.4% in the prior-year quarter. Cost of revenue represented 52.3% of revenue versus 60.8% in Q3 2019. Sales and marketing expense declined 52% to $78.5 million, primarily due to lower incentives. Stock-based compensation expense was $166.7 million in Q3 and $432.5 million for the first nine months.
Management reported Q3 cash used in operating activities of $155.7 million. For the nine months, cash used in operating activities was $1.114 billion, compared with $59.5 million in 2019. Investing activities provided $555.0 million, and financing activities provided $536.0 million for the nine months.
At September 30, 2020, Lyft had $424.8 million of cash and cash equivalents and $2.029 billion of short-term investments, or approximately $2.5 billion of unrestricted liquidity. Restricted cash, cash equivalents and investments totaled approximately $1.3 billion. Total assets were $4.968 billion and total liabilities were $2.965 billion.
Debt totaled $659.2 million, including $747.5 million principal amount of 1.50% convertible senior notes due 2025, carried at a net liability value of $560.2 million, and $99.0 million of vehicle-related loans acquired with Flexdrive. Long-term debt, net of current maturities, was $622.7 million.
Material changes versus the prior comparable period
- COVID-19 reduced rideshare demand, Active Riders and ride frequency. Q3 Active Riders improved from 8.7 million in Q2 but remained substantially below the prior-year level.
- Revenue declined faster than total expenses, causing the GAAP operating margin to deteriorate to approximately (90.7)% from (51.4)%; net loss margin was approximately (92.0)% versus (48.5)%, and Adjusted EBITDA margin also deteriorated.
- Lower ride volume reduced insurance, payment-processing, hosting, bike and scooter costs. Lyft also reduced rider incentives, marketing, capital expenditures and other operating costs.
- Lyft completed the Flexdrive acquisition in February 2020 for approximately $13.0 million of consideration and assumed vehicle-related debt and finance leases.
- Lyft issued $747.5 million of convertible senior notes in May 2020, receiving approximately $733.2 million of net proceeds, and paid approximately $132.7 million for capped calls intended to reduce potential dilution.
- The company transferred certain legacy auto-liability obligations to Clarendon for $465.0 million. It derecognized $407.9 million of insurance reserves and recorded a $64.7 million net cost, primarily in cost of revenue.
- Insurance reserves declined to $922.6 million from $1.378 billion at December 31, 2019, primarily reflecting the legacy-liability transfer, payments and current-period reserve activity.
- Lyft’s second-quarter restructuring, including termination of approximately 17% of employees, furloughs and salary reductions, generated a net restructuring benefit of $14.5 million. No additional restructuring charges were recorded in Q3.
Guidance, outlook, commentary and risks
Lyft did not provide a clear quantitative revenue or profitability forecast for the remainder of 2020. Management stated that it was not in a position to forecast the pandemic’s expected impact because the timing and pace of recovery were highly uncertain. Management expected continued demand suppression while travel restrictions, social distancing and altered consumer behavior persisted, but believed approximately $2.5 billion of unrestricted liquidity was sufficient for at least the next 12 months.
Management continued to express confidence in long-term growth and eventual profitability, while acknowledging that the pandemic’s effects could continue into the fourth quarter and beyond. Shared Rides remained paused, most employees could work remotely through June 30, 2021, and Lyft continued health and safety measures for drivers and riders.
California driver-classification litigation remained material. A preliminary injunction requiring employee classification was affirmed by the California Court of Appeal in October 2020, while California voters approved Proposition 22 in November 2020. Lyft expected Proposition 22 to become effective in Q4 2020 and anticipated additional driver-related costs, but did not expect a material impact on financial results. Litigation and regulatory proceedings also continued in Massachusetts and other jurisdictions.
Key risks include prolonged or recurring COVID-19 effects, inability to achieve profitability, driver and rider supply or demand constraints, insurance-reserve deficiencies, driver-classification changes, litigation and regulatory costs, competition, reliance on third-party providers, cybersecurity and privacy incidents, asset-intensive rental and micromobility operations, debt servicing and the need for additional capital.
As of September 30, 2020, the company disclosed a covenant violation related to a de minimis amount of vehicles financed under Flexdrive’s non-revolving loan. Management believed the violation would be cured within the applicable grace period and therefore did not classify the debt as current. Flexdrive remained responsible for, and Lyft continued to guarantee, certain payments under the acquired financing arrangements.
Facts investors should verify
- Reconcile the filing’s reported Q3 operating cash use of $155.7 million with the nine-month cash-flow statement and assess ongoing cash burn.
- Track recovery in Active Riders, ride frequency, revenue per rider and driver availability.
- Evaluate the sustainability of reduced rider incentives and the effect of driver incentives and Proposition 22 on margins.
- Review insurance-reserve development, the Clarendon retrocession arrangement and potential future claims costs.
- Monitor driver-classification litigation, California Proposition 22 implementation and possible consequences in other jurisdictions.
- Assess liquidity after recurring operating losses, capital expenditures, debt service, lease obligations and contractual commitments.
- Consider dilution and future cash obligations associated with the 2025 convertible notes, approximately 19.5 million potentially issuable shares and capped calls.
- Incorporate the $1.1 billion of unrecognized RSU compensation expected to be recognized over an average remaining period of approximately 2.5 years when evaluating future earnings and dilution.