The Quarter Lyft's Own Q1 Filing Warned Was Coming
Lyft's Form 10-Q for the quarter ended June 30, 2020 shows what the prior quarter's filing explicitly flagged as the real test: a full quarter of COVID-19 lockdowns, rather than the final two weeks captured in Q1. Total revenue fell to $339.3 million, down 60.9% year-over-year from $867.3 million and down 64.5% sequentially from Q1 2020's $955.7 million. Active Riders fell to 8.7 million, down 60.1% year-over-year from 21.8 million and down 59.0% sequentially from Q1's 21.2 million - a collapse Lyft attributes directly to shelter-in-place orders and travel restrictions across North America. Revenue per Active Rider held up far better in relative terms, down just 1.8% year-over-year to $39.06, though it fell 13.3% sequentially from Q1's $45.06 as riders who returned to the platform later in the quarter (as some regional restrictions eased) diluted the metric - the same mechanical effect the Q1 post described in reverse.
The five-quarter streak of rising Contribution Margin and narrowing Adjusted EBITDA losses, tracked in every post on this site since Q1 2019, ended here. Contribution Margin fell to 34.6%, down from 46.0% a year earlier and down sharply from Q1 2020's record 57.3%. Adjusted EBITDA loss widened 37.3% year-over-year, from $204.1 million to $280.3 million - Adjusted EBITDA Margin fell to negative 82.6%, from negative 23.5% a year ago. This is the direct, mechanical consequence of a fixed-cost, insurance- and driver-support-heavy cost base being spread over a revenue base that shrank by 61% - not a sign Lyft's underlying unit economics broke, but a real reversal of the trend this site has been tracking as Lyft's central story.
Two things cushioned the GAAP numbers against an even worse headline. First, a April 2020 restructuring - the 982-employee, 17%-of-headcount reduction disclosed as a subsequent event in the Q1 post - was substantially completed this quarter and produced a net restructuring benefit of $14.5 million (a $49.8 million stock-compensation reversal from unvested RSU forfeitures, offset by $32.1 million of severance and $3.1 million of lease-termination costs), which reduced rather than added to this quarter's operating loss. Second, in May 2020 Lyft issued its first-ever debt: $747.5 million in aggregate principal of 1.50% convertible senior notes due 2025, raising approximately $733.2 million net of costs, alongside $132.7 million of privately negotiated capped-call transactions designed to reduce potential share dilution on conversion. Combined with the cost-cutting, loss from operations narrowed 27.6% year-over-year to $487.5 million (from $672.9 million) and net loss narrowed 32.1% to $437.1 million (from $644.2 million) - both improving year-over-year even as revenue cratered, almost entirely because Q2 2019's comparison quarter still carried heavy post-IPO stock-compensation costs that have since normalized.
The Prescription
Lyft's own April 2020 actions - the workforce reduction, the debt raise, the capped calls - show management moved fast once the pandemic's scale was clear, and this quarter's numbers bear that out: even with revenue down 61%, the GAAP loss narrowed year-over-year rather than exploding. The real risk this quarter isn't in the numbers Lyft reported - it's in the California driver-classification injunction disclosed as a subsequent event (see Beyond the Usual below for the specifics). That threat is materially larger than a demand shock: a demand shock is temporary and industry-wide, while a forced reclassification in Lyft's largest state, if it survives appeal, restructures the company's entire cost base permanently. Management should treat it as the dominant story of the next several quarters' investor communication, not a footnote next to the COVID recovery narrative.
What it should stop doing: letting a year-over-year "improvement" headline (Adjusted EBITDA loss, net loss) stand without disclosing that the metric's own components shifted underneath it. This quarter's Adjusted EBITDA calculation newly excludes the legacy-insurance-liability transfer and restructuring charges described above, items the year-ago comparison quarter didn't exclude (see the note under Key Financial Metrics) - a reader taking the headline YoY comparison at face value has no way to know how much of the move is real operating performance versus a redefined base. Lyft should disclose exactly which cost categories moved in or out of the calculation in the same place it reports the metric, not leave it for a footnote to reconstruct.
Key Financial Metrics
Q2 2020 vs. Q2 2019 - consolidated, reported in USD (Lyft reports natively in USD, no FX conversion needed)
| Metric | Q2 2020 | Q2 2019 | YoY |
|---|---|---|---|
| Revenue | $339.3M | $867.3M | ❌ -60.9% |
| Adjusted EBITDA» | $(280.3)M | $(204.1)M | ❌ loss widened 37.3% |
| Loss from Operations | $(487.5)M | $(672.9)M | ✅ loss narrowed 27.6%* |
| Net Loss | $(437.1)M | $(644.2)M | ✅ loss narrowed 32.1%* |
*Both improvements are driven almost entirely by Q2 2019's comparison quarter still carrying elevated post-IPO stock-based compensation, plus this quarter's $14.5 million net restructuring benefit - not by revenue-driven operating leverage, which reversed this quarter (see Contribution Margin below).
Definitional note: this quarter's Adjusted EBITDA calculation newly excludes the legacy-insurance-liability transfer and restructuring charges discussed above - items the Q2 2019 comparison quarter's Adjusted EBITDA did not exclude, since neither existed yet. The YoY Adjusted EBITDA comparison above is therefore not on a fully consistent basis; part of the apparent narrowing (or widening) reflects this definitional shift, not just the underlying revenue and cost trend.
Balance sheet: June 30, 2020 vs. December 31, 2019
| Balance sheet metric | Jun 2020 | Dec 2019 | Change |
|---|---|---|---|
| Cash + Short-Term Investments | $2,775.9M | $2,850.1M | ⚠️ -2.6% |
| Total Assets | $5,214.4M | $5,691.4M | ⚠️ -8.4% |
| Total Liabilities | $2,917.9M | $2,837.3M | ⚠️ +2.8% |
| Total Stockholders' Equity | $2,296.6M | $2,854.1M | ⚠️ -19.5% |
Lyft's cash flow statement, like every prior quarter, is only disclosed on a cumulative year-to-date basis, not by quarter. For the six months ended June 30, 2020, net cash used in operating activities was $958.6 million (versus $69.5 million in the same period of 2019) and capital expenditures (property, equipment, and scooter fleet) were $56.2 million. Subtracting Q1 2020's already-disclosed operating cash flow of $(206.9) million and capex of $34.5 million leaves an implied Q2-only operating cash outflow of approximately $751.7 million and capex of approximately $21.7 million, for an implied Q2 Free Cash Flow» of roughly $(773.5) million. The bulk of that outflow is not a Q2 operating deterioration - it's the $465.0 million cash payment Lyft made on April 3, 2020 to Clarendon National Insurance under the Novation Agreement disclosed in the Q1 filing (see the Q1 2020 post), which lands in Q2's cash flow even though the obligation itself was extinguished March 31.
Total liabilities rose modestly despite that large insurance-related cash outflow, because $623.4 million of new long-term debt (net of current portion) from the May 2020 convertible notes, plus $93.1 million and $18.0 million of vehicle-related loans assumed in the February 2020 Flexdrive acquisition, landed on the balance sheet for the first time this quarter - Lyft had no debt at all as of December 31, 2019.
Contribution Margin and Adjusted EBITDA both reversed course this quarter for the first time in five quarters of tracking - a direct, expected consequence of a 61% revenue collapse, not a break in Lyft's underlying cost discipline, which the restructuring and debt-raise actions this quarter actually reinforce.
Key Operational Metrics
Q2 2020 vs. Q2 2019
| Metric | Q2 2020 | Q2 2019 | YoY |
|---|---|---|---|
| Active Riders | 8.7M | 21.8M | ❌ -60.1% |
| Revenue per Active Rider | $39.06 | $39.77 | ❌ -1.8% |
| Contribution» | $117.3M | $398.9M | ❌ -70.6% |
| Contribution Margin | 34.6% | 46.0% | ❌ -11.4pp |
Trailing the last six quarters this site has covered, Active Rider YoY growth now reads 44% (Q1 2019) → 41% (Q2 2019) → 28% (Q3 2019) → 23% (Q4 2019) → 3.5% (Q1 2020) → -60.1% (Q2 2020) - the cliff the Q1 2020 post anticipated but couldn't yet see in its own numbers, since that quarter only captured COVID-19's final two weeks. Contribution Margin's own six-quarter run reads 49.6% → 46.0% → 50.1% → 54.0% → 57.3% → 34.6%, giving back more than the entire prior five quarters of improvement in a single quarter. Lyft continues to report as a single reportable segment.
Management's Framing: A Plan to Survive, Not a Plan to Grow
Lyft's Q2 2020 filing doesn't attempt to describe a return to its pre-pandemic growth story - it describes an "aggressive plan to strengthen our financial position," and the specific actions disclosed back that framing rather than just asserting it. Sales-and-marketing incentive spend (driver, passenger, and rental incentives combined) fell 95% year-over-year and 96% sequentially from Q1 2020 - an extreme, deliberate pullback rather than incidental cost-cutting, consistent with a company managing for cash preservation over rider growth in the near term. Management states plainly that it is "not currently in a position to forecast the expected impact of COVID-19 on our financial and operating results for the remainder of 2020," a level of explicit forecasting refusal this site hasn't seen in a Lyft filing before. The filing frames the $2.8 billion cash-and-short-term-investments position and the new convertible-notes liquidity as giving Lyft the runway to wait out the pandemic rather than needing to react to it quarter by quarter - the debt raise and restructuring both happened proactively in April and May, ahead of this filing, rather than as a reaction disclosed after the fact.
Beyond the Usual
A California Court Order Now Threatens to Force Lyft to Suspend Operations in Its Largest Market
On May 5, 2020, the California Attorney General and the city attorneys of Los Angeles, San Diego, and San Francisco sued Lyft and Uber for allegedly misclassifying drivers as independent contractors under California's Assembly Bill 5. On June 25, 2020, they moved for a preliminary injunction, and on August 10, 2020 - the same day this 10-Q was signed - the court granted it, ordering Lyft and Uber to reclassify their California drivers as employees until the underlying lawsuit is resolved, with a ten-day stay. Two days later, Lyft filed a notice of appeal and requested a stay pending appeal. Lyft's own filing states that if the litigation is not resolved in its favor, it "will be forced to suspend operations in California while we assess whether, how, and when we can restart operations in compliance with applicable law." Separately, on July 14, 2020 the Massachusetts Attorney General filed a similar misclassification suit, and on August 5, 2020 the California Labor Commissioner filed its own lawsuit seeking damages and penalties on the same theory. None of this is reserved for in the June 30, 2020 balance sheet - Lyft states any possible loss or range of loss "cannot be reasonably estimated" - and none of it affects this quarter's reported numbers, since all of it happened after quarter-end. But a forced reclassification of drivers as employees in California, Lyft's founding and largest market, would restructure the company's cost base in a way a demand shock never could, and it is now a live, imminent legal outcome rather than a background risk.
The Legacy Insurance Liability Isn't Fully Gone - a Retrocession Agreement Left Lyft's Subsidiary Reinsuring Some of It Back
The Q1 2020 post covered the $465.0 million Novation Agreement that transferred PVIC's (Lyft's wholly-owned insurance subsidiary) reinsurance obligations for pre-mid-2019 legacy auto liability to Clarendon National Insurance, extinguishing $407.9 million of insurance reserves. This filing discloses a follow-on: in July 2020, Clarendon and PVIC executed a Retrocession Agreement (effective March 31, 2020, the same date as the original Novation) under which PVIC will reinsure Clarendon's losses on that same Legacy Auto Liability in excess of an aggregate limit of $816.0 million. In plain terms, Lyft paid nearly half a billion dollars to exit this liability, but retained exposure to losses that ultimately exceed $816 million in the aggregate - the risk wasn't eliminated, it was re-layered, with Lyft now holding only the tail above a much higher threshold. Lyft states the Retrocession Agreement did not have a material impact on the June 30, 2020 financial statements, and worth noting: the underlying claims-development trend that drove two prior quarters' adverse-development charges essentially flattened this quarter - the six-month 2020 change in estimates for prior periods was $58.3 million, almost entirely attributable to Q1 alone (which the prior post put at $58.4 million), implying Q2's own adverse development was close to zero.
The IPO Securities-Fraud Litigation Remains Unresolved and Unreserved, Now Into Its Second Year
The consolidated securities-fraud class actions tied to Lyft's April 2019 IPO disclosures, tracked in the Q4 2019 and Q1 2020 posts, remain pending with no reserve or estimable loss range disclosed. This filing adds no new procedural detail beyond confirming the matters are still active - a lack of movement that is itself notable given the litigation is now well into its second year without resolution.
Lyft's First-Ever Debt Came With Dilution Protection Built In
The $747.5 million convertible notes carry a conversion price of approximately $38.39 per share - roughly 16% above the $33.01 quarter-end close and well above where Lyft traded for most of 2020 to that point. Alongside the notes, Lyft simultaneously purchased $132.7 million of privately negotiated capped call transactions, a derivative structure designed to raise the effective conversion price further and reduce potential share dilution if the stock does eventually trade above the conversion price. This is a standard structure for convertible-note issuers, but it's Lyft's first use of debt financing as a public company, and the capped calls represent roughly 18% of the notes' gross proceeds spent purely on limiting future dilution - a real cost of raising this capital that doesn't show up as interest expense.
Stock Price Since Last Quarter
Lyft's stock recovered over the quarter, rising from a March 31, 2020 close of $26.85 to $32.83 at the end of April, $31.26 at the end of May, and $33.01 on June 30, 2020 - a 23.0% gain over the quarter, even as the underlying business reported its worst revenue quarter as a public company. The move tracks the broader market's second-quarter rebound off its late-March COVID lows rather than a Lyft-specific catalyst, and it leaves the stock still 54.2% below its $72.00 IPO price and well below its pre-pandemic 2020 levels ($47.48 at end of January).
Target Valuation Range
The market re-rated Lyft more expensive on a shrinking revenue base this quarter - a bet on recovery timing, not a verdict this filing's own numbers can confirm. EV/Revenue rose from roughly 2.2x to roughly 3.2x even as trailing-twelve-month revenue fell, meaning the stock price gain outpaced the fundamentals by a wide margin.
With 312.1 million total shares outstanding (303,273,200 Class A plus 8,802,629 Class B, per the June 30, 2020 balance sheet) and a June 30, 2020 close of $33.01, Lyft's market capitalization was approximately:
| Metric | Amount (USD) |
|---|---|
| Share price (Jun 30, 2020 close) | $33.01 |
| Shares outstanding | 312.1M |
| Market capitalization | $10.30B |
| Total liabilities | $2.92B |
| Less: cash and short-term investments | $(2.78)B |
| Enterprise value | ~$10.44B |
Against trailing-twelve-month revenue of $3,267.7 million (Q3 2019 through Q2 2020, down from $3,795.4 million a quarter earlier as Q2 2020's collapsed quarter replaced Q2 2019's healthy one in the trailing window), that implies:
| Metric | Q1 2020 (prior quarter-end) | Q2 2020 (this quarter-end) |
|---|---|---|
| Enterprise Value | ~$8.5B | ~$10.4B |
| EV/Revenue» | ~2.2x (trailing-twelve-month basis) | ~3.2x (trailing-twelve-month basis) |
That combination - enterprise value up roughly 23% while trailing revenue fell roughly 14% - only makes sense if the market is pricing a demand recovery Lyft's own filing explicitly declines to forecast ("we are not currently in a position to forecast the expected impact of COVID-19 on our financial and operating results for the remainder of 2020"). A full DCF still isn't attempted here for the same reason it wasn't last quarter: the business's near-term trajectory depends on pandemic policy and consumer behavior that neither this filing nor this site can model with any real precision, and it now also depends on the outcome of the California driver-classification injunction disclosed above, which could restructure Lyft's largest market's cost base entirely. Contribution Margin - Lyft's most consistent operating signal across six quarters of tracking - just gave back most of five quarters of gains in a single quarter, which is exactly what a fixed-cost business absorbing a 61% revenue shock should do, and not itself evidence the underlying model is broken; but it does mean the 3.2x multiple is being paid on a metric currently at its weakest point in this site's coverage, not its strongest.
Lyft, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed with the SEC in August 2020.