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March 29, 2019

Lyft IPO: 5 Things to Know about the Ride-hailing Company ahead of its IPO

Alaric Securities

Lyft will only report the revenue it receives from each ride, excluding the driver’s cut and other fees

Lyft Inc. has beat rival Uber Technologies Inc. to an initial public offering, and that’s important for a number of reasons.

The first is that Lyft LYFT is getting to set the narrative heading into the IPO process, which is crucial given that the company is smaller, more narrowly focused, and less well-known than Uber. Lyft removes an element of pricing uncertainty around the listing by going first, experts say. The company could kick off a roster of decacorns, or companies privately valued at upward of $10 billion, that are expected to go public in the year ahead.

The company’s prospectus shows that Lyft plans to report revenue on a net basis, excluding the money paid to drivers. Uber — which previously detailed a similar approach to MarketWatch — will be hard-pressed to break the mold and report gross revenue, given that the businesses are the same and share PricewaterhouseCoopers as an external auditor, something unusual for fierce competitors.

Lyft shares have been approved to list on the Nasdaq under the ticker “LYFT,” and are expected to do so Friday morning. Thursday afternoon, Lyft priced at $72 a share, at the top of its range, which it had raised Wednesday evening to a range of $70 to $72 a share after previously projecting a price between $62 and $68 a share. Lyft plans to sell 30.77 million class A shares, which would raise more than $2.2 billion at the top of the revised range with an initial valuation around $24 billion. That total could increase if underwriters exercise all the options to buy an additional 4.62 million shares.

Here’s what you need to know about the company ahead of its IPO.

The revenue is nothing but net

The company recognizes revenue on a net basis, meaning that the company’s top-line number is significantly less than the sum total of what all riders paid over the course of a given period. Lyft is able to report revenue on a net basis, rather than a gross basis, because it considers itself an “agent” in the process of connecting drivers and riders. The company argues that it merely helps third parties provide transportation services to riders and that both riders and drivers have the ability to reject a transaction price.

Uber is expected to make a similar choice as far as how it reports revenue, which has drawn criticism from accounting experts who argue that ride-hailing companies would be doing a disservice to investors by not reporting a fuller metric and giving investors a sense of what they pay their drivers. Both companies could also choose to report that metric under another name, as Lyft did with its bookings offering.

Slowing revenue growth, widening losses

Lyft doubled its net revenue in 2018, but that was a decelerating growth rate from a year earlier. The ride-hailing company posted revenue of $2.2 billion last year, up from $1.1 billion in 2017 and $343 million in 2016. The company’s losses are getting steeper as revenue grows: Lyft generated a net loss of $911 million in 2018, compared with losses of $687 million and $683 million in 2017 and 2016, respectively.

The company’s bookings, which represent the total dollar value of transportation spending through Lyft services, climbed to $8.1 billion from $4.6 billion in 2017 and $1.9 billion in 2016. Lyft’s net revenue represented 27% of the company’s bookings in the latest period. The company gives the example of a $24 ride-hailing charge, which includes a $4 tip and a $3 airport fee: Bookings would be $17 in this example, Lyft said. Revenue would presumably be $4 or $5 in that example based on the disclosure about what percentage of bookings go to revenue, though Lyft did not provide that figure in the example.

Lyft is mainly focused on the U.S. market, though it launched a Canadian business in 2017. The company provides scooter-sharing and bike-sharing services as well.

On a promo spree

In what seems like a fairly obvious bid to gain market share ahead of its expected listing, Lyft has been heaping discounts on riders in recent weeks. One offers 50% off 10 rides until mid-March, though it caps the savings at $6 per ride. Ride-hailing companies are already known for offering cheaper rides than can be found through traditional taxi services, and Lyft’s aggressive discounting ahead of the IPO plunges the company deeper into a price war with rival Uber.

“We believe that much of the growth in our rider base and the number of drivers on our platform is attributable to our paid marketing initiatives,” Lyft said in the risk-factors section of its prospectus. Growing brand awareness with both riders and drivers “can be costly,” the company contended. Lyft said its U.S. ride-hailing market share climbed to 39% in December, up from 22% a year earlier, based on third-party estimates from Rakuten Intelligence.

The company discussed other pricing risks as well in its filing. One involves the company’s shared-ride product, which offers users a lower fare if they agree to share a car with someone else going along a similar route. If Lyft fails to adequately match riders or determine an appropriate fare for drivers in the case of shared rides, the company warns that its financials could be impacted.

Another dual-class listing

Lyft, like many other hot tech companies to test the public waters, plans to concentrate voting power with founders Logan Green and John Zimmer, though the company hasn’t yet said what concentration each co-founder will have. Green, currently the chief executive, and Zimmer, Lyft’s president, each own 1,180,329 shares of Lyft’s class A shares, about 0.05% of the 240,597,591 shares currently outstanding, but are expected to have voting control.

Lyft will have 271.37 million class A shares outstanding and 12.78 million Class B shares outstanding. Class A shares will have one vote and Class B shares, which are convertible to class A shares at any time, will have 20 votes.

After the IPO, Green will have 29.3% of the voting power and Zimmer will have 19.5% of the voting power.

Dual-class structures haven’t deterred investors on the whole, though they’ve drawn sharp criticism as they make it nearly impossible for shareholders to question management’s judgment.

“Given the growing focus on corporate governance issues in general, and the negative commentary on the absolute voting majority that the startup founders prefer to hold, we believe tone-deaf is the right characterization for any company still planning to go ahead with the structure, Lyft included,” wrote Santosh Rao, head of research at Manhattan Venture Partners.

Other Lyft stakeholders include early investors including venture-capital firm Andreessen Horowitz, and investment entities associated with Rakuten Inc. RKUNY,  General Motors Co. GM, Fidelity and Alphabet Inc. GOOGL,  GOOG all of which own at least 5% of the pre-IPO shares.

On a mission

It’s a virtual requirement for tech companies considering IPOs to have corny mission statements. Lyft’s is to “improve people’s lives with the world’s best transportation.” The company stresses its culture often in the prospectus, highlighting its values of “Be Yourself,” “Uplift Others,” and “Make it Happen.” Corporate-speak to be sure, but there is probably something to Lyft’s culture: Amid sexual-harassment and other scandals at Uber, some riders flocked to Lyft and didn’t turn back.

Article was originally published by Emily Bary at marketwatch.com