The costs of driver incentives are weighing on Lyft, Uber

It’s not cheap to get non-employees to do what you need, when you need it

Lyft’s shares lost nearly a third of their value yesterday after the ride-hailing company reported its Q1 2022 results, despite the company beating market expectations for revenue.

If you delve a little deeper, it seems the market was instead focused about something else entirely: Slightly soft guidance on revenue growth in Q2 2022 when compared to analyst expectations, as well as the cost of driver incentives — supply stimulants that impact the company’s economic profile.

During the Lyft earnings call, analysts focused on the cost of incentivizing drivers to participate in the company’s two-sided marketplace, and they were not assuaged by its CEO and CFO’s responses.

Uber’s shares also fell in the wake of its earnings report. To understand the driver-incentive issue, we’ll first explore Lyft’s situation, and then compare it to what Uber said. The two companies are related and share competitive territory, but market reaction to their current state was sharp and notable. Let’s talk about it.

Lyft’s warning

In its earnings call, Lyft CFO Elaine Paul said the company expects revenues between $950 million and $1 billion in the second quarter, in line with current street expectations of about $995 million. (It’s worth noting that before the company’s report was digested by analysts, that figure was $1.02 billion.)

But more worrisome were Paul’s comments on the company’s profitability. Per the above-linked transcript (emphasis ours):

In terms of profitability, we expect Q2 contribution margin will be approximately 56%, which reflects the impact of growth investments on our leverage. Post omicron, we feel the worst is behind us, and this coming quarter is an opportunity to invest in kick-starting the next year of growth. We will do so with a focus on drivers, the overall marketplace, and some additional brand marketing. As a result, we expect adjusted EBITDA of between $10 million to $20 million for Q2.

Lyft’s adjusted EBITDA came to $54.8 million in Q1, implying that the company is about to eat heavily into its limited adjusted profitability in the second quarter, partially thanks to investments in its driver supply.

In its earnings call, Lyft stressed that while demand for rides can change rapidly — COVID-19 made that plain during its various waves — shifting driver supply takes more time. CEO Logan Green said that “supply adjustments” to its marketplace “are like moving the Titanic.”

Unfortunate metaphor aside, it seems that Lyft is going to spend to boost driver supply in anticipation of future demand; the company expects to grow more quickly this year than the 36% it posted last year, a feat that will require more cars available for hailing.