The life-changing magic of adjusted net losses
Lyft, the other player in the ride-hailing app game, has published its first financial results as a listed business. And thanks to the dark magic of non-GAAP accounting, the company has shrunk its titanic Q1 losses.
In the ride-hailing game, there are only two businesses that matter: Uber and the smaller and perhaps lesser-known Lyft. We’ve covered Uber’s dysfunction previously, but Lyft has some skeletons in its closet, too.
In his novel 2312, Kim Stanley Robinson describes Pluto and Charon, our Solar System’s only binary planet system, “as tidally locked to each other like two ends of a dumbbell”. It’s a nifty description that can be easily redeployed for the twin transportation services companies Uber and Lyft.
Both are ride-hailing apps, both are San Francisco-based, both have now floated on the stock market (hell, they filed their paperwork for IPO on the same day), both have business models predicated on securing a market monopoly, and both are losing money at a breathtaking rate.
Last week, AccountingWEB wrote about Uber’s dysfunction ahead of blockbuster IPO – which, it's fair to say, could’ve gone better – so it seems right that this week, it’s Lyft’s turn in the spotlight.
In its first quarterly results as a public company the company cheerily announced “record” first quarter results. “First quarter revenue grew to $776 million, up 95% year-over-year,” the quarterly statement said.
So revenue growth is looking good! But scan down the document and you’ll see an eye-catching figure: The company recorded a loss of $1.14bn, more than it lost in all of 2018. The technical accounting term for that is A Lot of Money.
Lyft, like Uber, has struggled with its IPO: shares were priced at $72 when the company went public, but at last glance, this had levelled off at $52-a-share. Lyft’s unclear path to profitability has spooked investors – and those Q1 losses won’t allay any fears.
But here’s where the magic of non-GAAP accounting comes to the rescue. Adjusted net losses for Q1 was $211.5m. Year-on-year, that’s actually an improvement on Q1 2018’s adjusted net loss of $228.4 million.
The word ‘adjusted’ is doing a lot of hard work here, however. Lyft’s finance team has stripped all sorts of costs out. The adjusted net loss figure ignores the costs associated with Lyft’s IPO: payroll tax expenses and $894m in stock-based compensation.
For a tech business to strip stock-based compensation out of its losses is an interesting decision. Clearly, Lyft views this as a non-recurring extraordinary expense -- but that’s not really true. Stock options are a common form of compensation for highly remunerated tech workers.
Even if Lyft plans to not offer stock-based compensation -- which is unlikely -- it’s not that simple. As Peter Garnry, Saxo Bank’s head of equity strategy pointed out: “Stock options are non-cash compensation so if they are not used, the company would likely have a higher cash salary expense.”
Lyft, a San Francisco-based tech business, will have a big wage bill featuring some handsomely compensated employees and execs. If it eschews stock-based compensation, as its accounts seem to imply, this cost will rise.
The likelihood is that Lyft can’t afford to get rid of stock options. While they won’t quite have The Simpsons-style toilet roll of share options, this form on non-cash compensation helps keep costs down.
Twitter pulled the exact same accounting trick when it launched its IPO. Commenting on Twitter’s decision at the time, Ash Damodaran, a finance professor, wrote he would believe the explanation that stock-based compensation wasn’t recurring if Twitter stopped doing it.
“But I don't see how they can afford to. They have a lot of employees, some of whom are highly paid, and they cannot afford to pay them cash.”
So, let’s stick with the $1.1bn loss for now. To reiterate Damodaran's point: we can believe Lyft’s figures if it stops issuing stock options. Until then, adjusted net loss doesn’t mean much.
The silver lining for Lyft? Uber’s first results as a public company are looming on the horizon, and if Lyft’s numbers are bad, it’s likely that its big rival’s will be much worse.