Flicking through Lyft’s Q1 results, its first since it listed on the Nasdaq in April, and you might have got the sense things are moving in the right direction for the "transportation-as-a-service" business.
Active riders, the number of people taking a Lyft car, rose 46 per cent to 20.5m, while revenue grew 95 per cent, to $776m. Perhaps of greatest cheer for investors, however, was that its adjusted ebitda margin improved from negative 60 per cent, to negative 28 per cent.
Not bad right? Profits are growing with revenues, meaning Lyft has managed to wrestle some control over its cost base since the first quarter of last year.
Well, that’s what you would assume from these purple and pink bar charts, sloping neatly in all the right directions. But scroll down to page 20 of the press release, where its adjusted ebitda figure of negative $216m is reconciled from Lyft’s $1.1bn net loss, and the story is rather different.
For your viewing pleasure:
Scanning through the various expenses Lyft’s added back and it all seems quite reasonable. Depreciation and amortisation, those pesky non-cash costs, are excluded along with a few other line items, such as $19.7m of interest income.
That is, until you get to the stock compensation line.
All $859.5m of it.
For context, that’s $83.5m more than Lyft made in revenues. Exclude this cost, and its adjusted ebitda margin would have been negative 139 per cent, not negative 26 per cent.
Look. We know stock-based compensation is not a cash cost. And ebitda, as invented by TMT wizard John Malone, is meant to be a metric that roughly captures cash flow. It was a way of saying to investors, whether in debt or equity, "look here at this number, this is a true representation of the business' cash generative abilities."
But, as we’ve written before ad nauseam, stock-based compensation, unlike depreciation, is a real cost to equity investors as it dilutes a shareholders claim over any future cash flows. Therefore it is arguably unsuitable to exclude it when presenting results to equity investors, as Lyft did Tuesday evening.
About the metric, Lyft said in the press release that:
Adjusted ebitda and Adjusted ebitda Margin are key performance measures that Lyft’s management uses to assess Lyft’s operating performance and the operating leverage in Lyft’s business. Because Adjusted ebitda and Adjusted ebitda Margin facilitate internal comparisons of our historical operating performance on a more consistent basis, Lyft uses these measures for business planning purposes.
And on the conference call, according to a transcript provided by Sentieo, Lyft chief financial officer Brian Keith Roberts did reveal that the stock awards are in the form of restricted stock units which only vest after a certain amount of time, or a “liquidity event-related performance condition”. So, not to worry, potential dilution might not be coming quite yet. Unless, of course, the IPO was one of the said liquidity events.
Lyft are not the only practicer of this accounting dark art. Ride-sharing competitor Uber, per its S-1 filing, excluded $172m of stock-compensation from its own non-GAAP figure in 2018. But notably this is also far below the $11.3bn revenues it recorded over the same period. Countless other businesses have also repeated the trick over the past few years.
More importantly, do investors care? Judging by the market performances of the share-compensation heavy cloud-software kings, and tech giants, probably not. After all, why worry about claims on future cash flows when everything has gone up and to the right for the best part of a decade? Right?
At pixel, Lyft's shares are muted on the results. Down 0.37 per cent in pre-market, to $59.12.