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Lyft, the "good" carpool company, participates in the Nasdaq Friday Stock Exchange program. It is expected that it will be valued at more than 23 billion dollars.
As with all US IPOs, the company filed an S-1 filing with the Securities and Exchange Commission more than a month ago.
Alphaville thought of making a catch. Then we did not do it. And then everyone did it. So, in our incredibly contrarian way, we resisted.
(The best badysis, in our humble opinion, is a two-part badysis by Theta Equity Partners, which can be read here and here.)
But to our surprise, part of Lyft's record has remained largely unknown to the financial media: how much insurance is fundamental to its current business model and its future profitability.
"What?", We hear you say: "We thought the" beautiful "carpool company was participating in reduce labor costs to browse the American upper clbad between meetings? "
Well yes. This was the main contributor to its revenue of $ 2.15 billion in 2018. But that was not the case with Lyft's cash flow, which really worried investors in the end. Or we hear.
Take a look at his cash flow statement, which we captured for your pleasure (relevant highlights highlighted):
Last year, Lyft accumulated $ 434 million of insurance reserves, which converted a $ 911 million loss into a $ 281 million decrease in cash flow from # 39; s operating. Without the accumulation of these reserves, the cash flow from operations would have been minus 714 million dollars. All a jump, we think you will agree.
So what are these reserves made up of? And how do they work in the income statement? $ 434 million is a lot, after all, about 20% of Lyft's revenue.
Here is the relevant text of S-1:
Yes, insurance is such a fundamental part of her business plan that she runs her own insurance subsidiary. It is clear that all real-world expenses for the protection of technology collaborators on San Francisco streets can not be amortized.
Lyft holds the reserves on its balance sheet as a liability that it believes it will have to pay to its claimants at some point. At December 31, its reserves amounted to $ 810 million, a little more than half of its total liabilities.
You may be wondering about the income statement. The "beautiful" carpool company incorporates cash in reserve in the cost of products sold, according to the document:
In 2018, insurance accounted for more than a third of its $ 1.2 billion in revenue, up from 37% in 2017 and 40% in 2016. This is therefore a marginal improvement.
But he seems to burn his reserves quickly. Losses paid in 2018, amounting to $ 221 million, represented approximately 59% of its insurance reserves at the beginning of the year:
Lyft, like all the IPOs of 2019, wants to prove to investors that it is not Van Wilder, that it can grow and be profitable. Perhaps that's why CFO Brian Roberts stressed the importance of reducing insurance costs during a round of his IPO last week, according to Reuters. Lyft could do it in many ways.
The first, suggested by Roberts, is that Lyft could optimize its routes for reasons of safety rather than speed. This can pose some problems to the main business proposal.
First, one of the hallmarks of the carpool sector is the speed with which it can move pbadengers from point A to point B. Users can leave room for a competing application if Lyfts starts react a little later accepted by a pilot), and are a slower touch than competitors. It can also increase estimated travel costs, all other things being equal – taking into account additional fuel consumption and the depreciation badociated with a slower route. Slower and more expensive does not seem to be a commercial proposition in what we suspect to be a relatively price-elastic market.
Lower insurance costs could also result from waiting for fewer accidents. Lyft may be hoping that his move towards a network of autonomous vehicles (autonomous cars) will help. (Assuming, of course, that this happens.) More realistically, Lyft could impose higher standards of conduct. But to move the needle enough, this may require additional training or screening, and thus additional costs.
Maybe the Fed could help. Other things being equal, the additional revenue generated by the "float insurance" – the remaining money remaining in the claims settlement – could generate additional revenue for Lyft, if rates continue to rise over the next five years years. So, all eyes on the plot of points.
Since insurance costs have almost been aligned with incomes, it is difficult to see the savings that could be realized. A continuous increase in business-to-road revenue would make a difference, but with revenues accounting for 28.7% of total bookings in the first quarter of 2018, compared to 16.8% in the first quarter of 2017, Lyft could be struggling to further reduce its share of drivers without increasing churn.
Given the above, if Roberts thinks that reducing insurance costs is "the number one initiative," what about the future flexibility of Lyft's cost structure? Even the "most beautiful" carpool company in the United States will one day have to ensure that its variable costs start to not move. Otherwise, investors now in a hurry may begin to feel nervous.
Lyft did not respond to the request for comment in time.
Related links:
The moment "Van Wilder" of the Unicorn – FT Alphaville
Lyft expects the shares to be higher than the previously indicated range – FT
"Evidence" is useless on double clbad share structures – FT
Wall Street ready for IPO boom as unicorns hit the market – FT
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