Lyft Inc. and Uber Technologies Inc. say they are business rivals, but the U.S. Securities and Exchange Commission had a lot more comments on Uber’s business before both companies went public this year, in particular focusing on the ride-hailing leader’s adjusted financial numbers.
Uber UBER, +0.48% and Lyft LYFT, -0.11% filed draft registration statements, or S-1s, confidentially with the SEC on the same day: Dec. 6, 2018. A federal-government shutdown delayed review of the documents into 2019, when Lyft’s S-1 was publicly released first, perhaps because the SEC had a much easier time with its presentation: Overall, Lyft had far fewer comments in general and four rounds of comment letters in comparison to six for Uber.
“Uber’s business model is significantly more complex than Lyft and Uber’s accounting judgments for recognizing and measuring revenues had additional complexities that generated more scrutiny from the SEC,” said Nerissa Brown, an associate professor of accounting at the University of Illinois.
Lyft is organized more simply than Uber, especially because it reports on a single business segment while Uber has two: “Core Platform” and “Other Bets.” Lyft also reported no material revenue from outside of the U.S. as of the end of 2018, while 24% of Uber’s overall ride-hailing business in 2018 came from five metropolitan areas – Los Angeles, New York City, and the San Francisco Bay Area in the U.S., and two international locations, London in the United Kingdom and São Paulo in Brazil. Uber recorded $959 million in revenue according to Generally Accepted Accounting Principles, or GAAP, from Brazil last year, the most from any non-U.S. location and 8.5% of total company revenue.
The SEC’s comments to Uber focused primarily on its presentation of non-GAAP information and covered very technical concerns, in particular about its revenue model. Uber and Lyft both incorporate several non-GAAP metrics to supplement financial statements that only present the fees from connecting drivers with end-customers. That aligns with the companies’ contention that the drivers are their actual customers, not the ride-hailing passengers or consumers ordering food delivery.
As a result, for accounting purposes, both companies say they are “agents” who connect the “principal” — a driver—with the end-customer. Under GAAP, agents report revenue on a net basis, not including the amount paid to drivers, instead of on a gross basis. While Uber explained its thinking on the issue to MarketWatch well ahead of its IPO, and believed it had the SEC’s blessing at that time, there were still plenty of questions about Uber’s approach.from the SEC before its IPO.
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“The SEC had to look carefully at Uber and Lyft or it would send the wrong message to other companies,” Tom Selling, a professor emeritus of the Thunderbird School of Global Management and author of the Accounting Onion blog, told MarketWatch in an interview. “But almost all of the SEC’s questions about their non-GAAP usage and presentation would be a non-issue if the two companies reported revenue on a gross basis instead of net — that is, with the total amount collected from passengers shown and the cost and payments associated with the drivers reported as an expense on their audited financial statements.”
Uber and Lyft’s determination that net revenue is the right way to report under GAAP is also consistent with their legal position that insists drivers are independent contractors and not employees of the companies. If the “drivers are independent contractors” assumption is invalidated in significant markets, both companies admit that the impact on their business model would be “adverse.”
Uber and Lyft push limits on use of non-GAAP metrics
Uber and Lyft both offered a non-GAAP metric meant to reflect the total amount consumers are paying for their services, called “Gross Bookings.” Both said at the time of filing their confidential draft IPO prospectuses with the SEC that the gross figure would provide investors with better insight into pricing trends and the size of the ride-hailing market, and offers some transparency about how much of passenger fares goes to drivers.
Uber did not stop at bookings, though. The larger company also offered a “Take Rate” figure, defined as the percentage represented by its non-GAAP metric “Core Platform Adjusted Net Revenue” divided by Core Platform Gross Bookings. Core Platform Adjusted Net Revenue eliminates excess driver incentives, the cost of driver referrals, the impact of operations divested in 2018, and the impact of legal, tax, and regulatory reserves and settlements that are recorded on a GAAP basis as an adjustment to revenue.
The adjustments can have a material effect on the revenue number. Uber’s exclusion of the impact of the 2018 divested operations from the adjusted net revenue metric increased revenue by $49 million in 2016 and $55 million in 2017.
Uber’s decision to further adjust its Bookings metric to Adjusted Net Revenue generated a comment from the SEC that required a change before the regulator would approve its filing.
In a comment letter to the company before its IPO, the SEC told Uber to remove the divested operations adjustment because “it did not meet the criteria for being presented as discontinued operations” and, therefore, “appears to represent individually tailored accounting measures.” SEC guidance prohibits companies from making up their own revenue accounting standards using “individually tailored” accounting measures because that can result in non-GAAP metrics that are misleading.
Lyft immediately stopped presenting its “Bookings” metric when it delivered its first post-IPO quarterly earnings report. MarketWatch reported that Brian Roberts, Lyft’s chief financial officer, said that investors just wouldn’t be able to understand the bookings data since Lyft is expanding beyond ride-hailing into bikes and scooters.
Opinion: Lyft stops providing key data after IPO, then insults investors’ intelligence
Selling says, “Uber and Lyft turn the SEC-accepted rationale for permitting non-GAAP on its head. Issuers have argued that GAAP doesn’t tell an accurate story of their performance; but Uber and Lyft may be intentionally limiting the full presentation of their business activity by reporting only net revenue. A more complete presentation would be to report the 100% of what they collect from riders, instead of only the 30 to 40% they keep.”
SEC had more comments for Uber than Lyft
SEC comment letters on IPO paperwork are normally routine. All companies that want to go public undergo a thorough review at the SEC and comments, often innocuous, are issued in almost all cases. The regulator may ask a company to clarify certain terms or remove obviously promotional language.
The SEC’s questions for Uber included a significant number related to its adjusted revenue and bookings metrics, in addition to general comments about Uber’s approach to GAAP-compliant revenue recognition. Uber’s response on Feb. 15, 2019, required 16 pages to answer all of the SEC’s comments.
For the last 20 years, companies have been focusing less on GAAP—the standards all public companies must use to report their results to the SEC—and more on non-standard measures they say give investors more information about their specific operations and trends. About 90% of S&P 500 SPX, +0.24% companies use at least one non-GAAP measure in earnings releases according to recent research. In May 2016, the SEC told companies it was concerned about this trend and issued updated guidelines on the use of non-GAAP metrics to reset their behavior.
Study: Earnings surprises are bigger, thanks to growing use of non-GAAP metrics
Uber presented almost a dozen non-GAAP revenue and profit metrics in its S-1: Gross Bookings, Ridesharing Gross Bookings, Uber Eats Gross Bookings, Other Bets Gross Bookings, Adjusted Net Revenue, Core Platform Adjusted Net Revenue, Core Platform Contribution Profit (Loss), Core Platform Contribution Margin, Adjusted EBITDA, Ridesharing Adjusted Net Revenue and Uber Eats Adjusted Net Revenue. In comparison, Lyft presented fewer non-GAAP metrics: Bookings, Contribution, Contribution Margin, Adjusted EBITDA and Adjusted EBITDA Margin.
Since non-GAAP numbers are not audited, Professor Selling told MarketWatch this may be a deliberate effort on the part of Uber, and Lyft, to move the most significant portion of their business transactions outside of their auditor’s view. Both Uber and Lyft are audited by personnel from PricewaterhouseCoopers LLP’s Silicon Valley office.
Additional analysis: Lyft is a better bet than Uber, analyst says
Uber defined the non-GAAP metric “Adjusted Net Revenue” as revenue less excess driver incentives and less driver referrals bonuses. That may be because the company has a complicated way of recording the impact of its driver incentives for GAAP purposes. If Uber pays the driver, with incentives, more in total than it collects from the passenger, the difference is recorded in cost of sales and reduces gross margins. However, if the total Uber collects from the passenger exceeds the driver incentives, the incentives are classified as a reduction of revenue.
Brown told MarketWatch, “The driver incentives portion of their revenue model was difficult for SEC staff to grasp, and any typical user would have issues with this as well. Lyft deducts all their driver incentives from revenue and it’s not clear why Uber didn’t use a similar treatment.”
The SEC asked Uber about the various ways it accounts for incentives for drivers and for passengers. When Uber offers free rides to a targeted group of passengers, for example, it doesn’t reduce revenue since the company treats that type of passenger incentive as a marketing expense. Uber said that’s because, “…incentives offered to end-users are not within the scope of ASC 606 because the end-user is not the company’s customer and is not in the distribution chain for the applicable offerings.”
Uber explained further that discounts that apply to a limited number of trips or meals and/or are targeted at a subset of passengers are accounted for as marketing expense. However, when all deliveries or fares are discounted, the expenses were be recorded as a reduction of revenue. The company stopped providing discounts to the entire market in 2017 prior to the IPO.
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Uber also said that there are “certain markets” where its pricing software “decouples” passenger and driver pricing. That means the rideshare passenger or Uber Eats customer pays an upfront price dynamically calculated based on demand and an estimate of trip time and distance. However, the driver earns an amount that is based on their actual time and distance traveled. In locations with notoriously heavy traffic such as São Paulo, Brazil, that might mean an Uber owes drivers more than they collect from the end customer.
MarketWatch requested comment from Uber about the SEC’s letters. MarketWatch received no response from an Uber spokesman despite repeated requests via email.
Lyft had its own issues
Lyft did receive one question from the SEC that Uber did not receive. On March 28, 2019 – just one day prior to Lyft’s March 29, 2019 IPO, the SEC asked Lyft to clarify whether its management had provided IPO pricing estimates to the media.
Lyft’s top lawyer and corporate secretary, Kristin N. Sverchek, confirmed in a letter to the SEC that, to her knowledge, “no member of Lyft’s management or board of directors, nor any member of the underwriting syndicate …made any statements to the media regarding the pricing of the IPO.”
A Lyft spokeswoman declined comment on the elimination of the “Bookings” metric and the question from the SEC about any statements made to media regarding IPO pricing.
Lyft raised $2.34 billion in its IPO, pricing 32.5 million shares at $72 a share on March 28. Lyft called itself a “multimodal transportation network” in its filing for the public offering of its shares, which closed at $78.29 on its first day of trading. The company closed at $62.30 on Wednesday.
Uber priced its offering at $45 a share in mid-May, raising $8.1 billion, but closed the first day at $41.57 and trailed its IPO price for more than a month. The self-professed “personal mobility platform” closed at $43.62 on Wednesday.