Lyft’s gargantuan earnings error proves Wall Street should cut the jargon

Lyft’s record fourth quarter and rosy outlook Tuesday were marred by what turned out to be a gargantuan error in the company’s press release — one that likely could have been avoided if the company had avoided dreaded Wall Street jargon.

Initially, Lyft

put out a target calling for 500 basis points (5%) of growth in its margin of adjusted earnings before interest, taxes, depreciation or amortization (Ebitda). Lyft reported a 1.6% margin on the metric in 2023, so 500 basis points of expected growth would suggest a 6.6% margin for 2024.

But that’s not what Lyft really meant. On Lyft’s earnings call, Chief Financial Officer Erin Brewer quietly corrected the figure, saying that Lyft expected 50 basis points of margin expansion. That would translate to 0.5% growth and imply a 2.1% expected margin for 2024.

The situation was confusing enough that one analyst used the question-and-answer portion to press for a clarification on the difference between the smaller figure shared in Lyft’s prepared remarks and the larger one put out in the release.

The snafu shows how much Wall Street relies on and perpetuates its useless and mind-numbing jargon, which is probably not quickly understood by average retail investors. That’s another way the house wins.

Investors already have to deal with jargon in the description of the metric itself — adjusted Ebitda margin, which is calculated on the basis of gross bookings, a term encompassing the dollar value of transactions for which riders are charged.

Admittedly, people talk in basis points and percentage points to avoid other types of confusion that pure percentages might cause. Projecting margin growth of 0.5% could be ambiguous — should investors add 0.5 to the 1.6 [percent] margin figure for 2023, or multiply 1.6 by 0.5%?

But Lyft could have saved investors — and themselves — a huge headache by simply doing the desired math for Wall Street and spelling out the actual margin target for 2024, without dealing in basis points and growth rates. Doing that would have made it easier for the company to spot a number that didn’t look quite right, and the whole fiasco might have been averted.

Lyft executives were more than capable of doing that math, since Brewer shared the 2.1% target on the earnings call. Why not simplify matters for investors early on and give that number in the release as well?

As a result of the snafu, Lyft shares went on a roller-coaster ride. They were up about 60% at one point shortly after the release came out, but most of those gains evaporated once Brewer shared the correct margin target. The stock finished up about 16% in the extended session.

Lyft did not respond to a request for comment yet, but the company was surely dealing with agitated or possibly angry investors.

It is not clear how long it took Lyft to actually issue the corrected press release, after the company verbally corrected the figure on the call with analysts, and not even explicitly mentioning the new number as a correction until an analyst made a query.

A corrected press release on Business Wire has a time stamp of 6:02 p.m. Eastern, a little under two hours after the initial release came out, but it’s not clear whether the company put out any other corrections in between those two points. The company also had to correct its 8-K filing with the Securities and Exchange Commission.

Of course, investors on X and talking heads on CNBC were speculating that Lyft could get sued by investors for the blunder.

But Jake Walker, a Boston-based attorney who represents investors and consumers, thought such a case would be hard to prove, based on his experience taking on Affirm Holdings Inc. AFRM, -11.67% in 2022. He said on X that he represented investors who sued Affirm, alleging it issued an incomplete and misleading tweet about one set of quarterly earnings. The case was dismissed by a federal judge for the inability to show intent.

“The complaint does not even come close to satisfying the PRSLA [Private Securities Litigation Reform Act of 1995] scienter requirement,” wrote Judge Vince Chhabria of the Northern District of California in a September 2022 ruling. The “scienter requirement” refers to a culpable state of mind or knowledge that an act is wrong and intent to act anyway.

“Indeed the context (quickly taking down the tweet and accelerating the earnings release) creates a far more compelling inference that the company reacted quickly to correct a mistake that was embarrassing but not nefarious,” the judge said.

While Lyft’s issue didn’t take place on social media, the company ultimately did correct the error.

Will the Street or Corporate America learn from the episode? Of course not.

Just as incomprehensible financial jargon has always been an edge for the big firms, the tactic is also embraced by companies, especially those eager to obfuscate their financial results, or lack thereof.

Lyft already uses adjusted Ebitda, which is not net earnings at all, but that bugaboo has already been opined about on MarketWatch.

Now, investors will be watching for any fallout at Lyft to see if any heads roll as a result of one of the craziest earnings mishaps in recent memory.

Read more from source