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For Uber and Lyft, California Shutdown Could Spell Lost Revenue and Delayed Profits

A weeks-long shutdown in the most populous U.S. state would mean an additional dent in Q3 and Q4 revenue for Uber and Lyft.
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As soon as this week, Californians could open up their Uber and Lyft apps and find no rides available. 

Both rideshare firms said that they'll pull out of the state in response to a recent court ruling that ordered them to reclassify their drivers as employees within 10 days. That ruling was issued on August 10, which means the order takes effect on Friday unless the companies are granted an extended stay. 

The companies have threatened to leave the state until November, when California voters will decide on Prop 22 -- backed by a number of gig platforms including Uber, Lyft and DoorDash -- that would overturn key provisions of AB5, a law enacted this year that reclassified swaths of independent contractors as employees. 

Even if Prop 22 ultimately wins approval, Uber and Lyft could lose out on roughly ten weeks' worth of rides revenue in the most populous U.S. state, spanning the end of Q3 and the beginning of Q4. Uber and Lyft are based in California, and it's an important consumer market for both. 

On a recent earnings call, Lyft president John Zimmer told investors that California makes up 16% of Lyft's overall rides, though management added that the state has been recovering more slowly than most markets. Lyft, which operates only in the U.S. and Canada, saw revenue drop 61% last quarter, though it reported improvements in July.  

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Uber, by contrast, operates globally and has a more diversified business than its smaller rival, with its food delivery division, Eats, helping to offset steep losses from rides last quarter. (The California ruling doesn't apply to Eats.) Uber hasn't broken out how much of its rides or revenue comes from California, but told investors last year that its top 5 markets, which include Los Angeles and San Francisco, make up 23% of its total gross bookings. 

The silver lining for Uber and Lyft -- if you can call it that -- is that because rides are down so much anyway because of COVID-19, the total dollar loss from a suspension in California will be lower than it would be otherwise. But it runs the risk of delaying their profitability targets, said Asad Hussain, mobility analyst at PitchBook.

“Uber and Lyft suspending operations in California will impact their revenue significantly, as the state is one of both companies’ largest markets. However, the real story is the potential margin impact of reclassifying drivers as employees -- which will likely delay these company’s paths to profitability," said Hussain. "There are a lot of eyes on what happens in California with AB 5 and Prop 22 this November, as the eventual outcome will likely influence how other states pass similar legislation."

If other jurisdictions follow California's lead, it would mean higher workforce costs and pressured margins -- and potentially further delay profits for both firms. Lyft is targeting adjusted EBIDTA profitability by the fourth quarter of 2021, and Uber is likewise targeting adjusted profitability by sometime in 2021

The worker-classification tangle could also accelerate efforts by  transportation businesses more broadly to minimize the role of drivers. 

"Additionally, increased prices in ridesharing will likely push consumers toward potentially more affordable, alternative mobility services such as shared micromobility and carsharing -- businesses not dependent on drivers," Hussain added. "More broadly, we think this speaks to a broader trend in mobility—moving away from connecting people to drivers, and instead connecting people directly to vehicles.”