Zipcar: Right About the Market, Wrong About the Weekend

What happened

Zipcar incorporated in 2000 on the thesis that a car parked within walking distance and rented by the hour beats owning one. Revenue climbed from $106 million in 2008 to $186.1 million in 2010 with losses shrinking, and it went public on Nasdaq in April 2011 at $18 a share. Members then grew 35% over two years, and usage revenue per vehicle per day did not move: eight consecutive quarters between $57 and $65. The first net profit came in 2012, and $10.9 million of the $14.7 million was a one-off non-cash tax benefit.

The case, start to finish

Membership rose 35% across eight quarters. The earning power of a single car never moved.

Right about the market

Zipcar was incorporated in Delaware in January 2000, when car sharing barely existed as a category. The thesis was that a car parked within walking distance, rented by the hour, beats owning one in a dense city. Two decades later almost nobody disputes it.

The operating record supports the thesis rather than undermining it. Revenue climbed from $106.0M in 2008 to $278.9M in 2012. Average monthly member retention ran between 97.3% and 98.2%, meaning people who joined stayed for years. Cost per new account was $53 to $89, which is cheap for a subscription with retention like that. The company listed on Nasdaq in April 2011 at $18.00 a share, touched $31.50 that same quarter, and in 2012 posted its first net profit in twelve years.

In January 2013 Avis Budget agreed to buy it at $12.25 a share, about $500M. That was a 49% premium to the prior close and 32% below the IPO price. The distance between being right about a market and capturing it is the whole case.

The number the filings printed every quarter

Zipcar disclosed, quarter after quarter, a metric called usage revenue per vehicle per day. Across eight consecutive quarters it read $57, $65, $65, $63, $60, $65, $65, $64. Over that same stretch membership rose 35%, from 576,914 to 777,689, and the fleet grew from 8,216 cars to 9,763.

Everything was growing except the thing that decides a rental business. Compare the fourth quarter of 2011 with the fourth quarter of 2012, a year apart so seasonality cancels: members up 15.5%, quarterly revenue up 12.4%, fleet up 9.6%, and usage revenue per vehicle per day up 1.6%. The first three describe how well the company sold itself. The fourth describes what it earned for doing so.

New members did not make the fleet busier because new members wanted the cars at the same moment as everybody else. Demand for a shared urban car concentrates violently at the weekend. To serve Saturday you must own Saturday's fleet, then pay to park it on Tuesday, and a reserved space in Boston or Manhattan costs on Tuesday exactly what it costs on Saturday.

A fleet business valued as a growth company

You can watch the company fight the peak in its own numbers. The fleet went from 9,329 vehicles at 31 March 2012 to 11,105 at 30 June and back to 9,763 by December: roughly 1,800 cars added and shed inside a single year, chasing a peak it could not smooth.

Underneath, the cost structure made the arithmetic unforgiving. Fleet operations, meaning vehicles, parking, insurance, gas, cleaning and maintenance, consumed $173.6M of $278.9M of revenue in 2012, sixty-two cents of every revenue dollar before a single engineer or salesperson was paid. Income from operations was $6.1M on that revenue, a 2.2% margin, and the headline $14.7M net profit included $10.9M of one-off non-cash tax benefit. Revenue per member was drifting down too, $378 in 2012 against $392 in 2011, as the base broadened toward lighter users. Twelve years in, the accumulated deficit stood at $58.0M.

The eventual buyer owned the missing half of the curve. The two fleets go quiet on opposite days: one empties out over the weekend, the other over the working week. Avis said as much in its own announcement, describing weekend demand that was constrained by fleet availability, and guided to $50 to $70M of annual synergies. The problem Zipcar could not fix alone was fixable by combination, which is a real answer, just not the one an IPO story is built on.

Read the per-asset number first

For any business whose assets earn only while they are out, whether those are machines, vehicles, rooms or equipment, one number sits underneath all the others: revenue per asset per period. Growth in customers, bookings or fleet size is not the same thing, and it can climb for years while the number that determines returns does not move at all.

The specific trap here is peaked demand. When everyone wants the asset at the same hour, the fleet gets sized for the peak and paid for through the trough, so adding capacity lowers average utilization rate rather than raising revenue in proportion. That is not a marketing problem and no amount of member growth solves it. What solves it is a second demand curve that wants the same asset at a different time, which is exactly what the acquisition bought.

Being early to a real market is a genuine achievement. It is simply not the same asset as owning that market, and the per-asset number is where the difference shows up first.

Timeline

• January 2000 Incorporated in Delaware. Car sharing barely exists as a category; the thesis is that a car parked within walking distance, rented by the hour, beats owning one in a dense city.
• 2008-2010 Revenue climbs from $106.0M to $186.1M. The 2010 loss from operations is $(7.4)M. Growth is real and losses are shrinking.
• April 14, 2011 Begins trading on Nasdaq. The IPO prices at $18.00 a share and closes on April 19 with net proceeds of roughly $111.6M. In that same quarter the stock touches $31.50.
• 2011-2012 Members grow 35%, from 576,914 to 777,689. Usage revenue per vehicle per day goes $57, $65, $65, $63, $60, $65, $65, $64. Eight quarters. The car does not get busier.
• Full-year 2012 First net profit in twelve years: $14.7M attributable, but $10.9M of it is a one-off non-cash tax benefit. Income from operations is $6.1M on $278.9M of revenue. The stock has traded as low as $5.90.
• January 2, 2013 Avis Budget agrees to buy Zipcar at $12.25 a share, about $500M, a 49% premium to the prior close and 32% below the IPO price.

You're in the owner's chair

December 2012. Your car-sharing company just booked its first profit in twelve years. Membership is up 35% in two years. But revenue per vehicle per day has not moved in eight quarters, the stock has fallen from $18.00 to under $6, and you add and shed ~1,800 cars a year chasing a weekend peak you still cannot fully serve. Avis Budget offers $12.25 a share. What do you do?

• Take the deal — Avis owns the weekday half of the curve
• Raise hourly rates — monthly retention is 97%+, they will absorb it
• Stay public and buy your way out — more cars, more cities, prove the growth story

Everything grew except the number that decided the business

• Ending members: 15.5%
• Quarterly revenue: 12.4%
• Vehicles in the fleet: 9.6%
• Usage revenue per vehicle per day: 1.6%

Growth from Q4 2011 to Q4 2012, one year apart so seasonality cancels out, all four lines from the same quarterly metrics table in the FY2012 Form 10-K: members 673,257 to 777,689, revenue $62.9M to $70.7M, fleet 8,904 to 9,763 cars, usage revenue per vehicle per day $63 to $64. The top bar is a marketing result. The bottom bar is the business.

Business model

Membership rental of cars by the hour. Zipcar leased or owned a fleet, parked it in reserved spaces inside dense cities and college campuses, and sold access rather than ownership. It is a rental business wearing a technology company's clothes: the fleet is the capital, and the only question that matters is how many hours a day the capital is out earning.

Revenue model

Two lines, disclosed separately. Vehicle usage revenue, the hourly and daily rate, was $235.1M in 2012. Fee revenue (annual membership, application, damage waiver) was $43.4M, 16% of the total. The revealing number is revenue per member: $378 in 2012, DOWN from $392 in 2011. Every fresh cohort of members drove slightly less than the one before it.

Cost structure

Fleet operations (vehicles, parking, insurance, gas, cleaning, maintenance) consumed $173.6M of $278.9M in 2012. Sixty-two cents of every revenue dollar, before a single salesperson or engineer is paid. And the largest piece of it, a reserved parking space in Boston or Manhattan, costs exactly the same on a Tuesday when nobody moves the car.

Strategic challenge

The killer number is one Zipcar published itself, every quarter, in its own metrics table: usage revenue per vehicle per day. Across eight quarters it never went above $65 and never below $57. Over those same eight quarters membership rose 35% and the fleet grew from 8,216 cars to 9,763, but the earning power of a single Zipcar did not move. New members were not making the fleet busier, because new members wanted the cars at the same moment everyone else did. Demand for a shared urban car is savagely peaked: Saturday morning to Sunday evening. To serve the weekend you must own the weekend's fleet, and then pay to park it Monday through Thursday. You can watch Zipcar fight this in its own fleet count: 9,329 vehicles at March 31, 2012, 11,105 at June 30, back to 9,763 by December. Roughly 1,800 cars added and shed inside a single year, chasing a peak it could not smooth.

Key decision

The costly one was going public in April 2011 on a market-growth story while the per-vehicle number was already flat: a fleet business valued as a growth company. The clear-eyed one came twenty months later: accept $12.25 a share from the one buyer who already owned the missing half of the utilization curve.

What worked

Almost everything except the peak. Average monthly member retention ran 97.3% to 98.2%, and people who joined stayed for years. Cost per new account was $53 to $89, which is cheap for a subscription with that retention. Revenue compounded from $106.0M in 2008 to $278.9M in 2012, and the company reached its first operating profit. The thesis about urban car sharing was correct then and is correct now. Zipcar was not wrong about the market.

What failed

The ownership structure and the timing, not the idea. A fleet business whose revenue per asset per day is flat cannot grow into a growth multiple; it can only grow into a bigger fleet, and each car added for the weekend peak earns less than the last because you add it at the peak. The 10-K states the consequence in its own risk factors: shares sold at $18.00 in the IPO and the stock “has subsequently traded as high as $31.50 and as low as $5.90.” Twelve years in, the accumulated deficit stood at $58.0M.

Risk factors

Weekend-peaked demand against a fleet that must be paid for all seven days; parking rent fixed in the most expensive cities in the country; an ~1,800-vehicle seasonal fleet swing; revenue per member falling as the base broadened to lighter users; a public-market valuation attached to an asset-heavy balance sheet; and ride-hailing scaling in the same cities over the same period.

Lesson summary

Being early to a real market is not the same as being able to own it. Zipcar was right about car sharing and still sold below its IPO price, because the number that decides every rental business, revenue per asset per day, never moved for eight straight quarters while the growth chart looked wonderful. Read the per-asset number before you read the member count.

Key data

• $57-$65, flat Usage revenue per vehicle per day, 8 quarters
• 576,914 -> 777,689 (+35%) Members, Q1 2011 -> Q4 2012
• 62% ($173.6M of $278.9M) Fleet operations, share of 2012 revenue
• $6.1M (2.2% margin) 2012 income from operations
• 9,329 -> 11,105 -> 9,763 vehicles Seasonal fleet swing within 2012
• $18.00 -> $12.25 (-32%) IPO price -> acquisition price
• $58.0M Accumulated deficit at 12/31/2012

Sources & basis

The company here is real and named, and nothing about it was invented to make the story land. The list below is where each fact came from — public filings, court records, published reporting — so you can open a source and check it against the sentence that used it.

1. Zipcar, Inc. Form 10-K for fiscal year 2012 (SEC EDGAR) — source for revenue, fleet operations, quarterly members/vehicles, usage revenue per vehicle per day, retention, cost per new account, accumulated deficit, IPO terms and the $31.50/$5.90 trading range View source ↗
2. Zipcar Reports Fourth Quarter and Full Year 2012 Results, February 15, 2013 (SEC EDGAR, Ex-99) — source for full-year revenue, net income, Adjusted EBITDA and the 777,000 member / 9,700 vehicle count View source ↗
3. Avis Budget Group release, January 2, 2013: Avis Budget Group to Acquire Zipcar for $12.25 Per Share in Cash — source for the ~$500M value, the 49% premium, the $50-70M synergy guidance and the weekend-demand rationale View source ↗