Lyft, Inc. (LYFT) Q2 2020 Earnings Call Transcript

Good afternoon, and welcome to the Lyft Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode to prevent any background noise. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Shawn Woodhull, Head of Investor Relations. You may begin.

Thank you. Good afternoon, and welcome to the Lyft earnings call for the quarter ended June 30, 2020. This is Shawn Woodhull, Head of Investor Relations. Joining me today to discuss Lyft’s results are Co-Founder and CEO, Logan Green; Co-Founder and President, John Zimmer; and Chief Financial Officer, Brian Roberts. Logan and John will give an update on our business and key initiatives, and then Brian will review our Q2 results and share some commentary regarding our outlook. This conference call will be available on our Investor Relations website at investor.lyft.com, and a recording will be available at the same location shortly after this call has ended. I’d like to take this opportunity to remind you that during the call, we will be making forward-looking statements including statements relating to the expected impact of the COVID-19 pandemic, the expected performance of our business, future financial results and guidance, strategy, long-term growth and overall future prospects, as well as statements regarding litigation matters and the Proposition 22 ballot initiative. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our Form 10-Q for the first quarter of 2020 filed on May 8, 2020, and our Form 10-Q for the second quarter of 2020 that will be filed by August 14, 2020, as well as risks associated with the outcome of litigation, including a decision issued on Monday, August 10, granting a motion for preliminary injunction in an action by the people of the state of California, as well as the current uncertainty and unpredictability in our business, the markets and economy. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and Lyft disclaims any obligation to update any forward-looking statements except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results may be found in our earnings release which was furnished with our Form 8-K filed today with the SEC, and may also be found on our Investor Relations website at investor.lyft.com. I would now like to turn the conference call over to Lyft’s Co-Founder and Chief Executive Officer, Logan Green. Logan?

Thanks Shawn. Good afternoon, everyone, and thank you for joining our call today. Before we review our second quarter results, I want to acknowledge how difficult the past few months have been for riders, drivers and the communities we serve. The effects of COVID-19 have been severe for our society and economy, as well as for our own business. As a country, we also received a long overdue call to action to address the persistent injustices that Black Americans face. We will discuss our efforts on this in more detail, but we recognize there's more we can do to speak up and to be part of the solution. Turning to our second quarter, I'll focus my remarks on the recovery to date as well as our efforts to accelerate our path to profitability. Let's start with the recovery we're seeing in our business. Our Q2 results reflect the challenging operating environment. While the recovery in our ridesharing business has not been a straight line, we are seeing encouraging progress. Revenue for our second fiscal quarter was down 61% year-over-year, reflecting a significant decline in rideshare rides. This was driven primarily by a decline in active riders as shelter-in-place orders and other restrictions across North America reduced travel overall. At the same time, ride frequency was relatively more resilient. This is reflected in our revenue per active rider, which was down just 2% year-over-year despite the extremely challenging environment. Even though rideshare rides were down significantly in the second quarter, rides have meaningfully recovered from the trough we observed in the second week of April. Trends within rideshare also reflect changes riders are making in their lives and in how they use Lyft. For example, in Q2, we saw an increase in the percentage of rides taken during what would have traditionally been off-peak times as riders increasingly turn to ridesharing to complete essential trips. And while airport rides fell significantly in April and remained down significantly year-over-year, weekly airport rides grew by over 350% between the trough in April and late June. While rideshare is still down significantly from prior periods, we saw very strong engagement in our bike share operations in Q2. Bike revenue increased both quarter-over-quarter and year-over-year. This remarkable performance demonstrates the tremendous value that bikes are adding to our platform and helps validate our diversified approach to transportation. Let me turn now to recent trends that we've seen. We saw a rebound in demand in Q2 and have seen further evidence of this trend since the end of Q2. Rideshare rides in July were 78% greater than April. And despite all the negative headlines regarding COVID, even in the last month, we saw 12% growth from June to July. As the recovery progresses, our performance will depend on our ability to anticipate and adapt to changes in the marketplace. And although the pandemic is certainly unprecedented, we have over eight years of experience navigating and evolving marketplace. More than any other company in our industry, managing through adversity thoughtfully and strategically has been a core part of our success since we founded Lyft near the start of the last decade. Over that period of time, we've built the right team, culture, tools, and processes to adapt to changes on both sides of our platform, which we are fully leveraging in the current environment. In March and April, our primary challenge was a decline in rider demand relative to driver supply, which created an imbalance that led to low driver utilization. In order to help us protect utilization for existing drivers and provide additional earnings opportunities, we introduced a wait list for new drivers and launched essential deliveries, which John will elaborate on. Over the last few months, we've seen this dynamic reverse. Rider demand began to outpace the supply of available drivers. This was observed across the industry in most cities. Given these circumstances, driver earnings and utilization are now at or above pre-COVID levels in nearly all of our markets. Accordingly, while we will continue to innovate and launch products and features to encourage riders to come back to our platform, we're also focusing significant resources on reengaging drivers so that we can capture our full growth potential. John will share some more details on the work we're doing on this front, including the significant progress we're making on our new health safety program. Looking ahead, we expect there will be bumps along the road to recovery. But we're prepared to withstand this turbulence, thanks to natural operating leverage in our business, our cost management focus and our robust balance sheet, which we reinforced in May through the issuance of our first convertible senior notes. Before handing the call over to John, I want to share an updated view on our path to profitability. While we cannot control the timing of the recovery in our top line results, we're continuing to make progress on the actions we outlined a few months ago to strengthen our financial position. Brian will discuss this progress in more detail, but we're executing on our previously announced cost reduction plans, as well as projects to improve our unit economics. We now expect we can achieve adjusted EBITDA profitability with 20% to 25% fewer rides than what was assumed when we initially disclosed this target last year. While we can't perfectly predict the timing of recovery, based on the reduced ride levels required for us to break even, as well as what we've observed in terms of the recovery to date, we believe that there are multiple scenarios and levers that should allow us to hit this milestone by the fourth quarter of 2021. Now, I'll turn it over to John to talk about the important work we're doing to support drivers, riders, and our communities.

Thanks, Logan. Now more than ever, delivering on our mission to improve people's lives with the world's best transportation begins with users' health and safety. As cities reopen and people adapt their routines to COVID, it is critical that we continue our focus on the work we started in March to help protect riders and drivers on our platform. We know that health considerations and earnings stability are two of the most important factors that impacted driver's engagement with our platform. We're taking meaningful action on both. First, health safety, in May, we announced our health safety program, which established new requirements for driving and riding with Lyft. As part of this program, both riders and drivers must self-certify that they will wear face masks throughout their ride, are free of COVID-19 symptoms, and will follow CDC and local guidelines related to COVID-19. In support of this program, we have now distributed over 150,000 sanitizing products and masks to drivers across the country. We further bolstered our health safety program in July, with the launch of vehicle partitions. These partitions were designed in-house by Lyft engineers, in line with CDC recommendations. Our team designed the partitions to be easily shipped, assembled, and installed across a wide range of vehicle makes and models. So far, we have made thousands of partitions available to drivers for free, across nine markets, including Atlanta, Baltimore, Boston, Dallas, Denver, New York City, Phoenix, Seattle, and Washington, D.C. Over the next coming months, we plan to expand this program to 30 regions and provide free partitions to over 60,000 drivers. Our ability to roll out vehicle partitions at scale is enhanced by our acquisition of Flexdrive, as we can install partitions at scale within the Flexdrive fleet. Now let me talk about what we're doing to protect and support drivers' earnings during this time. Since our last call, we have continued to expand our essential deliveries program, which connects drivers with incremental opportunities to earn. While it's still early days, we are very pleased with the results so far and continue to grow the program. With gradual increases in rider demand in the last few months, we've been taking steps to improve supply conditions on a market-by-market basis. This includes removing wait lists for new drivers in almost all markets and providing drivers with partitions and PPE. As a result of higher rider demand and corresponding increases in driver incentives, drivers' average hourly earnings have increased on the Lyft platform over the quarter and are now at or above pre-COVID levels in nearly all markets. We also remain focused on protecting the unique value and importance of flexible work available to drivers. In California, the Proposition 22 ballot initiative we're supporting would protect driver independence and flexibility while providing historic new benefits and protections, including contributions towards healthcare coverage, occupational accident insurance, and minimum guaranteed earnings. We are simultaneously working through litigation on the issue of driver classification in California. As we've discussed in prior SEC disclosures, the state of California filed a lawsuit in May against Lyft and Uber regarding driver classification. On Monday, the Superior Court of California granted a preliminary injunction motion filed by the state, which would force Lyft and Uber to reclassify drivers as employees in California. That injunction has been stayed until August '20, and we may appeal this ruling and request to further stay. If our efforts here are not successful, it would force us to suspend operations in California. Fortunately, California voters can make their voices heard by voting yes on Prop 22 in November. Drivers have said they want to remain independent contractors over being employees by a 4:1 margin. Economic studies in California have shown that 80% to 90% of drivers in entire regions of the state would lose access to Lyft and Uber platforms if drivers were forced to become employees. We will continue to fight for drivers' independence. Our plans and forecasts are currently based on the assumption that efforts to challenge the injunction will yield favorable results. I'd also like to share an update on the demand side of our marketplace. Even with rider coupons near all-time lows, rider demand has continued to improve. And we continue to build new offerings on our platform that we believe best support the recovery. As businesses around the country wrestle with how to adapt to the effects of COVID, Lyft can play an important role in solving transportation challenges for these organizations. We recently launched Lyft Pass, which allows organizations to cover the cost of rides for employees, customers, guests, patients, and more. For many top brands and organizations, Lyft has been the partner of choice before and during COVID-19 shelter and place mandates. We're excited to be able to create solutions that help these businesses navigate the new normal as their employees go back to work and have a renewed focus on safety, convenience, and flexibility. We've also made improvements to Lyft rentals, our consumer car rental program that is reimagining the traditional car rental experience. We launched this service late last year to complement our existing offerings and further build out our full portfolio approach to transportation. Having vertically integrated car rentals on Lyft helps customers address their full suite of transportation needs, including trips like weekend getaways. Lyft rentals remove many pain points that renters have historically faced: long lines at the service counter, insurance upsells before getting the keys, or not getting the car you expected. With Lyft Rentals, you pick your exact car and skip the counter. Recent trends in our initial markets, Los Angeles and the Bay area indicate strong consumer interest in this program, with revenue per car rental packed at pre-COVID levels in recent weeks. In order to expand our riders' access to the seamless car rental experience, we recently announced a partnership with Sixt, a global leader in the car rental industry known for outstanding customer experience that has been expanding their presence in the U.S. Unlike third-party aggregators, we're integrating with Sixt's systems on the back end, so the entire reservation flow is built directly into the Lyft app, delivering an integrated premium experience. Lyft riders who rent vehicles from Sixt will have access to special perks and privileges, including a Lyft ride credit to get to and from the rental lot, expedited pickup, and the ability to choose the exact make and model of the vehicle ahead of time. Our partnership with Sixt is rolling out over the next few months and will eventually become available nationwide. Additionally, as Logan mentioned earlier, one particularly bright spot in Q2 was bikeshare. Weekly bike rides increased over 200% from the beginning of April to the end of June, and new bike rider activations in the month of June were up 11% year-over-year. Ride volumes for bikes are now above pre-COVID levels as riders seek out this affordable, efficient, and open-air mode of transportation. We are extremely well positioned, given our leadership in the bikeshare market, including our exclusive right to operate bikeshare in some of the largest cities in the U.S. We are continuing to lean into this area by expanding the availability of our popular e-bikes, which are now available in San Francisco with Bay Wheels, New York with Citi Bike, Chicago with Divi as well as Washington, D.C., Minneapolis, and Columbus. Since we launched our new e-bike roughly one year ago in the Bay Area, riders have taken over one million e-bike trips, and we're excited to bring these bikes to more markets later this year. Before I hand things over to Brian, I wanted to highlight Lyft's first annual environmental, social, and corporate governance report, which we published at the end of July. In order to execute our mission, we must deliver for all stakeholders. This drives our work on a wide range of issues, including transportation, access and equity, economic mobility, and sustainability. An exciting example of our work in these areas is our recent commitment to reach 100% electric vehicles on the Lyft platform by 2030. By working with drivers to transition to electric vehicles, we have the potential to avoid tens of millions of metric tons of greenhouse gas emissions and to reduce gasoline consumption by more than one billion gallons over the next decade. In addition to being the right thing for the environment and society, we expect that a fully electric fleet will allow us to help drivers save money. Our commitment to this issue is clearly and deeply integrated into our decision-making and strategy at Lyft. We are driving our business toward a sustainable future, where riding with Lyft is the obvious choice. Our ESG report is the first for our industry, and we're proud of the progress we are making. We look forward to continuing to share updates with you through this annual report. With that, I'll now hand it over to Brian to review our Q2 results and outlook.

Thanks, John, and good afternoon, everyone. Let me share a few perspectives before I get into specifics regarding our Q2 performance and outlook. Given the significant decline in revenue related to COVID, I'm extremely proud of our success minimizing our adjusted EBITDA loss in Q2. We have also positioned the company to be stronger and more profitable in the long term. I attribute this to our decisive actions to reduce costs as well as our strong execution. I'm also pleased with Lyft's sequential monthly ride recovery, which resulted in meaningful month-over-month revenue growth from the April lows. The combination of this improving top line trend, along with broad and significant cost reductions, helped us to close Q2 well below the loss level we publicly communicated. As you will recall, when we announced Q1, we said we could manage our Q2 adjusted EBITDA loss to under $360 million, if April ride volumes persisted in May and June. In early June, we updated our outlook and indicated that if June held at May ride volumes, we could manage the loss to under $325 million. I will share more specifics shortly, but our Q2 adjusted EBITDA loss came in at $280 million, an improvement of $45 million versus our early June update. To put this in perspective, for every dollar of revenue decline from Q1 to Q2, our adjusted EBITDA loss increased by less than $0.32, which helps demonstrate how resilient our business model is. Finally, similar to our perspective three months ago, we continue to treat this crisis as a catalyst to shine a bright light on every expense line to drive incremental savings and efficiencies. However, let me be very clear, we are continuing to invest in initiatives that we expect will drive long-term growth and attractive shareholder returns. Let me now turn to our second quarter results. Revenue declined 61% year-over-year, given the significant impact of COVID on our marketplace. It's worth noting that this decrease was less than the 68.5% decline in ridesharing rides. Q2 revenue benefited from increased rideshare revenue per ride versus the year-ago period and our bike business achieved positive year-over-year revenue growth. As Logan mentioned, the decline in rideshare rides was driven primarily by a decline in Active riders, which decreased 60% from the year-ago period to 8.7 million. Revenue per Active rider in Q2 was $39.06, down only 2% year-over-year despite the extremely challenging environment, reflecting both improved revenue per ride and encouraging resilience in ride frequency. To put this in perspective, our revenue per Active rider in Q2 is $1.2 greater than it was in Q1 of 2019, the quarter we went public. Now, before I move on, I want to note that unless otherwise indicated, all income statement measures that follow are non-GAAP and exclude stock-based compensation and other select items. A reconciliation of historical GAAP to non-GAAP results is available on our Investor Relations website and may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC. This includes contribution, which is defined as revenue less cost of revenue, adjusted to exclude amortization of intangible assets, stock-based compensation-related expenses, and changes to liabilities for insurance required by regulatory agencies attributable to historical periods. Both contribution and adjusted EBITDA are also adjusted to exclude the restructuring charges that we've previously discussed, both on the Q1 call and in SEC filings. The majority of these restructuring charges relate to the workforce reduction we announced in April. In Q2, contribution was $117 million and contribution margin was 35%, down from 46% in the same period a year ago and 57% last quarter. Many of the factors that caused this decline were unique. As evidenced, we expect Q3 contribution margin will increase 10 percentage points if rides were to remain at July levels in August and September. Now let me walk through Q2. The decline in contribution margin reflects the significant sequential decline in revenue in conjunction with the fixed nature of certain expenses included in cost of revenue, such as allocated personnel costs and depreciation. Remember, depreciation expense is included in contribution margin. Separately, while insurance expense is virtually fully variable based on mileage, at the beginning of Q2, as shelter in place orders took effect, we experienced lower driver utilization, which led to more idle miles and greater insurance costs per ride. Given current driver utilization trends, we expect that the cost of insurance per ride will be lower in Q3 than Q2. Finally, hosting costs were also a headwind to contribution margin in Q2, as our ability to quickly adjust our hosting costs is limited by our usage of AWS reserved instances. Now as a reminder, contribution excludes changes to the liabilities for insurance required by regulatory agencies attributable to historical periods. We experienced $17 million of adverse development in Q2 related to historical claims. Finally, $3.5 million of costs related to our restructuring is excluded from contribution. Let's move to operating expenses. Operations and support expense for Q2 was $88 million, down 39% year-over-year and down 32% quarter-over-quarter. Operations and support expense as a percentage of revenue increased 900 basis points from the same period a year ago, which reflects the impact of a significant revenue decline with certain fixed costs within operations and support, such as facilities. R&D expense was $134 million, down 13% quarter-over-quarter, reflecting improved cost management and our recent restructuring. Sales and marketing in Q2 as a percentage of revenue reached an all-time low of 13%. In terms of absolutes, sales and marketing was only $44 million in Q2, down 77% from $191 million in Q1. A key driver to our sales and marketing leverage was our discipline on rider incentives. Total incentives classified as sales and marketing declined 96% between Q1 and Q2 from $100 million to just $4 million or 1.2% of revenue. G&A expense was $168 million, down 12% year-over-year and down 10% quarter-over-quarter. The sequential decline in G&A expense is notable as improved cost management more than offset a roughly $25 million increase in costs related to legal settlements between Q1 and Q2. As we discussed in our Q1 call, legal settlements and accruals were lower-than-expected in the first quarter, due to the postponement of mediations and hearings. CapEx for the quarter was approximately $22 million, which was less than half of our outlook as we focus on preserving cash. Stock-based compensation and related payroll tax expense was $111 million, which included a net benefit of approximately $50 million related to our workforce reduction. We ended the quarter with $2.8 billion of unrestricted cash, cash equivalents, and short-term investments, an increase of over $100 million from March 31. Our ending cash balance reflects both the net proceeds of approximately $600 million from our convertible debt issuance and corresponding cap call transactions, as well as the previously disclosed cash use of $91 million related to the insurance innovation transaction that we closed in April. Let me now turn to our outlook. We remain on track to achieve the fixed cost savings that we outlined on our last earnings call, $300 million on an annualized basis by Q4 of this year. In addition, we are tracking to beat our CapEx reduction plan. On our last call, we outlined the goal of reducing 2020 CapEx from our original plan of roughly $400 million to $150 million. We now expect that we can lower full year CapEx to $125 million, resulting in an additional $25 million of cash savings. Since our Q1 call, we've also made important progress on initiatives across the company to improve our underlying unit economics. We will share more information on these initiatives later in the year. But the progress to date suggests that there is upside to the long-term margin target we first outlined at the time of our IPO. We also believe we can now achieve adjusted EBITDA profitability with fewer rides, as Logan mentioned. I will come back to this. In terms of our near-term outlook, given the fluidity associated with government orders and health care recommendations to contain the spread of COVID-19, it is impossible for us to predict with any certainty our results for the third quarter. As such, similar to the second quarter, we are providing investors with an estimate of adjusted EBITDA loss based on July ride volumes. As a starting point, let me describe the ride comps on our rideshare platform. April was down 75%, year-over-year. May was down 70%. June was down 61%. July was down 54%. Rideshare rides for the week ending August 9th reached a new high since April but remained down 53%. Now, when evaluating year-over-year ride comps keep in mind that August was a much stronger month than July back in 2019, which is contributing to these trends. Before I discuss the loss, I want to remind everyone of the important increase in policy-related spend that we first mentioned at the beginning of the year. Most of this investment will be recorded in our Q3 results, with policy-related spend increasing by approximately $40 million in Q3 versus Q2, given the timing of key policy initiatives in California as well as other states. In California, as John described, we are focused on winning the Prop 22 ballot initiative. Alongside our coalition partners, including Uber, DoorDash, and Instacart, as well as tens of thousands of drivers and leading community organizations, we will continue to support a very large vote yes on Prop 22 campaign in the coming months. A majority of the incremental $40 million of quarterly policy expenditures relate to our share of third-quarter coalition spend, which was pre-funded by Lyft back in 2019, so it will not be a use of cash. Now, for comparison purposes, if we weren't investing this large one quarter increase in policy spend. And rides were to remain at July levels in August and September, we would expect our Q3 adjusted EBITDA September, we would expect our Q3 adjusted EBITDA loss, would be $225 million, a 20% improvement relative to Q2. But we are investing an incremental $40 million in Q3 policy spend, and this will be reflected in adjusted EBITDA. So inclusive of this spike, we expect to manage the business to a $265 spike if rideshare rides remain at July levels. While the company is not providing revenue guidance for Q3, we do expect year-over-year growth will more closely track the change in rideshare rides as we invest to improve service levels. Let's now move beyond Q3 and discuss an important milestone. We expect that we can achieve adjusted EBITDA profitability by Q4 of 2021. While this does require rides to continue to recover, we see multiple scenarios and levers to achieve this milestone. As Logan indicated, given our actions to reduce costs and increase unit economics, we are now positioned to achieve adjusted EBITDA profitability with 20% to 25% fewer rides than what was required when we first put out our Q4 2021 target back in October of 2019. This is a further improvement from the 15% to 20% that we announced, last quarter. For context, we now expect we can achieve adjusted EBITDA profitability when quarterly rides on our rideshare platform reach approximately 5% to 10% above the level achieved in Q4 of 2019. So while we expect our operations will be impacted by COVID-19 for some time, we again believe that there are multiple scenarios and levers that should allow us to hit this milestone by Q4 of next year. Our leadership team is focused on achieving adjusted EBITDA profitability to allow our business to self-fund future growth and demonstrate the strength of our model. In fact, we expect that we will lead our industry in terms of long-term margins. While scale matters, and yes, we have scale, what's critical to understand is the importance of focus, both business model and geographic footprint. We expect that the margins of a North American pure-play transportation network will exceed conglomerate models that include lower-margin businesses and geographies. Also, as we look forward, our focus positions us well for the rebound. We expect we will have strong organic year-over-year revenue growth in 2021, given our sole transportation focus. No portion of Lyft's business enjoyed favorable tailwinds from COVID. So Lyft is well positioned as a pure-play in the expected recovery. In terms of our geographic focus, we operate solely in the U.S. and Canada, and the U.S. government is directing nearly $10 billion aimed at gaining priority access to in volumes of select COVID vaccines and therapeutics. We believe that faster and wider availability of treatments and vaccines may help drive an accelerated and broader economic rebound in our direct operating footprint. In closing, while the operating environment we faced in the second quarter was a challenging test, we were able to limit the were able to limit the impact of the downturn, thanks to our team's execution, the resilience of our business model and the critical role our platform plays to facilitate essential transportation. We're making progress on key initiatives to improve our long-term margin profile, and we expect the decisions we made in Q2 will also position the company to reach profitability sooner and be stronger and more profitable in the long term. Finally, with $2.8 billion of unrestricted cash, cash equivalents, and short-term investments, we have the financial strength and runway to achieve our strategic objectives. So with that, let me turn it back to Logan.

Thanks, Brian. The second quarter was extremely challenging on many fronts. We're grateful for our driver and rider community, partners, team members, and shareholders for their continued support and dedication. We're encouraged by the recovery in our business to date, and we're confident that we're taking on the critical work necessary for the business to emerge stronger on the other side. While the headwinds we're facing won't disappear overnight, we believe they will prove temporary and we'll look back on this as a defining moment that strengthens the company. So while we navigate this crisis, our leadership team remains focused on capturing enormous long-term opportunity ahead of us. We continue to believe that people will rely on transportation networks like Lyft more than ever post pandemic. We're the only pure-play transportation networks company in North America that has integrated rideshare, bikes, scooters, transit, and car rentals all onto a single platform. And we believe that we're better positioned than ever to be the platform of choice for drivers, riders, and to deliver outstanding value to shareholders. Before we take questions, I want to acknowledge that for many of us, the past few months have been unlike anything we have ever seen before. Recent acts of injustice against Black Americans have created an inflection point in America. As we seek to become true allies and lead a company where our team feels empowered to do the same, our actions have been guided by our long-standing commitment to support the communities we serve. Our work starts within our own walls. Where we've doubled down on our internal efforts around inclusion and diversity, especially in regards to hiring and promotion. From there, we're harnessing the power of our platform to partner with organizations across the country to help eliminate access to transportation as a barrier to upward mobility for Black communities. Alongside partners, including the NAACP, National Urban League, and My Brothers Keeper Alliance, we'll be providing access to roughly 1.5 million free and discounted car, bike, and scooter rides to enable black communities to access a powerful network of essential resources and services over the next five years. This work is an important part of fulfilling our mission by ensuring that the world's best transportation is accessible to all. And with that, we're now ready to take questions.

Our first question comes from Benjamin Black of Evercore ISI. Please go ahead with your question.

Thank you for the question and for the update on the timeline to profitability. You mentioned several scenarios that could lead to profitability in the fourth quarter of 2021. Could you help us understand the factors that will contribute to achieving that? Additionally, regarding costs, you provided an update on when we could see the full benefit of the $300 million cost reduction. You also mentioned looking at all costs. Are we finished with the rationalization process, or is there still more work to do? Thank you.

Sure. Thanks, Ben. This is Brian. So let me just again repeat why breakeven is just so important to us because it's really the catalyst for us to start self-funding that future growth. And I think it's important for us to demonstrate to investors just the strength of our model. So we are committed to this target. As we mentioned, it does require ride recovery. There are several factors that give us confidence in our ability to reach this milestone. First, as you point out, it's our success in terms of reducing costs and improving unit economics. And this is leading to a reduction in the number of rides we need to generate to achieve profitability. And so as we mentioned, based on the progress to date between the first and second quarter now, we can achieve profitability with 5%. Basically, the required rides now are 20% to 25% reduction, which is an improvement of 5 percentage points. To go back to your specific question, we are committed to try to achieve this milestone. We refer to scenarios and levers and this is across the P&L. So both levers that affect top line as well as bottom line to help execute on this goal as well. In terms of our success in the fixed cost, cutting fixed costs out of the business requires really, really difficult decisions. But once you make those hard decisions, you have very high probability of success. And so as we said on the call, we do expect to achieve the full $300 million of run rate savings by Q4, and this is against our original plan for the year. And I forget, what was your last question?

You mentioned that you're signing a life and using a pandemic to address all costs in the business. I was wondering if you have any additional rationalizations or updates regarding cost savings. Thank you.

Yes, as I mentioned, we are quite pleased with the fixed costs that we've eliminated. We are also dedicating additional time and resources across the company to enhance our unit economics. This includes various initiatives and projects aimed at increasing revenue, which translates into more rides and higher revenue per ride. Additionally, we have several initiatives focused on cost reduction, such as improving computing efficiencies, achieving savings on transaction processing, and funding extra safety initiatives to lower insurance costs. As noted in our prepared remarks, we have successfully executed reductions in our fixed cost base and advanced projects to enhance our unit economics. We believe these changes will result in lasting structural improvements to our business. Given these advancements, we are now confident that we can achieve margins above the long-term model we discussed during our IPO. We plan to provide an update to investors early next year on this progress.

Great. Thank you.

Sure.

Thank you. Our next question comes from Doug Anmuth of JPMorgan. Your question please.

Great. Thanks for taking the questions. I have two. First, John, you talked about potentially suspending operations in California if you don't get the extended-stay on August 20th. Just hoping you could help us understand how that would work? Is that just temporary as you adjust the model to certain markets and adjust service levels? And curious how far along your planning is along this path. And maybe you can just remind us how big California is as a percentage of rides or revenue? And then, Brian, just on insurance, if you could talk about the opportunity to further shift insurance risk later this year. I know you went to about 25% risk transfer last October. Curious where that could go to and how does COVID impact the potential move there in October? Thanks.

Thanks Doug. This is John. So, on the first question, if a longer state is not granted, then the injunction would go into effect on August 21st, in which case, we'd be forced to suspend rideshare operations in California. And as we explained to the trial court, a preliminary injunction forces Lyft to transform its business model in California. One thing to remind everyone is the majority of the drivers on the platform have full-time jobs outside of Lyft and the constraints that we would need to add to the platform, such as schedules, would not work for many of them and Lyft cannot comply with the injunction at the flip of a switch; reclassifying tens of thousands of self-employed drivers would be a significant challenge in normal times. And in the current pandemic environment, that would be nearly impossible. So, it's difficult to predict timing, as you mentioned. Our focus is on Prop 22, and we are confident in moving that forward. Anything outside of that would need to be assessed at a later time. In terms of the business impact within California, California currently makes up around 16% of total rides. So that should address your question there.

And this is Brian. So, let me just give a little more color on California. I would say the West Coast is one of our weakest regions in terms of rebound. So, if you look at month-to-date in August, California as a percentage of total rides was down over five full percentage points year-over-year, as John mentioned, out of the 16% of total rides. In terms of specific data points, notwithstanding the recovery in other parts of the country in July, rideshare rides were down 75% in San Francisco, 72% in San Diego, and 75% in San Jose. And in the most recent week, both San Francisco and San Jose were down 77% year-over-year. In terms of the second part of your question around risk transfer, so as you recall, we are on a September fiscal year as it relates to insurance policies. And so in our current policy year, which ends this September 30, we transferred a majority of risk related to six states with regards to primary auto. We're actually in a live RFP right now for our next policy year, which begins October 1 for the first day of Q4. For us, there are two key benefits from transferring risk. First, it helps me sleep at night because it reduces volatility in our financials. And second, it aligns incentives between us and our insurance partners. The RFP is live right now. So, I don't have too many details that I can share, but I can say that we're pleased by the demand for our business amongst leading auto insurers to the upcoming policy year. And our progress to date on safety initiatives has been well received by the market. And this is super important to us because it factors into pricing. So negotiations are continuing. Nothing has been awarded, but we expect that we will have the option to transfer additional risk for the upcoming policy that would begin on October 1.

Thank you, you bet.

Our next question comes from Stephen Ju of Credit Suisse. Your line is open.

Thank you very much. So Logan and John, you touched on this to some degree, but can you talk about the puts and takes to the Lyft use case over the next 12 months perhaps and the next five years? Clearly, the morning and afternoon commute use cases are way down right now as are the airport rides. And there may be a possibility that some of the decline will be permanent as people work from home. So can you put that in context with your efforts to expand into new use cases like doctor's visits, among other things, that is perhaps not as work-related? Brian, you touched on this to some degree as well. Overall, it seems like rides improved pretty significantly from the April trough. But I'm just wondering if you could provide us with more granularity on some of the regional activity outside of California, especially as parts of the country seem to be going in different directions in terms of cases? Thanks.

Thanks, Stephen. I'll highlight a couple of interesting trends. We're noticing a shift toward more essential trips, and the commute scenario has remained fairly steady between Q1 and Q2, making up about 30% of our total rides. There's an increase in essential trips to grocery stores, doctor appointments, and more. Public transit usage has declined significantly nationwide, with many cities facing tough budget conditions and reducing transit services. As a result, more people are turning to ridesharing as a reliable and affordable alternative. On that note, we're excited about our new product called Lyft Pass, which we launched in July as part of Lyft Business. Lyft Pass allows organizations to cover the cost of rides for employees, customers, guests, and patients, offering a safe and flexible option. Organizations can purchase a one-time or recurring Lyft pass and customize the usage rules, including the time of day, ride types, locations, and more. We're eager to expand on Lyft Pass and continue developing products that assist individuals and cities as they reopen. Additionally, I want to comment on personal vehicle ownership, which we believe will decrease as people rely more on Lyft post-pandemic. Affordable and reliable transportation will be essential in navigating the likely challenging economic landscape ahead. Many potential car owners might choose to avoid the high fixed costs of car ownership either due to affordability concerns or the desire to avoid long-term commitments. Although it's early days, we sense a significant shift away from car ownership toward a broader transportation-as-a-service model. Brian, could you provide insights on some of the trends in specific cities? Sure. Thanks, Logan. So let me just maybe quickly touch on ride mix, then I'll talk about the cities. What's interesting for us, if you look at weekend rides as a percent of our total rideshare rides, in Q3 and Q4 of last year, weakened rides were 32% and then 33% of total rides. At the absolute COVID bottom, weekend rides dropped to 20% of total. In the last week of July, weekend rides have now reached 29% of total. So we're seeing a rebound there. And then as we reported last time, airport rides in Q3 and Q4 of last year were 9.1% and 9.4% of total rideshare rides. In April, airport rides dropped to 1.6%. And as Logan mentioned, airport rides are beginning to rebound. In the month of July, they've more than doubled as a percent of ride mix, and they're now up to 4%. So it's still down from last Q3, Q4, but definitely trending in the right direction. In terms of cities and regions, look, I think it's really important for investors to realize that the U.S. is a collection of unique data points. What you're seeing in your hometown doesn't necessarily represent what is happening in aggregate across the U.S. And so as I mentioned, rides in the West Coast, in particular, are weaker. But other regions have already recovered to a much stronger degree. For example, 10% of our top 50 cities in July were down 25% or less year-over-year. And the other key point to understand is each month, cities recover at different rates. And so while July rideshare rides jumped 12% system-wide, month-over-month, as Logan mentioned, over 10 of our top 50 cities grew faster than 20% month-over-month, and we had one top 20 city grow 57% month-over-month. And then finally, even in areas with really high COVID case counts and lots of media attention, like Los Angeles and Miami, we did see positive month-over-month growth in July.

Thank you.

Thank you.

Thank you. Our next question comes from Mark Mahaney of RBC. Your question please.

Thanks. Two questions, please. First, could you describe why you think the driver supply challenges are existing? You put in a wait list early on because there was a surge in drivers, but then it seemed like it reversed. I think there are probably macro factors at play here, but your thoughts on why you're experiencing driver supply challenges? And then secondly, Brian, could you talk about why rides volume will more closely match revenue or rides declines will more closely match revenue declines going forward than what we've seen in the last quarter or two? Thank you.

Thanks, Mark. I can take the first one around driver participation in the platform. So the two most important factors for drivers when considering whether they want to get behind the wheel right now are health considerations and earnings stability. And so on the health consideration side to your point, a lot of that is more macro, but we're taking that very seriously and doing everything we can to improve safety and health protection within the platform. So for example, the in-house created partition, we've shipped tens of thousands of those units and we're going to continue providing PPE and those partitions to keep drivers safe and make sure we're communicating all the different options they have to protect themselves if they choose to come back to the platform. On earnings because there was kind of that back and forth on the marketplace early on, it's now important that we communicate the fact, as we mentioned, that driver earnings are now at or above pre-COVID levels. And so we've really increased our communication around that for those drivers that are comfortable driving at this time.

Mark, let me address the second part of your question. I'll provide a bit more context on the second quarter before moving to the third quarter. In Q2, the incentives recognized as contra revenue remained relatively stable year-over-year but increased throughout the quarter. As John noted at the beginning of Q2, the marketplace experienced very low driver utilization, prompting us to implement waitlists. However, as the quarter progressed, demand began to exceed supply. We utilized incentives to encourage drivers to return to the platform, similar to comments made by our competitor last week regarding their use of incentives to help the marketplace reach a balance between supply and demand more swiftly. For Q3, we anticipate that year-over-year revenue growth will likely align with changes in ridesharing rides as we invest in enhancing service levels by bringing drivers back onto the platform. This is a careful balancing act that varies by region. Typically, when a city reopens, demand tends to surpass supply, and we believe it's a strategic long-term decision to boost liquidity and invest in supply in Q3. As we work to attract drivers back to the platform, there is a contra revenue effect from a GAAP perspective. This is why we expect Q3 year-over-year revenue growth to align with changes in rideshare rides, contrasting with Q2 where we experienced a slight benefit. Looking beyond Q3, we think that high unemployment will result in more individuals signing up to drive on the platform, especially as federal unemployment benefits are reduced or expire. All of this has been considered in our Q3 adjusted EBITDA estimate. Over time, we believe this will provide a future advantage as more markets reach typical equilibrium levels and incentives can decrease back to or below historical levels.

Okay. Thank you very much.

Thank you. Our last question comes from Eric Sheridan of UBS. Please go ahead.

Thanks so much for taking the question. Maybe two following upon the answers to Steven and Mark's questions. In those markets where there's been a greater degree of recovery than that. Have you seen any changes in competitive behavior between you and your main competitor in terms of the way either one of you might be approaching the market, in new markets where you're seeing more of a healthy recovery or snapback generally in the environment? And then secondly, following on to the last answer, how should we think about the demand side of the equation as opposed to the supply side of the equation? And as you see a market recover, how much you lean in on marketing initiatives and customer acquisition initiatives versus allowing some of that demand to come to you sort of organically holistically? Thanks so much.

Sure. I can share some insights on the macro trends we're observing, and Brian can provide additional details. Competition has remained stable on a national level, with no significant changes. As a company, we're focusing on differentiating our platform through product innovation to enhance the experience for both riders and drivers. For instance, we've reduced rider coupons to record lows, which aligns with third-party data we've reviewed. Currently, we have more demand than we can fulfill, leading us to decrease coupon offerings. Recently, as demand has surged faster than supply, we've eliminated the waitlist for drivers and have begun to recruit more drivers again. We're also utilizing incentives to balance the marketplace in response to strong rider demand. Our main goal is to position ourselves effectively for strong growth as the market continues to recover. Now, I’ll turn it over to Brian for some specific insights.

Thank you for the question, Eric. I want to emphasize that in the second quarter, we significantly reduced sales and marketing incentives by 96% compared to the first quarter. Simultaneously, we observed a strong recovery as the quarter went on without relying on coupons. As Logan noted, our priority is to excel in product innovation, customer experience, and brand preference rather than using coupons. A large portion of our investment in product innovation and customer experience is reflected in our R&D expenses. We believe these investments will provide us with genuine competitive advantages and yield a better return on investment than coupons, which can lead to a zero-sum game. We anticipate that our sales and marketing expenses as a percentage of revenue will be permanently lower in the post-COVID environment. This signals that our approach is more than just temporary cost-cutting. Additionally, regarding our observations in various states, each city is quite unique, making it challenging to generalize across the country. It's truly a balancing act at the city level.

Thank you. Our next question comes from Edward Yruma at KeyBanc. Your line is open.

Thank you for the opportunity. I have two quick questions. I know you introduced some new products during the quarter, specifically Wait & Save and delivery. Could you share any initial observations on their performance and how these businesses might scale over time? Thank you.

Sure. We're really excited about the performance of Wait & Save. In the early days of the pandemic, we paused shared rides nationwide, which was the right decision at the time. However, this removed our most affordable option, making it a particularly challenging moment as many people switched from public transit to Lyft in search of budget-friendly alternatives. Wait & Save effectively offers a lower-cost option for those who have flexible schedules. By waiting just 5 to 10 minutes, customers can access significantly better pricing, which enhances marketplace efficiency as we can improve driver utilization. Drivers are not having to go out of their way as much compared to a pure on-demand experience. While we aren't providing specific metrics on Wait & Save, we are pleased with its performance and excited to introduce this innovation when the market needs it. Perhaps, John, you can share insights on delivery.

Yes, for clarity, we launched an essentials delivery program. We're not offering a consumer-facing delivery service and we recognize the challenges of growing losses in that area. Our focus remains on our current programs. We've been pleased with the speed at which the team developed the essential deliveries product. Although it's still early, we're looking to collaborate with more organizations so that Lyft drivers can assist in delivering essential items, and we will continue to monitor and seek out opportunities in this space.

All right. With that thanks everybody, for joining our call today. We hope everybody is staying healthy and safe during this time, and we'll talk to everybody again next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.