Lyft, Inc. (LYFT) Q2 2022 Earnings Call Transcript

Good afternoon, and welcome to the Lyft Second Quarter 2022 Earnings Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Sonya Banerjee, Head of Investor Relations. You may begin.

Thank you. Welcome to the Lyft earnings call for the quarter ended June 30, 2022. Joining me today to discuss Lyft's results and key business initiatives are Co-Founder and CEO, Logan Green; Co-Founder and President, John Zimmer; and Chief Financial Officer, Elaine Paul. A recording of this conference call will be available on our Investor Relations website at investor.lyft.com 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. These include statements relating to the expected impact of the continuing COVID-19 pandemic, macroeconomic factors, the performance of our business, future financial results and guidance, strategy, long-term growth and overall future prospects. We may also make statements regarding regulatory matters. 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 2022 filed on May 10, 2022, and in our Form 10-Q for the second quarter of 2022 that will be filed by August 9, 2022, as well as risks related to the current uncertainty in 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 as well as in our earnings slide deck. These materials may also be found on our Investor Relations website. I'd now like to turn the conference call over to Lyft's Co-Founder and Chief Executive Officer, Logan Green. Logan?

Thanks, Sonya, and good afternoon. I'm pleased with our Q2 results. In light of the macroeconomic environment, we took swift and decisive actions, which helped generate $79.1 million in adjusted EBITDA, which is the highest in our company's history. Revenue of $991 million was near the top end of our outlook. Rides reached a new COVID high, and we added more than 2 million Active Riders versus Q1. We feel good about where things landed. And I'm grateful to team members for everything they do to support the company and our mission. We saw increased demand in Q2. Active Riders and rides both hit post-COVID highs with rideshare rides up 27% year-over-year. Travel came roaring back. The airport use case reached an all-time historic high at 10.2% of total rideshare rides in Q2 and managed Lyft business bookings more than doubled, up 105% year-over-year. In addition, bike and scooter rides more than doubled in Q2 versus Q1. We saw increased driver performance, too. The total active drivers were the highest they've been in 2 years, reflecting a mix of new and returning drivers. More than half of new driver acquisition in Q2 was organic. And we've seen strong driver retention year-to-date. In Q2, average driver earnings in the U.S. were north of $37 per utilized hour, which is up 18% year-over-year, including tips and bonuses. Critically, we attracted more drivers to our platform even as we grew our adjusted EBITDA and realized greater leverage. Contra revenue incentives on a per rideshare ride basis were down 17% versus last year, which is an even sharper decline than we expected. I want to remind folks that these incentives are primarily funded by prime time, which is reflected in the price riders pay. Service levels are also improving. With more drivers using Lyft, service levels are getting better even with more riders and higher ride volumes. Across the U.S., average rideshare ETAs in Q2 were roughly 3 minutes faster than they were in Q2 of last year. This means we are 1 to 2 minutes away from pre-COVID rideshare ETAs. Additionally, when normalizing for the $0.55 per ride gas surcharge that goes directly to the driver, which went into effect in mid-March, rideshare prices have come down year-over-year. And overall improved service levels have led to rideshare conversion rates that have returned to pre-COVID levels. Over the medium term, we expect rideshare ride volumes to reach and exceed pre-COVID levels. In Q2, shared rides were 1% of total rideshare rides versus roughly 20% pre-COVID. We're moving quickly to introduce our improved shared ride experience in more markets to go after this growth opportunity. John will go into more detail about our work on shared rides. While the West Coast has lagged behind other parts of the country, we see signs that it is recovering. In Q2, the top 10 West Coast markets grew more than twice as fast as the East Coast or the South relative to Q1. Nights out represent another growth opportunity since this use case has lagged as a percentage of total rideshare rides relative to what it was before COVID. We are also making prudent decisions and responsibly managing our cost structure. In mid-Q2, we revised our operating plan. We pulled back on discretionary spending and significantly slowed hiring. We reprioritized our R&D initiatives and reorganized teams to ensure laser focus on driving profitable growth. Our Q2 performance demonstrates our continued ability to navigate uncertain operating environments and deliver strong results. In addition, we recently announced our plans to discontinue our first-party consumer rental business. Since introducing rentals 3 years ago, we experimented with both first- and third-party models and saw third parties as the best way to scale Lyft rentals and provide better coverage. We also consolidated several of our vehicle driver support locations. Finally, even though we decided to exit the San Diego scooter market, Lyft riders will still have extensive nationwide scooter access through our spin integration. Taken together, these actions are expected to deliver incremental cost savings while maintaining a strong rider experience. The most important point I'd like to leave you with is that we are confident in our ability to continue navigating near-term headwinds and deliver strong long-term business results. Over the past several months, one of the most common requests in investor conversations has been for more visibility into our longer-term profitability. While the macroeconomic environment continues to create near-term uncertainty, we are confident in the fundamentals of our business. As we look out to 2024, we are targeting adjusted EBITDA of $1 billion with over $700 million of free cash flow, which is defined as operating cash flow less CapEx. We see multiple paths to achieving these milestones driven by expected industry growth and operating leverage. These will be key financial targets that we'll be using to drive the business forward over the next 2 years. Now let me turn the call over to Elaine to share the details on our financials.

Thanks, Logan, and good afternoon, everybody. In the second quarter, we delivered revenues of $991 million, representing an increase of 13% versus Q1 and 30% versus last year. Q2 revenue was just 3% below the all-time peak reached in Q4 of 2019. Revenue growth was driven primarily by rideshare, which was up 27% year-over-year in Q2. Relative to guidance, Q2 revenues came in towards the high end of our range. Active Riders grew by more than 2 million versus Q1 and were the highest they've been since early 2020. Active Riders were 19.9 million in Q2, up 12% quarter-over-quarter and 16% versus last year. Sequential new rider growth outpaced the growth of returning riders, which is great to see since it speaks to the runway in front of us. Q2 revenue per Active Rider of $49.89 was the second highest it has ever been. Revenue per Active Rider grew by $0.71 versus Q1 and by $5.26 versus Q2 of last year. The increase was driven by higher revenue per ride associated with longer trips. Two major trends are driving this: accelerated growth we've seen in Lyft business as well as a strong pickup in travel. Before I move on, I want to note that unless otherwise indicated, all income statement measures are non-GAAP and exclude stock-based compensation and other select items as detailed in our earnings release. 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. Q2 contribution significantly outperformed versus guidance. Contribution was $590 million, up 18% versus Q1 and up 31% versus Q2 '21. This is roughly $30 million better than the high end of our contribution outlet of $560 million. Relative to our guidance, around half of the beat or $15.5 million was driven by bike share related accounting adjustments that reduced cost of revenue. This is inclusive of a $3.2 million depreciation benefit. The remaining upside was driven by deliberate management actions that drove incremental growth and cost savings. Contribution margin in the second quarter was 59.6% and was 360 basis points higher than our guidance of 6%. The bike share items I just discussed delivered roughly 160 basis points of this outperformance. Relative to Q1 2022, contribution margin increased by approximately 220 basis points, reflecting deliberate management actions that drove improved per ride unit economics. As a reminder, contribution excludes changes to the liabilities for insurance required by regulatory agencies attributable to historical periods. In the second quarter, there was adverse development of $275 million. This was partly offset by a $37 million accounting gain and resulted in a net impact to GAAP cost of revenue of $239 million. This adverse development reflects insurance industry trends. The commercial auto industry has been experiencing higher costs and increasing insurance losses. Like many other services, auto repair and health care have become more expensive, reflecting the broad impact of inflation on both wages and materials given supply constraints as well as challenging litigation trends. Furthermore, our Q2 adverse development is primarily associated with a legacy third-party claims administrator, who did not resolve legacy claims as effectively as we would have expected. These claims predate the risk transfer structure that we've been implementing since Q4 of 2019, which means we do not have the same exposure to additional volatility on legacy claims in future periods. At this point, around 90% of the claims that are handled by our legacy claims administrator, which date back to 2018, are resolved. Let's move to operating expenses below cost of revenue. In the aggregate, these expenses came in well below guidance primarily driven by cost savings in R&D and sales and marketing. These savings are the direct result of actions we took in the quarter to address macroeconomic uncertainty. Let me start with operations and support. As a percentage of revenue, operations and support was 10%, down 60 basis points from Q1 and down 130 basis points from Q2 '21. In absolute terms, this expense was $98.6 million in Q2 and includes a $5 million benefit from an accounting adjustment related to our bike share systems. Relative to Q1 '22 and to Q2 of last year, we achieved better leverage on our operations and support expense even as ride volumes and driver supply grew. R&D was 10.7% of revenue in Q2, down 100 basis points from Q1 and 630 basis points down from Q2 '21. In absolute terms, R&D expense was $105.7 million in Q2. Year-over-year comparisons reflect the impact of our divestiture of our Level 5 self-driving division that closed in July of last year. Relative to Q1, R&D increased by just $3 million, which was below guidance that implied an $18 million to $25 million increase in R&D expense quarter-over-quarter. We were able to do this by streamlining the number of priorities we are working on and considerably limiting hiring. Sales and marketing as a percentage of revenue was 13% in Q2, roughly flat with Q1 and up 140 basis points versus Q2 of '21. In absolute terms, sales and marketing expense was $128.3 million. The $13.5 million increase in sales and marketing versus Q1 was below guidance of an increase of $19 million to $26 million. Relative to Q1, this incremental spending reflects precommitted brand marketing and driver referral bonuses. Within sales and marketing, incentives were 3% of revenue. G&A expense as a percentage of revenue was 20.6% in Q2, up 160 basis points from Q1 and up 60 basis points versus Q2 '21. In absolute terms, G&A expense was $203.7 million and includes a $12 million accounting benefit driven primarily by tax reserve releases that were identified during the quarter. Relative to guidance, G&A was incrementally higher than anticipated driven primarily by policy. In terms of the bottom line, our Q2 adjusted EBITDA profit of $79.1 million was the highest in our company's history. It also exceeded the top end of our $10 million to $20 million outlook by $59.1 million. This outperformance reflects actions we took to control costs and drive profits during the quarter in addition to business outperformance and accounting tailwinds. In total, Q2 adjusted EBITDA included $29 million of accounting tailwinds. We ended Q2 of '22 with unrestricted cash, cash equivalents and short-term investments of $1.8 billion. The sequential change in unrestricted cash was driven primarily by an insurance collateral requirement, which moved funds from unrestricted into restricted cash as well as our acquisition of PBSC. Before I move to our outlook, it's important to note that geopolitical dynamics and macroeconomic factors are impossible to predict with any certainty. Future conditions can change rapidly and affect our results. We are taking a prudent approach to managing our business. First, like many companies, we are keeping a close eye on consumer behavior. Even in a recessionary environment, transportation is a historically durable category of consumer spending. And the depth of our network means that we can deliver a wide range of price points to riders from bikes to wait-and-save shared rides to priority pickup. In addition, more people may turn to rideshare for supplemental earnings opportunities, serving as a tailwind to organic driver supply growth. Second, as I mentioned earlier, insurance costs were being affected by inflationary pressures. In Q3, we expect this will impact our contribution margin. We've been actively working to mitigate the impact and we aren't done. We believe that over time, we can offset higher insurance costs through both pricing and also product and engineering efforts that deliver better per ride unit economics and continue advancing the safety of our network. Internally, we continue to drive forward initiatives to reduce the frequency and severity of accidents, thereby also bringing down the cost of insurance. This includes further leveraging our risk models to assess behavioral and environmental risk factors. Our in-house mapping technology, Lyft maps, can help enable safer, cost-optimized routes that drive additional insurance savings. In terms of controlling our corporate overhead, we have materially pulled back on hiring, cut T&E budgets, and we'll continue scrutinizing every cost line item to ensure we are demonstrating strong discipline. Over a few quarters, we expect higher insurance costs will be mitigated by improving leverage. They will provide some near-term headwinds. Now let me share our outlook. We expect Q3 revenues of between $1.040 billion and $1.060 billion, which implies growth of between 5% and 7% versus Q2 and growth of 20% and 23% versus Q3 last year. Rideshare rides grew almost 4% month-over-month in July, and we expect an acceleration in September with back-to-school. We also expect an incremental tailwind from bikes and scooters in Q3. Given H1 actuals and our Q3 outlook, we now expect full year 2022 revenue growth will be slower than the 36% achieved in 2021. In terms of profitability, we expect Q3 contribution margin to be roughly 55%. This implies contribution of $572 million to $583 million. We expect operating expenses below cost of revenue will decrease slightly in Q3 versus Q2 as a percentage of revenue. As a result of the above, we expect Q3 adjusted EBITDA of $55 million to $65 million. This implies an adjusted EBITDA margin of roughly 5% to 6%. Excluding the accounting tailwinds in Q2 of $15.5 million in contribution and $29 million in adjusted EBITDA, for every $1 of incremental revenue in Q3, the high end of our outlook implies $0.12 will flow to contribution and $0.22 will flow to adjusted EBITDA. We recognize the importance of expanding the leverage in our business and growing our profits, and we are committed to driving both forward. With that, let me turn it over to John.

Thanks, Elaine. I'm going to focus my comments on the marketplace work we are doing to deliver incremental growth and profits. First, let me start with ride affordability since this is critical to support ride frequency and loyalty, which are key drivers of our business. Our network gives riders access to a wide range of transportation options and price points. In terms of rideshare, shared rides are top priority as the most affordable option. Shared rides were still a relatively small percentage of our total rideshare volumes in Q2, but it's clear that the new reimagined experience is delivering meaningful value. In Philadelphia, shared rides grew 20% quarter-over-quarter in Q2, far outpacing standard rideshare growth. And pre-booking a shared ride has become very popular, accounting for the vast majority of all shared rides in Q2. By booking a shared ride in advance, riders receive the best possible price. In exchange, we get more time to find the best possible match. As a result, we can make the experience better for the rider and driver, improve our marketplace efficiency and unit economics. As a specific example, in Philadelphia, our match efficiency and match rates are nearing pre-COVID levels on just 20% of pre-COVID shared ride volumes. We're moving quickly to introduce shared rides in more markets to scale this opportunity. In July, we doubled the number of markets where shared rides are offered from 7 to 14. And we'll continue scaling shared rides as we move through the year. Additionally, our bikes and scooters offer affordable and sustainable options for shorter trips. Last year, more than 2.4 million people tried Lyft operated bikes and scooters for the first time. And in the first half of this year, first-time bike and scooter riders were up 7% versus the same period last year. In addition, in New York City, city bike rides more than doubled versus Q1 '22. And in Chicago and Denver, our scooter systems reached new daily highs during Q2. Next, let me talk about the rideshare driver experience. We are working to give drivers even greater transparency when it comes to choosing when to drive and which rides to accept. By doing so, we expect we can increase organic driver acquisition and loyalty and continue improving our marketplace balance. These high-impact projects have the potential to drive meaningful top line and bottom line growth now and in the future. Upfront pay is one example. With upfront pay, drivers have more visibility into the rider's pickup location, the route details and their expected earnings when they're deciding whether to accept the ride request. We've seen that upfront pay can increase the number of drivers using Lyft and the amount of time they've been driving while also increasing ride completion rates. We'll continue working to deploy upfront pay in more markets throughout the year. Last, I want to highlight the significant additional opportunity we see to make our marketplace more and more efficient. This work is an important lever within our control that we will use to achieve our 2024 adjusted EBITDA target. One example is our work to more fully roll out Lyft maps, our in-house mapping technology that is based on open source software. This work allowed us to drive material cost savings per ride in terms of better routing and actual third-party mapping costs. To that end, in Q2, we launched Lyft maps within our rider app, and it's now providing the underlying map for more than 60% of rider sessions. With this rollout, we've grown the percentage of rides powered entirely by Lyft to 18%, up from around 3% of rides at the beginning of the year. Based on initial data, we expect Lyft maps can begin to deliver meaningful cost savings starting this quarter. Another example is the work we are doing to further improve the efficiency of our driver engagement spend. We are doing this by advancing our machine learning technology and enhancing our prediction tools. This work has the potential to deliver millions of dollars in incremental adjusted EBITDA profit by the end of the year. The bottom line is that there are several exciting opportunities within our control to drive positive leverage in our business. As we navigate the next few quarters, it's clear consumer transportation and the technology we're building is a strong long-term business with a massive addressable market. We continue to believe that Lyft has the opportunity to deliver one of the most significant shifts to society since the advent of the car by enabling and unlocking transportation as a service. Autonomous vehicles will provide an additional step change in long-term growth and Lyft will be at the forefront of that transformation. Operator, we're now ready to take questions.

Your first question is from Doug Anmuth with JPMorgan.

You mentioned that driver levels are at their highest in two years. Can you explain how your current situation with drivers compares to three months ago, the impact on service levels, and what that means for revenue adjustments or incentives for the latter half of the year? Additionally, considering the solid revenue in the second quarter, could you elaborate on what has contributed to the change in your outlook for 2022? I'm not anticipating acceleration anymore.

Doug, it's John. I'll take the driver question and then pass it to Elaine on revenue. So yes, coming out of the last earnings call, there were a lot of questions about the supply side of our marketplace. We're super happy with what we saw on the driver side. It's in the best place it's been in a very long time. And we're seeing continuous positive trajectory. We mentioned earlier on this call, total active drivers were the highest they've been in 2 years and more than half of new driver acquisition in Q2 was organic. Driver earnings also obviously super important to watch. In the U.S., we're north of $37 per utilized hour, which is up 18% year-over-year, including tips and bonuses. And you asked about contra revenue incentives. On a per rideshare ride basis, we're actually down 17% versus last year, which is an even sharper decline than we had expected. In Q3, we expect contra revenue incentives per rideshare ride will decline another 20% quarter-over-quarter. One reminder is that these incentives are primarily funded by prime time, which is reflected in the price riders pay. You asked about service levels. They continue to improve because of what I just mentioned. So what we're excited about is that Q2 average rideshare ETAs were 1 to 2 minutes away from pre-COVID levels. And so hopefully, that addresses your questions on service levels and drivers.

Yes. In terms of your question on our full year outlook and our revenues, modest macro headwinds have tempered our view on the pace of the recovery since what we expected since the start of the year. The trends we saw in Q2 and from July are informing that view. And even while we've continued to grow rides, the pace at certain points has been more tempered than we thought at the start of the year. As a result, as we disclosed, we brought down revenue growth to 5% to 7% quarter-over-quarter in Q3, and this has informed our full year outlook. And we've also revised our expectation for full year '22 revenue growth. Regardless, we expect to deliver $55 million to $65 million in adjusted EBITDA in Q3 and $1 billion of adjusted EBITDA in 2024. Going back to your question on contra and our outlook on contra revenue incentives. Contra, as John mentioned, was down 17% year-over-year, sharper decline than we're anticipating as of May. We expected a 15% decline year-over-year. And going forward, on a per rideshare basis, we expect contra to decline 20% year-over-year and to come down in absolute terms versus Q2.

Can I clarify something? When you mention the 20% decline, is that the 17% year-over-year going down to 20% year-over-year, or is that an additional 20% decline sequentially? I just want to clarify that point.

Doug, it's Sonya. Just clarifying, it's down 20% quarter-on-quarter on a per rideshare ride basis. Does that clarify your question?

Quarter-on-quarter, yes.

Your next question is from the line of Stephen Ju with Credit Suisse.

So John, regarding the steps you mentioned about allowing drivers to prioritize certain jobs, that's undoubtedly beneficial for them. However, it might not be as positive for the consumer experience. How do we balance the interests of both sides of the marketplace? Elaine, you touched on this in your earlier remarks. Can you update us on the potential liabilities from the older insurance claims? Our understanding is that about a year ago, Lyft transferred some risk to a third party, expecting not to see adverse events affect future provisions. When you mention that you've resolved about 90% of the claims, does that refer to the dollar amount or the number of cases?

Stephen, this is John. Regarding your first point about upfront pay, you are correct. It requires a careful balance. We want to give drivers as much information as possible while also ensuring a strong rider experience. That's why we initiated testing, and I believe we were the first to do this in the rideshare industry. We are progressively introducing more components to maintain the rider experience. What we've discovered through this process is that it effectively aligns incentives in the marketplace. If previously short rides were priced to attract fewer drivers and long rides were priced to attract more, we may adjust that balance between short and long rides. Overall, this results in no net change but better alignment of incentives across the board. The time we take to implement this in each market and for different driver segments is because we are fine-tuning it. In the long term, aligning incentives more effectively with drivers should lead to greater efficiency and operating leverage, as it's more effective than long or medium-term incentives—it's immediate. We believe this will improve our overall unit economics.

Thanks for the questions on adverse. And just to clarify, what I mentioned in my remarks was that at this point, 90% of the claims outstanding that are handled by our legacy claims administrator, which date back to 2018, 90% of the total claims are resolved, 10% are outstanding so of the number of claims. With respect to adverse, we do think that this adverse development reflects insurance industry trends. The commercial auto industry has been experiencing higher costs and increasing insurance losses. And like many other services, auto repair and health care have become more expensive, reflecting the broad impact of inflation on both wages and materials. Virtually all of our adverse development is attributable to historical auto losses that date back to 2018. This predates our risk transfer partnerships with insurance carriers, with rideshare specific experience, adjusting claims. The legacy book of liabilities primarily causing these adverse predates this risk transfer and will continue to shrink in size as the claims are closed out.

Your next question is from the line of Mark Mahaney with Evercore.

I have two questions, one short-term and one long-term. As gas prices decrease, is there a chance we might not need to rely on fuel charges for drivers anymore? Also, regarding the $1 billion EBITDA target and $700 million in free cash flow by 2024, could you share some of the key assumptions behind that? I know John mentioned some efficiencies with Lyft maps, but Elaine, is there anything else you would want to highlight? At a high level, what assumptions are necessary to achieve that goal?

Regarding gas prices, we are not providing updates for our drivers on this call. However, we are observing a decline in gas prices. As noted earlier, driver earnings have been healthy, exceeding $37. Overall, while there's nothing new to announce, I believe driver earnings remain strong.

And then on the $1 billion target for 2024, there are four key levers to get there. The first is overall rideshare market growth. Second is pricing. And along with that, changes in ride mix and modes and the sort of revenue management behind that. Third is the impact on our work to drive efficiency in the marketplace. And finally is overall operating leverage. So one key assumption that is important to call out is it only assumes rideshare volumes grow at the same rate as the rest of the market. We're confident in the plan and the assumptions behind it. And again, we have multiple paths to achieve that $1 billion target.

Your next question is from the line of Steven Fox with Fox Advisors.

A couple of questions from me. So I was just curious on the airport rides trend since it's reached record levels. How do we think about that going forward from here given future travel trends and how you're managing the mix of business? And then I had a follow-up.

Obviously, it's hard to perfectly predict the macroeconomic conditions, but we've made strong investments with the team in the airport trip. We have a phenomenal partnership with Delta and other airlines because we see it as such a great example. And as Logan mentioned, on the path to the $1 billion in adjusted EBITDA, he mentioned mode mix. And so when you look at an airport ride, it's obviously longer and can have great margin and be great for the driver. So again, I'm not going to predict the exact direction of that. I think it is both the fact that, that has hit an all-time high as both attributable to the fact that people are out traveling again as well as the work we've done internally to make that true.

Yes, this is Logan. Clearly, there is significant pent-up demand for travel, and we are currently experiencing a substantial increase in this area that is likely to persist. Additionally, I want to highlight that the airport experience has significantly improved over the years. In the past, it seemed that airports were not keen on allowing ridesharing services to operate, but now we represent a substantial part of their revenue. They are providing better curb space and queuing lots. We've also made extensive improvements to enhance the passenger experience. For instance, our priority pickup service, which offers the fastest Lyft pickup option, has now been expanded to over 34 airports. It took considerable effort to implement this priority pickup service at airports, but it is now successfully operational at many major airports. The infrastructure improvements we have made in collaboration with airports have improved the overall experience and positioned us well to take advantage of the resurgence in travel.

That's helpful. Is there any further update on the PBSC acquisition and whether that's included in the $1 billion EBITDA target?

That is included in the target. Things are progressing well there, and we are quite enthusiastic. It creates opportunities for revenue synergies between our bikeshare efforts and what they have been doing. While we were conducting R&D on bikeshare, such as developing an e-bike, they already have a customer base around the globe. This allows us to offset any R&D costs by having an immediate sales audience. It diversifies our overall customer mix in that sector and expands our geographic reach beyond the previous U.S. focus. PBSC bikeshare equipment has been sold in 45 markets across 15 countries. We are very excited about the potential impact on that part of our business.

Your next question is from the line of Brent Thill with Jefferies.

This is John asking on behalf of Brent Thill. I have a question about the progress you've made with cost savings in operating expenses this quarter. Some of those savings seem to be discretionary. I'm curious about how sustainable those will be in the near to medium term, particularly regarding sales and marketing. Additionally, could you please discuss your plans for headcount?

Yes, thank you for the question. As mentioned in our Q3 guidance, we expect to see further leverage in our overall operating expenses. As we noted in Q2, we made progress in reducing marketing costs, travel and entertainment expenses, and significantly slowing down headcount growth. While we are not providing specific guidance regarding our hiring plans, we are committed to disciplined cost management with a strong focus on our bottom line.

Your next question is from the line of John Blackledge with Cowen.

Two questions. First on the driver supply. Do you think the tougher macro is helping with driver supply and the organic driver acquisition that you saw? And then second on shared rides. Do you expect the shared rides to return to the kind of pre-pandemic 20% of rides volume? Or will it settle in at a lower percentage of volume in the next couple of years? And will pricing for the shared rides return to kind of pre-COVID levels? Or will it be elevated in the coming years?

Yes. We do expect to see some recessionary tailwinds on the driver side. I think as people are looking for earnings opportunities, driving for Lyft has always been a great opportunity. It is always on, always there. And like we were talking about earlier, now clocking in at $37 per hour — per utilized hour, earnings opportunity. It is extremely competitive. It is typically above that of what driving delivery or other sort of gig opportunities pay. So I think it will maintain a sort of unique place in the market, have a premium gig opportunity. And we launched the business back in 2012, which was really on the — in a more recessionary environment, coming out of the great recession of the '08, '09 time frame. And I think we are set up well to sort of thrive in any condition. But there's — we will lean into the moment.

On shared rides, as you mentioned, we — prior to COVID, we had 20% of rides as shared rides. It was actually 30% in the markets that existed in. And so we're — it's still quite early. And as we mentioned on the prepared remarks, Philadelphia, one of the first markets, if not the first market we brought it back to, grew 20% quarter-over-quarter for shared rides, outpacing standard rideshare growth. And we're continuing to dial it in carefully. We have basically a new product for shared rides, which can allow us to offer multiple price points within shared rides. So if you want one instantaneously kind of within 1 minute or 2, which was the old product, you can get that and pay for it. And to your point, maybe you pay a little bit more than you did historically for that instantaneous shared ride. But if you're willing to wait 5 minutes, 10 minutes or 20 minutes, we have much more time to find you a match, and therefore, to give you — to pass on and/or maintain that match efficiency. What is really heartening and really exciting for us to see, as we mentioned on the call earlier, is that our match rates are nearing — in Philly, nearing pre-COVID levels on just 20% of shared ride volumes. And so the whole reason we rebuilt the infrastructure behind shared rides is so that it would have better unit economics and be a better experience for our riders and drivers. And I think there's quite a bit of upside there. As also mentioned in July, we doubled the number of markets from 7 to 14, and we have much more to go.

Your next question is from the line of Benjamin Black with Deutsche Bank.

Great. Thanks for the question. Could you talk about market share dynamics? I think in the past, you mentioned maintaining share despite the slow recovery we've seen in the West Coast. Is that still the case? Any comment on market share would be really helpful. And the second question is on contribution margin. So excluding the accounting benefit you mentioned, what exactly drove the strength here? And why are you expecting contribution margins to actually contract sequentially in the 3Q?

Yes. First, on market share. On a national basis, market share is consistent with where it was pre-COVID. And this is true even with the West Coast lagging and shared rides not fully back, which are 2 areas where we historically over-indexed. Now in June, we ran a pricing pilot in a select number of markets that did have a negative impact on share. The pilot has since ended, and we expect that share in those markets will revert over time. But even with that, I want to underline that we are still at share levels consistent with pre-COVID. And on contribution margin?

In the second quarter, our contribution margin was positively influenced by proactive management decisions and strong business performance, along with some one-time accounting items. This resulted in a 150 basis point increase in revenue per ride, driven by longer rides and pricing adjustments, and an additional 160 basis points came from one-time accounting items, which included a $16 million bike share adjustment. It's important to remember that this also included a $3 million depreciation benefit, as our cost of revenue reflects depreciation expenses. When we look at adjusted EBITDA, we account for this depreciation expense. Looking ahead to the third quarter and our contribution margin, we aim to normalize our comparisons to the second quarter after adjusting for those accounting items. The main factor affecting our Q3 contribution margin guidance of 55% is insurance inflation, which is anticipated to exert about 260 basis points of pressure. We are actively working to mitigate the impact of insurance inflation on our business through several strategies, including pricing adjustments, enhancing marketplace efficiency to improve unit economics, and continuing our product initiatives aimed at improving safety. By reducing the frequency and severity of incidents through these initiatives, we can lower our insurance costs. It is crucial to emphasize that insurance inflation is a broader industry issue affecting not just Lyft but also the commercial auto industry, and we have several strategies in place to address it.

Your next question comes from the line of Brian Nowak with Morgan Stanley.

I have two questions. The first one is about the macro weakness you mentioned that is affecting revenue growth and outlook for the year. Can you provide more details on what you're observing from a macro perspective? Are there specific types of routes or operations that are declining? Have you analyzed your customers' income? What have you examined that shows any signs of weakness on the macro side? The second question is about the $1 billion target you referenced. To clarify, does this target assume that your growth will be in line with the overall market between now and 2024? Is this based on public statements from your competitors or a consensus view? What are your expectations for market growth during that time frame?

Yes. To go back to the questions around what kind of macro headwinds we're seeing, it's really to repeat a bit of what I said earlier on the call that we've tempered our view on the pace of the recovery. So we're pleased we saw a 4% uptick in rides in July. We're seeing that stabilize through the summer, which is what we would expect. And we do anticipate an uptick in September. What's impacting our full year view is at certain points, particularly since May, the pace of recovery has been more tempered than what we thought at the start of the year. So that's what's bringing down our Q3 revenue growth, and that's what's bringing down our full year expectations of revenue growth. And then moving to...

You asked about kind of the adjusted EBITDA 2024 guide to $1 billion and the comment that we expect to grow at levels of the industry?

Yes.

Yes. So we expect kind of low to mid-20% growth in the industry and for ourselves.

Your next question is from Eric Sheridan with Goldman Sachs.

Maybe one big picture and one on the financials. On the big picture side, would you see where the demand curve is coming back relative to 2019? And I know we've talked a lot about shared rides on the call. What do you think of as different layers of product innovation or market segmentation that you still want to go after possibly continue to expand the addressable market and think about ways in which you can bring more people on to the platform. That would be question one. And then we've got a lot of questions from investors about stock-based comp and how to think about internal compensation of employees given what's happened in the stock market over the last 6 to 9 months. How are you guys thinking about absolute levels of stock-based compensation and mixes of cash versus stock compensation for employees looking out over the next couple of years?

Great. So when we think about the long-term growth drivers and where we're focused, we look at three key areas. And the first is demographics. So every year, 4 million people in the U.S. become old enough to start using ridesharing on their own. And there's a lot of data externally, and we have a lot of internal data that shows the youngest people in the population tend to prefer digital-first experiences and they love service models. There's greater flexibility and more convenience. We see this in music. We see this in entertainment. So we think that preference has been there for a decade, and it's not going away anytime soon. So we're going to continue leaning into that. And when Lyft first launched, it really took off with folks in their 20s, 30s, and 40s. All of those folks are a decade older now, needing to shift continues. So we lean into the demographics and building products and really marketing to that audience. Second is on marketplace efficiency. And this is really one of our top priorities now. It always is. Our core job is to match supply and demand. And I'm sure everybody has had that experience where maybe you're in a smaller town and you open up the app and you can't get a ride. Or maybe you're opening up the app at a certain time of day when it's extremely busy and the prices spike too high. In many cases, those are — that sort of unmet demand can be met. Those are solvable problems. And when we look at the market opportunity, there is a driver out there who would be happy to provide the ride. But maybe we didn't communicate the opportunity to the right driver or maybe it's a forecasting or prediction issue. But it's something that we can address. And there's a ton of innovation and improvements that we have in the pipeline to address that. So there's a lot to work on and it's a key focus where we're leaning into fundamentally match supply and demand better. And the third trend where we invest a lot of energy and we see continued tailwinds is a little bit what I was talking about earlier with kind of the infrastructure improvements broadly. So I talked earlier about airports and how the infrastructure and experience at airports has meaningfully improved over the last number of years. Another example that I think is really relevant is if you think of vehicle replacement. So a few years ago, if your car was in the shop, your insurance company may have offered you a rental vehicle loaner sort of a voucher at one of the major rental companies. And now if your car is in the shop, there's a really great chance that you'll be offered your choice. And you can choose to get a ridesharing voucher. And that kind of those small integrations with day-to-day life and the kind of infrastructure environment take time to build and happen slower but then create great tailwinds for the industry.

Turning to your question about stock-based comp, we are always evaluating whether we have the right compensation structure. Given macro uncertainty and the potential for slowdown, we are currently prioritizing preserving cash. We have a big equity component to our compensation structure for eligible team members to align incentives to company performance and also to be competitive with our peers. We need to be competitive in terms of attracting and retaining talent. In terms of stock-based comp and where it's going, we're not providing any specific guidance at this point. But shifting the conversation to dilution, we know, obviously, that it's a critical focus for investors. We keep a very careful eye on it. And we benchmark our burn rate versus peers annually. In 2021, our gross burn rate was within the 50th to 75th percentile versus peers. And clearly, the level of dilution as a result of many factors, one of which is the share price, of course. But it is a balance between being able to compensate great talent in line with the market and being very focused on balancing that and managing dilution.

Your next question is from the line of Itay Michaeli with Citigroup.

Just two quick ones for me. First, going back to some of the initiatives that you mentioned on the insurance front, I was hoping to maybe talk through the timing to resolve in terms of how long it would take these initiatives to kind of offset some of the headwinds you anticipate. And then the second one on just thinking about revenue growth kind of into the fourth quarter. It looks like your Q2 and Q3 sequential revenue starting to follow a similar pattern as what you saw in 2019. Is it fair to sort of look at 2019 as a decent parameter into the fourth quarter in terms of the sequential revenue pattern?

Just quickly on Q4, and then I can pass it to Elaine to talk more about insurance. Obviously, we're not guiding on Q4, so I can't comment on that. But yes, we're starting to see some of the trends you mentioned on Q3. We're optimistic about back-to-school and excited that the driver part of the equation has come back into balance, which gives us a lot better conversion on all the ride intents that come our way.

Turning to your question about insurance and the timing and ability to address that along with future quarter impacts, the fourth quarter impact of insurance will reflect our ride volumes, ride mix, and third-party insurance renewals that take effect on October 1. We plan to update our outlook when we report in early November. As I mentioned, we have various strategies to address the increasing insurance costs, including pricing strategies, improving marketplace efficiency, and our product initiatives. I also want to emphasize that we consider insurance inflation to be an industry-wide issue, not unique to Lyft. To summarize, we're actively working to mitigate these challenges and will provide an update on our fourth quarter outlook in November.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.