Lyft, Inc. (LYFT) Q3 2022 Earnings Call Transcript

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

Thank you. Welcome to the Lyft earnings call for the quarter ended September 30, 2022. Joining me to discuss Lyft's results and key business initiatives are our 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. This includes statements relating to the expected impact of the continuing COVID-19 pandemic macroeconomic factors, the performance of our business, future financial results and guidance, including the impact of our cost reduction initiatives, 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 second quarter of 2022 filed on August 5, 2022, and in our Form 10-Q for the third quarter of 2022 that will be filed by November 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 would 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. First, I want to thank all of the team members that we had to say goodbye to last week. I'm grateful for all of their contributions towards building the business and advancing the mission. While difficult, the reduction in force sets us up for a strong 2023 and where we can focus on execution, knowing we are in a strong position in the face of external uncertainty. Thank you again to the entire team for your continued hard work to take care of drivers, riders, and our business. I'm going to kick things off by recapping our Q3 results. Then I'm going to focus my comments on the actions we've taken to accelerate key business initiatives and deliver on our 2024 financial targets. With a strong Q3 and adjusted EBITDA that beat the top end of our outlook, revenues of $1.054 billion were the highest in our company's history. And active riders, active drivers, and total rides all reached the highest level since COVID began, which was great to see. Demand was strong. Airport trips were 10.4% of rideshare rides in Q3, beating the record set last quarter. And bike and scooter rides reached a new all-time high, reflecting growing demand and warm weather seasonality. Additionally, Lyft business managed bookings grew by more than 50% year-over-year and reached a new high with strong adoption of our B2B offerings, including Lyft Pass and concierge. More drivers are organically choosing Lyft. In Q3, the number of active drivers using Lyft showed the strongest quarter-over-quarter growth in the year. New drivers grew at an even faster rate, helped by strong organic tailwinds. More than half of new drivers in Q3 were acquired organically. Our network gives drivers valuable access to supplemental earnings opportunities on demand. We expect to see more people looking for these kinds of opportunities in a recessionary environment. Overall service levels on our network keep getting better. Across the U.S., our average rideshare ETA was faster in Q3 than it was in Q2 '22 and got even closer to where it was before COVID, and our Q3 rideshare conversion rate was the highest they’ve been in several years. Additionally, for riders, the average price per mile declined quarter-over-quarter, reflecting less prime time. Drivers were also incredibly productive in Q3. Active drivers gave 17% more rides on average than they did in 2019. The average U.S. driver earnings this quarter were north of $35 per utilized hour, including tips and bonuses, which is up 7% year-over-year. Now I'm going to talk about Q4 and the go forward. In anticipation of continued economic headwinds and rising insurance costs, we've been taking prudent and decisive action. This includes taking a hard look at all of our costs to make sure we're using our resources to accelerate initiatives with the strongest returns. All in, the cost reduction initiatives we've been implementing since Q2 are expected to result in roughly $350 million of savings on an annualized basis. This reflects the work that we've done across three categories: headcount, operating expenses, and real estate. First, on headcount. Earlier this year, we significantly slowed and then froze new hiring. Last week's action reflected a continuation of our commitment to carefully manage our team size and expenses in this environment. One focus was to remove management layers to accelerate decision-making and execution. It was a hard decision, but we're confident that it's the right step for the business. Second, operating expenses. Starting in Q2, we reduced various operating expenses, inclusive of professional services and limited discretionary spending, particularly related to marketing. Third, our real estate. Since many team members now enjoy working remotely, we are reducing our office footprint and cutting the related real estate costs by approximately half. These actions go hand in hand with the continued prioritization and streamlining of our highest ROI initiatives that will further enable greater operational efficiency and speed. We are also using other levers in our marketplace. Given the uptick in insurance costs, we've increased our service fee to help provide this important coverage. With gas prices moderating, we were also able to remove the fuel surcharge that had been in effect since March so the net impact on riders has been roughly neutral. Additionally, we're focused on providing drivers with competitive earnings opportunities and fuel rewards. So while we expect an $82 million sequential cost of revenue headwind in Q4 due to our insurance renewal, we also expect to more than offset the impact to adjusted EBITDA. Keep in mind, our insurance fiscal year began on October 1, reflecting updated risk transfer agreements that are locked in for 12 months. So starting in Q1, the quarter-to-quarter changes in insurance costs will reflect the typical differences in ride mix, volumes, and mileage in each period. The bottom line is we expect the actions we are taking will more than offset the entire impact of higher insurance costs in Q4 and over the next 12 months. Coming off a strong Q3, we're continuing to take a prudent approach to managing our business to ensure we're successful over the long term. As I said last quarter and would like to reinforce today, we're confident in our ability to continue navigating near-term headwinds and to deliver strong long-term business results. Time and time again, we've proven our ability to make hard decisions and overcome difficult challenges. This is what we did after we first set our adjusted EBITDA profitability goal back in October of 2019, and we delivered on our target sooner than expected during a global pandemic. The work we've been doing sets us up to accelerate execution and deliver strong business results. We now feel even more confident in our ability to deliver $1 billion of adjusted EBITDA and more than $700 million of free cash flow in 2024. Let me turn the call over to Elaine to share the details on our financials.

Thank you, Logan, and good afternoon, everybody. In the third quarter, we delivered all-time high revenues of $1.54 billion, up 6% quarter-over-quarter and 22% year-over-year. Q3 revenues came in towards the high end of our outlook of $1.04 billion to $1.06 billion. Revenue growth was driven by rideshare strength in addition to bikes and scooters with total rides up more than 10% year-over-year. Active riders of $20.3 million reached the highest level in more than two years, reflecting strong new rider growth. Revenue per active rider reached a new all-time high of $51.88, up 4% quarter-over-quarter and 14% year-over-year. The increase reflects higher revenue per ride associated with longer trips given the sustained pickup in travel through Q3. 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. Contribution margin in the third quarter was 56%. This was 100 basis points higher than our guidance of 55% with the outperformance reflecting rideshare strength. Relative to Q2 '22, contribution margin declined by 360 basis points. Normalizing for $15.5 million in discrete accounting items in Q2 and contribution margin decreased sequentially by 200 basis points, reflecting a risk transfer renewal in Q3 that has now been shifted to align with our normal Q4 renewal timeline. As a reminder, contribution excludes changes to the liabilities for insurance required by regulatory agencies attributable to historical periods. In the third quarter, there was adverse development of $93 million. This adverse development is primarily related to claims between October 2018 and September 2021, and is specifically associated with the legacy third-party claims administrator that did not close these claims out as effectively as we would have expected. The longer claims take to close, the more expensive they can become, especially when subject to the inflationary pressures that are affecting the broader insurance industry. We are working quickly to resolve the remaining open 10% of claims that were handled by our legacy partner. Let me provide a quick update on the insurance structure that's in place for the next 12 months. Just as we did for the previous insurance fiscal year, we've transferred a significant majority of risk to best-in-class third-party partners. So as of October 1, all of our risk transfer agreements have been locked in. Over time, we believe that our risk transfer strategy will limit our exposure to future adverse. Let's move to non-GAAP operating expenses below cost of revenue in Q3. In the aggregate, these expenses declined as a percentage of revenue by roughly 150 basis points quarter-over-quarter and 270 basis points versus Q3 of '21. Let me start with operations and support. As a percentage of revenue, operations and support was 10.6%, up roughly 60 basis points from Q2, but down 140 basis points from Q3 of '21. In absolute terms, this expense was $111.6 million in Q3. The sequential increase is a reflection of bike and scooter seasonality, which typically peaks in Q3. At the same time, relative to Q3 of last year, we achieved better leverage on our operations and support expense even as ride volumes grew and we onboarded more drivers. R&D was 10.2% of revenue in Q3, down roughly 40 basis points from Q2 and 240 basis points from Q3 of '21. In absolute terms, R&D expense was $107.7 million in Q3. Year-over-year comparisons reflect the partial impact of the divestiture of Level 5 that closed mid-July of last year. Relative to Q2 '22, R&D increased by $2 million, reflecting incremental investment in rideshare-related infrastructure and support. Sales and marketing as a percentage of revenue was 11.3% in Q3, and down 170 basis points from Q2 and 20 basis points from Q3 of '21. This is a reflection of organic tailwinds to supply and demand as well as our continued discretionary cost discipline. In absolute terms, sales and marketing expense was $118.7 million. Within sales and marketing incentives were 3% of revenue. G&A expense as a percentage of revenue was 20.6% in Q3, flat with Q2 and up 130 basis points from Q3 of '21. In absolute terms, G&A expense was $216.9 million. Normalizing for $12 million of discrete accounting items in Q2 '22, G&A increased by roughly $1.2 million quarter-over-quarter. In terms of the bottom line, our Q3 adjusted EBITDA profit of $66 million came in above the high end of our outlook of $55 million to $65 million. Adjusting for $29 million in discrete accounting items in Q2 for every $1 of sequential revenue growth in Q3, roughly $0.26 flowed to adjusted EBITDA. We ended Q3 '22 with unrestricted cash, cash equivalents, and short-term investments of $1.8 billion. Today, we announced we've entered into a revolving credit facility for $420 million that will provide us with additional available liquidity. Now I'd like to address the difficult but responsible step we took last week to reduce our workforce. As we disclosed in the 8-K filed on November 3, we expect to incur a charge of between $27 million and $32 million related to this restructuring, which we expect will be incurred in Q4. In addition to this amount, we expect to record a stock-based compensation charge and corresponding payroll tax expense related to affected team members as well as restructuring charges related to a decision to exit and sublease or cease the use of certain facilities. However, we're unable to estimate these charges at this time because they depend in part on our future stock price. We will exclude these restructuring charges in our calculation of non-GAAP metrics. Before I move to our outlook, it's important to note that macroeconomic factors are impossible to predict with any certainty. Future conditions can change rapidly and affect our results. Now let me share our Q4 outlook. We expect revenues of between $1.145 billion and $1.165 billion, up 9% to 11% quarter-over-quarter and 18% to 20% versus Q4 of last year. To be clear, even at the low end of the range, our guidance implies a new all-time high for our business. Our Q4 revenue guidance assumes sequential rideshare-wide growth consistent with the seasonality we saw in Q4 last year, which is stronger than what we saw in Q4 of 2019. Let me share an update on what we've seen so far in Q4. For the month of October, our total company bookings are on track to reach an all-time high. Rideshare rides grew roughly 6% month-over-month versus September, which is consistent with the seasonality we've seen over the past two years and is stronger than what we saw in 2019. Keep in mind, while October ride trends were robust, it's typically the strongest month in the fourth quarter. November and December rideshare trends are generally dampened with people spending more time at home around the holidays. We also expect softening bike and scooter seasonality in the winter. This will impact active riders in Q4 since this metric captures bike and scooter riders in addition to rideshare. In terms of profitability, we expect Q4 contribution margin to be approximately 51.5%. This is a decline of 450 basis points from Q3, reflecting the impact of roughly $82 million or roughly 700 basis points from our insurance renewals. However, we expect this headwind to be partly offset by higher revenue per ride inclusive of the service fee change. As a percentage of revenue, we expect operating expenses below cost of revenue will be roughly 46% to 47%. This would represent a sequential improvement of roughly 600 to 700 basis points with the majority reflected in G&A and operations and support. Within operations and support, there are savings associated with bike and scooter seasonality between Q3 and Q4. In terms of adjusted EBITDA, we expect to deliver $80 million to $100 million in Q4, which would be an all-time high for our business. Guidance implies an adjusted EBITDA margin of 7% to 9%. To put a finer point on it, while we expect contribution margin to decline quarter-over-quarter, we expect adjusted EBITDA margin will increase sequentially by roughly 1 to 2 percentage points. Given our Q4 outlook, we expect calendar year 2022 revenue of $4.65 billion to $4.85 billion, up roughly 27% versus 2021. We expect a full year 2022 contribution margin of approximately 56%. Finally, we anticipate adjusted EBITDA of $280 million to $300 million for the full year with a margin of 7%. This would be triple the level of adjusted EBITDA achieved last year with more than twice the margin. We are laser-focused on delivering on our 2024 financial targets. Between the momentum we are seeing in our business, our product and marketplace work, and our cost management, we are even more confident in our ability to deliver $1 billion of adjusted EBITDA with over $700 million of free cash flow, which is defined as operating cash flow less CapEx. We continue to see multiple paths to achieving these milestones driven by industry bookings growth, marketplace efficiency work, and cost discipline. With that, let me turn it over to John.

Thanks, Elaine. We're continuing to accelerate the work that will have the biggest impact for drivers, riders, and our company. Let me start with how we are increasing the efficiency of our overall marketplace using three specific examples on maps, drivers, and riders. First, Lyft maps. Approximately 25% of our rideshare rides are now powered entirely by Lyft's in-house mapping and navigation. And on average, each ride that leverages our mapping technology can produce more than $0.10 of incremental value for Lyft, and there's more ahead. We are leveraging Lyft maps to optimize our routing. This can save drivers and riders time and add to our marketplace efficiency. This is helping us solve last-mile problems that ride-sharing drivers encounter daily. For example, when ride requests lead to closed apartment complexes, we can route drivers to public entry points, solving a pain point that couldn't be addressed with traditional mapping tech. In markets like Dallas and Atlanta, up to 20% of weekly pickups and drop-offs can occur under these circumstances. So this routing improvement can have a meaningful impact. We've also integrated Lyft maps with Android Auto and CarPlay. This integration is one of the most requested over the past few years and can make driving safer by reducing dashboard clutter and resulting in a better overall driving experience. Since launching in September, drivers have given nearly 1 million rides leveraging this integration. We're excited to be the first rideshare company to bring this to market and expect it to continue scaling in the months ahead. Next, we are accelerating initiatives that can increase driver preference. Upfront pay is a great example. In the markets where upfront pay has been available, we've seen drivers spend more time using our network and an uptick in driver preference for Lyft. As of last week, upfront information is available on more than 70% of rideshare rides on our network, and we are accelerating the rollout with a goal of covering all rides by the end of the year. Driver innovations can increase organic driver acquisition and loyalty and greatly improve marketplace balance. Finally, for riders, we are continuing to ensure we provide a full range of price points and ride experiences. Wait & Save is one example on the affordable side of the spectrum that delivers great value to consumers as well as to our broader marketplace management. This mode gives us more time to balance supply with demand and can increase driver utilization. It also serves as a strong acquisition funnel for new riders. In the past six months, nearly 20% of Wait & Save riders were new to Lyft. Priority Pickup is another example, one that provides a premium experience. With priority pickup, riders have the option to pay a little more for a faster pickup. This can result in a higher margin for Lyft. The work we are doing to improve the rider experience helps us reinforce rider loyalty, increase ride frequency, and have better tools for both revenue management and marketplace management. Finally, Lyft continues to be extremely well-positioned in consumer transportation and is set up to take on more and more consumer spend. There are three big drivers fueling long-term growth: demographics, infrastructure changes, and new products. Let me start with demographics. As we've shared in the past, every year, roughly 4 million people in the U.S. become old enough to use ridesharing on their own. Younger members of the population have a digital-first preference and value the convenience and flexibility of on-demand services. Second, infrastructure changes. These happen over a longer time frame and continue to provide important tailwinds. Consider the airport use case. It took time for airports to get comfortable with ridesharing. And now many airports allocate designated curb space and queuing lots, plus rideshare serves as an important source of airport funding. This is just one example of how infrastructure changes over time reinforce rideshare in people's lives. And finally, new products. Lyft launched 10 years ago with one rideshare option. Today, we offer a range of ride modes and price points, including Wait & Save and Priority Pickup. We've also integrated new categories like bikes and consumer rentals that reinforce our core with additional touch points. In fact, this year, more than 2 million people used Lyft for the first time because of our bike and scooter systems. With continued product innovation, we expect to capture a larger portion of consumers' transportation wallets in the months and years ahead. I'm very grateful to the team and the Lyft community and excited about the road ahead of us. Operator, we're now ready to take questions.

Your first question is from Doug Anmuth with JPMorgan.

I have two questions. First, regarding insurance costs, you mentioned $82 million in Q4. Could you explain the offsets for both the top and bottom line? I want to ensure I understand those clearly. Additionally, you mentioned that the impact to riders is neutral, but I would like to know what drivers are saying about the changes in the surcharges. Lastly, could you discuss the different paths to achieving $1 billion EBITDA? That would be helpful.

Yes, we got that. Sure. So Elaine is going to take about the first one on insurance and then we'll go to the other two.

Sure. In the fourth quarter, we anticipate an $82 million increase in the cost of revenue compared to the third quarter, which reflects our insurance challenges for Q4. In terms of guidance, we expect revenue to be around $100 million higher quarter-on-quarter. This increase more than compensates for the $82 million insurance headwind, leading to an overall rise in contribution margin from one quarter to the next, even considering the cost of revenue. Our total operating expenses will decrease by approximately $20 million in Q4 compared to Q3, which accounts for the partial impact of our workforce reduction and other adjustments to our operating expenses. All of these factors contribute to our EBITDA projection increasing from $66 million in Q3 to a range of $80 million to $100 million in Q4.

Did that answer your question on insurance prices? I'll talk about the driver side.

Yes, that's helpful.

Okay. Great. Yes. So on the driver side, we're doing a couple of things. Number one is we're investing in the Lyft Rewards program. So we increased the cashback on the gas reward that comes along with the Lyft debit card that has now bumped up to 7% cashback, which is a pretty meaningful benefit. We additionally have had for the last year or so, a partnership with a company called Upside that gives all drivers access to additional cashback on gas, and we bumped that up with higher rewards for our gold and platinum drivers. The bottom line is that since we have eliminated the fuel surcharge at the start of the quarter, we have not seen any impact on driver supply. And in October, active driver growth accelerated month-over-month compared to September. Overall, additionally, the driver churn levels are meaningfully below our 2019 levels. So broadly, we feel like we're in a great position with drivers. And then your last question was on the 2024 targets. Is that right?

Yes. The multiple paths exactly.

Yes. So feeling more and more confident in our ability to hit that $1 billion adjusted EBITDA and $700 million in free cash flow. We believe we can achieve this regardless of the macro environment. We've been using internally two main cases. One is the growth case, which assumes market bookings grow in the low to mid-20% year-over-year and that the labor market stays as tight as it currently is. And then internally, what we call a recession case where the market growth slows, and we see operating leverage through lower driver engagement and acquisition costs if unemployment rises. So in both cases, we have a very confident path to the $1 billion, and in both cases, we'll continue to focus our R&D spend on marketplace innovation that helps improve the cost basis of the business.

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

Okay. Thank you. So I don't want to sit here and dwell too much on the reduction in force. But can you talk about some of the projects that you may have had to sunset or deprioritize from a product development perspective, given the cost containment measures you talked about earlier? And secondarily, revisiting the insurance costs, it seems like we had a bunch of irons in the fire between making greater use of telemetry data and changing driver behavior, et cetera, which were all supposed to help lower costs longer-term. So should we be thinking about potential benefits over the longer term from these initiatives? Or are they basically sidelined for the time being?

Okay. Great. Yes. So first, just to talk a bit about the reduction in force. We wanted to be equally prepared for any scenario that we encountered in '23, whether it's the growth scenario or the recession scenario. To try to put kind of the scale of the reduction in force in context, we had started to invest in headcount growth in late 2021 and the first half of 2022 before we slowed and then froze hiring, preparing for a larger kind of faster post-COVID recovery. The reduction in force effectively takes us back to the same team size that we were at in Q3 of last year. Broadly speaking, we always believe having a lean team is important. We try to focus these cuts on cuts that would help us increase our velocity. So one of the areas that we focused on was removing layers of management to increase span of control, helping the organization operate faster. One of the particular areas that we've been spending a lot of energy on additionally is how we support our drivers. So today, we have both virtual online support through SMS channels and phone support. Part of the reduction in force was focused on closing the majority of our in-person support centers. We had seen through testing over the last six months or so that by offering premium driver support through our virtual channels, we're able to produce a great experience for drivers at a lower cost point, and we felt like it was important for us to double down on that and focus on the virtual support experience. Beyond that, there's a long list of kind of smaller areas that we're either slightly unprofitable or just lower ROI areas of investment or shifting resources. The last piece to note is that we are putting the vehicle service business up for sale, running a sale process. The logic is very similar to the change we made around Lyft Rentals where we're still dedicated to providing the rental and the vehicle service experience. But both those first-party businesses have real significant scale thresholds that need to be achieved for that business to work well. It wasn't going to be the highest ROI investment for us to make, so we decided to exit those businesses. We will be doubling down on our strength, which is building a third-party marketplace so that we're still able to provide our drivers and our customers with great vehicle service capability through partners.

I'll address the insurance question. To begin with a broader perspective, the inflationary pressures and rising insurance costs are challenges faced across the industry, primarily due to increasing premiums resulting from higher costs of used vehicles, vehicle repairs, elevated medical expenses, and growing litigation costs. This is evident in both personal and commercial auto sectors. However, as previously mentioned in this call, we have fully addressed the insurance cost pressures experienced in the third and fourth quarters, and we are now secured for the next year. We suspect there may be a timing difference in our renewals compared to our competitors, with our focus being on October while they will likely renew early next year. We are proud of the efforts made by our team in the last two quarters to counteract the significant rise in costs. We believe the product initiatives we're implementing around mapping and telemetry have the potential for even greater benefits, not just in cost reduction, but more crucially, in diminishing the frequency and severity of accidents that result in additional expenses.

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

You mentioned two challenges heading into the December quarter: insurance costs and macroeconomic factors. The October trends you shared seemed fairly positive. So, while I understand the concerns about macro influences, have you noticed anything in terms of rider volume, trip lengths, or usage frequency that raises any concerns for the fourth quarter? Since you mentioned macro issues, I'm curious why I don't hear about challenges in the October data. Additionally, could you discuss the recovery of shared rides, which I know have been slow to rebound for ridesharing overall and for Lyft in particular? How close are we to returning to full 2019 levels? I realize this may take some time, but where do we currently stand in that journey?

Yes, we are not observing any worrying macro trends related to growth in the fourth quarter. We are analyzing the same information as you are and recognize that we cannot precisely predict how 2023 will unfold. Our goal is to prepare for maximum flexibility to manage any situation effectively. However, we are seeing strong performance in the business during the fourth quarter.

And then on shared rides, still a small percentage of total rideshare volume, but starting to look at the right markets to bring it back to or additional markets like New York City. We just relaunched shared rides in New York City. This is a market where share works really well because it's very dense. The other perspective I'd give is that we're starting to see our affordable ride options as more of a portfolio. When we first had shared rides, we didn't have Wait & Save. Wait & Save has become very popular among our riders as an option to wait an extra 5 to 10 minutes and save a few dollars. That has become very popular.

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

This is John on for Brent Thill. Two questions. I guess if you could maybe give some color on how the use cases are trending. You gave the airport case, but wondering how the other use cases are trending in terms of community nights as well as business. And then I don't know if you have any sense in terms of market share change, maybe especially on the West Coast as well as ride price trends on average?

So can you repeat the second part of your question?

Yes. I wanted to see if you have any sense for the market share, any total changes versus your main competitor? And maybe even related to that in terms of how the West Coast is recovering?

Yes. So on use cases, as we mentioned, airport rides being all-time high, about 10.4% of rides. Commute seems pretty static, I think, around the 30% mark. I think there's still more upside and opportunity and where we're seeing some of the growth in the kind of more nights and weekends use cases as people continue to come back out. That's on the use case. On the West Coast, still more runway ahead. It is improving. Q3 rideshare volumes in our top U.S. markets were 75% recovered versus Q4 '19. Within that, the top 10 West Coast markets, we're just 65% recovered. So feeling good that we have more room on the West Coast where we've historically over-indexed. Logan, do you want to talk about market share?

Yes. Broadly on market share, third-party data that we track shows a 1% drop in market share quarter-to-quarter. Based on our internal assessment, it was primarily driven by additional driver incentives that the competition temporarily put into the market, along with their rollout of upfront pay. Those incentives no longer appear to be in the market, and over the last couple of weeks since those incentives have dried up, we've seen market share increase in a meaningful way. We think there's always opportunities to take share, but we are focused on durable growth and driving the bottom line.

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

I was just curious, you went through a detail on some of the marketplace improvements you're making right now. How do we think about those factoring into getting to $1 billion? And how does it maybe help the contribution margins or the conversion margins over the longer term?

So on the high-level marketplace work, something we've talked about in the past and has continued to be a big focus for the R&D dollars we're spending is the use of the driver engagement spend. One important thing to note is that people often don't think about the fact that there is a variable pay component to what a driver makes as well as kind of the base. There's always going to be variable pay, but you could either time it a week in advance or a day in advance or just in time. Our machine learning that we're doing is getting more and more accurate and the tools and incentives that we have to break up things like nights and weekends at the time when there is the most demand are getting more targeted. There's quite a bit of efficiency in driving the supply when you need it versus paying for it when it's less needed. I'd say that's like the biggest opportunity on the marketplace side to improve the bottom line.

But do you think there's sort of an efficiency curve we should think about as you go to $1 billion of EBITDA? Or is it mainly OpEx and topline driven?

What specific cost curve are you referring to?

In general, for the marketplace, there are significant improvements happening. It seems there are more opportunities to enhance this further. However, how much does this contribute to the $1 billion target for 2024?

It's a meaningful part of that. There's still quite a bit of room left in the last two quarters. With the goal of swallowing this insurance increase, we did make some material progress, but there are tens to hundreds of millions of dollars of marketplace efficiency over the next couple of years.

Your next question is from the line of Deepak Mathivanan with Wolfe Research.

Just a couple of ones. So first, if I look at the fourth quarter guide, it's about $100 million or so quarter-to-quarter increase. It sounds like a sizable portion of that is coming from the incremental service fees. I know the seasonality is a little bit different for rides and scooters. And you said that macro is not as much of an impact right now. But what's factored in, in terms of sort of organic rate growth maybe quarter-to-quarter. Maybe you can provide a little bit of color on that, that would be great. And then on the long-term guide or 2024 expectations for $1 billion, with the additional cost savings, it seems like you certainly have a lot more levers and conviction to reach those levels. But what do you need to see to kind of raise those to a higher levels right now?

Sure, Elaine will address your first question.

Yes. So in terms of our Q4 revenue outlook, it implies 9% to 11% quarter-on-quarter growth and 18% to 20% year-on-year growth. Just to reiterate, that Q4 revenue range would be a new company high. It reflects the service fee and growth in rideshare rides. As you noted, that is partly offset by the seasonality we see in bike and scooter revenue. Just to reiterate, the service fee is less than $0.50 a ride. With respect to the rides growth, we are assuming rideshare rides grow quarter-on-quarter in Q4 in line with the same sort of rides growth we saw quarter-on-quarter last year in 2021. So it's the combination of those two things, service fee plus the rides growth, partially offset by the seasonality in bikes and scooters that are driving the incremental roughly $100 million increase quarter-on-quarter.

And then on 2024, again, as we've noted a few times on this call, we have increasing confidence in our ability to hit the $1 billion adjusted EBITDA target. The material differences between the two cases we're tracking are: one, the rate of growth on the demand side or any recessionary pressure, which on the driver engagement side lower the cost of driver engagement and acquisition. Those are the biggest movers, and in either direction would drive even further confidence.

Your next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe one to double back and one more on the financials. In terms of driving continued adoption of new riders, maybe just give us a little bit of sense of what you see as the biggest unlock factors there? Is it lower priced rides? Is it more flexibility? Is it the product continuing to evolve? Because I think the biggest question we get from investors a lot is just elements of continuing to deepen out and widen the rider base in the next couple of years as an element of growth, even if that results at more moderate price per unit type ride. So just better understanding that, I think would be helpful. And then looking at the financials, any color you could give us on some of the trends around stock-based comp not just for you guys, but generally across the industry, we continue to see sort of upward pressure there. How much is that driven by elements of hiring or retention or elements of where the stock price is or things that are more backward-looking than forward-looking. Some color on how to think about that would be super helpful.

Yes. So first, in terms of really kind of the TAM growth and the opportunity, one of the largest areas of opportunity that we see beyond the demographic trends is increasing reliability and affordability. First on reliability, the moments where the ETA is too high or there's simply not a driver available, that is sort of latent demand in the system today that we are just not capturing and we should be. There are many times where we can match. There is a driver out there somewhere who would be willing to do that ride at the right price, and there's a rider out there willing to pay that price. We are simply not matching those two, and we can be. So increasing that reliability so that you can always get a ride and you can count on it in any situation, any geography, etc., I think is probably the largest opportunity. Secondarily, as John was talking about earlier, our portfolio of lower-cost options from Wait & Save to shared rides, I think we found to be very powerful. The ridesharing sort of market is known to have significant dynamic pricing where supply tightens up, the prices go up to maintain service levels. But being able to maintain a low-cost option and flexing service levels so that the low-cost option may mean you're sharing the ride or it may mean you're waiting a little longer for the pickup. Always having those options at that price point and having that flex coherently as a portfolio, I think there's still a lot of room in terms of how we kind of price and organize the portfolio together to create optimal kind of experience for our customers. Those are broadly the kind of big product-focused levers that we're focused on in addition to the demographic shifts over time.

Then in terms of your question regarding stock-based comp, a couple of things that will help reduce stock-based comp going forward. Obviously, the risk has an impact on reducing stock-based comp. In addition, we have stopped U.S. new hiring in the United States. With respect to backfills going forward, we're shifting the nexus of our hiring away from largely U.S. to focus on international markets. where there's a different compensation model with low or no equity in markets like Canada and Eastern Europe. So we're proactively taking these moves to reduce the impact on our comp and bend expense as well as the impact of stock-based comp and effective dilution.

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

Great curiosity, how should we be thinking about driver incentive levels? You mentioned it earlier. I think last quarter, you spoke about incentives spend per trip being down sequentially sort of between the second and the third quarter. How should we be thinking about trending into the fourth? And then it would be great if you could sort of give us your perspective on the new DOL proposal for employee classification. Where do you sort of see driver classification the debate sort of ending up? Is there a path sort of for the IC model to be or more widely adopted across the country?

Yes. With respect to your first question on driver incentives, one thing that's really important to remind everyone to point out is that driver incentives and the extent to which they fluctuate quarter-to-quarter is largely driven by prime time and the imbalance that we see in the marketplace. We do project going from Q3 to Q4, and embedded in the guidance that we're giving, we're projecting driver incentives to go up quarter-on-quarter in aggregate and on a per ride basis, but for it to be entirely funded by prime time. That increase in prime time is largely driven by things that we're seeing on the demand side and increased demand in peak periods, which we see as a good healthy sign.

On the pro regulation, you asked about the Department of Labor. They released a proposed rule with 60 days of public comment. This was not at all a surprise. In fact, it was expected on day one of the administration. There's no immediate or direct impact on the Lyft business. It's important to note, this rule does not reclassify Lyft drivers as employees. It does not force Lyft to change our business model. It's a very similar approach to that the Obama administration took to use to determine employee status. It was previously applied to Lyft and other app-based companies and did not result in a reclassification of drivers. App-based work is quite fundamentally different from traditional work. We will continue to advocate for laws that drivers consistently show they prefer that includes flexibility plus benefits like the one that was recently enacted in Washington State, which gave drivers, what they wanted that independence was benefit. I do think there will be more opportunities for that type of law of independence plus benefits and no major change from the federal policy.

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

Maybe just the first one on the active riders. I know there's a lot going on with the recovery and sort of getting back to pre-COVID levels. But just as you sort of think about the growth of riders, the port to kind of bring new people into the population. Can you just help us better understand percentage of your riders right now are new credit cards and new people that weren't on the Lyft platform, say, pre-COVID swing an idea of new people coming to the platform? And then the second one, I think insurance has been somewhat surprising to people this year a little bit. As you think about the path toward $1 billion of EBITDA, what are your assumptions on insurance costs between now and 2024?

So on the first point, in Q3, we had the most active riders and ride volume since COVID started. Quarter-over-quarter, it was 2% active rider growth, which was in line with the broader industry. If you look back and sort of look at absolute numbers, it's in line with the quarter-over-quarter growth we saw back pre-pandemic, which is Q3 2019. Broadly, as we talked about before, we continue to see service levels improve. We see better retro ETAs. We see less prime time declining quarter-over-quarter, and our conversion rate in Q3 '22 was the highest it's been in recent years. We feel great about that. We continue to market to and bring in new riders all of the time. In terms of new rider growth in Q3, new riders grew by nearly 10% quarter-over-quarter. So it's something that we continue to invest in and lean into.

You asked about the 2024 outlook and our assumptions regarding insurance. We are confident in reaching the $1 billion target, and we have accounted for potential changes in insurance during our annual October renewal process. Looking ahead, we have clearer visibility into those insurance rates. I want to emphasize that we are assured in our strategy to achieve $1 billion in 2024, which includes the insurance renewal planned for next October.

Your next question is from John Blackledge with Cowen.

Two questions. First, what markets drove the strength in the third quarter and into October? And then what markets were lagging? It sounds like West Coast still lagging a bit? And then second, on Lyft Pink, any update on the subscription program and what percentage of bookings are from Lyft Pink subs?

Sure. Just a quick response on the markets. Quite similar to what we've seen in the past, we continue to see strength on the East Coast compared to pre-pandemic markets like New York and Miami continue to be extremely strong, whereas those SF, LA, West Coast markets are just lagging behind. Over the last two quarters, we have seen them starting to pick up. So no difference in that trend, which we talked about last quarter. Logan, do you want to talk about Pink?

Yes. So back in April, we relaunched Pink at a new price point. It's now priced at $9.99 a month and a brand-new headline benefit, which is unlimited priority pickups. Priority pickups typically cost $4 to $5 over the standard price of ride, and it gets you a faster pickup. You sort of cut the line ahead of everybody else. Our members are seeing great product market fit. Our members are seeing, on average, over $29 of benefit per month, which is roughly a 3x return for them. We're layering in other benefits. We're doing savings on luxury and preferred rides, waiving fees on cancellations. A really unique benefit is our roadside assistance that we think is a lot better than AAA. You open up the app, click a button, and you have a tow truck showing up, the same kind of classic Lyft experience. Additionally, we have the All Access Pink, which is $199 a month. This is where we've been or our bike share membership programs. This is an incredible deal weaving in sort of first-of-its-kind national bike share membership. We see Pink members taking 3x the number of rides compared to nonmembers. It is showing a lot of impact. While we're not disclosing the number of subs, we are starting to see some real growth in the program, and we are very excited about it.

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