Lyft, Inc. (LYFT) Q2 2023 Earnings Call Transcript

Good afternoon, and welcome to the Lyft Second Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode to prevent any background noise. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Sonya Banerjee, Head of Investor Relations. You may begin.

Thank you. Welcome to the Lyft earnings call for the second quarter of 2023. On the call today, we have our CEO, David Risher, and our CFO, Erin Brewer. In addition, Kristin Sverchek, our President, is here for the Q&A session. We'll make forward-looking statements on today's call relating to our business strategy and performance, future financial results, and guidance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied during this call. These factors and risks are described in our earnings materials and our recent SEC filings. All of the forward-looking statements that we make on today's call are based on our beliefs as of today, and we disclaim any obligation to update any forward-looking statements except as required by law. Our discussion will include non-GAAP financial measures, which are not a substitute for our GAAP results. Reconciliations of our historical GAAP to non-GAAP results may be found in our earnings materials, which are available on our IR website. And with that, I'll pass the call to David.

Thanks, Sonya. Good afternoon, everyone, and thanks for joining us. To start, I want to take a moment to introduce Erin Brewer, who joined us as CFO in July. Erin is a skilled finance professional and brings an incredible combination of strong technical abilities, excellent business judgment, and great leadership. She's also a valuable thought partner. She knows how to drive growth and operate efficiently at scale, and she's an amazing leader to our finance team. She and I are completely in sync on the opportunities ahead, and I'm thrilled to be working with Erin to build a rider and driver-obsessed, durable, and profitable business. Erin, it's great to have you here. Now we're going to talk about what we've been up to and what's next. First, our customer obsession and focus on strong execution are really paying off. The effects can be seen in our Q2 performance. Rideshare rides grew 18% year-on-year, accelerating for the second quarter in a row, and standard rides reached the second-highest level in our history. Active riders and drivers each reached multiyear highs, resulting in an improved balance in our marketplace. So relative to Q1, the share of rides affected by prime time pricing dropped by 35%, and a larger percentage of ride intents converted into rides taken. With more people getting out to work and travel, the market is growing. And with the strength of our actions, they're increasingly choosing Lyft. Second, we're doubling down on innovating for riders and drivers. We're already seeing the results of our April reorganization with flatter teams communicating more effectively and making decisions more quickly. At the same time, we've opened up more channels of communication so we can hear directly from customers. Through drive roundtable discussions, surveys, and our various public inboxes, including my own, we've been getting a lot of information about what we've been doing well and where we can still improve. And we're acting on what we're learning. I have been so energized by how quickly changes to our product can translate to better customer experiences. I actually want to go deeper on this for a second. In June, we addressed some of the drivers' top requests and pain points with the driver app, with a release that gives them more control over where and how they learned. So here are two examples. First, we made our proprietary stay within area filter more precise. So drivers can pinpoint where they want to drive and flex the area for pickups and drop-offs to within a five-mile radius. This is absolutely huge. It means the drivers can stay within their own neighborhood if they want and not end up super far away at the end of the day. This update resulted in a 26% increase in the number of drivers who used the feature, in addition to an increase in driver hours and weekly retention rates. I actually used the feature myself when driving for Lyft to make sure I got home in time for dinner with my wife, and it is a total game changer. The second thing we did is we upgraded our Ride Challenge bonus program to give riders even more choice. So now instead of being offered a specific challenge, drivers can choose from a menu of options and choose the challenge that works best for them. It might be long rides or short rides. It might be working on weekends or weekdays. Driver feedback on the launch has been really positive with more than half of drivers saying these changes have made their overall experience using Lyft better. So these kinds of updates have an enormous impact on driver satisfaction and preference, and that's really important to understand. Among drivers who use both Lyft and Uber, we have seen a 25% increase in preference for Lyft since Q4 of last year. And in Q2, the number of drivers using Lyft grew by more than 20% compared to Q2 last year, and driver hours increased even faster, up by more than 35%. We'll closely monitor driver preference because we want to see it keep growing. Over on the rider side, we continue to see growth, particularly with wait and save, which is our most affordable rideshare option. So wait and save offers riders a way to save money when they aren't in a big hurry. This lets riders price shop within our app instead of going to the other guy. In Q2, wait and save trips grew by more than 40% year-on-year and reached new all-time records, far exceeding where our shared ride volumes ever got. And just to give you a specific data point that gives you a sense of how large this is, in New York City alone, we averaged more than 150,000 wait and save rides per week in Q2. So you can expect us to continue innovating for our riders and our drivers, which creates an increasingly differentiated experience over time. Customers are reacting positively to what we're doing, and there's a lot more to come. Finally, we're building on our strong brand recognition, reminding the world that Lyft is a great rideshare choice. So most people already know our company, and I feel this all the time when I introduce myself. Our awareness levels are super high. Surveys tell us that over 70% of US adults ages 18 to 65 are familiar with Lyft. So now, as we approach the back-to-school season and the back-to-work season, which I'm sure we're all reading about, riders tend to change their habits. So this is exactly the moment for us to remind everyone to consider using Lyft, particularly those who haven't used us or considered us in a while. And in the coming months, we'll be teaming up with other well-known brands as a way to raise awareness even further. Stay tuned for that. So in summary, we are executing well on our strategy of being customer-obsessed, and the results suggest this strategy is working. Riders and drivers want and value choice. It's in everyone's best interest for there to be two strong players competing for their business. By obsessing over our customers we can continue to differentiate ourselves and grow this market, and we have an incredible team that's focused on these objectives. Much more to come on all that in the coming months and quarters. Now I want to turn it over to Erin.

Thanks, David, and thank you, everyone for joining us today. I also want to thank the entire Lyft team for giving me such a warm welcome. I've been really impressed by the depth of talent and culture, and I'm excited to be a part of Lyft’s next chapter. We have an amazing brand, a big market opportunity, and we serve an important purpose for drivers and riders. One of the reasons I joined Lyft is that it's a great fit. David and I share the same philosophies around building a durable, healthy, and profitable business. So today, I want to provide you with some insight into how we're working together and what you can expect. First, we're building Lyft for the long term. We will be customer obsessed, taking into account the needs of both drivers and riders and the corresponding health of our marketplace. Second, we're pressure-testing goals and commitments to ensure they are aligned with what we want to accomplish long-term. We'll be disciplined and consistent in how we execute, both in the near term and in how we think about future growth opportunities in the business. Third, we're going to be clear with investors about our specific measures for success. We're focused on making it easier for the investment community to follow our progress and get behind what we're doing. This is one of my top priorities in the coming months. Next, I'm going to discuss our Q2 results and share our Q3 outlook. I'm also going to address our upcoming third-party insurance contract renewals and provide some directional commentary about the fourth quarter. Before I dive in, I want to remind everyone that unless otherwise indicated, all income statement measures are non-GAAP and exclude select items, which are detailed in our earnings materials. Now, in terms of Q2, the rideshare market is growing, and our focused execution is paying off. Q2 represents a full quarter pricing rideshare competitively and roughly in line with the market, and the balance in our marketplace improved. We had strong driver growth and a strong mix of new and returning riders, with the average number of rides taken by each active rider, which we refer to as frequency, reaching the highest level in more than two years. With our renewed focus on delivering an experience that riders and drivers love, we've seen momentum across use cases. Commute and early morning trips were standouts, growing by just over 20% year-over-year. And we have the highest volume of airport rides since 2019. All of that translated into solid financial performance in Q2. Revenue was $1.21 billion, up 3% year-over-year. This reflects a combination of strong rideshare ride growth, up 18% year-over-year, along with lower revenue per ride, given our focus on pricing competitively and roughly in line with the market. In addition, our bike and scooter systems sales showed strong growth year-over-year. This was partially offset by non-recurring legal costs in the quarter that were classified as contra revenue. Active riders were 21.5 million, up 8% year-over-year, driven by strong rideshare demand. Lower revenue per ride naturally affected revenue per active rider, which was $47.51 in Q2, down 5% from Q2 of 2022. Contribution margin was 42%, in line with guidance. Relative to Q2 of last year, contribution margin increased by 10 percentage points. As a reminder, in the second quarter of last year, our contribution margin was affected by approximately $275 million of adverse development on our legacy insurance reserves. Excluding this impact, contribution margin in Q2 2023 declined by roughly 18 percentage points year-over-year, reflecting higher insurance costs compared to Q2 2022 and lower revenue per ride. In absolute dollars, contribution in Q2 2023 was $426 million, up 35% year-over-year. Operating expenses were $410 million, down 24% year-over-year, due primarily to our cost restructuring initiatives. As a percentage of revenue, Q2 operating expenses were 40% compared with 54% in Q2 of the prior year. I will point out that operating expenses were roughly $20 million lower than guidance we provided for the second quarter. Our outlook assumed operating expenses would include the impact of non-recurring legal costs, but this expense was instead classified as contra revenue, which I referenced earlier in my comments on Q2 revenue. Q2 adjusted EBITDA was $41 million and exceeded the high end of our guidance range. This performance was driven by stronger rideshare demand than expected. Our adjusted EBITDA margin in Q2 was 4%. We continue to have a solid cash position. We ended Q2 with unrestricted cash, cash equivalents, and short-term investments of approximately $1.7 billion. Before I share our outlook for Q3, let me provide some framing. We've entered the third quarter on solid footing. In July, we saw continued healthy supply trends as 25% more drivers used Lyft versus last year, and driver hours grew by nearly 45% year-over-year. Rider demand also grew in July, with ride intents up 17% year-over-year, and our conversion rate continued to improve both year-over-year and quarter-over-quarter. The shared rides affected by prime time also continued to decline sequentially in the month of July, reflecting an even better balance of drivers and riders. With our focus on strong execution and delivering for our customers, we anticipate rideshare volume growth in the third quarter of approximately 20% year-over-year. With that, let me review our Q3 guidance. We expect revenue of $1.130 billion to $1.150 billion, up 7% to 9% year-over-year. This reflects rideshare ride growth of approximately 20% year-over-year, as I just mentioned, in addition to lower revenue per ride versus the prior year period with our focus on operating competitively with the market. We anticipate contribution margin will be approximately 45%. The sequential improvement of roughly 3 percentage points reflects healthier driver supply dynamics, in addition to lower contra-revenue, which will not include the legal costs that offset Q2 revenue per my earlier comments. We expect operating expenses as a percentage of revenue will be 40% to 41%, reflecting an increase in volume-driven costs and targeted marketing spend, partially offset by incremental savings relative to Q2 from our recent cost restructuring initiatives. Finally, we expect adjusted EBITDA of $75 million to $85 million and an adjusted EBITDA margin of approximately 7%. I'd like to turn now and make some directional comments on the fourth quarter in anticipation of our third-party insurance contract renewals on October 1. We'd like to give you our current best thinking on the range of expected outcomes. Our preliminary view of the fourth quarter suggests revenue will grow low to mid-single digits quarter-over-quarter. Additionally, the fourth quarter adjusted EBITDA margin as a percentage of revenue will be in line to slightly lower than the level in Q2 2023. This reflects expectations of continued strong rideshare ride growth year-over-year in the fourth quarter, the impact of our insurance renewals, and continued improvement in our cost structure. Of course, we'll look to refine this view in our Q3 earnings call in the fall. Let me address how we're managing our third-party insurance renewals and what we are doing differently this year. With the Q4 renewal of our third-party insurance contracts, we expect to have substantial visibility into our insurance costs for the next 12 months. Going forward, we proactively changed the structure of these agreements to allow us to stagger our renewals in certain states. We believe this staggered structure gives us better optionality and is a better way to manage our insurance. Additionally, over the long term we'll continue to build on the work we've done to bend the insurance cost curve through product and safety initiatives that help reduce accident frequency and improve settlement outcomes. Finally, I want to share a few closing remarks. We had a solid second quarter and we have strong momentum going into Q3 and the back half of the year. We've improved our cost structure, and we're operating more competitively, and the team is unified and focused on delivering great experiences for drivers and riders. I’m excited to be here. We've got lots more to do to build on our progress, and I look forward to keeping you all updated. Operator, we're now ready to take questions.

Thank you. Your first question comes from the line of Stephen Ju of Credit Suisse. Your line is open.

Great. Thank you so much. So, David, you've now been at the helm for about four months now. So is there anything you can share in terms of what projects you may have prioritized versus de-prioritized in terms of resource allocation? And maybe this is a little bit too early, but is there a way to parse apart how much of the volume growth acceleration is due primarily to price versus product innovation? Price matching is a lever you can probably pull once, but service improvements due to product should be more durable. So I'm just wondering if you can share any sort of perspective there. Thanks.

Yes, Stephen, great to hear from you. Yes, it has been. I feel like an old-timer here, a few months in or something like 100 and some days. So a couple of things. First thing I'd say, just baseline, is our strategy of sort of customer obsession and good execution is working. And we can see it; the results speak for themselves, 18% up year-on-year and so forth. So that's super exciting. If you then go one level deeper to the second part of your question, how much was price and how much were other factors? There's sort of an all-the-above thing going on. We're very focused on improving service for riders. We're very focused on making sure our driver experience is great. We're making sure that when customers do check both apps, riders, I mean, they get a fair price. And then that allows us to start competing on other things. And so, as an example there, wait and save, which I mentioned before, is a product innovation that we're very proud of and really leaning into, same with some of the airport work we did. In Q2, that allows people in some airports to basically call Lyft as soon as their plane touches down, and the car is right there. So how to split what's price versus what's product innovation is a little hard. What I can tell you is, I would add a third thing to what's driving growth, which is a secular move. Back to school is a thing, and that's we're very focused on that. Back to work is a bigger thing every day. You probably saw the articles about even Zoom trying to get people back to work. That's the thing. And we definitely play a role there. So there's some of all these things kind of gone, but I think it's more of a story of firing on all cylinders rather than any one of those. And last thing I'll say is, we've got a lot more innovation on sort of the rider and driver side coming up, which we think will be a step-changer over time. That's longer term, but that'll start to drive even more growth.

David, I just might add to that. In addition to the great progress we saw here in the second quarter, our Q3 outlook and the directional commentary we provided on the fourth quarter assumes continued strong rideshare ride growth in the back half of the year.

Thank you.

Your next question comes from the line of Eric Sheridan of Goldman Sachs. Please go ahead.

Thanks so much for taking the questions. Two, if I could. Maybe following up on Stephen's question also, just what would you characterize as some of the key elements you feel you continued to invest in, whether it's on brand, product, or differentiation to continue to sort of the growth momentum not just in Q3, but going into Q4? And I know it's early and appreciate the framing of Q4. But in terms of some of the growth dynamics in Q4, I’m curious about how much of it is cost headwinds that will hamper some investments in the business that could cause a slowdown in growth, or just elements of lapping impact you're seeing versus the year-ago period? Thanks so much.

Yes. Eric, Erin, and I will share this question. Could you please repeat the first part of the question so I can focus on it?

I just want to know what some of the key elements you think that you have to sort of lean into to continue some of the momentum and growth. You talked about brand, you talked about product, service elements of that.

Yes, absolutely. Let me outline our approach. It all begins with mastering the fundamentals and excelling in operations, which has become a key focus for us at Lyft. We provide hundreds of millions of rides each year, so even minor improvements can have a substantial impact. For example, we've discussed pricing, but you can also see it in our average pickup time, which is now 10% faster than it was a year ago. This is important because riders consistently prefer quicker pickups. Next, we build on this foundation with awareness campaigns. While we are a recognized brand, we should not take that for granted. I often share that when I mention I'm the CEO of Lyft, people express admiration, contrasting with my experiences with other brands. This emotional connection to our brand is a great asset, and we aim to leverage that. We are focusing on targeted social media and press work rather than large-scale advertising like Super Bowl commercials, with the message that Lyft is back and drivers and riders should have both our app and Uber's, as both provide superior choices. Additionally, we're innovating for our customers. One example currently in development is collaborating with companies and cities to facilitate a smooth transition back to the office. I recently met with the Mayor of San Francisco to discuss our commitment to helping the city recover by enabling people to return to work, which is essential for our downtown area. We are also working with companies like Cisco and others on trials to assist with this transition. Overall, our strategy encompasses all these elements, and as Erin mentioned, we are investing significantly in our growth, starting off on a very positive note.

Yes. Thanks, Eric. I might just reiterate that we do expect a similar level of rideshare ride growth year-over-year in Q3 and in Q4, so that's approximately 20%. So maybe you could clarify a little bit more about what you meant by not being hampered by investment, but just reiterating that as our assumption.

Just wanted to know if there's elements of some of the insurance costs you've called out that will sort of have an impact on the ability to redeploy capital back into investing in the business in Q4.

No, I don't expect that to be a factor.

Thank you. Your next question comes from the line of Doug Anmuth of JP Morgan. Your line is open.

Great, thanks for taking the questions. One for David and one for Erin. David, it sounds like you're making good progress with wait and save. Any update to the 30% plus of rides that you've previously mentioned? And then, just given the volume of rides here, how should we think about profitability of that product? And then, Erin, just following up on the preliminary 4Q outlook. I guess, just trying to drill down a little bit more on the revenue to understand why the insurance renewals are impacting revenues potentially as much in 4Q. Because I think it comes up to suggesting low single-digit year-over-year growth? Thanks.

Yes, it's great to hear from you, Doug. I'll address the first question, and Erin will handle the second. Regarding the first question, I'm sorry, I completely lost my train of thought. Could you please repeat the question?

Wait and save.

In our wait and save service, we're not providing specific data about it, but I can say it's up about 40% year-on-year, which is an all-time record. This represents a significant increase, about 25% higher than traditional shared rides. To give you an idea of the scale, in New York City alone in Q2, we averaged around 150,000 wait and save rides per week. Regarding profitability, I often emphasize the importance of doing the right thing and doing things right. The right thing for us is to offer an option in our app that allows riders to save money, and since people appreciate a deal, we are also working to enhance its profitability over time. Any product portfolio includes some lower-margin and higher-margin items, and I expect this will remain a lower-margin offering. However, we are putting a lot of effort into improving its profitability. I also hope this service supports some of our other ride services. In summary, it currently generates revenue, and I anticipate it will generate more in the future, and we are pleased with the volume we are experiencing, as it provides a strong foundation for growth.

Thanks, Doug. Just to be clear, insurance does not impact the revenue line. We gave you a topline framework and a bottom-line framework. Again, just to give you a sense for our best thinking right now about the fourth quarter. So on the topline, I think we've given you information about the trends that we expect. And remember the quarter-over-quarter rate in Q3 reflects the take rate. We're also assuming pricing in the market stays in fairly consistent levels quarter-over-quarter. So hopefully, that's helpful.

Thank you.

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

Thank you. I have two questions. First, regarding the product side and drivers, it seems like you've made significant improvements that have enhanced driver satisfaction. Looking ahead, are you planning to continue focusing on these innovations? Are there other areas in the market that you consider opportunities for growth? Secondly, do you have any updates on the regulatory environment? It appears the situation has calmed down, and I assume no news is good news, but is there anything we should be vigilant about? Thank you.

Yes. Hi, Mark. Great to hear from you. On the driver side, there's still a significant amount of work ahead. The key point is that millions of drivers are earning billions on our platform, which is crucial. This emphasizes the importance of seriously addressing their needs. It's vital to remember that in every vehicle, there are two customers: the rider and the driver. A lot of the upcoming innovations will focus on increasing transparency and making it easier for drivers to understand their earnings. For instance, we’ve previously discussed upfront pay, which provides drivers with a reliable estimate of their potential earnings before they accept a ride. Additionally, we've introduced features to help drivers stay within favorable zones and ensure they finish closer to home at the end of their shifts. Overall, we're committed to enhancing drivers' independence and control, and there’s definitely more to come. Regarding the regulatory situation, Kristin, our President, is here and can provide more details if needed. It seems the intensity has decreased, and while there are some ongoing matters we can discuss, we generally feel optimistic about our position.

Okay. Thank you, David.

Your next question comes from the line of Nikhil Devnani of Bernstein. Your line is open.

Hi there. Thanks for taking the question. On the rideshare volume growth, do you think that this healthy kind of double-digit pace is sustainable beyond 2023? I think it'd just be helpful to hear kind of your perspective on the building blocks between customer frequency and pricing as you look out over the medium term? And then my second question is just around free cash flow. I think we started to see some cost takeouts coming through, but cash burn is still a challenge. And so how do you bridge that gap to sustainable free cash flow generation, and are you able to do that while reaccelerating the top line as well? Thank you.

Erin, do you want to take that one or let me tag team?

Yeah. Sure. I'll start with the second part. So first and foremost, what I'd say is, generating consistent positive free cash flow is definitely a priority for the company. As I think about the near term, there are a couple of different things to think through in particular in our second-quarter results. The first one is insurance payments. The second piece is cash out related to our restructuring programs, and we expect that portion to be substantially complete in the second quarter. And the third main factor is capital expenditures. We have invested over the first half of the year in an acceleration of the mix of e-bikes, for example, within our TBS business. We do expect that to moderate over the second half of the year. But I'll just come back around to saying again, moving toward consistent positive free cash flow is a top priority as we think about navigating for the long term.

Nikhil, I'll answer part of the first question. We're not providing specific guidance on growth over time, but I can share two thoughts. First, I believe both Uber and Lyft agree that we are still in the early stages of rideshare. There are numerous segments to explore. I mentioned the return to office, but there are many areas we are just starting to tap into, helping people understand how rideshare can simplify their lives. While I don’t want to overly reference COVID, I hope that as people transition to the next phase of their lives, they will get out more. It’s beneficial for society, for mental health, and is what many employers desire. You hardly hear anyone express a wish to stay in more, claiming happiness as a result. By targeting segments individually, there is significant potential for growth. The other aspect I focus on is usage frequency. A frequent rideshare user might utilize the service four times a month, once or twice a week, but that’s still far fewer times than they leave their home. Consider how often people have to park their cars, drive, or deal with traffic. Although this is a preliminary perspective on rideshare's revival, I genuinely believe it reflects the reality. We are at the very beginning of this journey, and with the return to work, school, and seasonal travel, we see many opportunities for people to rediscover and grow excited about rideshare with two strong competitors.

Great. Thank you both.

Your next question comes from the line of Ken Gawrelski of Wells Fargo. Your line is open.

Thank you very much. I appreciate it. I have a couple of questions. First, I would like to delve a bit deeper into the fourth quarter revenue growth rate outlook. Can you discuss the year-over-year change in the take rate? I believe the take rate for the fourth quarter of 2022 was significantly higher compared to the fourth quarter of 2021. Could you explain the factors that might be influencing the year-over-year growth slowdown anticipated in the fourth quarter compared to the third quarter, given the otherwise positive trends you mentioned? My second question relates to the fourth quarter and extends into 2024. As both your company and your competitor will face increases in insurance costs, which will raise the cost per ride, how do you plan to approach pricing in that scenario? What do you consider the most constructive perspective for the next 12 months?

I will begin by addressing the end of our current situation and then work backwards. I believe we are in a good position now, having made a significant decision earlier this year to align our pricing with market standards. Our primary focus is now on enhancing our service and differentiation. I don't anticipate major changes in this approach. One nuance we haven't emphasized much is our pricing strategy, which goes beyond just setting a base price. We have the concept of prime time pricing, similar to what Uber calls surge pricing, where higher prices are set due to insufficient driver availability to encourage more drivers and reduce demand. This practice is unpopular with riders, and we are actively trying to eliminate it. Thanks to our dedicated efforts to improve driver supply, instances of prime time pricing have decreased significantly, with the share of affected rides down 35% since Q1. This shift does impact revenue, as we are earning less. However, it is beneficial for riders and the market overall. Revenue can be a tricky aspect since it can move in different directions, but overall, we are pleased with our pricing strategy. Erin?

Yes. Thanks, Ken. Thanks for your question. So taking a step back, it's obviously not in our norm to guide two quarters out. So we're providing some directional commentary. This was really important to us, so you could better track our progress and have an understanding of the impact of our renewal. So you're seeing there in the top line, probably a wider range of outcomes given those dynamics, again, in that directional guide. But maybe a broader way to think about it is, price will be lower year-over-year, kind of similar trends as we've seen in 2023, and volume will be higher. And consistent with what we've seen in the first part of this year, take rate is down year-over-year. We expect that trend to continue in the back half of the year. So the combination of those factors is what gets you to that, again, a range of outcomes implied within that directional commentary for the fourth quarter.

Your next question comes from the line of Ross Sandler of Barclays. Your line is open.

Great. Two questions please. So Uber likes to talk about half their growth in the long term coming from the base single ride service and then half from new products like they've got Reserve and I guess they've now got shared ride again. So is there a framework that you guys think about where the base service can produce a certain amount of growth? And then as we think forward multiple years, some new products that might be introduced could layer on top of that? And any thoughts on that? And then, I know we're not getting gross bookings right now, but maybe with the fresh look here, could we request revisiting that idea? And even though we're not getting that today, if we had to look at the rate of take rate compression that you've guys have experienced between lower pricing and some of the driver initiatives that you talked about, what would that look like on a year-on-year basis?

Yes, Ross, thank you for your question. As I mentioned earlier, our take rate is moderating year-over-year, and we expect this trend to continue in the latter half of the year. I'm pleased you noted my comments about our focus on providing guidance and metrics to help track our progress and business performance. There is nothing new to announce today, but I want to emphasize that this is a priority for me in the near term.

Yes. Definitely. I'll second that. Erin is very focused on that and I think that’s a good thing. On the first part of your, Ross, I think that's a reasonable framework. I don't know, the percentages are a little hard to predict. But for sure, we have a kind of a base standard product, which is a high-volume product. It has certain margin characteristics at a certain kind of base characteristics. And then on top of that, yes, we too will build differentiated products and services that will have typically higher margins, not always, but you would expect that in general. One of the things I was lucky enough to be in a dinner with Jamie Dimon a couple of weeks ago, and he was very clear. He cautioned me about trying to make promises on things that the external world drives as opposed to Lyft drive. So what I can tell you is that's our strategy: to produce a great, great base product and then do things on top of it. Whether that turns out to be 50-50 or 60-40, 40-60, that's really hard to know, particularly at a time when so much is changing in the external world about people's habits as they come back to work and so forth. But I think the framework is a good look.

Thank you.

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

Great. Thanks for taking my question. I'd be curious to hear a little bit about headcount. So after the two restructuring initiatives over the last few quarters, do you feel adequately staffed to execute against some of the initiatives you have planned going forward? Or is there a need to sort of add headcount selectively in the next year or so? And then, Erin, just to double down on the early look into the 4Q. I was wondering if you could give us any sort of guide points as to how contribution margin should progress as well. Thank you.

Great. Yes. Let me start, Benjamin. Regarding headcount, I can't provide very strong opinions on that, but generally speaking, I would say we're in a good position. We've been discussing some incremental shortfalls, but overall, we feel confident. We believe our team is appropriately sized and has a lot of energy. One of the significant benefits of the headcount reduction, aside from the challenges we faced and the cost savings, is a real sense of agility and fast decision-making. I'm impressed by how we now hold meetings with precisely the right number of people, make decisions quickly, and then move forward. I think that's a positive impact at this time, and I'm not inclined to add a lot of new people, as that doesn't align with our strategy.

Yes. And thanks. As it relates to your question on contribution margin, so our insurance costs are part of that contribution margin equation. So we would expect some quarter-over-quarter compression in our contribution margin in that directional guide in the fourth quarter, that's a reasonable assumption. And again, what we've provided in terms of a directional guide on the fourth quarter is EBITDA margin in line to slightly below the level we saw in Q2 2023. And as a reminder, that's up 4%.

I want to emphasize that we are focused on the long-term management of this business. This means we won’t let a single quarter’s unfavorable cost balance distract us. We will work to address these costs and manage them effectively, but we will not pass them on to our customers as much as possible. This is a strategic decision; we are not pursuing growth at any cost or prioritizing profitability at any cost. Our goal is to build a sustainable business for the long term, rather than merely focusing on quarter-to-quarter results.

Great. Thank you for all that color.

Your next question comes from the line of John Colantuoni of Jefferies. Your line is open.

Thanks for taking my question. When looking at all the different use cases for rideshare, where do you see Lyft having a particularly acute advantage or skill set that you can exploit more over time to begin carving the market into different niches so that you're competing less on price alone? And maybe if you could just talk about how that journey could impact the P&L in the near term and long term? Thanks.

Yes, I'll give it a try. This is an area where I want to be careful not to reveal too much, but I can share a few insights. First, let's focus on our strengths, particularly in the health care segment. This is an area we've invested in over time. While I don’t have the exact statistics with me, it's been a relatively quiet part of our business, yet one that has proven effective. To clarify, when I say health care, I mean nonemergency health care, as we aren't looking to replace ambulances. We have authorization to provide these services across about 20 states, which facilitates transportation to doctors and nonemergency medical treatments. There's also some overlap with Medicaid and other government programs. Notably, rides in this category grew by approximately 40% year-on-year in the second quarter of 2023. This area has become a solid strength for us, and customers really appreciate it. Given our demographic trends, I believe this will continue to be a key strength. Additionally, we now have partnerships with around 120 colleges and universities for their transportation needs. While this is more B2B, the first segment is more B2C, and in both cases, we have historical insights that will benefit us. Looking at the broader picture, it's difficult to assess brand value precisely, but I can confidently say that drivers choose Lyft based on how we treat them, as well as our values and marketplace perception. This holds true for riders too. I sometimes notice that while people may not have a strong affinity for our competitors, many do feel a connection to us, which is something we can leverage. Over time, examining successful consumer brands, especially large ones, reveals that customers often develop an identity or affinity that extends beyond the basics of the product. I believe we have the potential to achieve that, supported by our origins and story.

Great. Thanks for the details.

Your next question comes from the line of John Blackledge of TD Cowen. Your line is open.

Great. Thanks you. Just any updated thoughts on market share in any particular geographies that are stronger since Lyft implemented the competitive pricing? Thank you.

Yes, there are a couple of factors to consider. Regarding open market share, there's not much more to add from what we have discussed. I want to emphasize that while this may not be a leading indicator, we view an increase as a positive sign that suggests we are on the right track. It is particularly noteworthy that in specific regions such as Phoenix, Portland, and Salt Lake, we've maintained a 50-50 position, which highlights our ability to execute effectively. This isn't just a coincidence; it indicates real progress. Additionally, we've seen gains in several other cities, including a significant 4 percentage point increase from Q1 to Q2 in my own city, which is encouraging. This improvement is a result of our efforts, and we don't need to resort to extreme pricing strategies. Instead, we simply need to operate well and communicate to the market that we are back in the game. Overall, we see the market as an area where we can test and replicate successful strategies moving forward.

Okay. Let's see if that helps.

John, did you hear my answer to that question?

Yes. No, I think that was super helpful. Thank you.

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

Hi. Good afternoon. I was just wondering if you could provide a little bit more color around the micro-mobility results during the quarter. And then to the extent that you're able to give us a sense for how you think those businesses, including the recent acquisition that was done before you came aboard, best fit from an ownership structure at this point.

Yes. Thanks so much. I'll start off with the question. So in terms of our micro-mobility business, as you think about Lyft overall, the vast majority of our business is rideshare. So, micro-mobility is still a small portion of the overall total. If we look at this year-over-year, we certainly did grow at a faster rate than the micro-mobility business. As a reminder, we closed the PBSC acquisition in the second quarter of last year. But also, frankly, our ride volume is up. Some great stats like in New York City, we support more than 100,000 bike rides every day, the city bike system. And increasingly, as e-bikes are becoming more prevalent across the fleet, that's an opportunity to have each ride be more valuable, if you will, overall in that revenue line. So good progress there. But again, this is still a relatively small portion of our overall business.

Yes. I will add to that, Steven. As Erin pointed out, financially, it's not very significant on the income statement. However, what I find fascinating about this space is that e-bikes are rapidly gaining popularity. Erin mentioned that we reach around 100,000 rides a day in New York City, with numbers soaring to 140,000 on some days. We also opened a new area in San Francisco that is again gaining traction, similar to what we see in New York City. This trend is particularly beneficial for urban environments because e-bikes are eco-friendly and tend to promote inclusivity. Once someone tries an e-bike, they often share their experience with others. We anticipate continued growth and believe this will become an increasingly vital part of the overall transportation ecosystem. Looking back at ten years ago, the situation was quite different, especially in bike-friendly cities, whereas now bikes are ubiquitous. This transition underscores our current position. While it may not seem crucial, we have received substantial interest in partnerships from companies that truly grasp civil-level infrastructure, and we are moving forward with these collaborations.

Thanks very much.

Steven, was all the part of that answer clear? I'm just making sure it sounds okay.

Yes, I could hear everything that was being answered in the call on that one.

Your next question comes from the line of Lloyd Walmsley of UBS. Your line is open.

Great. Thanks. I have two questions. First, Erin, I appreciate your early assistance regarding the fourth quarter. I apologize for bringing this up again, but I'm curious about the sequential revenue outlook, which seems a bit lower than usual. You mentioned that pricing is expected to remain flat. Is this unusual and could it account for the reduced quarter-over-quarter growth? Are there other factors, perhaps a cautious approach due to it being far in the future, that might be influencing this? Secondly, regarding legal charges that you mentioned earlier, how should we anticipate those impacting the contra figures in the second, third, and fourth quarters of this year? Thank you.

Yes. Thanks, Lloyd for the question. Again, just framing up that directional guide for Q4, we probably were giving you a broader range of outcomes because it's not typical for us to give this kind of directional commentary two quarters out. The second thing I'd point to is my comments about a moderating take rate. So I think that hopefully would like to be helpful as you think about the trends you were referring to sequentially and year-over-year. As it relates to contra revenue and your question was about trends there. As the balance in our marketplace, so the balance between supply and demand has gotten healthier and healthier, our incentive costs per ride continue to decline. And so, I think that really reflects the more efficient needs of those dollars over volume. And we expect that trend to continue in the third quarter and into the back half of the year.

Okay. Thank you.

Thank you. Your next question comes from the line of Rohit Kulkarni of ROTH MKM. Your line is open.

Hi. Thank you. David, I have a more personal question for you. You've brought on many new team members while restructuring others. What are your thoughts on the current state of your team regarding those who report directly to you and those one level below? Are there any gaps to address or new roles you feel need to be created or developed? Additionally, since we are discussing the fourth quarter, I would like to know how you anticipate insurance and contribution margins may play out early next year. If possible, could you provide some insights on insurance renewal and how you think it will impact contribution margins in the first half of 2024? Thank you.

I'll take the first part and Erin will take the second. We have an exceptional team, and I genuinely believe that if you could join our meetings or listen in on our discussions, you would be surprised by how focused everyone is and the effort they put in, both individually and as a group. This is perhaps a scenario that showcases our synergy and collaboration. Currently, there is only one open position on my team, which is for the Chief Marketing Officer. We have some excellent candidates and anticipate strengthening that team further. Other than that, I feel quite positive about our current situation.

Yes, we are on track to announce new long-term targets, likely around the time of our Q4 results. This remains a near-term priority for me. Looking at unit economics in a broader context, we have discussed our pricing strategy. David has explained a lot about volume and growth, particularly the healthy balance we’re seeing in our marketplace. Additionally, there are opportunities for mix, such as making choices and shopping within our app, developing new features and products, and pursuing higher-margin opportunities like media. Although the media business is currently relatively small, it has quadrupled compared to last year and shows potential for further growth. Regarding costs, we have talked about our strategy for driver pay to ensure a great experience for our drivers, and we have made progress on our overall cost structure. Considering all these factors, I see ongoing opportunities for healthy unit economics and positive contributions across the business. Again, we plan to announce new long-term targets soon, so stay tuned.

Thank you. Your next question comes from the line of John Colantuoni of Jefferies. Your line is open.

Thanks for taking my question. When looking at all the different use cases for rideshare, where do you see Lyft having a particularly acute advantage or skill set that you can exploit more over time to begin carving the market into different niches so that you're competing less on price alone? And maybe if you could just talk about how that journey could impact the P&L in the near term and long term? Thanks.

Yes, I'll give it a shot. This is an area where I might not be completely straightforward, as I prefer not to fully reveal our strategic plans, but I can share a few insights that might be useful. First, let's focus on our strengths, particularly in the health care segment. This has been a significant area of investment for us over time. I don't have the exact statistics on hand, but this aspect of our business has quietly become successful. To clarify, we focus on nonemergency health care, not emergency services like ambulances. We are authorized to operate in over 20 states, helping people access doctors and receive nonemergency medical treatments. This segment has seen a 40% year-on-year growth in rides during Q2 of 2023, demonstrating its durability and importance to our customers' lives. Furthermore, we've established partnerships with roughly 120 colleges and universities for their transportation needs, creating a business-to-business aspect that complements our consumer services. On a broader level, valuing brands is quite complex, and it's challenging to precisely compare ours to others. However, I can confidently say that driver preference for Lyft is influenced not only by how we treat them but also by our values and market perception. Riders share similar sentiments. It's interesting to note that while I don't want to disparage our competitors, many people don't express strong loyalty to them, whereas we see genuine affection from our users. This is a foundation we can build upon. If you examine successful brands, particularly large ones, many have customers who feel a deep connection or identity with them that goes beyond the products offered. I believe we have the chance to cultivate that kind of connection, thanks to our origin story and values.

Great. Thanks for the details.

Your next question comes from the line of John Blackledge of TD Cowen. Your line is open.

Great. Thank you. Just any updated thoughts on market share in any particular geographies that are stronger since Lyft implemented the competitive pricing? Thank you.

Yes, there are a couple of factors to consider. Regarding open market share, there isn't much more to add beyond what we've already discussed. I want to highlight that while it's not specifically your question, thinking of open market share as a trailing indicator rather than a leading one is important. When we see it rising, that's a good sign because it indicates we are making progress. In terms of specific geographies, there have been some interesting developments. For instance, in Phoenix, Portland, and Salt Lake, we've maintained a roughly 50-50 balance, which is significant because it shows that with effective execution, we can expand our presence. This isn't just a temporary fluctuation; it reflects real improvements. Additionally, we've gained a few points in other cities, including a notable 4 percentage point increase in my own city from Q1 to Q2, which is encouraging. This progress isn't coincidental; it results from our efforts. We don't need to engage in extreme pricing tactics; we just need to operate effectively and communicate to the market that we are fully engaged again. Overall, we see the market as a space where we can experiment and test strategies, ultimately allowing us to replicate successful outcomes.

Okay. Let's see if that helps.

John, did you hear my answer to that question?

Yes. No, I think that was super helpful. Thank you.

This concludes today's conference call. You may now disconnect.