Lyft, Inc. (LYFT) Q3 2023 Earnings Call Transcript

Good afternoon. And welcome to the Lyft Third 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 may be recorded. I would now like to hand over the call to Sonya Banerjee, Head of Investor Relations. You may now begin the conference.

Thank you. Welcome to the Lyft earnings call for the third 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 will 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. Also, please be aware that today we have announced changes to our key business metrics. These changes are described in our press release and our supplemental slide deck, which are also available on our Investor Relations website. And with that, I will pass the call to David.

Thank you, Sonya. Hey, and good afternoon, everyone. Thanks for joining us. I am thrilled with our progress in creating a customer-obsessed and financially strong Lyft. More drivers and riders are choosing Lyft every day. In fact, this is post Q3. Just in the past few weeks, our gross bookings have been the highest in our history. The actions we have taken over this year to refocus our business on drivers and riders, including pricing more competitively and improving the customer experience, are producing incredible results. In the first nine months of 2023, we supported over 0.5 billion rides and generated more than $10 billion in gross bookings. Ride growth has accelerated each quarter this year, up 10% year-on-year in Q1, 17% in Q2, and 20% in Q3. With better balance in our marketplace, primetime is at the lowest level it’s been in years and driver pickup times have gotten faster across our regions. These factors underpin a very solid Q3 performance. A big headline this quarter is that more drivers are choosing Lyft and are driving more often. In Q3, this resulted in an almost 45% year-over-year increase in the number of hours drivers spent using Lyft, with non-incentivized driver hours growing even faster. Our focus for drivers is on making Lyft the simplest way to earn, and it’s paying off. So even while rider demand accelerated, our conversion rate, which means the share of ride intents that converts to rides taken, was stable and that translates to a higher volume of completed rides. Overall, our execution was impressive. Our team has worked in lockstep to prepare for back-to-school and return-to-office and delivered very strong results. For example, over the roughly 70 regions we targeted for back-to-school, particularly in university towns, rideshare rides grew by 25% year-on-year, reflecting a surge in new and returning riders and drivers. And with return-to-office morning commute rides growing even faster, up more than 30% year-on-year the last week in September, this means more activity too. We are seeing a pickup in weekday evening rides, particularly on Thursday and Friday, all due to this great execution. Bottom line, we are helping more people get out and connected, which is our purpose and something we are really excited to see. We will continue to listen to customers and act on what we are learning to create differentiated experiences. Women+ Connect, which we introduced in early September, is a great example. It’s a feature that prioritizes matching women and non-binary drivers and riders, giving them more comfort, camaraderie, and control when they use Lyft. In our early access cities, we have seen great results; more than half of eligible drivers have opted into this feature and are keeping the feature turned on nearly every time they are online. Just to give you a little color on this, the feedback we have gotten has been amazing. Ambrosia, one of the drivers in Chicago, told us, 'Having Women+ Connect actually encourages me to drive more', and Amy, a driver in Phoenix, said, 'I find myself driving more at night with Women+ Connect, which has allowed new opportunities for me to earn money.' So, we are listening carefully to what the drivers are saying; both examples speak to how customer-obsessed features can directly improve their experience and our business metrics, in this case increasing driver hours, which of course leads to more rides on the platform. The last thing I want to say about this is that customers and city officials have taken notice, and they are asking us when Women+ Connect will be available in their market. That’s why we accelerated the rollout of Women+ Connect to an additional 50 cities last week, and we expect it to be available nationwide early next year. Women+ Connect is a great example of the type of innovation that customers want, which can reinforce our brand, expand our addressable market, and help drive preference and growth over time. As we move into the holiday season, we will continue to deliver new customer-obsessed features targeted to driver and rider needs. For example, we want to make getting to and from airports stress-free. We have already done a ton of work this year to make scheduled rides highly reliable. We actually have a big announcement coming tomorrow that will provide even more peace of mind for riders going to the airport this holiday season. So please stay tuned for that. Finally, I wanted to touch on the small, but growing part of our business that can improve our margins over time: Lyft Media. We have a great opportunity to connect brands with our millions of riders in ways that deliver differentiated and relevant messages and experiences. In Q3, our Lyft Media unit launched in-app advertising, which adds to our in-car, on-car and on-street offerings you may have seen if you have been in Manhattan recently. We can tailor ads to where a rider is heading and to their lifestyle. Imagine you are on the way to the movies and getting an ad that allows you to preorder your drinks and popcorn. Great experience means you are even ready to go by the time you get there. This is what’s opening up conversations with partners like Universal Pictures. We want to help design and co-launch new ad products including in-app video advertising, which will roll out this quarter. It’s still early days, and this is a small business now, but we see a ton of potential to be creative in how we enable brands to engage with riders at relevant moments and build a meaningful, high-margin business. Now, before I turn the call over to Erin, it’s worth taking just a moment to reflect on the road we have traveled over this year and really, over my first seven months. We have refocused our business, streamlined our cost structure, and are operating in a healthy and competitive way. We are also building a culture of true customer obsession and operational excellence. These are foundational to our ability to deliver profitable growth. In fact, you will hear me say several times that customer obsession drives profitable growth, and that’s what we are seeing. As we move into 2024, we have our foot on the pedal. I want to say a huge thanks to the entire Lyft team for their unbelievable work. We have a lot more to do but we are super excited about the road ahead. Erin, over to you.

Thanks, David. Good afternoon, everyone, and thanks for joining us today. I am going to kick things off by addressing the changes we are making to our key business metrics. Then I will review our Q3 results, as well as our Q4 guidance. 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. Starting with new metrics, today we introduced gross bookings, rides, and adjusted EBITDA margin as a percentage of gross bookings. If you haven’t seen our supplemental slides, please take a look at them as they contain detailed information, including seven quarters and two fiscal years of historical data. We hope you find this information useful. Overall, our expanded disclosures better align our reporting with our strategic priorities and how we are managing the business. Let’s start with rides, which represent how much our platform is used across rideshare, bikes, and scooters. At a high level, when we grow rides, it shows that drivers and riders are choosing Lyft. Our objective is to grow rides within the construct of building a durable, healthy, and profitable business. Next, gross bookings, which reflect the aggregate size and impact of our business. On the rideshare side, gross bookings include applicable fees, tolls, and taxes invoiced to riders but exclude tips to drivers. This is consistent with our largest competitor. Gross bookings also include amounts that are invoiced to our non-rideshare operations, such as bikes, scooters, Express Drive, data licensing, and advertising. We are also moving to report adjusted EBITDA margin as a percentage of gross bookings. Please note that our definition of adjusted EBITDA, as described in our earnings materials and SEC filings, is not changing. As a reminder, in connection with our IPO, we disclosed rides and bookings metrics; I am going to touch on how these new metrics compare. Our definition of rides is consistent with the prior metric. However, our S1 disclosure would have reflected a significant volume of shared rides, which, as a reminder, was largely sunset earlier this year. Next, the gross bookings metric we have released today is largely consistent with the definitions of bookings included in our S1. However, in our S1, pass-through fees like tolls and taxes were excluded, and today we have included those pass-through fees in our definition of gross bookings, again, which is consistent with our largest competitor. Given our focus on gross bookings, we are shifting away from formally providing metrics that anchor to revenue. Of course, you will still be able to continue to disclose revenue, cost of revenue, adjusted EBITDA, and active riders, so you will still be able to calculate revenue-based metrics. However, beginning in Q4 of 2023, we will no longer present as key metrics revenue per active rider, contribution margin, or adjusted EBITDA margin as a percentage of revenue. With that, let’s now move to our third-quarter performance. We came together as a team with purpose to deliver a great experience for drivers and riders and saw strong results consistent with our outlook. Driver and rider demand and engagement increased, and our rides growth accelerated. Let me share a few operational and financial highlights for the third quarter. We supported 187 million rides and 22.4 million active riders. Total rides grew 20% year-over-year. Within this, rideshare rides grew 22%. Ride frequency, referring to the average number of rides per active rider, was the strongest it’s been in more than three years but remains a significant growth opportunity. We saw continued momentum in travel with airport trips growing by nearly 15% year-over-year. Regionally, the West Coast showed the biggest sequential improvement in Q3 with nights out and commute leading the way. Gross bookings were $3.554 billion, up 15% year-over-year. This reflects strong ride growth, partially offset by lower prices year-over-year, given our competitive focus and the improving health of our marketplace. Revenue was $1.158 billion, up 10% year-over-year and slightly above the high end of our outlook, driven by rideshare strength. Cost of revenue was $638 million, up 15% year-over-year, driven by higher ride volumes along with higher per-ride insurance costs, reflecting last year’s third-party insurance renewals. Operating expenses were $455 million, down 18% year-over-year. As a percentage of gross bookings, operating expenses were 13%, reflecting an improvement of 5 percentage points versus Q3 of 2022, primarily driven by our recent cost restructuring actions. Relative to Q2 of 2023, operating costs increased by $45 million sequentially, reflecting targeted marketing investments along with volume-driven costs related to bikes and scooters. Adjusted EBITDA was $92 million, which as a percentage of gross bookings was 2.6% and reflects momentum across the business. We ended the quarter with a solid cash position, with unrestricted cash, cash equivalents, and short-term investments of approximately $1.7 billion. Now turning to Q4. We are off to a great start. Our teams are executing extremely well, and demand was strong for the month of October. Driver hours maintained their 45% year-over-year growth and our rideshare ride growth accelerated above the 22% we achieved in Q3. We also delivered a great Halloween week experience for drivers and riders, with driver hours, ride intents, and rides, each reaching new multiyear highs. With that, let me review our Q4 guidance. I will highlight that our outlook is consistent with our previous directional comments on the fourth quarter. We expect gross bookings of $3.600 billion to $3.700 billion, up 13% to 16% year-over-year. We expect total rides growth year-on-year will accelerate slightly from the 20% year-on-year growth rate we saw in Q3 driven by rideshare. If you are doing comparisons on a sequential basis, note that our outlook implies a slight decline in total rides, again sequentially due to bike and scooter seasonality. We expect adjusted EBITDA of approximately $50 million to $60 million and an adjusted EBITDA margin as a percentage of gross bookings of roughly 1.4% to 1.6%. This reflects a full quarter impact of our third-party insurance contract renewals that went into effect on October 1st. As you may recall, last quarter we provided directional Q4 outlook in terms of revenue. So just to sync that up for you, here’s how our formal guidance compares. We now expect our fourth quarter revenue will grow mid-single digits quarter-over-quarter, which is at the high end of our prior directional comments. On a year-over-year basis, our outlook implies revenue growth in low to mid-single digits, reflecting our competitive focus and greatly improved marketplace health versus Q4 of last year. We expect fourth quarter adjusted EBITDA margin as a percentage of revenue will also be at the high end of prior directional comments and roughly in line with the 4% we achieved in Q2 2023. Again, this refers to adjusted EBITDA margin as a percentage of revenue. And finally, as we make the transition in reporting, consistent with our updated key metrics, I thought it would also be helpful this quarter to share some comments on cost of revenue and operating expenses. We expect our fourth quarter cost of revenue will increase by approximately $100 million quarter-over-quarter, reflecting the impact of our third-party insurance contract renewals along with higher rideshare ride volumes. We expect operating expenses will be roughly flat quarter-over-quarter. With that, I will bring our prepared remarks to a close. Our team is focused on building a business that is both customer obsessed and financially strong. I have been impressed with the team’s solid execution and focus on delivering great experiences for drivers and riders. We have had a really great start to our fourth quarter and I am excited about the road ahead. Operator, we are now ready for questions.

Our first question comes from Mark Mahaney from Evercore. Your line is now open.

Okay. Thanks. I make it a point to ever congratulate management teams, but congratulations on the much greater disclosure. I think it’s a huge win for investors and for you. So thanks for doing that. Two questions I had. One is you talked about the long-term drivers. If we think about the long-term drivers of the company in terms of riders, rides provider, bookings provide, take rate, etc. Erin, you mentioned a particular confidence about increasing the rides per rider. But just long-term, as you think about those drivers, which do you think you have the most power to move, and where would be the biggest driver of growth going forward? And then secondly, just a small question on scheduled rides; what’s the kind of penetration rate you are seeing with that now, and just talk about the benefit that has to the model? I assume that’s higher margin rides for you? Thank you.

Hey, Mark. It’s David. I will start and then Erin and I will share our thoughts on this. First, thank you for the recognition regarding our increased transparency. Erin has prioritized this since the beginning, and it's great to see our team achieve it. I'm glad you appreciate it, and I hope it proves beneficial. Regarding growth, customer obsession is our main focus. Let me take a moment to provide a broader perspective. Doing the fundamentals right every day, consistently, is crucial. Customers notice this, which leads to competitive pricing and a solid take rate. Additionally, we emphasize execution excellence. For instance, our back-to-school campaign saw 25% year-on-year growth across 70 markets. Achieving such success requires substantial effort, similar to our Halloween efforts; these are all-time highs in gross bookings we observed in early October. This highlights our commitment to ongoing operational excellence. We also aim to innovate with differentiated products and services. One example is Women+ Connect, targeting a significant market—women make up half the population, yet only 23% of our drivers are women, with a mere 15% of driver hours coming from them. There’s a vast opportunity here to enhance comfort for women in driving and riding, which could lead to significant long-term growth. In another context, there’s been a surge of articles about returning to the office. We’re seeing this ourselves as people come back to Lyft, and we're actively selling to companies. We're collaborating with firms like Amazon, Netflix, and LinkedIn to transform the challenging commute into a more positive experience for employees, benefitting both Lyft and riders. Our unique offerings encourage customers to choose Lyft over Uber and help boost our growth. This brings us to scheduled rides, which currently only account for about 5% of our rideshare services—a surprising figure. Using airport rides as an example, we can better assist customers by coordinating scheduled rides and ensuring a great experience. We're launching an exciting product related to this soon, aimed at reducing stress, especially during the holidays. While airport rides are a clear match for scheduled services, I know Kristin, our President, plans to schedule her Pilates classes for the same reasons—it's more convenient and reliable than on-demand requests. As for your margin question, yes, scheduled rides tend to be higher-margin and more reliable, allowing us to charge more and incentivize drivers to be timely, enhancing the experience for everyone involved. There’s considerable potential in this area, and as we focus more on it, we can drive further growth through this product. I know that was a lengthy response, but I wanted to cover a lot of points. Erin, do you have anything to add?

Yeah. No. Mark, the only thing I would say is, David, I think, you covered many of the levers, and so I think it’s important to understand that we really do have multiple growth levers across the business. But you also talked about frequency; as you think about active riders, it’s gratifying to see that frequency is increasing year-over-year and even sequentially quarter-over-quarter. I am sure some of that is again getting out and about after the pandemic or returning to office. But we still think there’s obviously more opportunity there in addition to all the other levers that David mentioned.

Our next question comes from Doug Anmuth from JPMorgan. Your line is now open.

Thanks for taking the questions. David, after a couple of years of price inflation, it feels like we are starting to see some moderation on a like-for-like basis and then combined with the mix shift, perhaps, into more affordable ride options for consumers. Just curious how you are thinking about pricing exiting the year and into 2024? And also just wanted to ask about another ride mode in terms of Wait & Save. I think you have talked about that as around 30% of rides in the past. Can you give us an update there on how that product is doing? Thanks.

Yeah. Sure. So sort of great points, both. On pricing, pricing has been fairly stable right now, no major changes. It sounds unchanged around a little bit, as you would expect, but it’s not a significant; we don’t expect a significant change there. We kind of like what we are seeing, and frankly, our riders do too. It’s one reason why we have seen such great ride growth quarter-on-quarter and year-on-year. On Wait & Save, I am actually really glad you brought it up, because I think it’s a great reminder. People do not price rides in a vacuum. As a rider, your choice is not binary. So if you are more price-sensitive as a rider or if you are at a more price-sensitive time in your life or if you are at a time where you frankly have a little bit of time that you don’t mind burning because you want to go get a coffee at Starbucks or whatever, Wait & Save is a great option. And we see it still, no major changes from where it was before. I will tell you that Wait & Save riders take about double the rides of non-Wait & Save riders. That really suggests that there’s a segment that you can really speak directly to; we can optimize it over time, improve the economics, and so on and so forth, but it’s a really important part of the mix. And just to answer the question that you didn’t ask, but I will answer it anyway, which is that Uber has got a mode for price-conscious folks, too. It’s called shared rides, and we innovated there; it’s an area where we started. We largely have turned it off, except for some specific use cases, because we don’t find our riders or our drivers like it very much. So we think just on a head-to-head basis, we have a better, more customer-access strategy there.

Great. Thank you, David.

Sure.

Our next question comes from Brian Nowak from Morgan Stanley. Your line is now open.

Okay. Thanks for taking my questions. I have one on the implied take rate. I appreciate the bookings disclosure. So I know take rate can be somewhat crude, but if we sort of take the revenue and divide it by your bookings, it looks like your effective take rate is in the low 30s, somewhat higher, I think, than your competitive peer in the U.S. How do you think about that take rate over the next year or so to try to sort of load balance supply and demand and sort of more supply into the overall ecosystem? Thanks.

Yeah. I will start with that one. As a reminder, of course, we report as a single segment and that includes both our rideshare business, but also a mix of bikes and scooters, fleet, media, etc. So as you think about that total revenue as a percentage of gross bookings, there’s more than rides here. What I will say about that, though, is as you think about TBS fleet and media, that will drive revenue as a percentage of gross bookings up about 2 percentage points to 3 percentage points, depending on seasonality and overall in the quarter. But what I would really say bottom line is we, of course, track in a very methodical way how we are competing in the market, both in terms of price and how it relates to driver earnings. We feel confident that since Q2, we have been operating in pricing competitively and in line with the market. If I can steal a phrase from David, people are voting with their feet; more drivers and riders are choosing Lyft, and that’s just another data point that gives us a sense of where we are competitively.

Yeah. I will just underscore the last thing that Erin said. Our driver strategy is to pay them fairly for sure and to continue to make sure it’s a great way to earn. So we expect to pay in line with the competition, just the same way we price. We have seen 45% historic highs in driver hours, so really no material difference there. I think it’s more of a math issue around how we present versus how Uber does.

Our next question comes from Ken Gawrelski from Wells Fargo. Your line is now open.

Thank you. I appreciate it. I appreciate the question. Could you please help me think about medium-term insurance inflation? How should we just think about the various dynamics that might play into that? First, and then second, again, a kind of more medium-term question, which is if you look out beyond the next several quarters, how do you think about the various factors driving overall ride growth, both from an industry level and from a Lyft level specifically? Thank you.

Thanks, Ken. I'll begin with the insurance question and then pass it to David. As a reminder, we renewed our most recent third-party insurance contracts effective October 1st, and this renewal aligns with our previous communications during the last earnings call. This gives us solid visibility for the next 12 months, with no changes from what we shared earlier. Rising auto insurance costs are indeed a reality for our industry. However, the rate increases we observed in this latest round were lower than those from the previous year, suggesting that the effects of COVID on these rates may be diminishing. That said, a key aspect of our overall cost strategy is managing insurance over a multi-year period, which requires a cross-functional approach within the company. This includes product improvements and various safety initiatives we've been developing for many years, along with more room for growth as our capabilities advance. Anything that enhances safety reduces accidents, and leveraging our telematics to improve settlement outcomes will be central to our strategy. On the policy front, we are actively pursuing common-sense reforms related to T&C insurance requirements at the state level, while also collaborating with major insurance carriers in the U.S. to address issues like social inflation or legal system abuse. Overall, we have a comprehensive strategy regarding insurance. For this year and for the renewals we've just completed, everything proceeded as anticipated, and we have strong visibility for the next 12 months.

So, Ken, I will continue from where Erin left off. Discussing the next 12 months in insurance, I’d like to provide some perspective on growth over the next few years. Strong execution and ongoing operational excellence can significantly enhance this business. If we consider the longer term, it’s essential to focus on deeper aspects. People enjoy being together and appreciate life beyond their homes. Not only do they value this, but various companies and organizations, including cities, benefit from it as it encourages spending. We have a solid partnership with Chase Bank, for instance. We can delve deeper into that later if there’s interest, but our credit card collaboration with them, specifically with Chase Sapphire, is promising and still in its early stages. Looking ahead a couple of years, the narrative shifts from just Uber and Lyft to how organizations like ours can innovate for customers, expanding our rideshare network into a more integral part of people’s lives, enriching their experiences, while also providing increased support for our partners. It may be a bit philosophical, but that’s how we view the situation.

Our next question comes from Deepak Mathivanan from Wolfe Research. Your line is now open.

Hey, guys. Thanks for taking the question. Kind of a two-part question on bookings growth. It was nice to see some acceleration in Q3. But more broadly, how do you think about the market and sort of the industry growth for 2024? And then the second one related to that: Uber is seeing some benefits from new verticals inside rideshare, like the products Shared Ride and Reserve. How do you think about the opportunity for incremental growth from there? And maybe can you unpack some of the contribution from these products that you currently have at all? Thank you so much.

Hey, Deepak. Really quickly. Sonya, can you actually hear us?

Yeah. We can.

Okay. Sorry, a little technical glitch there. Can you just repeat the first part of that question one more time?

Yeah. No. I was just asking about your expectations for industry growth in 2024 in the U.S. rideshare space?

Yeah. We probably, and Erin, I will chime in on this as well. Obviously, we are not giving any longer-term guidance besides what we just gave for Q4. We are still very much on track for what we call our long-range plan, LRP, but that will be the beginning of next year. Broadly speaking, we see a lot of reasons to be really optimistic about growth. Let’s start with where we are today and then try to extrapolate a little bit. Looking back over the past couple of weeks, we have seen growth higher than we have ever seen in our corporate history, not only since 2019, but literally since day one. That’s energizing. Number two, we see some secular trends: travel will continue to be a big growth driver across the sector as people come back to work post-pandemic. Looking at where we sit, we are really, again, customer-obsessed, trying to identify large segments like women or airport travel, which includes business and leisure travel, and figure out how we can create more and more differentiated experiences that drive that incremental use and frequency. Heavy users of rideshare might use the service maybe a couple of times a month, but most people go to work three times a week; at least most people engage in social activities a couple of times a week. In many ways, we are really under-penetrated in how people can use rideshare in their daily lives. We feel super good about our trajectory in 2024.

Yeah. The only thing I’d add to that, David, is obviously, I fully agree. As you think about our model, it’s important to note that as we get into Q2 of 2024, we will have anniversaried a couple of important things. First and foremost, that’s really the first full quarter where we operated competitively and in line with the market as it relates to our pricing strategy, and it’s also the quarter where we enacted a cost restructuring program. So as you think about 2024, Q2 2024 will be the quarter where we anniversary those two items.

Got it. And then the second part on contribution from products like Shared Ride and potentially something similar along the lines of Reserve, how do you think about that?

Yeah. So in our world, we started Shared Ride back in I think it was 2019, 2018, and found that it wasn’t particularly a great experience for riders or for drivers. Riders didn’t like it because it felt like a diversion from their destination. Drivers didn’t love it because the least enjoyable part of a ride is pickup and drop-off, which, of course, increases the pickup and drop-off time. So, it’s an area that we decided to sunset, but there are specific use cases where we still use it. Instead, we have Wait & Save, which allows people to wait a little or have some flexibility in exchange for a discount. I mentioned before it represents about 25% to 30% of our ride volumes. As for what Uber calls Reserve, that’s our scheduled ride product, and you will hear more about that tomorrow; we are making a stronger commitment to reliability for those going to the airport. It can reduce the hassle and stress in their lives, and as I mentioned, it has a slight premium price point. It also provides better economics for drivers, so they appreciate it too. I’d also bring up Extra Comfort, which is an affordable higher-end ride we are launching soon. The cars are newer, drivers are more experienced, leg room is increased, and riders can choose a quiet ride and so on. We are seeing this as an area that represents a particularly customer-focused offering that allows customers to have a better experience, and it’s a higher-margin product as well. It constitutes a very small part of our ride volume today but can grow over time.

Thanks so much.

Our next question comes from Eric Sheridan from Goldman Sachs. Your line is now open.

Thanks for taking the question. Maybe just two, if I could. In terms of capitalizing on the market opportunity when you look out to next year, David, I would love to get your sense of what you see as the mission-critical sort of two or three elements on either the product side or the investment side to continue some of the momentum, especially as you move into an environment where you will be lapping some of the changes you have had to make to pricing this year. That would be number one. And then in terms of the Q4 adjusted EBITDA as a percentage of bookings, can you walk us through some of the headwinds and tailwinds we should be keeping in mind in the Q4 guidance that impact margin guidance, just so we better understand some of those velocities, both headwinds and tailwinds leaving 2023 into 2024, almost as a way to think about incremental margins going forward? Thank you.

Sure. Yeah. Let’s Erin and I will tag team on this. I think, I guess, I would come back to differentiated products and services in 2024, and I will mention two again. One, we have already talked about, which is Women+ Connect. That’s a new product for us. We launched it in 50 new markets last week. We hope to roll that out nationwide early next year. Again, that’s not a small marketplace, right? We are talking about roughly half the U.S. population. If you looked on social media at the comments we are getting, they give you a pretty good indication of why we are so excited about it. Literally, women riders saying, 'I am in tears now because of what you have done.' This will allow me to feel more comfortable in a new city at a time of day when I don’t typically feel comfortable riding. For drivers, this will allow them to drive more and work with friends to get them on the platform. We will continue to pour gasoline on that bonfire because it’s great for riders and drivers, providing volume and additional earnings. For drivers, anything we do to increase driver supply is a big win. An example of something we have launched is a feature that allows you as a driver to pick your destination or a radius within which you will drive today. It’s picking up massive momentum, allowing drivers to earn more money per hour. These drivers, most of whom are our dedicated long-term drivers, absolutely love it; it helps them earn more on the platform.

And Eric, as it relates to your question on Q4 adjusted EBITDA margins as a percentage of gross bookings. I might start with the tailwinds as you think about this sequentially quarter-over-quarter. We talked about the health of our marketplace; that has definitely been a tailwind for us. It continues to improve, and we will continue to do so in our estimates here for the fourth quarter. We have got revenue going up in the fourth quarter and operating expenses staying flat. So, there’s leverage there. The headwind primarily reflects increases we are expecting from our recent insurance contract renewals that will fully flow through cost of revenue beginning at the start of the fourth quarter.

Our next question comes from Benjamin Black from Deutsche Bank. Your line is now open.

Good evening. Thanks for the questions. Perhaps one on Lyft Media. Can you dig a little bit into sort of what the early takeaways have been? Where do you see the need to invest more to grow that business on the infrastructure side, sales force side, sort of more products? I would really be great to hear sort of how big you think the advertising business could become over the medium to long-term. And then one on contra revenue, so your competitor obviously spoke about favorable supply tailwinds, which is supporting lower contra. I am curious to hear how you are thinking about your current sort of driver incentive levels, how far we have been seeing normalization here, and is there anything you can do or work from an operational standpoint that could structurally lower driver incentive spend per trip? Thank you.

Yeah. Benjamin, I will take the first, and Erin will take the second. Let’s talk media for a second, because it’s such an interesting opportunity. Today, if you are a brand trying to come up with a new way to speak with your customers, gosh, the online world has gotten a little small. You can buy Google AdWords and they will charge you for that, and you can do some stuff on Meta. But if you really want to get your message out there, you are probably not as excited about Twitter anymore. These are what brands are looking at. We know that our younger generations are super brand-focused and very responsive to brands. People are looking for new areas; TikTok is doing a lot of work there and having success. But if you think about the experience a rider has when they open up the app to look for a ride, what have they told us? They not only tell us where they are coming from but where they are going, spending 5-15 minutes in a captive situation in a place where they are not doing much besides looking out the window. We have four products we use: first, in-app ads that start as you request a ride and go through a ride-matching screen; we are serving on about 70% of requests and our goal is for those ads to be relevant and interesting. We are seeing very high engagement rates, and I can also share that cancellation rates tend to go down as people have something to do rather than contemplate canceling the ride. This is exciting for us. In the car, two things happen: number one, you still have the app on your phone; also, increasingly, we are putting tablets in cars across 14 markets. These provide ride mapping, driver tipping, and advertising. We have had Apple advertising with good responses, and we see very promising data. Also, we have visual rooftop screens in cab cars that allow city-wide advertising. Finally, we have ads at bike stations and we intend to electrify more over time to enhance opportunities here. Early stages, but significant growth potential for advertising overall. So we see this growth as a multi-billion-dollar opportunity.

Yeah. And I will take the question on contra revenue incentives. I want to brag on our marketplace team a little bit because they manage this piece of our business every day. Since we have pivoted to focus on competitively pricing with the market, I think that team has delivered masterfully. Remember, we operate one of the most complex real-time dynamic marketplaces. Consequently, we are making dynamic decisions as it relates to both driver and rider incentives. But to give you a sense of the performance that the team has delivered from a contra revenue per incentive perspective, we have become more efficient per ride in Q2 and Q3, and we expect that efficiency to continue in Q4. While we spent more on the rider side in Q3 to support back-to-school efforts, that piece of the incentive structure is still quite small, less than 5% of revenue. I highlight that just to illustrate how we will make those decisions dynamically; I am pleased with our marketplace health and balance.

Great. Thank you very much.

Our next question comes from Michael Morton from MoffettNathanson. Your line is now open.

Thank you for the question and also the additional disclosures. I was wondering; your competitor has spoken to 1P insuring versus 3P model. I would love to hear a little bit more about the pros and cons of each strategy and how you think about that going forward. When we did the meet and greet in the Bay Area, you spoke about it a little bit, keeping the insurance companies honest, but that would be great to learn some more about how you are approaching that.

Sure. For a number of years, what I would say is that we have had a mix, a portion of our book that is self-insured and then a mix where we contract with third parties through relationships that extend over many partners we have been with for many years. We always look at this from a number of dimensions, one, obviously, ensuring that we are getting the best and most competitive rates. We now have about 10 years of data across the marketplace; I think that helps give us a really informed point of view. We like the mix that we have today; as a portion of our book that we contract with third parties, that gives us certainty regarding cash flow. I wouldn’t expect that total mix might move by a few percentage points in any given point in time in our renewal cycle, but overall we are pretty pleased with the mix that we have and think it’s a very competitive structure.

Okay. And I forgot to ask, are you able to quantify what percentage of the total book in taxes and tolls are?

This total pass-through, as a percentage of total bookings? Is that what you are asking, Michael?

Yes.

That’s roughly 10%.

Our next question comes from John Blackledge from TD Cowen. Your line is now open.

Great. Thanks. Two questions. First, could you talk about Lyft’s competitive position in the third quarter in any geographies where you might have seen some share gains? And then, second, just any further color on the growth on the West Coast and kind of where it is, where the ride volume is relative to pre-pandemic levels? Thank you.

Yeah. I will say a little bit about the second, and actually, Sonya, you will have to remind me. But the West Coast grew fastest; I think it was actually our fastest-growing region in the third quarter. Some of that was focused execution. We doubled down in a couple of markets to understand how to continue to grow those markets. Some of it’s also secular; the West Coast has lagged a little in back-to-work. However, we see that coming across super strongly. I don’t think we will talk too much about the other regional stuff unless someone else in the room has anything stronger to say there.

Thank you.

Sure.

This concludes our question-and-answer session. I will now turn the call back to Lyft’s CEO, David Risher, for any closing comments.

For sure. Thank you so much, and let me find my notes here. Yeah. Thanks for joining us all. That’s the main thing I wanted to say. I want to say a huge thank you to the Lyft team. Erin mentioned the marketplace team, but they are not alone. When you look at what we have been able to talk about today, it’s only because of the amazing work done by so many of our team members. We are super customer-obsessed; I think you heard us say that a whole bunch of times. Our focus is on creating a customer-obsessed, financially healthy business, and our basic thesis is that customer obsession is what drives our profitable growth. We are excited about the momentum we have seen and the growth in this past quarter, and we look forward to updating you on our business and progress in the new year. So, thank you all.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.