Lyft Inc (LYFT) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to the Lyft Fourth Quarter 2020 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Shawn Woodhull, Head of Investor Relations.

You may begin.

Thank you.

Good afternoon, and welcome to the Lyft earnings call for the quarter ended December 31, 2020.

Joining me today to discuss Lyft's results and key business initiatives are our Co-Founder and CEO, Logan Green; Co-Founder and President, John Zimmer; and the Chief Financial Officer, Brian Roberts.

A recording of this conference call will be available on our Investor Relations website at investor.lyft.com shortly after this call has ended.

I'd like to take this opportunity to remind you that during the call, we will be making forward-looking statements, including statements relating to the expected impact of the continuing COVID-19 pandemic, the expected performance of our business, future financial results and guidance, strategy, long-term growth and overall future prospects as well as statements regarding regulatory matters.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call.

In particular, those described in our risk factors included in our Form 10-Q for the third quarter of 2020, filed on November 12, 2020; and in our Form 10-K for the full year 2020 that will be filed by March 1, 2021, as well as the current uncertainty and unpredictability in our business, the markets and economy.

You should not rely on our forward-looking statements as predictions of future events.

All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof and Lyft disclaims any obligation to update any forward-looking statements, except as required by law.

Our discussion today will include non-GAAP financial measures.

These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results.

Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found on our Investor Relations website at investor.lyft.com.

I would now like to turn the conference call over to Lyft's Co-Founder and Chief Executive Officer, Logan Green.

Logan?

Thanks, Shawn.

Good afternoon, everyone, and thank you for joining our call today.

Despite the difficult backdrop in 2020, we focused on improving our business for the long term.

The progress we've made has been significant, and I believe we are now in a stronger position than at any time in our past.

Given the improvements we've made to our unit economics and our overall cost structure, we're like a tightly coiled spring, positioned to drive strong organic growth and margin expansion as the recovery takes hold.

Turning to our Q4 results.

Ridesharing continued to rebound, but the monthly trends were uneven.

Rideshare rides were down 47% year-over-year in October and 50% in November.

In December, rideshare rides were down 52% year-over-year as COVID-19 cases surged and state and local governments implemented restrictions limiting people's mobility.

Given the effect on demand, we were able to reduce driver acquisition and incentive spend, which had a positive impact on our financial results.

So despite the pandemic headwinds, revenue for our fourth quarter grew 14% sequentially and was towards the top end of our outlook range.

Recall that in early December, we said that Q4 revenue may come in at the lower end of the range.

Now as we've discussed on prior calls, recovery trends vary locally across North America, reflecting differences in COVID-19 case counts and responses.

The West Coast generally remains the weakest region, while we've seen further rebounding in Florida and Texas as examples.

Separately, in Q4, there was a mix shift towards higher frequency riders, which led to record revenue per active rider.

In fact, revenue per active rider grew 14% quarter-over-quarter and showed positive growth year-on-year despite the pandemic overhang.

Let me now shift to January.

While rideshare rides were down 51% year-over-year, the trend still reflects positive week-on-week growth throughout the month, excluding the MLK holiday week.

The operating environment does remain uncertain, but we currently anticipate an improvement in average daily ride growth in the months of February and March.

Brian will share more details, but based on current COVID-19 recovery expectations, in Q1, we plan to invest in driver supply to improve service levels and prepare for stronger demand beginning in Q2.

On the other side of the pandemic, when people are able to resume a fuller range of activities and safely come together, we anticipate a strong rebound in demand across our fully integrated transportation network.

As individuals return to activities like leisure travel and entertainment in the second half of the year, we are taking steps today to ensure that we're ready to support this anticipated demand when the time comes.

While we can't predict the timing or efficacy of vaccine rollouts with certainty, based on current trends, we believe the U.S. could reach critical immunity levels earlier than many international destinations.

As a result, the pop in leisure travel that I mentioned may primarily occur within the U.S., which we are well positioned to capture.

I think people are eager to get back to normal.

There is pent-up demand to see friends, go to restaurants and bars and attend sporting events and concerts.

And by taking Lyft, these venues can all be accessed responsibly without drinking and driving.

I want to take a few minutes to discuss our long-term vision.

We believe the future of transportation is as a service, and we are the only company in North America that has a seamless, multimodal transportation platform that can replace car ownership.

We expect autonomous vehicles to accelerate this transition.

They will transform the ridesharing industry and their business.

Here's how we're thinking about this.

We believe the first generation of AVs will be deployed on rideshare networks.

Given the expected vehicle cost, one key issue will be getting first wave vehicles to breakeven, which will depend on utilization.

This will be tricky because these vehicles will only be able to serve a subset of trips due to likely domain and weather restrictions.

It'll take time for AV technology to advance to the point where AVs are able to accommodate every ride under every condition.

There can be regulatory speed bumps, too.

Our rideshare network will help maximize AV utilization because we can dynamically dispatch AVs when the trip type and route are suitable.

This is critical.

Because of the nature of our multimodal platform and because we aggregate demand, we're able to match riders with a ride, whether or not it's fulfilled by an AV.

This type of hybrid deployment model is well established in other industries.

As wireless carriers have introduced 5G, they've rolled it out on top of existing networks for redundancy.

That way, if the new 5G tower is too far away, subscribers could still be supported by 4G or 3G service.

This model works because it allows the carriers to capture value as they scale.

Early AVs that deploy on our rideshare network will be able to benefit from a similar dynamic.

Keep in mind that daily travel patterns typically don't resemble a static horizontal line.

They're closer to a heartbeat, with large spikes around morning and evening commutes and a mix of peaks and valleys during other parts of the day.

Providing consistent service levels requires having infrastructure that can scale on demand.

Extending the carrier analogy, imagine what would happen to the carrier subscriber base if people were unable to access the network, not just 5G but any network at critical points during the day.

It would be a major problem.

For AVs deployed on hybrid rideshare networks, the advantage is that as demand spikes, the network can supplement a fixed pool of AVs with traditional vehicles to seamlessly serve rider demand.

Also for the same reason that nationwide roaming was critical to increase mobile penetration, Lyft's broad national footprint ensures consistent service virtually everywhere we operate.

We'll also be able to introduce AVs to millions of potential riders, expanding the reach of AVs to a wide audience.

We've spent 9 years building a business that is uniquely capable of supporting and scaling AVs.

Our Level 5 data-driven autonomy program taps into our greatest asset, our rideshare network, to help tackle some of the hardest problems in self-driving.

And our open platform partners will be able to leverage our rideshare technology stack, including our dispatching and routing algorithms, our shared rides platform and our pricing capabilities.

Since we aggregate demand, these partners will have access to a scaled network of riders and drivers.

Our fleet management expertise will drive additional operating efficiencies, as John will discuss.

We are already leading the way in our industry.

We facilitated more than 100,000 paid AV rides on our platform since 2018 with Motional.

In Q4, we announced our plans to deploy fully autonomous Motional vehicles on our network in multiple cities in 2023.

This is a landmark deal and the first agreement of its kind in our industry.

Through the investments we've made in our network, we've continued to build on our core competencies to be the partner of choice among autonomous programs.

We are excited about the transformative impact AVs will ultimately have on our industry and on transportation broadly.

Finally, we remain confident in our ability to address the significant market opportunity in front of us.

And our focus on revenue growth and cost discipline continues to strengthen our financial position.

Before John provides a few updates on the business, I'll turn the call over to Brian to review our financial performance and provide details on our path to profitability.

Thanks, Logan, and good afternoon, everyone.

The COVID-19 pandemic and its far-reaching effects remain unparalleled.

As case counts surged in the fourth quarter, cities and states reinstituted shelter-in-place orders, curfews and other measures to help slow the spread.

Now while our recovery advanced in the fourth quarter as rideshare rides improved to a year-over-year decline of 49.6% versus 51.8% in the third quarter, monthly trends worsened, with December down 52% versus 50% in November.

Given the uncertainty and decline in demand, Lyft cut expenses and significantly reduced driver acquisition and engagement programs in the month of December.

The reductions in incentives classified as contra revenue helped drive upside of revenue.

In fact, fourth quarter revenue of $570 million approached the top end of our initial range of $555 million to $575 million.

This compares with our updated outlook provided in early December that revenue may be at the lower end of the range.

Given the uncertain operating environment in Q4, we further reduced expenses.

The cost reductions combined with the revenue outperformance drove a significant improvement in our adjusted EBITDA loss.

So let's dive into the details of the fourth quarter.

I'll start with the top line metrics.

In the fourth quarter, the number of active riders increased by roughly 30 basis points from the third quarter to 12.6 million.

As stronger restrictive measures to control the accelerating spread of COVID-19 were reintroduced, rider growth was impacted by a decline in rider activations as well as the absence of lower frequency riders from prior quarters.

However, these dynamics led to record revenue per active rider.

Remember, additions to our rider count near the end of any quarter are normally dilutive to revenue per active rider since there's only limited time for these new riders to help generate revenue.

As Logan shared, this led to a mix shift towards higher frequency riders.

So in Q4, revenue per active rider reached $45.40, which is over $5 above the $39.94 achieved in the third quarter, representing an increase of 14%.

In terms of the year-over-year comparison, despite the pandemic, revenue per active rider increased by exactly $1 in the fourth quarter versus the prior year.

The combination of these trends led to a 14% increase in fourth quarter revenue to $570 million, up from $500 million in the third quarter.

Now before I move on, I want to note that unless otherwise indicated, all income statement measures that follow are non-GAAP and exclude stock-based compensation and other select items.

A reconciliation of historical GAAP to non-GAAP results is available on our Investor Relations website and may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC.

This includes contribution, which is defined as revenue less cost of revenue, adjusted to exclude amortization of intangible assets, stock-based compensation related expenses and changes to liabilities for insurance required by regulatory agencies attributable to historical periods.

Q4 contribution increased 27% sequentially to $316 million from $249 million in Q3.

For each $1 of incremental revenue growth between Q3 and Q4, contribution increased by $0.96.

Contribution margin was 55.5%, up over 500 basis points from 49.8% in Q3 and well above our outlook of 51.5% to 52.5%.

Contribution margin even increased on a year-over-year basis despite the significant difference in absolute revenue.

Contribution margin benefited from 2 unique windfalls in Q4.

As demand declined, we reduced driver acquisition and engagement spend by $15 million in December versus the average level in October and November.

Second, we took advantage of the strong used car market in Q4 to remarket older Flexdrive vehicles, which generated a $6.7 million net benefit to contribution.

Together, these items created a onetime benefit to our Q4 contribution margin.

Without these benefits, Q4 contribution margin would have been 53%, still above our outlook of between 51.5% to 52.5%.

I will provide more detail shortly, but we plan to invest in driver supply in Q1, which will reverse this Q4 benefit and create a slight headwind to first quarter revenue and contribution margin.

As a reminder, contribution excludes changes to the liabilities for insurance required by regulatory agencies attributable to historical periods.

In the fourth quarter, there was $128 million of adverse development, which we attribute to the impact of COVID on legacy liabilities.

After the onset of COVID-19, plaintiff law firms mined and reconsidered older matters for legal representation as new potential auto cases shrank given the drop in rides.

The share of bodily injury claims with attorney representation is approximately 20% higher for the impacted periods versus prior experience.

That said, while COVID-19 created the conditions that increased the cost trends of historical claims, we are pleased that we did not experience any adverse development associated with our primary auto book related to the second or third quarters of last year after the onset of COVID-19.

84% of the adverse development is associated with accident liabilities from the end of 2018 and 2019.

We remain confident in our insurance risk management strategy.

For the insurance policy year ending September 2021, we have transferred more than 50% of the risk to strategic insurance partners with competitive advantages and deep experience handling rideshare claims to help reduce future volatility.

In the fourth quarter, primary insurance cost as a percentage of revenue was lower than Q3.

Finally, as of December 31, even after the adverse development charge, we remain approximately 8% over-collateralized in our restricted cash and investment accounts held against our primary insurance liabilities associated with the period Q4 of 2018 through Q3 of 2020.

Let's move to operating expenses.

Operations and support expense for Q4 was $93 million, down 33% year-over-year.

Operations and support expense as a percentage of revenue declined to 16.4% in Q4, down from 23.5% in Q3.

Q4 R&D expense was $130 million, roughly flat with Q3.

As a percentage of revenue, R&D expense declined to 22.8% in Q4, down from 26.2% in Q3.

Sales and marketing in Q4 as a percentage of revenue was 14.3%.

In terms of absolutes, sales and marketing was only $82 million in Q4, down over $100 million or 56% from $187 million in Q4 of 2019.

Incentives classified as sales and marketing declined 80% in Q4 on a year-over-year basis from $99 million to $20 million or 3.5% of revenue.

G&A expense in Q4 was $192 million, down 16% from the year ago period.

Relative to Q3, G&A expense declined by $12 million.

In summary, total operating expenses below cost of revenue declined by over $25 million between Q3 and Q4, representing a 5% quarter-on-quarter reduction.

On a year-over-year basis, operating expenses decreased by $200 million in the fourth quarter.

This is not an annualized figure.

Operating expenses decreased from roughly $700 million in Q4 of 2019 to $497 million in Q4 of 2020 as we reduced expenses.

In terms of the bottom line, our adjusted EBITDA loss of $150 million was 19% better than our $185 million loss outlook.

On a sequential basis, our adjusted EBITDA loss improved by nearly $90 million, meaning for each $1 of incremental revenue growth between Q3 and Q4, our adjusted EBITDA loss improved by $1.28.

We ended the quarter with $2.3 billion of unrestricted cash, cash equivalents and short-term investments.

We again were disciplined on CapEx, which came in at $23 million.

Total 2020 CapEx was approximately $94 million.

Now looking forward, the near-term outlook still remains uncertain.

We are pleased that widespread vaccinations have begun in the United States and Canada and are confident that we will benefit from a significant rebound when communities fully reopen, but we don't know when that will be.

In the near term, though, given the current fluidity associated with government orders and health care recommendations as well as variability in reopenings among cities, it is impossible for us to predict with any certainty our results for the first quarter.

But let me share what I can about the first quarter.

Weather in Q1 is highly unpredictable and severe storms can shut down cities and impact rides.

We've recently seen an impact from storms in Chicago and across the East Coast.

Also, keep in mind that Q1 has 2 fewer days than Q4, 90 versus 92.

And for year-over-year comparisons, remember, we are comping a year that included a leap day.

In terms of trends, January rideshare rides were down 51% on a year-over-year basis, which is a slight improvement from December.

Rideshare rides in January grew 4% month-over-month, but were 7% below the level reached in October before case count spiked.

On an intra-month basis, as Logan mentioned, we experienced consistent positive week-on-week ride growth throughout January, except for MLK week.

While we expect to see a generally improving trend line in Q1, it is extremely difficult for us to forecast the number of Q1 rides with any confidence.

If we apply January's average daily ride volume to the 90 days in Q1, rideshare rides would be down 4% quarter-on-quarter.

But assuming an improving trend line, we expect average daily rideshare ride volume will grow further in February and March.

So based on a modest Q1 recovery, given the significant remaining overhang of COVID-19, we estimate that Q1 rideshare rides could be flat or slightly down relative to Q4.

This implies a year-over-year decline in Q1 rideshare rides of 45% to 46%, an improvement versus 49.6% in Q4.

Keep in mind that the pandemic began to impact our results in March of last year.

If you isolate just the month of March, we expect rides will decline at less than half of the quarterly figure.

Then fast forward to Q2, and we hit a major inflection point with rides expected to increase both on a quarter-over-quarter and year-over-year basis for the first time since the pandemic began.

Let me now address revenue.

As I've described, we realized a Q4 benefit when we reduced driver acquisition and engagement spend in December.

In Q1, to prepare for the recovery, we will do the reverse and accelerate investments.

It is important for us to invest in driver supply to improve service levels and prepare for stronger demand in Q2 and beyond.

This will create a headwind to reported revenue of $10 million to $20 million in Q1.

In addition, we face a sequential headwind on bikes and scooters.

Their first quarter is the weakest for bikes and scooters given weather.

So while we cannot provide formal guidance, we expect Q1 reported revenue to be down at least by $15 million to $25 million relative to Q4 despite growing ride momentum throughout the quarter.

This outlook translates to a year-over-year decline in Q1 revenue of 42% to 43% versus the 44% decline in Q4.

We believe investing in supply is the right strategic decision to position Lyft for a stronger rebound.

We anticipate that Q1 should be the last quarter with negative revenue growth in 2021.

We expect to generate exceptional year-over-year revenue growth in Q2 as we begin to comp the first full quarter impacted by COVID-19.

We expect significant organic growth to continue in Q3 and Q4 as well.

Given the operating environment, we continue to focus on driving expense leverage while we invest for a strong recovery.

We expect that we can manage our Q1 adjusted EBITDA loss to between $145 million to $150 million, barring a significant change in the pandemic, and this range is inclusive of 3 headwinds.

First, this loss includes the $10 million to $20 million investment in driver supply.

Second, we expect to realize a $5 million incremental loss related to bikes and scooters given fixed cost and lower Q1 demand.

Finally, this outlook also includes the sequential impact of the payroll tax headwind always faced in the first quarter, which this year we estimate at nearly $10 million.

So our adjusted EBITDA loss range of $145 million to $150 million includes between $25 million to $35 million of headwinds relative to Q4.

We expect Q1 contribution margin will be approximately 51% to 51.5%.

Q1 contribution margin will be reduced by an investment of up to $20 million in driver supply.

Additionally, Q1 will be impacted by a decline in remarketing profits as well as bike and scooter seasonality.

From this Q1 base, we expect we can drive contribution margin improvements and achieve an all-time record contribution margin later this year.

So let's move to expense leverage.

Last year, we had a goal to remove $300 million in annualized fixed costs relative to our original Q4 outlook.

We are pleased to report that we beat this target by 20% and achieved a $360 million reduction, and our Q4 results demonstrate this impact.

And as we look forward, we're not done.

In Q1, we expect to further reduce expenses below cost of revenue by approximately $35 million relative to Q4, even as we increase R&D investments.

We plan to deliver the savings through a significant reduction in first quarter G&A expense relative to Q4.

So despite headwinds from our driver supply investments, we are confident we can maintain or slightly improve our adjusted EBITDA loss on a sequential basis through this additional expense leverage.

Let me provide an update on our path to profitability.

The fourth quarter and our plans for Q1 serve as visible proof points of the extent to which we've reduced our expense base.

Given the impact of new efficiencies and our lower cost structure, we're even more confident that we'll be able to achieve adjusted EBITDA profitability by Q4.

In fact, based on the improvements we've made, there is a chance we can achieve profitability in Q3.

Obviously, pulling in profitability would require a strong summer rebound.

However, the fact that this is now even a possibility in the Q3 time frame should increase investor confidence.

Finally, while profitability is an important milestone, we also want to be super clear that despite being disciplined in our budgeting process, we are continuing to fund strategic investments in new initiatives like B2B delivery to expand our TAM over time and drive long-term growth.

As Logan and John shared in their original investor letter, we will thoughtfully balance investments in growth versus profitability while deliberately leaning more towards growth, especially in these early days.

So while we are intent on achieving adjusted EBITDA profitability this year, we are not losing sight of growth opportunities that create shareholder value.

So in closing, I want to emphasize 2 key points.

First, we expect to generate significant operating leverage.

Our success driving efficiencies and cost reductions in the fourth quarter and our expectation that we achieve further expense leverage in Q1 should increase investor confidence that we are on the right path to achieve adjusted EBITDA profitability in 2021.

We've been investing in and executing initiatives to increase our unit economics and we expect to demonstrate strong operating leverage as ride volume returns.

So we remain confident that Lyft will emerge on the other side of the pandemic structurally more profitable per ride than it was going in and expect to lead the industry in terms of long-term margins.

Second, we have a TAM in excess of $1 trillion, which provides a long growth runway.

In 2021, Lyft is well positioned to generate strong organic revenue growth as a pure-play in the expected rebound given our transportation focus.

We also expect to drive solid growth in 2022 and beyond, fueled by the continued recovery in the long-term secular and structural trends that have underpinned our growth from Day 1.

So with that, let me turn it over to John to provide a few key updates on the business.

Thanks, Brian.

I'm proud of the team's resilience and of the significant progress we've made over the past year.

Even as we continue to navigate the pandemic, I am very confident that we are extremely well positioned to deliver strong organic growth as the recovery takes hold.

To start, I'd like to build on Logan's comments about why we'll be the partner of choice among AV programs, which will fuel long-term growth.

There are 3 key elements: first, our hybrid AV network that includes human drivers; number two, our efficiency engine powered by our marketplace technology; and number three, our highly efficient fleet management capabilities.

Each of these elements creates a competitive moat that reflects the fundamental value of all the work we do across our business.

I'd like to talk about our fleet management capabilities.

Today, we already manage thousands of vehicles, multiple service centers and field operations across North America.

These services are an integral part of our platform, enabling us to drive more efficient operations and improve long-term economics in a reinforcing cycle.

And as self-driving cars begin to scale, they'll need to be efficiently managed and maintained.

This means serviced, repaired, stored and monitored.

By offering a comprehensive set of technology-enabled fleet management services, we expect to be able to add even more critical value to our customers and partners.

Our strategy works incredibly well today and tomorrow.

Our fleet management offerings can deliver strong cash flows in advance of AVs.

And with AVs, our competitive advantages will become even more clear.

For partners, we expect our hybrid AV network will support the highest revenue per mile while our fleet operations will drive the lowest cost per mile.

As Logan mentioned, the future of transportation is as a service.

We are best positioned to deliver on this vision because of the strength of our platform today and because of the long-term focused investments we are making.

All of this is powered by our engineering and data science expertise, which we've been using to drive increasing efficiencies.

We are also continuing to invest strategically in new initiatives like B2B delivery that build on our core competencies.

The bottom line is, we will continue to lean into our platform that delivers more value to drivers, riders and partners while lowering the cost of operating.

We believe this focus will serve as a key point of differentiation over the long run.

On the public policy front, let me provide a brief update on initiatives that are a result of the Proposition 22 win in California.

As of December 16, drivers began receiving a minimum earnings guarantee while also retaining the flexibility to drive whenever, wherever and as often as they want.

In addition, California drivers now have the ability to earn a health care contribution based on the average number of hours they drive passengers during the quarter.

Every driver also now has an additional insurance policy that covers their medical bills and lost earnings in the event of an accident.

To help offset the cost of these Prop 22 initiatives and to provide transparency to drivers and riders, we recently introduced a Lyft California Driver Benefits Fee that applies to each ride taken in the state.

We continue to view the outcome in California as a turning point in the conversation around the future of work in America, a future with the benefits drivers want along with the independence they desire.

We continue to engage in productive conversations with state and federal policymakers on this topic.

I'd now like to highlight some of the new work we're doing to provide further support to drivers and riders.

We've doubled down on our health safety initiatives.

This includes implementing mask recognition technology to ensure face coverings are being used by drivers and riders.

And we've strengthened our enforcement policies.

In December, we began reaching out to governors and local policymakers to advocate for drivers to receive high priority status for vaccines as frontline essential transportation workers.

And we've now achieved priority tiering for drivers in multiple markets.

In addition, we've continued to introduce product innovation that delivers more and more value to drivers and riders.

We've been building our own mapping and dispatching technology.

This drives experience improvements for our customers and cost savings for Lyft.

For example, we're now better able to help riders and drivers meet on the same side of the street, which shortens trip times, improves ETA accuracy and reduces the cost of certain rides.

Another innovation the team is driving forward is around creating more leverage on payment processing by transitioning a majority of riders to daily billing over the course of 2021.

These are just a couple of examples that collectively have a meaningful impact on both the user experience and our bottom line.

Quick update on the enterprise space.

In Q4, we continued to see strong adoption of our business solutions to facilitate employee commutes.

Corporations and government agencies are increasingly engaging with us about our bikes and scooters in addition to rideshare to help employees get to and from work.

This interest continues to validate our multimodal approach.

The pandemic opened the door to new use cases, and we will use these inroads to win the corporate rebound.

I'd like to close by addressing the ways we are helping communities through the recovery.

In December, we announced a universal vaccine access program with a goal to provide 60 million rides to and from vaccination sites, with a strong focus on supporting low income, uninsured and at-risk communities.

We are working with JPMorgan Chase, Anthem, Inc.

and United Way to lead this effort, along with a coalition of other organizations.

COVID-19 has amplified transportation and security, especially for seniors and vulnerable communities.

We are committed to ensuring that transportation access is not a barrier to beating this virus.

With that, we're now ready to take questions.

(Operator Instructions) I show our first question comes from the line of Doug Anmuth from JPMorgan.

Great.

One for Logan or John and then one for Brian.

First, just we often get the question of, how will rideshare be different when it comes back?

So if you think about hopefully late '21 or into '22, just curious on your view on what the key differences in the business will be beyond the changes in the cost structure.

And then Brian, just wanted to clarify on your long-term margin comments.

Are you quantifying long-term margin at all relative to the 70% gross margins and I think 20% EBITDA margins over the last couple of years or really just pointing to versus competitors and their numbers?

Doug.

All right.

I'll take that first part.

So first of all, there's a lot of talk out there about how the world may or may not change.

One thing, just talking about cities, I think there's a lot of hype that's kind of hogwash about how cities are dead and everybody is going to leave cities.

I think when some people decide to leave, it makes room for other people.

And you'll see an influx of younger folks, creative folks, ambitious people moving to cities.

If you look at the broader arc of history, the world has been on a steady march towards urbanization.

There have been economic disasters, wars, pandemics in the past.

And after each one, cities come back stronger than ever.

So I don't foresee that kind of change having an impact on our business long term.

The second piece is on the work-from-home trend.

I definitely think elements of that are here to stay.

But I think one key thing to understand about our business is even pre-COVID, the commute business was never demand constrained, right?

We talked about in the kind of opening remarks about how our demand patterns are more like a heartbeat than a flat line.

And when demand is high, we are often supply constrained, not demand constrained.

So if things even out a little bit, I think that could kind of net-net be a positive for the business.

But those are a couple of kind of, I think, modest things.

When you really look at the opportunity we're going after, it's a $1.2 trillion consumer transportation market with the vast majority of that being spent on the car ownership ecosystem.

And that fragmented, ultimately broken ecosystem is what we're setting out to fix and to move the world towards a transportation-as-a-service model.

And while the pandemic obviously has large near-term impacts on our business, long term, I think all of the sort of structural factors that are going to move people away from this fragmented car ownership model to transportation as a service will remain intact, and that's what we're going to continue to focus on going after.

So I'll let Brian jump in on the margin.

Sure.

Thanks, Doug, for the question.

Look, we continue to believe that we will lead the industry on long-term margins.

In terms of our North Star, we share the same financial objective as Amazon, which is to maximize long-term free cash flow growth per share.

And free cash flow is operating cash flow less CapEx.

We believe this is the metric most aligned with how to generate long-term shareholder value.

Near term, we expect margins to increase.

As I said in my prepared remarks, we expect we will achieve an all-time record contribution margin later this year, which would obviously translate to record adjusted EBITDA margins as well.

And what I would say is, because of COVID, we're in an uncertain operating environment, but our results demonstrate the improving leverage of our model.

So while we are confident that we will lead the industry in terms of long-term margins, we're not speculating on the time frame or what the ultimate margins could reach.

I show our next question comes from the line of Eric Sheridan from UBS.

Maybe just taking a step back from all the commentary you had during the prepared remarks.

As you look out to 2021, what are the investments you feel you need to make in the business that are sort of quasi-fixed or necessary irrespective of how the end demand environment evolves?

And then the second part of the question would be, how should we think about some of the investments you want to make that are more tied to end demand improving and how variable are those costs and investments against the broader recovery that you would expect to see in 2021?

Sure.

So Eric, let me start.

And then Logan, feel free to add on.

When I look at what we did between Q3 and Q4, we took operating expenses below cost of revenue down by $25 million.

And now, as we just disclosed, we expect to take the same OpEx below cost of revenue down a further $35 million in Q1.

And a lot of this, obviously, there was elevated policy spend in Q3 and Q4 related to Prop 22 in California.

But it really goes to our philosophy around how we budgeted the company for 2021 and how we approach planning.

And it's this zero-based budgeting mindset that we've mentioned is unlocking lots of opportunities.

And it's where you have to justify every single dollar, you find unlocks.

And this is across the board in terms of headcount growth, in terms of facility spend, T&Es, et cetera, and we did this across all cost centers.

So we still see opportunities in terms of just managing the business.

The fact that we're taking out another $35 million in Q1 I think speaks volumes to that.

In terms of the rebound, look, we want to be opportunistic.

We want to remain flexible.

And as conditions warrant, we will invest in growth.

And so in terms of Q1, we want to make sure we're investing in supply in advance of the rebound that we expect will really begin -- again, we expect demand will strengthen over the course of Q1, but we expect to see more of an inflection point in Q2 and then a much stronger recovery in Q3 and Q4.

And we just want to remain super flexible to be in a strong position strategically to win the rebound.

Yes.

I'll jump in with a little bit more color just to what Brian was talking about.

Our top priority is navigating the recovery.

And one of the biggest challenges in ridesharing is creating marketplace balance, making sure you have enough drivers for every rider.

And the 2 respond on very different time lines.

So supply and bringing more drivers onto the system takes time.

It's a little more like steering, turning the Titanic, whereas demand can move much faster.

And that's the real challenge.

We don't know when that demand will come back.

And so we need to invest a little bit ahead of the curve.

We expect to see some of that demand pick up in Q2, and we could be wrong, but we'd rather be prepared for that than not.

Back to the kind of always-on investments and always-on opportunities, we are investing and spending a lot of our time and R&D work and just energy on driving down unit costs.

And we think that's going to pay dividends for years to come.

We've already made really dramatic improvements on a lot of our variable costs.

But there's still huge opportunities.

So when you look at defects in the product experience, what do folks file support tickets for and ask for refunds around, those experiences not only add hard cost to the business, but they deteriorate the customer experience.

And by investing a lot in the perfection of the experience end-to-end, removing these defects, we can make dramatic improvements for the bottom line and for our riders and drivers.

And kind of along with that, we're investing in a really big way around the precision and the accuracy of all of our systems.

So from things like mapping to dispatch and pricing, there is a lot of leverage in the business in terms of the improvements we can make there.

Every second that we can get a driver to get to a rider faster, that is a huge amount of value to the system.

And so we will invest quite heavily to be able to deliver that.

And then there's a few longer-term investments that we're making as well, like our B2B delivery and some sort of more future-looking work.

But hopefully, that gives you some good color as to what we're looking at.

And I'm going to provide, sorry, maybe an even longer extended answer.

But the leverage that Logan is describing is what is allowing us to say, there is a chance we can be profitable in Q3.

Now obviously profitability is not tied to a single scenario.

But achieving profitability does require more absolute contribution, which is impacted by ride volume.

One illustrative data point that we would share is, we believe we could be profitable in Q3 if rides grew at a high single-digit month-over-month growth rate beginning at the start of the second quarter based on current expectations for Q1.

Now obviously, the actual recovery won't be this straight line.

We also expect the second half of the year to be stronger than the first half.

But in terms of just trying to capture the leverage that Logan was describing in terms of some of the benchmarks we've shared previously, we now see an opportunity to achieve adjusted EBITDA profitability with a ride volume of 80% to 85% of Q4 of 2019.

This is a full 10 percentage point improvement from the last quarter, when we estimated that we needed at least 90% to 95% of the Q4 2019 ride volume.

And just relative to the original ride level when we discussed breakeven back in October of 2019, we see a path to profitability with 35% to 40% fewer rides.

That's how much leverage we've created.

I show our next question comes from the line of Stephen Ju from Crédit Suisse.

Okay.

So Logan, building on your answer to, I guess, Eric's question, is there anything on the incremental cost reductions you're rolling through in the first quarter that cannot be easily undone?

I guess can you spin things up fairly quickly if you are seeing more rapid unit recovery?

And Brian, I was wondering if you can weigh in on the future impact your new insurance agreements will have toward contribution margin improvements as it seems like, at least going by the wording on the deck, you've already transferred primary insurance risk on the majority of the units, which seems to match the wording around what you announced at the time you announced the new insurance deals.

Yes.

Just to dig in on the first part of your question about cost reductions.

I think most of the cost reductions that we're working on are going to build a stronger business for the long haul.

So the type of cost savings we're looking at drive long-term value, drive a better rider experience, a better driver experience.

They are not the types of sort of cost cutting that detracts from the business or that we would look to unwind.

So I'm not sure if that helps answer the question.

I think the kind of biggest change overall that we've commented on a little bit where we may invest more than we did in Q4 is on the driver side.

So we pulled back on our driver engagement spend in Q4, which we're likely to lean into, especially as we see demand return.

And that is something that is much more kind of dynamic in nature and needs to respond to market conditions.

But as far as the rest of the work, there's nothing kind of top of mind that I can think of that we would consider unwinding.

Sure.

And Stephen, let me just expand on that, then I'll address your question around insurance.

I think it's important to keep in mind that this company went through nonlinear growth for a period of years.

We had 19 straight quarters of 100%-plus year-over-year ride growth.

When you grow that fast, you sometimes throw people at problems.

And last year, when COVID hit, it forced us to re-examine the business.

We took it down to the studs, and we created some new muscles.

We found opportunities to merge teams, create new efficiencies, tap emerging leaders and make investments that increase our unit economics, and these are lasting changes.

And so again, in Q1, we're further reducing expenses below cost of revenue by $35 million relative to Q4 even as we increase R&D investments to tap the areas that Logan described.

And this is primarily through G&A reduction.

So that's where the cuts are in.

And keep in mind, this is not a one quarter move.

G&A will grow in absolute dollars as ride volume grows, but we expect to drive further expense leverage, so G&A as a percentage of revenue should decline.

Now in terms of the insurance question, it's important to understand that, again, we transferred, starting on October 1, a slight majority of primary auto insurance risk to partners.

And the rates are fixed on a per mile basis through Q3 of 2021.

Now in terms of the financial impact, if we can continue to increase monetization per ride, we can increase margins.

Now the Q1 contra revenue impact from the driver supply investment will create slight headwind.

But again, we expect to report all-time record contribution margin later this year.

And so I hope that gives a little more context there.

I show our next question comes from the line of Brent Thill from Jefferies.

For Logan or John, you mentioned the B2B delivery investments.

I'm curious if you could just drill in and expand a little more around what you're doing and the opportunities that you see over the next year?

Sure.

Thanks, Brent.

So we're quite excited about the inbound interest we're getting.

And on the tiger team we've put together on delivery, we're excited about their performance.

We have a handful of pilot markets live.

We're not planning to disclose specifics.

So I'm focused on the strategy.

So for clarity, as you mentioned, it is a B2B opportunity that we're focused on.

The good part about this is it leverages our existing tech and community of drivers for what we see as the best use case, same-day local delivery.

What we're hearing from these businesses is that they want to focus on their organic traffic and customer loyalty and that they need a broadly scaled logistics capability that doesn't compete with them for the direct-to-consumer relationship.

So in terms of timing for when we're likely to talk more about it, more around midyear.

I think what COVID taught everyone is that the world is moving, obviously, even faster to e-commerce and local delivery.

Many of these retailers didn't have time to set up their own systems and form these type of partnerships like the ones that we're forming with them and instead had to jump on these third-party marketplaces.

But once they've had the time to breathe a bit and made their investments on their tech platform, we're quite excited about what this could mean for us and them going forward.

And just a quick follow-up for Brian.

Logan's comment about being a tightly coiled spring, it sounds like what you're seeing on your expense structure is, as demand comes back, you can support this on this leaner muscle structure, as you called it, down to the studs, that, that can support the snapback.

You're not going to have to fuel the investments back in to support that return to growth?

Yes, I think that you captured it well.

Again, we expect to achieve an all-time record contribution margin later this year.

The current record is 57%.

So we're saying in excess of 57%.

And then given the success we've had in terms of expenses below cost of revenue, again, we went through 2021 planning, very focused in terms of this zero-based budgeting mindset.

So we feel very good in terms of the overall leverage for the business.

Our next question comes from the line of Benjamin Black from Evercore ISI.

Great.

Just going back on your decision to invest in driver supply ahead of the second quarter.

Can you maybe talk about the competitive environment as it pertains to both drivers and riders at the moment and how you think that evolves throughout the year?

And then also going back to insurance, how are you thinking about the remainder of your self-insurance exposure?

Should we expect that over time you transfer the remaining risk to insurance partners?

Sure.

So just on the first part of the question, overall, the competitive environment has been quite stable on incentives specifically.

Keep in mind that incentives classified as sales and marketing declined 80% year-over-year and were 3.5% of revenue in Q4.

So as far as how we compete goes, we're going to continue to focus on differentiating our platform through product innovations and providing a better experience, not competing on incentives.

And Brian, if you want to take the second part.

Sure.

So I think it's important when you look at our go-forward, so again, we're locked through September, technically October 1 of this year.

When we bid this out, we have an annual RFP effectively that starts over the summer each year.

We were very pleased with demand for our business amongst leading auto insurers who really see our progress to date on a number of different key safety initiatives and sort of the changes we're making, operational changes as well as just how we're leveraging the platform to try to make sure we have the safest drivers on the platform.

So I think on a go-forward basis, we're going to assess it every year.

I don't see a world where it's 100%, but I do like, again, having world-class insurance partners can provide significant value.

And it's just helpful having, again, they bring in their own claims administration organizations that tend to be more local.

So you sort of get, you can create sort of a network across the United States with some of the best claims teams.

And it's great to have these partners here with skin in the game helping us close out claims as professionally and efficiently as possible.

Our next question comes from the line of Itay Michaeli from Citi.

Great.

Just going back to the AV discussion.

Thank you for all that color earlier.

A couple of questions there.

First, it's interesting to see in your announcement that you expect to deploy in multiple cities in 2023 as opposed to maybe one city at a time.

I was hoping you could talk about that decision as well as maybe roughly what percentage of your routes you think could be covered by AV as you deploy.

And then secondly, maybe for Brian, if you could talk a little bit about the financial impacts from the Motional arrangement and maybe how we think about layering kind of the impact from AV on the financial model kind of medium term?

Yes, thanks.

I'll take the first part of that question.

We have run pilots in multiple cities, and we've analyzed the data from our ridesharing network and the billions of miles traveled by ridesharing drivers.

And certain cities have easier weather.

They have easier streets and grids to navigate and we will be targeting kind of the most favorable conditions initially, start where it's easy and scale up from there.

So we're not saying that we expect multiple cities to launch on the same day.

But we think we'll, together with Motional, have the capability to launch multiple cities in 2023.

So we're quite excited about that.

Again, this is going to start very small.

It's going to be about the learning that we're doing together.

And the technology will have to prove itself and win the trust of consumers and regulators, of course, before we're able to scale it up.

So at this point, we're not able to forecast or predict the kind of impact in terms of our financials and revenue.

But long term, of course, we are very bullish that this is going to be an incredibly large part of our business over time.

So I'll leave it at that.

Our next question comes from the line of Edward Yruma from KeyBanc Capital Markets.

Really 2 just on the driver promotions again.

As it relates to Prop 22, I know there was some concern that drivers may kind of stick to one network as they're trying to aggregate enough hours to get the subsidy.

I know it's still early days, but have you seen any learning in terms of whether drivers who are still on 2 networks are opting on one?

And then second, I know when COVID hit there was some tough trends on supply because of the extended unemployment insurance.

I guess, are you thinking about that as a headwind if, in fact, that happens again?

Sure.

Thanks for the question.

This is John.

Just again, as Logan mentioned, the balance of supply and demand is always critical.

One thing to note, wasn't necessarily a part of your question as it relates to Prop 22, but somewhat related because people ask similar things about drivers doing delivery and then coming back in.

Typically, rideshare drivers earn more than delivery drivers.

So we feel quite good about all the new drivers that have come on these various platforms as kind of lead gen for what we're about to see coming out of COVID and going to higher earning rideshare opportunities.

As it relates to Prop 22, we're not concerned.

We're quite happy with the benefits that are coming in as part of Prop 22 that include a health care subsidy and other benefits that actually bring, we believe, more drivers into the platform holistically and having loyalty from certain drivers means that you can focus your incentives on the highest value drivers that are driving the most value to the platform.

All right.

With that, we'll call it a wrap.

So thank you, everybody, for joining the call today.

We hope everyone is staying safe and healthy.

And we look forward to talking with everybody again soon.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.

Good day.