Lyft Inc (LYFT) 2020 Q3 法說會逐字稿

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

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

I would now like to turn the conference over to Sonya Banerjee, Investor Relations.

You may begin.

Thank you.

Good afternoon, and welcome to the Lyft earnings call for the quarter ended September 30, 2020.

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

Logan and John will give an update on our business and key initiatives, and then Brian will review our Q3 results and share some commentary regarding our outlook.

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 litigation matters and the Proposition 22 ballot initiative.

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

In particular, those described in our risk factors included in our Form 10-Q for the second quarter of 2020, filed August 13, 2020, and in our Form 10-Q for the third quarter of 2020 that will be filed by November 16, 2020, as well as risks associated with the outcome of litigation 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, Sonya.

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

Before I review our financial results, I want to acknowledge that 2020 has been challenging on many fronts.

We are proud of our team's execution, and we remain focused on controlling what we can to support the recovery and accelerate our path to profitability.

I also want to highlight the outcome of Prop 22.

Last week, we made history in California as voters stood with drivers to pass Prop 22, a landmark achievement for our industry that will make ridesharing even better for drivers and riders.

We believe the outcome in California is a win-win-win: it's good for the drivers, who will maintain their flexibility and independence, it's good for the riders, who will continue to have access to rides, and it's good for California's economic recovery because hundreds of thousands of its residents will continue to have access to flexible earnings opportunities on platforms like ours.

Beyond California, we are continuing to engage with policymakers across the country and believe that the policy solution that California voters chose can provide a model for other states.

Turning to our third quarter.

Let's start with the trends we saw in our business.

As we expected, the recovery in ridesharing was ongoing.

We saw strong performance improvements in other areas, such as bikes, scooters and fleet, which includes Express Drive, Lyft Rentals and our Driver Centers.

Revenue for our third quarter was down 48% year-over-year, but up 47% quarter-over-quarter.

The sequential improvement in revenue was driven primarily by growth in active riders, which increased 44% quarter-over-quarter.

As communities reopened, more people turned to ridesharing to go about their daily activities.

Revenue per active rider was up 2% quarter-over-quarter, reflecting an improvement in ride frequency.

Even though rideshare rides are still down from pre-COVID levels, they have meaningfully recovered from the trough we observed in the second week of April.

In fact, for the last week of October, rideshare rides were up over 130% from April's low.

It's worth noting that recovery trends vary locally across North America, reflecting differences in responses to COVID-19.

While some cities have sustained wider reopenings, enabling people to be more active, other cities have taken a more cautious approach by maintaining or reimposing restrictions.

We remain confident that demand will continue to return to our platform as we progress through the recovery and vaccines are approved and become available.

While the recovery in ridesharing continued, we also saw strong engagement in our bikeshare and scooter operations in Q3.

Likewise, in our fleet business, we saw improved Express Drive vehicle utilization and strong uptake of Lyft Rentals, our best-in-class consumer car rental experience.

Our first-party business achieved record revenue in September as customers have embraced road trips and car-related travel during the pandemic.

And with our Sixt integration now complete, Lyft riders across the country have been using our app to book a Sixt rental car the Lyft way.

That means selecting the exact car and skipping the counter at pickup.

Early trends have been positive.

We are the only company in North America that has a seamless, integrated solution to replace car ownership, all of which can be accessed through Lyft Pink.

Since we launched Lyft Pink late last year, we've continued to look for ways to help members unlock even more value from the program.

And I'm excited to highlight our new partnership with Grubhub.

Every Lyft Pink member now has access to unlimited free delivery from nearly 200,000 of their favorite restaurants through Grubhub+ and Seamless+.

Grubhub stands out in the crowded food delivery category as a pioneer that built significant scale and selection across key markets, and we're thrilled to be able to extend the benefits of Grubhub+ to our members.

So whether Lyft Pink members are going out or staying in, they receive preferred pricing and exclusive benefits on our rideshare, bike and scooter offerings, plus new access to free delivery and one-of-a-kind rewards from the restaurants they love.

We'll continue to look for ways to further enhance the value of Lyft Pink to delight riders on our platform.

Let me now turn to recent trends that we've been seeing in ridesharing.

October rides were down 47.4% year-over-year.

On our last call in August, we discussed an imbalance we were seeing in the marketplace as the rebound in rider demand was outpacing the supply of available drivers.

Since then, this issue has become less pronounced, and we have been pleased with the improving balance in our marketplace.

Looking ahead, while we continue to expect there will be bumps along the road to recovery, we're prepared to withstand this turbulence, thanks to the natural operating leverage in our business, our robust balance sheet and our expense discipline.

Before handing the call over to John, I want to share an updated view of our path to profitability.

While we cannot control the timing or trajectory of the recovery in our top line results, we're continuing to make strong progress on the cost actions we outlined earlier this year to strengthen our financial position.

In addition, as we approach 2021 budgeting, we are taking an extremely disciplined approach to increase our operating leverage.

We're focused on achieving adjusted EBITDA profitability by Q4 2021 even with a slower recovery.

For context, with our current plans and execution, we are now positioned to achieve adjusted EBITDA profitability with approximately 30% fewer rides than what was required when we originally issued our Q4 '21 profitability target in October 2019.

This is a further improvement from what we shared last quarter.

Before Brian reviews our financial performance and outlook, I'll turn it over to John to talk about the results of Prop 22 and some of the important work we've been doing to support drivers, riders and the communities we serve.

Thanks, Logan.

As Logan mentioned, last week, California voters made their voices heard on Proposition 22.

This is a major victory for drivers, our industry and the broader Lyft community.

It ensures our business can continue to operate as normal while also providing drivers with new earning opportunities.

I believe the campaign was successful because it ultimately reflected the desires and priorities of drivers.

From all of our experience talking to drivers in California and elsewhere, and from all the research we've done, one thing has always been consistent, drivers want to keep their independence.

Very few jobs allow you to start or stop working whenever, wherever, as often as you want and that experience is what has attracted so many drivers to our platform.

Voters clearly agreed.

I'm really proud that we found a way to protect that independence while also providing drivers with important new benefits, a health care subsidy, occupational accident insurance and a minimum earnings guarantee.

This is a policy challenge we've wanted to solve for a long time.

The voters of California have now pioneered a solution that is a win-win for the state.

I believe strongly that other states as well as policymakers on the federal level will see this as a watershed moment and recognize that the model that voters backed in California makes sense.

We look forward to continuing our conversations with policymakers at every level.

Now more than ever, we are focused on finding ways to engage with and support drivers, riders and the communities we serve.

Let's start with drivers.

Health considerations remain top of mind for new and returning drivers, and we've continued to roll out new products and services as part of our Health Safety Program.

In October, we introduced our "clean ride guide", a recommended vehicle cleaning process designed specifically to fight COVID-19.

We developed this cleaning process in collaboration with P&G Professional and the University of Tennessee Health Science Center.

In addition, drivers can now visit one of our driver centers to have their cars sanitized or they can leverage our free mobile disinfection service that is available in select markets.

Drivers also look for earnings stability.

To that end, over the last few months, we've increased our communication with drivers to help them stay up to speed on evolving rider demand pallets.

Giving drivers opportunities to maximize their earnings is critical to help them make the most of their time on the road.

In addition, in Q3, we expanded our Lyft Rewards loyalty program, giving more to drivers when they drive during busy times.

These efforts to increase retention and incremental usage of our platform by drivers are expected to lead to reduced incentives classified as contra revenue as a percentage of revenue in Q4 versus Q3.

These efforts should also improve the service levels on our marketplace, which translates to increased drive conversion.

I'd also like to provide an update on delivery.

We've been pleased with our essential deliveries pilot, which we initially launched to connect drivers with incremental opportunities to earn during the pandemic.

As we've expanded the program, we've spent time talking to retailers and other local businesses about what they need.

And they've told us that current delivery models with their expensive commissions are not working for them, and they've emphasized that the overall incentives are not aligned between delivery platforms and individual retailers.

This creates a significant and differentiated white space opportunity to help retailers and local businesses fulfill their organically obtained traffic.

These businesses want a partner, someone to help them move their goods from point A to point B, but one that does not step in between them and their customers.

This delivery model plays to our strengths, including making full use of our existing technology.

It is very early days, but we look forward to updating you on our progress as we continue exploring this path.

Next, I'd like to highlight a few key points related to the demand side of our marketplace.

As Logan mentioned, bikes and scooters were a bright spot during the quarter, further validating our diversified approach to transportation.

Bike and scooter rides increased quarter-over-quarter, as did revenue, which was up roughly 40% collectively, reflecting their increasing popularity during the pandemic, along with favorable seasonal trends.

We also continue to make inroads with our electric bike fleet, which is now available across 9 markets, including 2 new all e-bike fleets in Santa Monica and Portland.

Across major cities, including New York, Chicago, San Francisco and Portland, we are the exclusive bikeshare provider, and we are seeing this strategy pay off.

I'll now turn to the work we are doing in Lyft Business.

During Q3, as communities reopened, more organizations adopted Lyft Pass as an alternative or supplement to public transit, including major retailers, airlines, hospitals and operations-focused businesses.

We also saw new use cases for our business solutions as companies like Nike, Starbucks and T-Mobile leaned on our products and strong brands to help facilitate voting access.

We will continue to look for ways to support businesses as they navigate the recovery.

With products like Lyft Pass, we believe we are well positioned to capture the corporate travel rebound.

We are also making inroads in health care.

In October, we announced our new integration with Epic, a leading electronic health record system that's used by a majority of the country's top-ranked hospitals.

Through this integration, health system staff will be able to book Lyft rides for patients directly through their health records, helping to ensure that transportation is never a barrier to good health care.

We view this as a significant opportunity because of the many health systems in the U.S. that use Epic, nearly 70% have not yet worked with Lyft for their non-emergency medical transportation programs.

In aggregate, the non-emergency medical transportation market represents a multibillion-dollar opportunity.

Finally, I'd like to talk about what we're doing to help the communities we serve.

This is intrinsic to who we are and is good for society and the business.

Through the long-standing partnership between LyftUp and Mastercard, we have delivered more than 2 million meals and provided nearly 900,000 bike and scooter rides to critical workers.

We've also expanded our Jobs Access Program with Goodwill and United Way.

Across 20 major cities, this program is designed to provide eligible individuals with access to the transportation they need to get to job opportunities, which now includes bikes and scooters, in addition to rideshare.

Access to reliable, affordable transportation can mean the difference between successful long-term employment and lost opportunities.

And with the help of partners, Lyft is proud to be able to support economic mobility and recovery across our communities.

I'll now hand it over to Brian.

Thanks, John, and good afternoon, everyone.

As local and state governments update rules, and cities slowly come back to life, we've seen an increase in activity on our platform.

In terms of the shape of the recovery, rideshare rides on a year-over-year basis were down 75% in April, 70% in May and 61% in June.

In the third quarter, July was down 54%, August was down 53% and September was down 48%.

While rides remained down significantly year-over-year, we realized strong sequential growth across key metrics in the third quarter.

The number of active riders increased to $12.5 million, up 44% from $8.7 million in the second quarter.

Despite this large increase in the number of active riders, we were pleased that revenue per active rider increased to $39.94 in the third quarter, up $0.88 from the $39.06 in the second quarter, as ride frequency per active rider increased in Q3 relative to Q2.

The combination of these trends led to a 47% increase in third quarter revenue to $500 million, up from $339 million in the second 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 is 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.

In Q3, contribution was $249 million, which represents a 112% increase from the $117 million in the second quarter.

Contribution margin increased 15 absolute percentage points to 49.8% in Q3, up from 34.6% in the second quarter.

This is well above Lyft's prior outlook of 45%.

In fact, contribution margin in Q3 was roughly flat with the year ago level, even with substantially lower revenue.

As volume returns, we expect to generate additional leverage.

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

In the third quarter, there was less than $1 million of adverse development, $680,000 to be exact.

We have been taking steps to reduce volatility on both a historical and go-forward basis.

On March 31, Lyft entered into a novation agreement to effectively eliminate nearly all of Lyft's primary auto insurance liabilities related to periods preceding October 2018.

Further, we are actively reducing the amount of future risk that Lyft retains.

On October 1, Lyft expanded its rideshare insurance program to include subsidiaries of Allstate and Liberty Mutual.

We also deepened our existing partnerships with Progressive, AXA/XL and Travelers.

Lyft expects to transfer a slight majority of total insurance risk required by regulatory agencies for U.S. ridesharing during the 12 months ended September 30, 2021.

This is more than double the amount transferred during the prior year ended September 30.

Let's move to operating expenses.

Operations and support expense for Q3 was $118 million, down 17% year-over-year.

Operations and support expense as a percentage of revenue declined to 23.5% in Q3, down from 25.8% in Q2 of 2020.

Q3 R&D expense was $131 million, roughly flat with Q2.

R&D expense as a percentage of revenue declined to 26.2% in Q3, down from 39.4% in Q2 of 2020.

Sales and marketing in Q3 as a percentage of revenue was 14.2% as we maintain rider incentives near historical lows.

In terms of absolutes, sales and marketing was only $71 million in Q3, down 54% from $155 million in Q3 of 2019.

Incentives classified as sales and marketing declined 86% in Q3 on a year-over-year basis from $78 million to just $11 million or 2% of revenue.

G&A expense in Q3 was $204 million, roughly flat with a year ago period, but up approximately $35 million from Q2 as we increased policy spend, especially in California in support of Proposition 22.

Please note that towards the end of the third quarter, a portion of spend originally expected to be recognized in Q3 was intentionally shifted to Q4 to be spent closer to the election.

The outcome of Prop 22 validates our decision to shift this portion of spend into the current quarter.

In terms of the bottom line, our Q3 adjusted EBITDA loss of $239.7 million was approximately 10% better than our $265 million loss outlook.

Stock-based compensation and related payroll tax expense was $171 million.

As a reminder, the prior quarter had a net benefit of approximately $50 million related to our workforce reduction.

We ended the quarter with $2.5 billion of unrestricted cash, cash equivalents and short-term investments.

We, again, were disciplined on CapEx, which came in at $15 million.

We have lowered our annual 2020 CapEx forecast each quarter this year.

I'm pleased to report we now expect to reduce annual CapEx, 75% from our original plan of roughly $400 million to $100 million, which implies an additional $25 million of cash savings from our prior outlook.

In October, rideshare rides were down 47.4% year-over-year.

Now it's worth highlighting that beginning in early October, we increased our focus on monetization per ride to drive profit growth versus unit growth.

One indicator of this strategy was that the decline in bookings was less than the decline in rides for the month of October on a year-over-year basis.

In terms of Q4, we cannot provide formal guidance given the variability in reopenings among cities and fluidity associated with government orders and health care recommendations to contain the spread and resurgence of COVID-19.

In addition to COVID, the fourth quarter also has unique seasonal fluctuations that prevent us from using the first month as a growth benchmark.

During prior fourth quarters, more rides occurred in the month of October than in either November or December, given the relative ride impact of the seasonal holidays.

Finally, we also faced unique headwinds to revenue and adjusted EBITDA in this fourth quarter.

In terms of revenue, we expect a quarter-on-quarter decline in absolute revenue in Q4 related to the rental of bikes and scooters given seasonality.

In addition, we're continuing to take advantage of the strong used car market to sell older vehicles, which impacts Fleet revenue.

Now for context, our bike, scooter and Fleet offerings provided a greater than $25 million revenue tailwind between Q2 and Q3, but are expected to cause a nearly $10 million headwind to revenue growth between Q3 and Q4.

So in summary, these headwinds, along with the continued impact of COVID-19 in our marketplace, will pressure total company sequential revenue growth in the fourth quarter.

In terms of adjusted EBITDA, we expect to achieve further improvements in Q4, but I want to highlight a few headwinds that investors should consider.

In addition to the aforementioned seasonality headwinds, let me call out 3 factors.

First, recall that Q3 benefited from approximately $8 million of savings related to the temporary salary reductions, which expired in August.

As a reminder, these salary reductions were implemented in conjunction with our layoffs announced in April.

In effect, we realized a benefit in Q3, which does not repeat in Q4, so it creates an $8 million headwind.

Second, while we are on track to achieve the fixed cost savings that we outlined in our first quarter earnings call, $300 million on an annualized basis by Q4 of this year, the sequential impact in Q4 will be muted because we've already realized virtually all of these cost savings.

Finally, as I mentioned, the step-down in policy-related spend between Q3 and Q4 will be less pronounced than originally expected.

We intentionally delayed $10 million in spending from Q3 to Q4, and we spent more than $20 million in October alone.

We believe these factors will impact revenue and adjusted EBITDA in Q4.

While we're not providing formal guidance, we will want to make sure that our strategy is clear.

In Q4, we're focused on driving profitable revenue growth as we further leverage expenses.

Including the aforementioned revenue and adjusted EBITDA headwinds, assuming that the resurgence of COVID case counts doesn't lead to a new round of shutdowns or change rider or driver behavior, we currently estimate that in Q4: Revenue may grow 11% to 15% quarter-over-quarter.

And given our strategy to drive profitable growth, we expect each dollar of incremental revenue growth can add roughly $0.67 to $0.70 to contribution.

We anticipate we can hold OpEx nearly flat quarter-on-quarter.

So in terms of the bottom line, on the high end, we estimate that we can manage our Q4 adjusted EBITDA loss to $190 million, which represents a $50 million quarter-over-quarter improvement.

Let me turn to our 2021 outlook.

As Logan shared, we have an update on our path to profitability.

We are absolutely focused on achieving adjusted EBITDA profitability by Q4 of next year even if ride volume remains below Q4 of 2019.

As such, we're taking an extremely disciplined approach to 2021 planning by using a zero based budgeting mindset.

With our current plans and execution, we now expect we can achieve adjusted EBITDA profitability with a ride volume of approximately 5% to 10% below the level in Q4 of '19.

This compares to our prior outlook, just last quarter, which assumed we would need ride volume 5% to 10% above Q4 of '19.

In addition, we believe we have multiple levers under different scenarios to still reach profitability by Q4 of next year, even if ride volume is below this level.

Let me end with 3 key takeaways.

We're executing on key 2020 initiatives to help navigate the challenges of COVID, including eliminating $300 million of annualized fixed costs relative to our original 2020 guidance.

Second, while Lyft's operations will continue to be impacted by COVID-19, we remain confident that we're positioned to reach quarterly profitability by Q4 of next year.

Finally, in addition to improving margins, Lyft is well positioned for strong organic revenue growth in 2021 as a pure-play in the expected recovery given our sole transportation focus.

So in closing, our mission remains the same and our actions are clear.

I'm confident that Lyft will emerge on the other side of COVID structurally more profitable per ride than it was going in.

We will revisit our long-term adjusted EBITDA margin target next year.

As we said last quarter, we continue to believe that we will lead the industry.

Finally, notwithstanding that we're positioning the company to reach profitability even with a slower recovery, we're continuing to build the foundation to drive strong long-term growth and shareholder value.

So with that, let me turn it back to Logan.

Thanks, Brian.

I'd like to reiterate that we are thrilled by the outcome of Prop 22 and the opportunity it creates to work with legislators across the country on similar solutions, ones that protect driver independence and enable earnings opportunities.

We'll have more to share on the regulatory outlook for the company on future calls, but we're confident that our position is now greatly improved.

I'd like to take a moment to reflect on our business and speak to our "Y".

Our mission is to improve people's lives with the world's best transportation.

We're the only pure-play transportation network company in North America that has integrated rideshare, bikes, scooters, transit and rental cars all onto a single platform, and we believe that we are better positioned than ever to be the platform of choice for drivers and riders and to deliver outstanding value to shareholders.

We're encouraged by the ongoing recovery in our business to date, and we are confident that we are setting ourselves up to exit this period stronger.

We're grateful for our rider and driver community, partners, team members and shareholders for their continued support and dedication.

And with that, we're now ready to take questions.

(Operator Instructions) Our first question comes from the line of Stephen Ju of Credit Suisse.

So Logan or John, I think there's a perception out there that as we come out of the pandemic, the addressable market for Lyft may have potentially shrunk or at least a time to unlock that same level of dollar TAM might be a little bit stretched.

So wondering what your response to that might be as you think about the existing use cases versus the new use cases for rideshare you might be thinking about, especially as it sounds like we're going to be in an environment where pricing seems to be heading higher as opposed to lower.

And Brian, your contribution margin is now at 49%.

Presumably, most of this is being driven by optimization of your insurance costs.

So which, I guess, with your new agreement, should ripple through to subsequent quarters.

So talk to us about this as well as, I guess, the other OpEx factors that get you to profitability with 30% less units versus your original guidance.

All right.

Brian, you want to start with profitability?

Sure.

So maybe, Stephen, to answer that.

Let me give you a little color in terms of how we're thinking about Q4.

And I must start, obviously, with a disclaimer.

The extent to which our operations will be impacted by COVID will largely depend on future developments, which are highly uncertain and cannot be accurately predicted.

Obviously, this has not been a simple straight-line recovery to date.

We've seen, generally speaking, small positive stair steps, but there have been regions that have reversed temporarily as case counts increase.

In terms of the monthly year-over-year growth as folks know, starting in April, we've gone from down 75% to 70% to 61% to 54% to 53% to 48%, and most recently, 47.4% in October.

In the most recent week, so this would be the week ended November 8, rideshare rides were down 48.3% year-over-year.

And if you normalize to the election day boost, we probably would have been down around 49%.

Now barring a significant change in COVID restrictions or, I guess, rider behavior, we expect that active riders will increase in Q4, but the quarter-on-quarter growth will be more modest.

And I have to say, it's really difficult for us to forecast active riders during COVID.

But we would estimate in Q4 that we may see an increase in active riders of between 800,000 to 1 million.

Now given our focus on monetization and the stable ride frequency that I mentioned, we expect revenue per active rider will increase in Q4 relative to Q3, both in terms of the absolute change as well as the percentage growth rate relative to Q3.

So overall, we expect that the sequential quarterly growth between active riders and revenue per active rider will be generally more balanced in Q4.

And again, we expect total revenue will grow somewhere between 11% to 15% quarter-on-quarter.

Now obviously, none of this is formal guidance, and this assumes that the increasing COVID case count doesn't cause a new round of shutdowns or change rider behavior.

To address your question on profitability, we expect to realize adjusted EBITDA leverage in Q4, driven by strong incremental contribution growth.

We estimate that contribution margin can increase 170 to 270 basis points in Q4.

So that would imply a range of 51.5% to 52.5%.

In terms of the financial impact, we believe it's possible on the high end to generate $0.70 of additional contribution for every dollar of incremental revenue growth.

And then below contribution, we also expect to show leverage.

We anticipate that absolute OpEx will probably grow about 1% quarter-on-quarter versus revenue growth of 11% to 15%.

So OpEx as a percentage of revenue should decline.

In terms of the absolute dollars, we're trying to hold total OpEx to an increase of approximately $5 million quarter-on-quarter.

And within OpEx, we want to modestly invest in sales and marketing now that supply levels are improving.

So sales and marketing will increase, but we expect we can hold sales and marketing as a percentage of revenue between 17% and 18%, which would be below the level in Q4 of '19.

And we anticipate that we can reduce OpEx in other areas, including G&A, to nearly fully offset the sales and marketing.

So one key takeaway here is that as rides volume increases post the recovery, this should create strong tailwinds for our path to profitability given the contribution and OpEx leverage.

I think as it relates to Q4, at the high end of our estimate, we expect we can achieve a $50 million adjusted EBITDA loss improvement, fueled by sequential growth and contribution.

So this would basically imply a 20% quarter-on-quarter improvement in adjusted EBITDA, again, at the very high end of our outlook.

I think to answer your question about being able to achieve profitability now with 30% fewer rides from our original ride forecast than was necessary.

Let me answer that really in 2 parts.

First, we've significantly reduced our fixed costs with the restructuring in the second quarter.

And we are on track to achieve the $300 million of run rate savings by Q4.

The second key part is, as part of '21 budgeting, we're making decisions with a zero-based budgeting mindset.

And so we're finding opportunities to reduce third-party spend and slow hiring.

Separately, we're driving significant progress on a variety of initiatives to increase revenue by both generating more rides as well as more revenue per ride.

So this would include product unlocks as well as just driving efficiencies from our marketplace.

And then on the variable cost side, we see continuing opportunities to drive more leverage on transaction processing and hosting costs.

And we're also funding incremental safety initiatives to reduce insurance cost as a percentage of revenue.

So maybe to close, we expect that these actions will create lasting structural improvements to our business.

And as a result, we believe we can generate margins in excess of the long-term model discussed at the time of our IPO and more near term, achieve quarterly adjusted EBITDA profitability in 2021, even if there's a slower ride recovery.

To take the -- thanks, Brian.

To take the other part of the question, we are going after, and have been going after since Day 1, the $1.2 trillion consumer transportation market.

And we have been laser-focused on that.

I think all of the same structural elements that have been shifting this market from one that's been based on car ownership to transportation as a service are still as true today as they were pre-pandemic, and we think all of these forces will continue to be in play as we see the recovery play out.

And just to talk about that for a second.

Today's car ownership ecosystem is extremely fractured.

A typical consumer has to interact with 10 different companies just to keep up with the basics of owning a car.

And at each step, you're paying full retail prices.

So you have a bad disjointed experience with very high prices.

And our vision is to build a transportation network that can handle every single one of our customers' transportation needs.

So imagine taking those 10 different companies down to one.

And we can create a completely frictionless customer experience and leverage the scale of our network to deliver incredible value to our customers.

So that's our vision.

That's the TAM.

I think it's unchanged.

And I think all of the secular trends at force, moving people from ownership to transportation-as-a-service are still at play.

If you look at what happened to DVDs and CDs as the world moved to streaming, when you can deliver something as a service at a lower cost, with a better experience, that ends up being a really, really powerful combination.

And I think in our industry, you've always seen it first with younger generations.

Each generation after the next is less interested in getting their license.

They're less interested in owning a car.

And we think all of those structural elements to our industry will continue playing out.

And while our P0, our top priority right now is navigating the recovery and ensuring we hit profitability.

We will continue to double down on this vision of building an all-inclusive transportation network and seizing that $1.2 trillion TAM.

Our next question comes from the line of Doug Anmuth of JPMorgan.

Brian, just when you talked about getting to adjusted EBITDA profit on 70% of late '19 volumes, can you just clarify there?

There's a lot of moving parts, but just clarify where you're seeing the biggest part of the incremental savings in your view over the next year.

And then second, maybe for Logan or John, I was just hoping you could clarify the comments on the food delivery business and your plans there.

Is that more specifically something that is on the business and corporate side?

Or are you considering anything there in terms of consumer?

Sure.

So Doug, let me take the first part.

When John and Logan spoke at the Wall Street Digital Conference, which was only a year ago, it feels longer than that.

We had built a ride forecast that achieved profitability by Q4 of next year.

And what Logan said, we've now, relative to what we need, it's 30% lower than what we thought a year ago at that conference.

In terms of just where we were 90 days ago to today, 90 days ago, we needed 5% to 10% more rides than Q4 of '19.

And through a lot of work, which I'll cover in a second, we now need 5% to 10% fewer rides to achieve adjusted EBITDA profitability.

I think folks are well aware of the fixed cost changes in terms of our cost structure we made.

But we're not letting up.

And so with a zero-based budgeting mindset, as you look at budgets for next year, just because you spent x this year doesn't mean you get x plus y next year.

It could mean you get z, which is a much lower number.

And so by having each team and function really try to justify first dollar spend, we can unlock more fixed cost savings.

But I think what gets really exciting is just the expected contribution margin improvement because our unit economics, we're going to emerge on the other side of COVID, just structurally more profitable per ride.

And so this is monetization per ride as well as all the key variable expenses.

I am very excited in terms of the leverage we're building, and we just need some oxygen to come back in terms of ride recovery, and it will translate and drop to the bottom line.

I'm happy to take -- this is John, Doug.

I'm happy to take the delivery question.

So as we mentioned a while back, we started doing delivery pilot program at the start of the pandemic to connect drivers with more earning opportunities, and we did a lot of social impact work around delivering meals to those in need during the pandemic.

And one, we're proud that we did that; and, two, it really helped us see how certain elements of our existing technology, we're perfect for being this kind of logistics arm for existing retailers and restaurants, organic traffic.

So if you take an example, I think, Doug, you're in New York area, on the East Coast, one of my favorite restaurants is Dinosaur BBQ.

And if you care about that restaurant and you think about all the -- what's happening to restaurants in the time like this, when they sell food on a platform, like Uber Eats, that they get charged 20% to 30%.

They lose 20% to 30% of their revenue to that platform.

And so what we're hearing from these restaurants and retailers, especially during the pandemic, is they want a partner, not someone that's going to be taking 20% to 30%, but they want to just have the delivery capabilities, which, obviously, with the 1 million-plus drivers we have on the platform, we can provide.

So not interested in a consumer platform.

Interested in kind of more of the B2B organization-level approach, which we think is differentiated, and where we can say, "Hey, we're not going to step between you and your customer, unlike other platforms."

Our next question comes from Mark Mahaney of RBC.

Okay.

Can I ask 2 questions about Prop 22?

First, there are some extra expenses associated with Prop 22 in terms of minimum plus wage benefit guarantees, whatever, to the drivers.

Can you talk about how you'll absorb -- what your plans are for absorbing those costs, to what extent you think you could pass those along?

And then talk about the implications of Prop 22 beyond California.

Do you think that, that -- is there evidence that you've seen that, that materially changes the possibility of similar legislation being impacted -- being implemented either federally or in other states?

Sure.

Thanks, Mark.

This is John again.

So one, we're very happy with the result from Prop 22, seeing the voters nearly 60% support this measure and doing so in a very progressive state across Democrat, Republican and independents having that support was very meaningful.

In terms of cost, that is something that as over the next few quarters, we'll have a better picture on.

There are certain things like occupational accident insurance that every driver will be covered, and that will happen once the results of the election are certified, which the deadline is December 11.

And then Prop 22 will go into effect no later than December 16.

In terms of the other costs like health care subsidy, it will depend on how many drivers ultimately become eligible.

So as I mentioned, we'll have a better sense of that in a few quarters.

In terms of what this means across the country, I think it's a quite distinct, clear, decisive win that is a turning point for the conversation.

There is a working model now that has independent contractors and has benefits along with that, that other states can look to.

And so we have been engaged in conversation with policymakers across the country, and we'll continue to do so to take this and do our best to replicate a model, where relevant, across the country.

Our next question comes from Eric Sheridan of UBS.

Maybe 2. What -- how can you contrast what you're seeing from Lyft Pink subscribers and users compared to the rest of your rider cohorts?

Curious how that behavior of someone who's more aligned with your platform on a subscription basis, might have been behaving as you saw elements of recovery over the last couple of months.

And then bigger picture question, can you give us an update on where your autonomous efforts sit?

And any sense of sort of go-to-market strategy or levels of investment you're making behind the broader autonomous efforts?

Yes.

Sure.

So in terms of Lyft Pink, I talked about something we launched recently that we're very excited about.

We don't actually break out any kind of metrics in terms of performance, but we just launched a partnership with Grubhub.

Grubhub has their own membership program called Grubhub+ and Seamless+ that offers unlimited delivery to thousands of their restaurants.

And Lyft Pink members now get access to Grubhub+ and Seamless+, which we think is an incredible benefit and a great way for both of us -- to both of our businesses and focus on what we each do best.

So that's been extremely popular.

I linked my account.

It's a couple of taps, and you can connect your account up.

It's a really seamless experience, no pun intended, and a great benefit.

So we are quite excited about our work with them.

And I think that gives Pink a nice benefit that applies for folks, who may be using ridesharing less right now during the pandemic.

But in terms of kind of specific stats, that's not something that we can break out at this moment.

I can hit on your other question in terms of autonomous vehicles.

So I think AV is absolutely going to be the biggest thing that happens to our industry eventually.

It will take some time, but it is obviously fundamental to the future of transportation and particularly transportation-as-a-service.

So we, obviously, I think, no matter what the time line is, it is incredibly important, and it's something that we spend a lot of time and energy thinking about.

So we have -- as we've talked about before, we have a dual strategy.

So we have an open platform, where we partner with folks in the industry who are best-in-class.

We actually have one of the largest commercial self-driving deployments out there.

We've done over 100,000 paid, self-driving rides with our partner, Motional, this used to be Aptiv, is now the -- the JV between Aptiv and Hyundai is Motional, and we've done those rides in Vegas.

And we also have a pilot program with Waymo, where we're doing some testing together.

So we will continue to lean into others, who are making great progress in the industry.

In terms of our own investment, I think something we've talked about before, and has proved out in many ways, is that progress is not necessarily tied to dollars put into the program.

And we are really proud of how efficient we've been with our investments.

I think we've made pretty incredible progress.

We recently restarted testing in San Francisco, our initial testing had all been done in Palo Alto.

And we're really excited to see how quickly and rapidly the system scaled to San Francisco.

We're also making some really great progress in terms of outfitting our cars with specialized cameras and sensors to collect data from the actual ridesharing fleet, which we think is one of our distinct advantages.

And we've made some early progress, proving out the ability to use that data to learn from it and train our self-driving system.

And we think that's going to be a really important approach to building and ultimately rolling out self-driving cars.

In terms of partnership, we also pride ourselves on being a great partner and very flexible in how we work with other folks.

So we had, for example, a great 2-year partnership with Magna, where we co-funded the development of Level 5 together.

And we're in conversations with a lot of other partners and always looking for ways that we can move faster and invest in this more efficiently together.

So I think the kind of bottom line is I think we're positioned extremely well for the eventual rollout of autonomous vehicles.

I think there's no question that they will scale up on ridesharing networks.

Early autonomous vehicles will not be able to cover 100% of rides out there, and they will not be able to cover entire geographies the way that ridesharing does.

And riders want to be able to open up an app and get a ride 100% of the time, and we can provide that, and we can provide the best platforms for monetizing the first generation, the second generation, the third generation of autonomous vehicles.

So that's the kind of ultimate role we see ourselves playing in the ecosystem, and we like our position.

Our next question comes from Benjamin Black of Evercore ISI.

I have 2. So we've looked at TNC data here in New York, and it seems like subway ridership is down over 70%, and rideshare trips are only down about 40%.

So what are you seeing in terms of share shifts from public transit at the moment?

And how durable do you think these shifts are?

And then secondly, it'd be great to have an update on the competitive environment.

When cities have reopened, what trends are you seeing in terms of incentives for drivers, for riders?

And how do you see these playing out over the next 12 months or so?

Yes.

Absolutely.

So I'll take that first part, and then maybe Brian can take the second.

So in terms of public transportation, I think we're seeing the same data you are.

Public transportation in general is down further than most other forms of transportation as people look for alternatives and look to get some space from large groups of other people.

So we think we've been able to offer a great alternative for folks who are looking for a different type of transportation to move from, from public transit.

We're working with employers to power their commute programs with Lyft Pass and seeing some great tick up there.

We're also seeing kind of above-average uptake of our bikes and scooters services as folks prefer to often travel in the open-air even versus a vehicle.

So in terms of what sticks and what doesn't, it's really hard to say.

I think a little bit, so will probably stick here and there.

And in general, once there's a vaccine out there, I think folks will migrate pretty quickly back to old habits.

Brian, do you want to take the second part.

Sure.

And maybe let me start with some -- just some ride trends, and then I'll talk about the competitive environment.

As I said last time, what you're seeing in your hometown doesn't necessarily represent what is happening in aggregate across the U.S. and Canada.

We report overall changes, and subsidies are showing much stronger recoveries to date, including New York.

The West Coast, I would say, generally, is the weakest region.

For example, notwithstanding the recovery in other parts of the country, in October, rideshare rides were down 70% year-over-year in San Francisco.

Now other regions have been recovering much faster.

For example, in July, about 1/8 of our top 50 cities at the time had recovered to be down less than 35% year-over-year, and this figure has now doubled in October.

Roughly 1/4 of our top 50 cities were down less than 35%.

And I want to call out New York City.

New York has been down less than 40% now for 3 months in a row.

Now in terms of the competitive environment, I would just use our financials.

I think that's sometimes the most helpful.

For the second quarter in a row, we've maintained sales and marketing as a percentage of revenue below 15%.

And further, we've reduced incentives classified as sales and marketing by 86% year-over-year, from $78 million to just $11 million or 2% of revenue.

So I think these 2 telling data points -- these are 2 telling data points in terms of just the current environment.

Our next question comes from the line of Youssef Squali of Truist Securities.

Great.

Two quick questions for me.

One, on the 2021 guidance or the breakeven expectation by Q4.

Just to follow up on Mark's question earlier around Prop 22.

Does that assume -- does that make any assumptions about maybe the extension of Prop 22 to states other than California?

Or is it just basically California now?

Meaning if Prop 22 gets extended to the rest of the country, then maybe that guidance gets pushed out?

And second, Brian, can you speak to -- or can you maybe just quantify the -- any policy spend planned for Q4?

And what was the actual number for Q3?

Sure.

So let me first talk about Prop 22.

And so as John mentioned, once Prop 22 becomes law in California, we expect to pass through the additional costs because we're a marketplace, obviously.

So in terms of by how much, we're still analyzing what increase is necessary to drive similar margins on our marketplace.

It will definitely vary by city and time of day, but we're not overly concerned.

And so I think if this -- if a few more states can adopt this third way, again, we're not overly concerned.

It would not change our outlook.

In terms of policy spend, I tried to highlight -- because the expected step-down between Q3, and Q4 will be less pronounced than we originally expected.

If you look at our public policy spend between Q2 and Q3, it increased by $27 million.

And for -- between Q3 and Q4, it's only going to step down about $6.5 million.

We've already spent over $20 million in October alone.

And so we expect that there would be more leverage than in 2021 from that.

All right.

Well, thank you, everybody, for joining our call today, and we hope everybody is staying safe and healthy during this time and look forward to talking with everybody next quarter.

All right.

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

Thank you for participating.

You may now disconnect.