Lyft Inc (LYFT) 2020 Q2 法說會逐字稿

Good afternoon, and welcome to the Lyft Second 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 Shawn Woodhull, Head of Investor Relations.

You may begin.

Thank you.

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

This is Shawn Woodhull, Head of Investor Relations.

Joining me today to discuss Lyft's results are 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 Q2 results and share some commentary regarding our outlook.

This conference call will be available on our Investor Relations website at investor.lyft.com, and a recording will be available at the same location 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 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, including in our Form 10-Q for the first quarter of 2020, filed on May 8, 2020, and our Form 10-Q for the second quarter of 2020, that will be filed by August 14, 2020, as well as risks associated with the outcome of litigation, including a decision issued on Monday, August 10, granting a motion for preliminary injunction in an action by the people of the state of California, 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.

Before we review our second quarter results, I want to acknowledge how difficult the past 2 months have been for riders, drivers and the communities we serve.

The effects of COVID-19 have been severe for our society and economy as well as for our own business.

As a country, we also received a long overdue call to action to address the persistent injustices that Black Americans face.

We will discuss our efforts on this in more detail, but we recognize there's more we can do to speak up and to be part of the solution.

Turning to our second quarter.

I'll focus my remarks on the recovery to date as well as our efforts to accelerate our path to profitability.

Let's start with the recovery we're seeing in our business.

Our Q2 results reflect the challenging operating environment.

While the recovery in our ridesharing business has not been a straight line, we are seeing encouraging progress.

Revenue for our second fiscal quarter was down 61% year-over-year, reflecting a significant decline in rideshare rides.

This was driven primarily by a decline in Active Riders as shelter-in-place orders and other restrictions across North America reduced travel overall.

At the same time, ride frequency was relatively more resilient.

This is reflected in our Revenue per Active Rider, which was down just 2% year-over-year despite the extremely challenging environment.

Even though rideshare rides were down significantly in the second quarter, rides have meaningfully recovered from the trough we observed in the second week of April.

Trends within rideshare also reflect changes riders are making in their lives and in how they use Lyft.

For example, in Q2, we saw an increase in the percentage of rides taken during what have traditionally been off-peak times as riders increasingly turn to ridesharing to complete essential trips.

And while airport rides fell significantly in April and remained down significantly year-over-year, weekly airport rides grew by over 350% between the trough in April and late June.

While rideshare is still down significantly from prior periods, we saw very strong engagement in our bikeshare operations in Q2.

Bike revenue increased both quarter-over-quarter and year-over-year.

This remarkable performance demonstrates the tremendous value that bikes are adding to our platform and helps validate our diversified approach to transportation.

Let me turn now to recent trends that we've seen.

We saw a rebound in demand in Q2 and have seen further evidence of this trend since the end of Q2.

Rideshare rides in July were 78% greater than April.

And despite all the negative headlines regarding COVID, even in the last month, we saw 12% growth from June to July.

As the recovery progresses, our performance will depend on our ability to anticipate and adapt to changes in the marketplace.

And although the pandemic is certainly unprecedented, we have over 8 years of experience navigating an evolving marketplace.

More than any other company in our industry, managing through adversity thoughtfully and strategically has been a core part of our success since we founded Lyft near the start of the last decade.

Over that period of time, we've built the right team, culture, tools and processes to adapt to changes on both sides of our platform, which we are fully leveraging in the current environment.

In March and April, our primary challenge was a decline in rider demand relative to driver supply, which created an imbalance that led to low driver utilization.

In order to help us protect utilization for existing drivers and provide additional earnings opportunities, we introduced a wait list for new drivers and launched Essential Deliveries, which John will elaborate on.

Over the last few months, we've seen this dynamic reverse.

Rider demand began to outpace the supply of available drivers.

This was observed across the industry in most cities.

Given these circumstances, driver earnings and utilization are now at or above pre-COVID levels in nearly all of our markets.

Accordingly, while we will continue to innovate and launch products and features to encourage riders to come back to our platform, we're also focusing significant resources on re-engaging drivers so that we can capture our full growth potential.

John will share some more details on the work we're doing on this front, including the significant progress we're making on our new Health Safety Program.

Looking ahead, we expect there will be bumps along the road to recovery.

But we're prepared to withstand this turbulence, thanks to natural operating leverage in our business, our cost management focus and our robust balance sheet, which we reinforced in May through the issuance of our first convertible senior notes.

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

While we cannot control the timing of the recovery in our top line results, we're continuing to make progress on the actions we outlined a few months ago to strengthen our financial position.

Brian will discuss this progress in more detail, but we're executing on our previously announced cost reduction plans as well as projects to improve our unit economics.

We now expect we can achieve adjusted EBITDA profitability with 20% to 25% fewer rides than what was assumed when we initially disclosed this target last year.

While we can't perfectly predict the timing of recovery, based on the reduced ride levels required for us to break even as well as what we've observed in terms of the recovery to date, we believe that there are multiple scenarios and levers that should allow us to hit this milestone by the fourth quarter of 2021.

Now I'll turn it over to John to talk about the important work we're doing to support drivers, riders and our communities.

Thanks, Logan.

Now more than ever, delivering on our mission to improve people's lives with the world's best transportation begins with users' health and safety.

As cities reopen and people adapt their routines to COVID, it is critical that we continue our focus on the work we started in March to help protect riders and drivers on our platform.

We know that health considerations and earnings stability are two of the most important factors that impacted drivers' engagement with our platform.

We're taking meaningful action on both.

First, health safety.

In May, we announced our Health Safety Program, which established new requirements for driving and riding with Lyft.

As part of this program, both riders and drivers must self-certify that they will wear face masks throughout their ride, are free of COVID-19 symptoms and will follow CDC and local guidelines related to COVID-19.

In support of this program, we have now distributed over 150,000 sanitizing products and masks to drivers across the country.

We further bolstered our Health Safety Program in July with the launch of vehicle partitions.

These partitions were designed in-house by Lyft engineers in line with CDC recommendations.

Our team designed the partitions to be easily shipped, assembled and installed across a wide range of vehicle makes and models.

So far, we have made thousands of partitions available to drivers for free across 9 markets, including Atlanta, Baltimore, Boston, Dallas, Denver, New York City, Phoenix, Seattle and Washington, D.C. Over the next coming months, we plan to expand this program to 30 regions and provide free partitions to over 60,000 drivers.

Our ability to roll out vehicle partitions at scale is enhanced by our acquisition of FlexDrive as we can install partitions at scale within the FlexDrive fleet.

Now let me talk about what we're doing to protect and support drivers' earnings during this time.

Since our last call, we have continued to expand our Essential Deliveries program, which connects drivers with incremental opportunities to earn.

While it's still early days, we are very pleased with the results so far and continue to grow the program.

With gradual increases in rider demand in the last few months, we've been taking steps to improve supply conditions on a market-by-market basis.

This includes removing wait lists for new drivers in almost all markets and providing drivers with partitions and PPE.

As a result of higher rider demand and corresponding increases in driver incentives, drivers average hourly earnings have increased on the Lyft platform over the quarter, and are now at or above pre-COVID levels in nearly all markets.

We also remain focused on protecting the unique value and importance of flexible work available to drivers.

In California, the Proposition 22 ballot initiative we're supporting would protect driver independence and flexibility while providing historic new benefits and protections, including contributions towards health care coverage, occupational accident insurance, and minimum guaranteed earnings.

We are simultaneously working through litigation on the issue of driver classification in California.

As we've discussed in prior SEC disclosures, the State of California filed a lawsuit in May against Lyft and Uber regarding driver classification.

On Monday, the Superior Court of California granted a preliminary injunction motion filed by the state, which would force Lyft and Uber to reclassify drivers as employees in California.

That injunction has been stayed until August 20, and we may appeal this ruling and request a further stay.

If our efforts here are not successful, it would force us to suspend operations in California.

Fortunately, California voters can make their voices heard by voting yes on Prop 22 in November.

Drivers have said they want to remain independent contractors over being employees by a 4 to 1 margin.

Economic studies in California have shown that 80% to 90% of drivers and entire regions of the state would lose access to Lyft and Uber platforms if drivers were forced to become employees.

We will continue to fight for drivers' independence.

Our plans and forecasts are currently based on the assumption that efforts to challenge the injunction will yield favorable results.

Still, as you know, we cannot provide assurances on the timing and ultimate outcome.

I'd also like to share an update on the demand side of our marketplace.

Even with rider coupons near all-time lows, rider demand has continued to improve, and we continue to build new offerings on our platform that we believe best support the recovery.

As businesses around the country wrestle with how to adapt to the effects of COVID, Lyft can play an important role in solving transportation challenges for these organizations.

We recently launched Lyft Pass, which allows organizations to cover the cost of rides for employees, customers, guests, patients and more.

For many top brands and organizations, Lyft has been the partner of choice before and during COVID-19 shelter-in-place mandates.

We're excited to be able to create solutions that help these businesses navigate the "new normal" as their employees go back to work and have a renewed focus on safety, convenience and flexibility.

We've also made improvements to Lyft Rentals, our consumer car rental program that is reimagining the traditional car rental experience.

We launched this service late last year to complement our existing offerings and further build out our full portfolio approach to transportation.

Having vertically integrated car rentals on Lyft helps customers address their full suite of transportation needs, including trips like weekend getaways.

Lyft Rentals removes many pain points that renters have historically faced - long lines at the service counter, insurance upsells before getting the keys or not getting the car you expected.

With Lyft Rentals, you pick your exact car and skip the counter.

Recent trends in our initial markets, Los Angeles and the Bay Area, indicate strong consumer interest in this program, with revenue per car surpassing pre-COVID levels in recent weeks.

In order to expand our riders' access to the seamless car rental experience, we recently announced a partnership with Sixt, a global leader in the car rental industry known for outstanding customer experience that has been expanding their presence in the U.S. Unlike third-party aggregators, we're integrating with Sixt systems on the back end so the entire reservation flow is built directly into the Lyft app, delivering an integrated premium experience.

Lyft riders who rent vehicles from Sixt will have access to special perks and privileges, including a Lyft ride credit to get to and from the rental lot, expedited pickup and the ability to choose the exact make and model of the vehicle ahead of time.

Our partnership with Sixt is rolling out over the next few months and will eventually become available nationwide.

Additionally, as Logan mentioned earlier, one particularly bright spot in Q2 was bikeshare.

Weekly bike rides increased over 200% from the beginning of April to the end of June, and new bike rider activations in the month of June were up 11% year-over-year.

Ride volumes for bikes are now above pre-COVID levels as riders seek out this affordable, efficient and open-air mode of transportation.

We are extremely well positioned given our leadership in the bikeshare market, including our exclusive right to operate bikeshare in some of the largest cities in the U.S. We are continuing to lean into this area by expanding the availability of our popular e-bikes, which are now available in San Francisco with Bay Wheels, New York with Citi Bike, Chicago with Divvy as well as Washington, D.C., Minneapolis and Columbus.

Since we launched our new e-bike roughly 1 year ago in the Bay Area, riders have taken over 1 million e-bike trips.

And we're excited to bring these bikes to more markets later this year.

Before I hand things over to Brian, I wanted to highlight Lyft's first annual Environmental, Social and Corporate Governance Report, which we published at the end of July.

In order to execute our mission, we must deliver for all stakeholders.

This drives our work on a wide range of issues, including transportation access and equity, economic mobility and sustainability.

An exciting example of our work in these areas is our recent commitment to reach 100% electric vehicles on the Lyft platform by 2030.

By working with drivers to transition to electric vehicles, we have the potential to avoid tens of millions of metric tons of greenhouse gas emissions and to reduce gasoline consumption by more than a billion gallons over the next decade.

In addition to being the right thing for the environment and society, we expect that a fully electric fleet will allow us to help drivers save money.

Our commitment to this issue is clearly and deeply integrated into our decision-making and strategy at Lyft.

We are driving our business toward a sustainable future where riding with Lyft is the obvious choice.

Our ESG report is the first for our industry, and we're proud of the progress we are making.

We look forward to continuing to share updates with you through this annual report.

With that, I'll now hand it over to Brian to review our Q2 results and outlook.

Thanks, John, and good afternoon, everyone.

Let me share a few perspectives before I get into specifics regarding our Q2 performance and outlook.

Given the significant decline in revenue related to COVID, I'm extremely proud of our success minimizing our adjusted EBITDA loss in Q2.

We have also positioned the company to be stronger and more profitable in the long term.

I attribute this to our decisive actions to reduce costs as well as our strong execution.

I'm also pleased with Lyft's sequential monthly ride recovery, which resulted in meaningful month-over-month revenue growth from the April lows.

The combination of this improving top line trend along with broad and significant cost reductions helped us to close Q2 well below the loss level we publicly communicated.

As you will recall, when we announced Q1, we said we could manage our Q2 adjusted EBITDA loss to under $360 million if April ride volumes persisted in May and June.

In early June, we updated our outlook and indicated that if June held at May ride volumes, we could manage the loss to under $325 million.

I will share more specifics shortly, but our Q2 adjusted EBITDA loss came in at $280 million, an improvement of $45 million versus our early June update.

To put this in perspective, for every dollar of revenue decline from Q1 to Q2, our adjusted EBITDA loss increased by less than $0.32, which helps demonstrate how resilient our business model is.

Finally, similar to our perspective 3 months ago, we continue to treat this crisis as a catalyst to shine a bright light on every expense line to drive incremental savings and efficiencies.

However, let me be very clear: we are continuing to invest in initiatives that we expect will drive long-term growth and attractive shareholder returns.

Let me now turn to our second quarter results.

Revenue declined 61% year-over-year given the significant impact of COVID on our marketplace.

It's worth noting that this decrease was less than the 68.5% decline in ridesharing rides.

Q2 revenue benefited from increased ride share revenue per ride versus the year ago period, and our bike business achieved positive year-over-year revenue growth.

As Logan mentioned, the decline in rideshare rides was driven primarily by a decline in Active Riders, which decreased 60% from the year ago period to 8.7 million.

Revenue per Active Rider in Q2 was $39.06, down only 2% year-over-year despite the extremely challenging environment, reflecting both improved revenue per ride and encouraging resilience in ride frequency.

To put this in perspective, our revenue per Active Rider in Q2 is $1.20 greater than it was in Q1 of 2019, the quarter we went public.

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.

Both contribution and adjusted EBITDA are also adjusted to exclude the restructuring charges that we've previously discussed both on the Q1 call and in SEC filings.

The majority of these restructuring charges relate to the workforce reduction we announced in April.

In Q2, Contribution was $117 million, and Contribution Margin was 35%, down from 46% in the same period a year ago and 57% last quarter.

Many of the factors that caused this decline were unique.

As evidence, we expect Q3 Contribution Margin will increase 10 percentage points if rides were to remain at July levels in August and September.

Now let me walk through Q2.

The decline in Contribution Margin reflects the significant sequential decline in Revenue in conjunction with the fixed nature of certain expenses included in Cost of Revenue, such as allocated personnel costs and depreciation.

Remember, depreciation expense is included in Contribution Margin.

Separately, while insurance expense is virtually fully variable based on mileage, at the beginning of Q2 as shelter-in-place orders took effect, we experienced lower driver utilization, which led to more idle miles and greater insurance cost per ride.

Given current driver utilization trends, we expect that the cost of insurance per ride will be lower in Q3 than Q2.

Finally, hosting costs were also a headwind to Contribution Margin in Q2 as our ability to quickly adjust our hosting costs is limited by our usage of AWS Reserved Instances.

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

We experienced $17 million of adverse development in Q2 related to historical claims.

Finally, $3.5 million of costs related to our restructuring is excluded from Contribution.

Let's move to operating expenses.

Operations and Support expense for Q2 was $88 million, down 39% year-over-year and down 32% quarter-over-quarter.

Operations and Support expense as a percentage of revenue increased 900 basis points from the same period a year ago, which reflects the impact of a significant revenue decline with certain fixed costs within Operations and Support, such as facilities.

R&D expense was $134 million, down 13% quarter-over-quarter, reflecting improved cost management and our recent restructuring.

Sales and marketing in Q2 as a percentage of revenue reached an all-time low of 13%.

In terms of absolutes, sales and marketing was only $44 million in Q2, down 77% from $191 million in Q1.

A key driver to our sales and marketing leverage was our discipline on rider incentives.

Total incentives classified as sales and marketing declined 96% between Q1 and Q2 from $100 million to just $4 million or 1.2% of revenue.

G&A expense was $168 million, down 12% year-over-year and down 10% quarter-over-quarter.

The sequential decline in G&A expense is notable as improved cost management more than offset a roughly $25 million increase in costs related to legal settlements between Q1 and Q2.

As we discussed on our Q1 call, legal settlements and accruals were lower than expected in the first quarter due to the postponement of mediations and hearings.

CapEx for the quarter was approximately $22 million, which was less than half of our outlook as we focus on preserving cash.

Stock-based compensation and related payroll tax expense was $111 million, which included a net benefit of approximately $50 million related to our workforce reduction.

We ended the quarter with $2.8 billion of unrestricted cash, cash equivalents and short-term investments, an increase of over $100 million from March 31.

Our ending cash balance reflects both the net proceeds of approximately $600 million from our convertible debt issuance and corresponding capped call transactions as well as the previously disclosed cash use of $91 million related to the insurance novation transaction that we closed in April.

Let me now turn to our outlook.

We remain on track to achieve the fixed cost savings that we outlined on our last earnings call - $300 million on an annualized basis by Q4 of this year.

In addition, we are tracking to beat our CapEx reduction plan.

On our last call, we outlined the goal of reducing 2020 CapEx from our original plan of roughly $400 million to $150 million.

We now expect that we can lower full year CapEx to $125 million, resulting in an additional $25 million of cash savings.

Since our Q1 call, we've also made important progress on initiatives across the company to improve our underlying unit economics.

We will share more information on these initiatives later in the year, but the progress to date suggests that there is upside to the long-term margin target we first outlined at the time of our IPO.

We also believe we can now achieve Adjusted EBITDA profitability with fewer rides, as Logan mentioned.

I will come back to this.

In terms of our near-term outlook, given the fluidity associated with government orders and healthcare recommendations to contain the spread of COVID-19, it is impossible for us to predict with any certainty our results for the third quarter.

As such, similar to the second quarter, we are providing investors with an estimate of Adjusted EBITDA loss based on July ride volumes.

As a starting point, let me describe the ride comps on our rideshare platform.

April was down 75% year-over-year.

May was down 70%.

June was down 61%.

July was down 54%.

Rideshare rides for the week ending August 9 reached a new high since April but remained down 53%.

Now when evaluating year-over-year ride comps, keep in mind that August was a much stronger month than July back in 2019, which is contributing to these trends.

Before I discuss the loss, I want to remind everyone of the important increase in policy-related spend that we first mentioned at the beginning of the year.

Most of this investment will be recorded in our Q3 results with policy-related spend increasing by approximately $40 million in Q3 versus Q2 given the timing of key policy initiatives in California as well as other states.

In California, as John described, we are focused on winning the Prop 22 ballot initiative.

Alongside our coalition partners, including Uber, DoorDash and Instacart as well as tens of thousands of drivers and leading community organizations, we'll continue to support a very large "Vote Yes on Prop 22" campaign in the coming months.

A majority of the incremental $40 million of quarterly policy expenditures relates to our share of third quarter coalition spend, which was pre-funded by Lyft back in 2019 so it will not be a use of cash.

Now for comparison purposes, if we weren't investing this large one-quarter increase in policy spend and rides were to remain at July levels in August and September, we would expect our Q3 Adjusted EBITDA loss would be $225 million, a 20% improvement relative to Q2.

But we are investing an incremental $40 million in Q3 policy spend, and this will be reflected in Adjusted EBITDA.

So inclusive of this spike, we expect to manage the business to a $265 million loss if rides remain at July levels.

While the company is not providing revenue guidance for Q3, we do expect year-over-year growth will more closely track the change in rideshare rides as we invest to improve service levels.

Let's now move beyond Q3 and discuss an important milestone.

We expect that we can achieve adjusted EBITDA profitability by Q4 of 2021.

While this does require rides to continue to recover, we see multiple scenarios and levers to achieve this milestone.

As Logan indicated, given our actions to reduce costs and increase unit economics, we are now positioned to achieve Adjusted EBITDA profitability with 20% to 25% fewer rides than what was required when we first put out our Q4 '21 target back in October of 2019.

This is a further improvement from the 15% to 20% reduction that we announced last quarter.

For context, we now expect we can achieve Adjusted EBITDA profitability when quarterly rides on our rideshare platform reach approximately 5% to 10% above the level achieved in Q4 of 2019.

So while we expect our operations will be impacted by COVID-19 for some time, we again believe that there are multiple scenarios and levers that should allow us to hit this milestone by Q4 of next year.

Our leadership team is focused on achieving Adjusted EBITDA profitability to allow our business to self-fund future growth and demonstrate the strength of our model.

In fact, we expect that we will lead our industry in terms of long-term margins.

While scale matters, and yes, we have scale, what's critical to understand is the importance of focus - both business model and geographic footprint.

We expect that the margins of a North American pure-play transportation network will exceed conglomerate models that include lower-margin businesses and geographies.

Also, as we look forward, our focus positions us well for the rebound.

We expect we will have strong organic year-over-year revenue growth in 2021, given our sole transportation focus.

No portion of Lyft's business enjoyed favorable tailwinds from COVID.

So Lyft is well positioned as a pure-play in the expected recovery.

In terms of our geographic focus, we operate solely in the U.S. and Canada, and the U.S. government is directing nearly $10 billion aimed at gaining priority access to in volumes of select COVID vaccines and therapeutics.

We believe that faster and wider availability of treatments and vaccines may help drive an accelerated and broader economic rebound in our direct operating footprint.

In closing, while the operating environment we faced in the second quarter was a challenging test, we were able to limit the impact of the downturn thanks to our team's execution, the resilience of our business model, and the critical role our platform plays to facilitate essential transportation.

We're making progress on key initiatives to improve our long-term margin profile, and we expect the decisions we made in Q2 will also position the company to reach profitability sooner and be stronger and more profitable in the long term.

Finally, with $2.8 billion of unrestricted cash, cash equivalents and short-term investments, we have the financial strength and runway to achieve our strategic objectives.

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

Thanks, Brian.

The second quarter was extremely challenging on many fronts.

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

We're encouraged by the recovery in our business to date, and we're confident that we're taking on the critical work necessary for the business to emerge stronger on the other side.

While the headwinds we're facing won't disappear overnight, we believe they will prove temporary and we'll look back on this as a defining moment that strengthened the company.

So while we navigate this crisis, our leadership team remains focused on capturing an enormous long-term opportunity ahead of us.

We continue to believe that people will rely on transportation networks like Lyft more than ever post-pandemic.

We're the only pure-play transportation network company in North America that has integrated rideshare, bikes, scooters, transit and car rentals all onto a single platform.

And we believe that we're better positioned than ever to be the platform of choice for drivers, riders and to deliver outstanding value to shareholders.

Before we take questions, I want to acknowledge that for many of us, the past few months have been unlike anything we have ever seen before.

Recent acts of injustice against Black Americans have created an inflection point in America.

As we seek to become true allies and lead a company where our team feels empowered to do the same, our actions have been guided by our long-standing commitment to support the communities we serve.

Our work starts within our own walls, where we've doubled down on our internal efforts around inclusion and diversity especially in regards to hiring and promotion.

From there, we're harnessing the power of our platform to partner with organizations across the country to help eliminate access to transportation as a barrier to upward mobility for Black communities.

Alongside partners including the NAACP, National Urban League and My Brother's Keeper Alliance, we'll be providing access to roughly 1.5 million free and discounted car, bike and scooter rides to enable Black communities to access a powerful network of essential resources and services over the next 5 years.

This work is an important part of fulfilling our mission by ensuring that the world's best transportation is accessible to all.

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

(Operator Instructions) Our first question comes from the line of Benjamin Black of Evercore ISI.

I think you mentioned several -- you see several scenarios which would get you to profitability in the fourth quarter of 2021.

Could you maybe help us understand the levers that will get us there?

And then one on costs.

I know you gave us an update on when we should -- could you give us an update on when we should see the full benefit of the $300 million cost reduction?

But I think you also mentioned shining a light on all costs.

So are we done with the rationalization now?

Or do you still have some more wood to chop?

Sure.

Thanks, Ben.

This is Brian.

So let me just again repeat why breakeven is just so important to us because it's really the catalyst for us to start self-funding on future growth, and I think it's important for us to demonstrate to investors just the strength of our model.

So we are committed to this target.

As we mentioned, it does require ride recovery.

There are several factors that give us confidence in our ability to reach this milestone.

First, as you point out, is our success in terms of reducing costs and improving unit economics.

And this is leading to a reduction in the number of rides we need to generate to achieve profitability.

And so as we mentioned, based on the progress to date between the first and second quarter now, we can achieve profitability with 5%.

Basically, the required rides now are 20% to 25% reduction, which is an improvement of 5% or 5 percentage points.

To go back to your specific question, we are committed to try to achieve this milestone.

We refer to scenarios and levers, and this is across the P&L.

So both levers that affect top line as well as bottom line to help execute on this goal as well.

In terms of our success in the fixed cost, cutting fixed cost out of a business requires really, really difficult decisions.

But once you make those hard decisions, you have very high probability of success.

And so as we said on the call, we do expect to achieve the full $300 million of run rate savings by Q4, and this is against our original plan for the year.

And I forget, what was your last question?

You mentioned that you're shining a light -- you're using the pandemic to shine a light on all costs in the business.

So I was wondering if there are some more rationalizations that you have.

So any more on the cost savings front there?

Yes.

So as I mentioned, we feel very good in terms of the fixed costs that we've taken out.

But we're spending incremental time and energy across the company driving higher unit economics.

And so in terms of what that means, it's both initiatives and projects that help us increase revenue.

And so this is driving more rides as well as just more revenue per ride.

And then we have a number of initiatives to reduce costs.

So this is everything from increasing our computing efficiencies, unlocking savings on transaction processing, and funding incremental initiatives on safety to reduce insurance costs.

Again, one of the things that we mentioned in the long -- in the prepared remarks is that our success now on executing on the reductions in the fixed cost base and our success on driving forward on these projects to reduce or improve our unit economics, we believe we're creating lasting structural improvements to our business.

And given these improvements, we now believe we can generate margins in excess of the long-term model that we discussed at the time of our IPO.

So we'll be planning to update investors in early next year on that.

Our next question comes from Doug Anmuth of JPMorgan.

Great.

I have 2. First, John, you talked about potentially suspending operations in California if you don't get the extended stay on August 20.

Just hoping you could help us understand how that would work.

Is that just temporary as you adjust the model to certain markets and adjust service levels?

And curious how far along your planning is along this path.

And maybe you can just remind us how big California is as a percentage of rides or revenue.

And then, Brian, just on insurance, if you could talk about the opportunity to further shift insurance risk later this year.

I know you went to about 25% risk transfer last October.

Curious where that could go to and how does COVID impact the potential move there in October.

Thanks, Doug.

This is John.

So on the first question, if a longer stay is not granted, then the injunction would go into effect on August 21, in which case we'd be forced to suspend rideshare operations in California.

And as we explained to the trial court, a preliminary injunction forces Lyft to transform its business model in California.

One thing to remind everyone is the majority of the drivers on the platform have full-time jobs outside of Lyft, and the constraints that we would need to add to the platform such as schedules would not work for many of them and Lyft cannot comply with the injunction at the flip of a switch.

Reclassifying tens of thousands of self-employed drivers would be a significant challenge in normal times.

And in the current pandemic environment, that would be nearly impossible.

So it's difficult to predict timing, as you mentioned.

Our focus is on Prop 22, and we are confident in moving that forward.

Anything outside of that would be -- need to be assessed at a later time.

In terms of the business impact within California, California currently makes up around 16% of total rides.

So that should address your question there.

And this is Brian.

So let me just give a little more color on California.

I would say the West Coast is one of our weakest regions in terms of rebound.

So if you look at month-to-date in August, California as a percentage of total rides was down over 5 full percentage points year-over-year, as John mentioned, out of 16% of total rides.

In terms of specific data points, notwithstanding the recovery in other parts of the country in July, rideshare rides were down 75% in San Francisco, 72% in San Diego and 75% in San Jose.

And in the most recent week, both San Francisco and San Jose were down 77% year-over-year.

In terms of the second part of your question around risk transfer.

So as you recall, we are on a September fiscal year as it relates to insurance policies.

And so in our current policy year, which ends this September 30, we transferred a majority of risk related to 6 states with regards to primary auto.

We're actually in a live RFP right now for our next policy here, which begins October 1, so the first day of Q4.

For us, there's 2 key benefits from transferring risk: first, helps me sleep at night because it reduces volatility in our financials; and second, it aligns incentives between us and our insurance partners.

The RFP is live right now.

So I don't have too many details that I can share, but I can say that we're pleased by the demand for our business amongst leading auto insurers for the upcoming policy year.

And our progress to date on safety initiatives has been well received by the market.

And this is super important to us because it factors into pricing.

So negotiations are continuing.

Nothing has been awarded, but we expect that we will have the option to transfer additional risk for the upcoming policy that would begin on October 1.

Our next question comes from Stephen Ju of Crédit Suisse.

So Logan and John, you touched on this to some degree, but can you talk about the puts and takes to the Lyft use case over the next 12 months perhaps and the next 5 years?

Clearly, the morning and afternoon commute use cases are way down right now as are the airport rides, and there may be a possibility that some of the decline will be permanent as people work from home.

So can you put that in context with your efforts to expand into new use cases like doctor's visits, among other things, that is perhaps not as work-related.

Brian, you touched on this to some degree as well.

Overall, it seems like rides improved pretty significantly from the April trough.

But I'm just wondering if you could provide with -- us with more granularity on some of the regional activity outside of California, especially as parts of the country seem to be going in different directions in terms of cases.

Thanks, Stephen.

Yes, I'll touch on a couple of interesting trends.

We are broadly seeing a shift to more sort of essential trips and seeing -- the commute case has been fairly consistent actually between Q1 and Q2.

It makes up roughly 30% of our total rides, but seeing more essential trips to grocery stores, doctor's appointments, et cetera.

A couple of interesting trends.

Public transit usage across the country has really fallen nationally.

And a lot of cities have been in really tough budgetary sort of conditions and forced to cut back the amount of transit service that they offer.

And we're seeing a lot of people turn to ridesharing as a reliable, safe and affordable alternative there.

One of the exciting things that we've launched on that front as part of Lyft business, we launched a new product called Lyft Pass, and we just launched that in July.

And Lyft Pass is a new product that allows organizations to cover the cost of rides for an employee, for a customer, a guest, a patient, et cetera, and find a -- provide a safe and convenient, flexible option.

So an organization -- the way it works, an organization can buy a onetime or a recurring Lyft Pass and set up a great set of custom rules and restrictions around the time of day that it's used, the right type that it can cover, the location and more.

So we're really excited about Lyft Pass, and we'll continue to look for more ways to build products that support folks and support cities as they reopen.

One other thing.

We talked about it a little bit before, but I just want to comment on personal vehicle ownership.

We really believe that people are going to depend on Lyft and shift to Lyft more and more on the other side of the pandemic.

Affordable and reliable transportation is going to be critical in navigating a challenging economic environment.

And I think on the other side of the pandemic, most folks expect there to be, obviously, a very challenging economic environment to deal with.

So we think car owners and folks considering car ownership might opt out of the high fixed costs that go along with owning a car either because they can't afford it or they don't want to sign up for that type of long-term burden.

And obviously, it's still the early days, but we think we're still at the very beginning of a long-term secular shift away from car ownership and towards adopting a broader transportation as a service type product.

So as far as specific cities, Brian, can you weigh in on some of those trends?

Sure.

Thanks, Logan.

So let me just maybe quickly touch on ride mix, then I'll talk about the cities.

What's interesting for us, if you look at weekend rides as a percent of our total rideshare rides, in Q3 and Q4 of last year, weekend rides were 32% and then 33% of total rides.

At the absolute COVID bottom, weekend rides dropped to 20% of total.

In the last week of July, weekend rides have now reached 29% of total.

So we're seeing a rebound there.

And then as we reported last time, airport rides in Q3 and Q4 of last year were 9.1% and 9.4% of total rideshare rides.

In April, airport rides dropped to 1.6%.

And as Logan mentioned, airport rides are beginning to rebound.

In the month of July, they've more than doubled as a percent of ride mix, and they're now up to 4%.

So it's still down from last Q3, Q4 but definitely trending in the right direction.

In terms of cities and regions, look, I think it's really important for investors to realize that the U.S. is a collection of unique data points.

What you're seeing in your hometown doesn't necessarily represent what is happening in aggregate across the U.S. And so as I mentioned, rides in the West Coast, in particular, are weaker.

But other regions have already recovered to a much stronger degree.

For example, 10% of our top 50 cities in July were down 25% or less year-over-year.

And the other key point to understand is each month, cities recover at different rates.

And so while July rideshare rides jumped 12% system-wide, month-over-month, as Logan mentioned, over 10 of our top 50 cities grew faster than 20% month-over-month, and we had 1 top 20 city grow 57% month-over-month.

And then finally, even in areas with really high COVID case counts and lots of media attention, like Los Angeles and Miami, we did see positive month-over-month growth in July.

Our next question comes from Mark Mahaney of RBC.

Two questions, please.

First, could you describe why you think the driver supply challenges are existing?

You put in waitlists early on because there was a surge in drivers, but then it seemed like it reversed.

I think there are probably macro factors at play here, but your thoughts on why you're experiencing driver supply challenges.

And then secondly, Brian, could you talk about why rides volume will more closely match revenue -- or rides declines will more closely match revenue declines going forward than what we've seen in the last quarter or 2.

Thanks, Mark.

I can take the first one around driver participation on the platform.

So the 2 most important factors for drivers when considering whether they want to get behind the wheel right now are health considerations and earnings stability.

And so on the health consideration side, to your point, a lot of that is more macro, but we're taking that very seriously and doing everything we can to improve safety and health protection within the platform.

So for example, the in-house-created partition, we've shipped tens of thousands of those units.

And we're going to continue providing PPE and those partitions to keep drivers safe and make sure we're communicating all the different options they have to protect themselves if they choose to come back to the platform.

On earnings, because there was kind of that back and forth on the marketplace early on, it's now important that we communicate the fact, as we mentioned, that driver earnings are now at or above pre-COVID levels.

And so we've really increased our communication around that for those drivers that are comfortable driving at this time.

And Mark, let me touch on your -- the second part of your question.

I'm going to just give a little more context on Q2 and then I'll transition to Q3.

So in the second quarter, incentives that are classified as contra revenue as a percentage of revenue were roughly flat year-over-year but increased as the quarter progressed.

And so as John was mentioning, at the start of Q2, the marketplace had really low driver utilization so much so that we created these waitlists.

But as the quarter progressed, demand began to outstrip supply.

So we used incentives to help attract drivers back on the platform.

Very similar to the comments from our competitor last week, we use incentives to help the marketplace more quickly reach equilibrium in terms of supply and demand.

In terms of Q3, we expect that year-over-year revenue growth will likely track the change in ridesharing rides as we invest to improve service levels by bringing drivers back on the platform.

Now this is really a region-by-region balancing act.

In general, a city reopens, demand tends to outstrip supply.

And we think it's the right long-term move to increase liquidity and really strategically invest in supply in Q3.

And as we invest to bring drivers back on the platform, this has, from a GAAP perspective, a contra revenue impact.

And this is why we expect that Q3 year-over-year revenue growth will track the change in rideshare rides versus Q2 where we actually earned a slight benefit.

Now in terms of trends beyond Q3, we believe that high unemployment will lead to more people signing up to drive on the platform especially as federal unemployment benefits expire or are further reduced.

And of course, all this is factored into our Q3 Adjusted EBITDA estimate.

And over time, we believe that this will create a future benefit relative to Q3 as more markets reach really typical equilibrium levels, and incentives can decline back or below historical levels.

Our next question comes from Eric Sheridan of UBS.

Maybe 2 following upon the answers to Stephen and Mark's question.

In those markets where there's been a greater degree of recovery than that, have you seen any changes in competitive behavior between you and your main competitor in terms of the way either one of you might be approaching the market in the markets where you're seeing more of a healthy recovery or snapback generally in the environment?

And then secondly, maybe following on to the last answer, how should we think about the demand side of the equation as opposed to the supply side of the equation?

And as you see a market recover, how much you lean in on marketing initiatives and customer acquisition initiatives versus allowing some of that demand to come to you sort of organically and holistically?

Sure.

I can -- I'll weigh in on some of the macro trends we're seeing, and maybe Brian can hit some specifics.

So competition has been nationally fairly stable, so nothing -- no dramatic changes.

And as a company, we're putting our competitive focus on differentiating our platform through product innovation, through providing a better experience to our riders and drivers.

If you look at some of the programs that we run in markets, on the rider side, we have really significantly cut coupons down to record lows.

And that seems to be consistent with what we've seen from third-party data.

And of course, we're in a place where generally, we have more demand than we can handle.

So we're really pulled back on that side.

On the -- over the last few months, as we've seen demand ramp faster than supply, we removed the waitlists we had on the driver side.

We've started acquiring drivers again, and we are leaning into using incentives to balance the marketplace against the strong rider demand.

So ultimately, our focus is on putting ourselves in the best possible position to deliver strong growth as the market recovers.

Maybe, Brian, can weigh in on a couple of specifics.

Sure.

Thanks again for the question, Eric.

Look, I think I have to repeat it because it's just so powerful.

If you look at the second quarter, we reduced incentives, classified as sales and marketing, 96% from Q1 levels.

But at the same time, we saw a meaningful rebound as the quarter progressed without using coupons.

Again, as Logan mentioned, we want to win on product innovation, on customer experience and brand preference, not coupons.

And so much of the investment in product innovation and customer experience is captured in our R&D line.

We believe these investments can create competitive -- real true competitive advantages and have stronger ROI than coupons, which can turn into a zero-sum game.

So we expect that sales and marketing expense for us as a percentage of revenue will be permanently lower post COVID.

So you should take away that this is more than just a short-term cost-cutting measure.

And then just to add in terms of what we've seen in different states, it is -- back to my comment, like each city is so unique.

It is really hard to generalize across the United States.

It's really a city-by-city balancing act.

Our last question comes from Edward Yruma at KeyBanc.

Just 2 quick ones.

I know you leaned in/introduced some new products during the quarter, specifically Wait & Save and Delivery.

I guess just any initial observations of how they performed and kind of how these businesses may scale over time.

Sure.

So we're really excited about what we've seen from Wait & Save.

So in the sort of first days of the pandemic, we paused Shared Rides across the country and it was the right thing to do.

But it took away our most affordable option from our customers, which was particularly, I think, a difficult moment to do that as we had a lot of people switching from public transit into Lyft looking for affordable options.

And Wait & Save is really great at providing a lower cost option for folks who are more flexible on their schedule.

And if you can wait a few minutes, wait 5 to 10 minutes, you can get a significantly better price and it drives marketplace efficiency because we can send -- we can increase driver utilization.

And ultimately, a driver is not going -- is going out of their way a little bit less than for the kind of pure on-demand experience.

So we're not breaking anything out or disclosing any kind of specific metrics on Wait & Save.

But we're pleased with how it's performing and excited to be able to kind of unlock that type of innovation right when the market needs it.

Maybe, John, you can comment on delivery.

Yes, sure.

So for clarity, we -- on delivery, we launched an Essential Delivery program.

We're not doing a consumer-facing delivery service.

We're well aware of those -- despite the growth in delivery, the continued growing losses as well in that space.

So we're really focused on our current programs.

In Essential Deliveries, we've been really happy with the speed at which the team has built that product.

It's early days but we're looking forward to working with additional organizations so that Lyft drivers can help deliver essential items, and we're just continuing to monitor and look for opportunities there.

All right.

Well, with that, thanks, everybody, for joining our call today.

We hope everybody is staying healthy and safe during this time, and we'll talk to everybody again next quarter.

Thank you.

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

Thank you for participating.

You may now disconnect.