Q3 2020 Lyft Inc Earnings Call
Good afternoon, and welcome to the lifts third quarter 2020 earnings call. At this time all participants are in a listen only mode to prevent any background noise. Later, we will conduct a question and answer session and instructions will be given at that time, if anyone should require operator assistance. Please press Star then zero on your Touchtone telephone Alfa Romeo.
Finally, this conference call is being recorded I would now like to turn the conference over to Sonya Banner Gi Investor Relations you may begin.
Thank you good afternoon, and welcome to the lift earnings call for the quarter ended September Thirtyth 2020, joining me today to discuss lifts results, 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 in 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 Dot lift dot com. Shortly after this call has ended I'd.
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 pro.
Opposition 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 13th 2020, and in our form 10-Q for the third quarter of 2020 that will be filed by November 16th 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 unless 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 Dot lift dot com.
I would now like to turn the conference call over to lift co founder and Chief Executive Officer, Logan Green Logan.
Thanks, Sonia 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.
We remain focused on controlling what we can to support the recovery and accelerate our path to profitability.
Also I 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 ride sharing even better for drivers and riders.
We believe the outcome in California is a win win win it.
It's good for the drivers who will maintain the flexibility and independents. It's good for the writers 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're continuing to engage with policymakers across the country and believes 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 and ride sharing was ongoing.
We saw strong performance improvements in other areas such as bikes scooters and fleet, which includes express drive lift rentals and our driver centers.
Revenue for the 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 turn to ride sharing to go about their daily activities.
Revenue per active rider was up 2% quarter over quarter, reflecting an improvement in ride frequency.
Even though Roger rides are still down from pre cobot levels. They have meaningfully recovered from the trough we observed in the second week of April.
In fact for the last week of October right sure rides were up over 130% from April's low.
It's worth noting that recovery trends very 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 and ride sharing continued we also saw strong engagement in our bike share and scooter operations in Q3 like.
Likewise in our fleet business, we saw improved express drive vehicle utilization and strong uptake of lift rentals are 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 six integration now complete lift writers across the country have been using our app to book a six the rental car the lift way that means selecting the exact car and skipping the counter pickup early.
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 lift pick.
Since we launched lift pink late last year, we continue to look for ways to help members unlock even more value from the program.
I am excited to highlight our new partnership with Grubhub.
Every lift think member now has access to unlimited free delivery from nearly 200000 of their favorite restaurants through Grubhub, plus and seamless plus.
[noise] 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 plus to our members.
So whether lift pink members are going out or staying in they receive preferred pricing and exclusive benefits on a ride share bike and scooter offerings, plus new access to free delivery and one of a kind of rewards from the restaurants They love.
We'll continue to look for ways to further enhance the value of lift pink to delight writers on our platform.
Let me now turn to recent trends that we've been seeing in ride sharing.
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 Ryder 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.
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 topline 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're 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 that execution, we're 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.
This is a further improvement from what we shared last quarter.
Before Brian reviews, our financial performance and outlook alternative 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 in 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 lift 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 experienced 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.
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 healthcare subsidy occupational accident insurance and a minimum earnings guarantee.
This is a policy challenge we bought it just all 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, we'll see this as a watershed moment and recognize that the model that motors back 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 of 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 right guide a recommended vehicle cleaning process designed specifically to fight COVID-19.
We developed this cleaning process in collaboration with KPMG professional and the University of Tennessee Health Science Center.
In addition drivers can now visit one of our driver centers to have their car 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 patterns given.
Keeping drivers opportunities to maximize the earnings is critical to help them make the most of their time on the road.
In addition in Q3, we expanded our lift 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 auto marketplace, which translates to increased REIT 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 have told us that current delivery models with their expensive commissions are not working for them.
And they have 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 obtain traffic.
These businesses want a partner someone to help them move their goods from point a to point b, but one that does not stepping between them and their customers.
This delivery model plays to our strengths.
Leading making full use of our existing technology it.
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 transportation.
I can scooter rides increased quarter over quarter as did revenue, which was up roughly 40% collectively reflecting the increasing popularity during the pandemic along with favorable seasonal trends.
We also continued to make inroads with our electric bikes fleet, which is now available across nine markets, including two new all ebike fleets in Santa Monica and Portland.
Across major cities, including New York, Chicago, San Francisco, and Portland, We are the exclusive by share provider and we are seeing this strategy pay off.
I'll now turn to the work we are doing and lift business. During Q3 as communities reopened more organizations adopted lift 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 link on our products and strong brands help facilitate voting access.
We will continue to look for ways to support businesses as they navigate the recovery.
With products like lift pass we believe we are well positioned to capture the corporate travel read about.
We're 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, who will be able to book lift price 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 lift for the 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 longstanding partnership between lift up in Mastercard, we have delivered more than 2 million meals and provided nearly 900000 bike and scooter rights 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 ride share.
Access to reliable affordable transportation can mean, a difference between successful long term employment and lost opportunities and with the help of partners left is proud to be able to support economic growth.
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 city slowly come back to life, we've seen an increase in activity on our platform in terms of the shape of the recovery right. Your rights 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.
33% and September was down 48%.
All right to remain down significantly year over year, we realized strong sequential growth across key metrics in the third quarter. The number of active writers increased to 12.5 million up 44% from $8.7 million in the second quarter. Despite this large increase in the number of active writers. We were pleased that revenue per active writer increased a three.
$89.94 for the third quarter up 88 cents from the $39.06 in the second quarter as ride frequency per active rider, increasing 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 a follower non gap and excludes 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 to the form 8-K.
Okay filed today with the SEC this.
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 $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 list 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.
No 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 680000 to be exact we've been taking steps to reduce volatility both historical and go forward.
Basis.
On March 30, Onest lifts entered into a novation agreement to effectively eliminate nearly all of this primary auto insurance liabilities related to periods preceding October 2018.
Further we are actively reducing the amount of future risk that lift for teens.
On October 1st lift expanded its rights your insurance program to include subsidiaries of all state and Liberty Mutual we also deepen our existing partnerships with progressive Axa XL and travelers.
Lift expects to transfer a slight majority of total insurance risk required by regulatory agencies for U.S. ride sharing during the 12 months ended September Thirtyth 2021. This is more than double the amount transfer during the prior year ended September thirtyth.
Let's move to operating expenses operations and support expense for Q3 was $118 million down 17% year over year.
Operations and support expenses 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 expenses 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 absolute sales and marketing was only 71 million in Q3 down 54% from 155 billion 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.
Gionee expense in Q3 was 204 billion roughly flat with the year ago period, but up approximately 35 billion from Q2, as we increase policies bad, especially in California and support a 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 stay 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.
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, a roughly 400 million to 100 million, which implies an additional $25 million of cash.
Cost savings from our prior outlook.
In October right your rights 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 right for them.
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 cope with the fourth quarter also is unique seasonal fluctuations that prevent us from using the first month as the growth benchmark.
During prior fourth quarters more rides occurred in the month of October than in either November or December given the relative right impact of 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 Q4 related to the rental 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.
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 dollar headwind to revenue growth between Q3 and Q4.
So in summary, these headwinds along with the continued impact of COVID-19 on 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 three 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, the salary reductions were implemented in conjunction with our layoffs announced in April in effect, we realized a benefit in Q3, which is not repeat in Q4. So it creates an 8 million dollar 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 October alone.
We believe these factors will impact revenue and adjusted EBITDA in Q4.
While we're not providing formal guidance, we 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 cobot 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 67 to 70 cents to contribution.
We anticipate we could 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 dollar quarter over quarter improvement.
Let me turn to our 2021 outlook as Logan shared we have an update on our path to profitability we.
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 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 the right volume approximately 5% to 10% below the level in Q4 of 19. This.
This compares with our prior outlook, just last quarter, which assume we would need right 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 right volume is below this level.
Let me I'm going to three key takeaways, we're executing a key 2020 initiatives to help navigate the challenges of cove, it, including eliminating $300 million annualized fixed cost relative to our original 2020 guidance.
Second well lift operations will continue to be impacted by COVID-19, we remain confident that we are positioned to reach quarterly profitability by Q4 of next year.
Finally in addition to improving margins lift 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 lift will emerge on the other side of cobot 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 similar solutions once 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 why.
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 into different looks standing value to shareholders.
We're encouraged by the ongoing recovery in our business to date, and we're confident that we're setting ourselves up to exit this period stronger.
We are grateful for rider driver community partners team members and shareholders for their continued support and dedication.
And with that.
Ready to take questions.
Thank you as a reminder to ask a question. Please press Star then one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question to withdraw your question press the pound key please standby lobby.
Compiled the Q and a roster.
Our first question comes from the line of Steven Ju of Credit Suisse.
Line is open.
Okay. Thank you very much so Logan or John I think there's a perception out there that as we come out of the pandemic. The addressable market for last may have potentially shrunk or at least the time to unlock that same level of dollar tam or it might be a little bit scratch. So.
No wonder what's your response to that might be as you think about the existing use cases, you know versus a new use cases for rush or 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 or your contribution margin is now at 49%, presumably most of this is being driven by optimization of your insurance costs. So you know, which I guess would you agree that it should ripple through to subsequent quarters. So talk to talk to us about this as one of those I guess the other opex factors that gets you to profitability.
With a 30% less units versus your original guidance. Thanks.
Hi, Brett Bryan you want to start with.
Profitability sure. So maybe if you want to answer that let me, let me give you a little color in terms of how we're thinking about Q4.
And I must start obviously with the disclaimer you know the extent to which our operations will be impacted by cobot will largely depend on future developments, which are highly uncertain and cannot be accurately predicted.
So obviously this has not been a a simple straight line recovery to date, we've seen a 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.
The 61 to 54 to 53 to 48 and most recently a 47.4% in October.
In the most recent week. So this would be the week ended November eight Oh.
Right your rights 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 coping restrictions or or I guess rider behavior.
We expect that active riders will increase in Q4, but the quarter on quarter growth will be more modest you know and I have to say is really difficult for us to forecast active writers during cove it but.
But we would estimate in Q4 that we may see an increase in active writers of between 800000 to a million.
Now given our focus on monetization and the stable right 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 Ryder will be generally more balanced in Q4 and again, we expect total revenue will grow somewhere between 11% to 15% quarter on quarter. No. Obviously, none of this is formal guidance and this assumes that the increasing cobot case count doesn't cause a new round of shutdowns or or change rider behavior.
Sure.
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 a 170 to 270 basis points in Q4, so that would imply a range of 51 and a half to 52 and a half a percent.
In terms of the financial impact we believe is possible in the high end to generate 70 cents of additional contribution for every dollar of incremental revenue growth and.
And then the low 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 two an increase of approximately 5 million quarter on quarter and within Opex, we want a modestly invest in sales and marketing now the 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 both.
Below the level in Q4 up 19, and we anticipate that we can reduce opex and other areas, including gionee to nearly fully offset the sales and marketing. So one key takeaway here is that you know as right volume increases post recovery. This should create strong tailwinds for our path to profitability given the contribution and all.
Thanks leverage I think as it relates to Q4 at the high end of our estimate we expect we can achieve a 50 million dollar adjusted EBITDA loss improvement fueled by sequential growth and contribution. So this would basically imply a 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 you know.
Being able to achieve profitability now with 30% fewer rides from our original right for it does have the right forecast that was necessary let.
Let me answer that really in two parts first.
We have significantly reduced our fixed cost 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 are 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 is whats 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 finding incremental safety initiatives to reduce insurance is a or insurance cost as a percentage of revenue. So maybe to close you know 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.
Steve adopt profitability in 2021, even if there's a slower ride recovery.
To take the thanks, Brent to take the other part of the question. You know, we we are going after and have been going after since day. One the 1.2 trillion dollar consumer transportation market and we have been lase laser focused on that I think all of the same struck.
Actual 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 the recovery play out.
And just to talk about that for a second.
Todays car ownership ecosystem is extremely fractured.
You know as a typical consumer has to interact with 10 different companies.
Just to keep up with the basics.
Of owning a car and that 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 patient needs.
So imagine taking those 10 different companies down to one.
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 that's sort of vision, that's the Tam I think it's unchanged I think all of the secular trends.
At force.
Moving people from ownership to the transportation and service are still at play if you look at what happened to Dvds and Cds as the world moves to streaming when you can deliver something as a service.
At a lower cost with a better experience.
That that ends up being a a really really powerful combination and and I think you know what our industry you've always seen at first with younger generations.
Each generation after that AXT is less interested in getting their license. They are less interested in owning a car.
And we think all of those all of those structural elements to our industry will continue playing out and.
While our RP zero, our top priority right now is navigating the recovery and ensuring we we hit profitability.
Stability.
We will continue to double down on this vision of building, an all inclusive transportation network and seizing that 1.2 trillion dollar Tam.
Thank you.
Thank you. Our next question comes from the line of Doug Anmuth of JP Morgan Your question. Please.
Thanks for taking the questions.
Brian just when you when you talk 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.
Then second maybe for a Logan or John I was just hoping you could clarify the comments on the on the food delivery business and your plans there is that more specifically something like it was on the business and corporate side or are you considering anything there in terms of consumer thanks.
Sure So Doug let me, let me take the first part.
You know when when John in Logan spoke at the Wall Street, or digital conference, which it was only a year ago fills out longer than that.
You know we had built a a ride forecast.
You know that achieve profitability by Q4 of next year and what Logan said, we've now relative to what we need is 30% lower than what we thought a year ago at that conference in terms of just where we were 90 days ago. Today, you know 90 days ago, we needed 5% to 10% more right.
Less than Q4 of 19 and through a lot of work, which I'll cover in a second we now need 5% to 10% fewer rights to achieve adjusted EBITDA profitability. You know I I think folks are well aware of the fixed cost changes in terms of our cost structure, we made <unk>.
We're not letting up and so when a zero based budgeting mindset as we 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 Dizzy, which is a much lower number and so by having each team and function really try to justify first dollar spend we can.
More fixed cost savings, but I think whats gets really exciting is just the the the expected contribution margin improvement because our unit economics.
No we're going to emerge on the other side of coated just structurally more profitable per ride and so this is monetization per ride as well as all the key variable expenses you know I am I'm 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 dropped to the bottom line.
I'm happy to say that as John Doug I'm happy to take the the delivery question, So and as we mentioned a while back we started doing.
Delivery pilot program at the start of the pandemic to connect drivers with more earning opportunity.
I mean, 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 into it really helped us I see how certain elements of our existing technology.
Were perfect for being this kind of logistics arm for existing retailers and restaurants organic traffic. So you take an example, I think Doug you're in New York area on the East Coast. One of my favorite restaurants is a dinosaur barbecue and if you care about that right.
Got anything about.
All the you know whats happening to restaurants in a time like this when they when they sell food on a platform or you know like over its that they get charged 20% to 30%. They released 20, 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 you know, taking 20% to 30%, but they want to just have the delivery capabilities, which obviously with the million plus drivers. We have on the platform. We can provide so not interested in a consumer platform are interested in kind of more of the b to b organization level approach, which we think is differential.
Created a and where we can say hey, we're not going to step between you and your customer unlike other platforms.
Okay. Thank you both.
Thank you. Our next question comes from Mark Mahaney of RBC. Your line is open.
Okay can I ask two questions about the prop 22 first there are some extra expenses associated with the prop 22 terms of minimum plus a wage benefits guarantees whatever to the to the to the drivers you talk about how your lips or what are your plans are for absorbing those costs to what extent you think you can pass those up.
Long and then talk about the implications are probably 20 to be on California. Do you think that that is there evidence that you've seen that that materially changes the possibility of similar legislation being impacted I have been implemented other federally or in other states. Thank you very much.
Yeah. Thanks. Thanks, Marc. This is this is John again, so one we're very happy with the result from Cop 22.
Seeing that 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 or in in terms of Ah you know cost that it's something that as you know over the next few quarters, we'll have a better bet.
Her picture on there are certain things like occupational accident insurance.
But every driver will be covered and that will happen you know once the results of the election or 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 other costs like health care subsidy.
Hand on how many drivers ultimately become eligible so as I mentioned, we'll have a better sense of that in a in a few quarters in terms of what this means across the country I think its a quite distinct clear decisive when that is a turning point for the conversation.
There is a working model now that has independent contractors and had benefits along with that that other states Kim 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.
Cross the country.
Okay. Thank you John.
Thank you. Our next question comes from Eric Sheridan of you'd be it your question. Please.
Thanks, very much for taking the questions maybe to what how can you contrast, what you're seeing from lift pink subscribers and users compared to the rest of your LIBOR cohorts curious how the behavior of someone who is more in line 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. You know can you give us an update on where you are a problem its efforts it and any sense of sort of go to market strategy or levels of investment you're making behind the brother autonomous separate thanks, so much.
Yeah sure so in terms of lift pink talk.
Talk talk about something we launched recently that were very excited about but we don't actually brink break out any kind of metrics in terms of performance, but we we just launched a partnership with Grubhub Grubhub has their own membership program called <unk>, plus and Cmos plus that offers unlimited delivery.
Two thousands of their restaurants, and let's pick members now get access to Grubhub plus it seamless plus which we think is a an incredible benefit and a great way for both of us to both car businesses and focus on what what we each do best.
So that's been.
You know extremely popular I linked to my account, it's a couple of taps and.
And you can connect to your kind of it's a really seamless experience no pun intended.
And a great great benefit. So so we are quite excited about our work with them and I think that that gives paying a nice benefit that applies for folks who may be using ridesharing less right now during the pandemic.
But but in terms of kind of specific stats.
That's not something that that we can break out at this moment.
You can hit on your other question. Your other question in terms of autonomous vehicles.
You know so I think it Avi is absolutely going to be you know the the biggest thing that happens to our industry eventually.
It will take some time, but but it is obviously fundamental to the future of transportation.
Particularly transportation as a service. So so we obviously think no matter what the timeline is it is.
It is incredibly important and that's something that we spend about you know a lot of time and energy thinking about.
So we have a you know 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.
We actually have one of the largest commercial self self driving deployments out there we've done over 100000 paid self driving rides.
With our partner emotional this used to be active.
It is now that the JV between captive and Honda is motion all.
And we've done those rides in Vegas.
And and we also have a pilot program with with Waymo.
Where we're doing some testing together.
So so we will we will continue to lean into to others, who are making great progress in the industry.
In terms of our own investment I think something we've talked about before and as has proved out in many ways is that progress is not necessarily tied to dollars put into the program and and we are really proud of how efficient weve been with our investments I.
I think we've made pretty incredible progress, we recently restarted testing in San Francisco, our initial testing at all been done in Palo Alto.
And we're really excited to see how how quickly and rapidly the system scaled to San Francisco, We're also making some some really great progress in terms of outfitting our cars.
With specialized cameras and sensors to collect data from the actual ride sharing fleet, which we think is one of our distinct advantages and 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.
<unk> approach to building and ultimately rolling out self driving cars.
And in terms of partnership we we also you know pride ourselves on being a great partner and very flexible in how we work with other folks.
So we had a you know for example are great to your partnership with Magna, where where we co funded the development of level five 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 more efficiently together.
So I think that you know the kind of bottom line is I think were positioned extremely well for the eventual rollout of autonomous vehicles I think that there's there's no question that.
They will scale up on on ride sharing networks early economist vehicles will.
Not be able to cover 100% of rides.
Out there and they will not be able to cover you know entire geography is the way that ride sharing ties and writers 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, but their generation of.
Autonomous vehicles so.
No that that's the kinda ultimate roll.
Role, we see ourselves playing in the ecosystem and.
And we like our position.
Right.
Thank you and next question comes from Benjamin Black of Evercore ISI. Your line is open.
Hey, Thanks for taking my questions I have two so we've looked at TMC data here and in New York and it seems like somebody somebody ridership over 70% and write your interests are only down about 40. So what are you seeing in terms of share shifts public transit at the moment and how do.
Durable you think these shifts are and then secondly, it'd be great to have an update on the competitive environment. You know when cities have reopened what trends are you seeing in terms of incentive Dryburgh riders and how do you see these playing out over the next 12 months or so thank you.
Yeah, absolutely so I'll take the first part and then maybe Brian can take the second.
So in terms of public transportation, I think where we're seeing the same data you are public public transportation in general is down further than most other forms of transportation.
As people look for alternatives and look a look to get space from from large groups of other people.
So you know we think we've been able to offer a great alternative for folks.
Who are looking for.
Different type of transportation to.
To move from from public transit, we're working with employers to power their commute programs with lift pass.
And seeing some some great pickup 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 I think and you know little bits 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 the 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. in Canada.
We report overall changes in some cities are showing much stronger recoveries to date, including New York.
The West Coast I would say generally is the weakest region. You know for example, notwithstanding the recovery in other parts.
Of the countries in October right, you're right, we're down 70% year over year in San Francisco No. Other regions have been recovering much faster for example in July about one eight 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.
Quarter 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 three months in a row now in terms of the competitive environment I I mean, I would just use our financial I think that sometimes.
The most helpful. You know for the second quarter in a row, we maintain sales and marketing as a percentage of revenue below 15%.
Further we've reduced incentives classified as sales and marketing might 86% year over year from 78 million, just $11 million or 2% of revenue. So I think these two telling data points.
These are two telling data points in terms of just that the current environment.
Great. Thank you.
Sure.
Thank you. Our next question comes from a line of Youssef Squali Truest Securities. Your line is open.
Great. Thank you very much two quick questions for me one on the 2021 guidance or the breakeven expectation by Q4.
Just follow up on Mike's question early around prop 22 does that assume does that make any assumptions about maybe de 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 blind can you speak to or what can you maybe just quantify the any policy spend planned for Q4 and what was the actual number for Q3. Thank you.
Sure. So let me let me first talk about prop 22, and so as John mentioned once probably 22 becomes law in California, We expect to pass through the additional cost you know because we're a marketplace. Obviously so in terms of by how much.
We're still analyzing what increases necessary to drive similar margins on our marketplace. It will definitely vary by city in time, a day, but we're not overly concerned and so I think if this is a few more states can adopt this third way you know again, we're not overly concerned it would not change our outlook in terms of.
Paul Seaspan I tried to highlight because there 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.
M. for between Q3, and Q4 is only going to step down about six and a half 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.
Got it thank you.
All right well. Thank you everybody for joining our call today, and we hope everybody 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.
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