Lyft - Q4 2023

Transcript

Operator (participant)

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. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Sonya Banerjee, Head of Investor Relations. Sonya, you may begin.

Sonya Banerjee (Head of Investor Relations)

Thank you. Welcome to the Lyft Earnings Call for the fourth quarter and full year 2023. On the call today, we have our CEO, David Risher, and our CFO, Erin Brewer. Our president, Kristin Sverchek, is here for the Q&A session. We'll make forward-looking statements on today's call relating to our business strategy and performance, future financial results, and guidance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied during this call. These factors and risks are described in our earnings materials and our recent SEC filings. All of the forward-looking statements that we make on today's call are based on our beliefs as of today, and we disclaim any obligation to update any forward-looking statements except as required by law. Our discussion will include non-GAAP financial measures, which are not a substitute for our GAAP results.

Reconciliations of our historical GAAP to non-GAAP results can be found in our earnings materials, which are available on our IR website. With that, I'll pass the call to David.

David Risher (CEO)

Thanks, Sonya, and good afternoon, everyone. Thank you for joining us. I am really proud of what Lyft accomplished in 2023. We supported more than 700 million rides, and gross bookings reached an all-time high. Ride growth accelerated every quarter, ending the year up 26% in Q4 versus last year. More than 1 million drivers collectively earned over $8 billion using Lyft. We also had the highest annual ridership in our company's history, and ride frequency growth was the strongest it's been since 2018, prior to our IPO. Our team came together with a vision for how customer obsession can drive profitable growth. We set clear goals and we achieved them. So we're entering the new year with a lot of momentum. We're competing and executing really well, and we're giving drivers and riders great reasons to choose Lyft every day.

Again, our thesis is the customer obsession drives profitable growth, and we're keeping our foot on the pedal to prove it this year. To that end, we have three focus areas for 2024, and here they are: continuous innovation, rideshare perfection, and partnership-driven growth. I'm gonna walk through each of these and share a few examples that demonstrate how we're going about each. First, continuous innovation. One enormous advantage we have at Lyft is our focus on rideshare and on specifically creating the absolute best rideshare experience. Continuous innovation gives riders and drivers differentiated reasons to choose Lyft and increases their preference for using Lyft over our competitor. Women+ Connect is one great example. Since the launch back in September, roughly two-thirds of eligible riders, excuse me, drivers, and millions of active riders are using the feature, and their feedback has been outstanding.

Women+ Connect resonates with a lot of people. In fact, we have seen double-digit increases in driver referrals in market, in markets where that feature has gone live. That's a great sign of strong product-market fit. I'll also point out we're the only rideshare company that offers this feature in the U.S. So if you're a woman or if you have a woman in your life who prefers to ride or drive with another woman, download the Lyft app. We're the only game in town. And some news: we're thrilled to announce that as of today, Women+ Connect is now available in every market across the United States. Over 295 cities, including Atlanta, Boston, Chicago, D.C., L.A., and of course, New York City. In fact, if you're in New York and out of the snow, check out our billboard in Times Square, if you can.

Huge thank you to Christina Aguilera for being such a great advocate. Another great example of how we're innovating is our new pay standard for drivers. We have made a commitment that Lyft drivers will earn at least 70% of rider payments each week after the external fees. Most Lyft riders earn more than that already, but there are instances where that's not the case. The rideshare industry talks a lot about driver earnings, often in terms of averages, but with averages, some people walk away unhappy. That's why we've designed this as a guaranteed floor. Our intention is to set a standard for transparency, raise the earnings bar for our sector, and further increase drivers' preference for Lyft. In turn, that reduces Prime Time, which riders strongly dislike, it shortens ETAs and results in higher rider preference and usage of Lyft. That's what continuous innovation looks like.

Our second focus area relates to the way we execute, what we call rideshare perfection. You've heard us talk a lot about customer obsession. Drivers and riders have very high standards, so we put an enormous amount of effort into perfecting the rideshare experience, and we'll do even more in 2024. Let me give you an example of this kind of perfection and how it drives our business. In mid-November, we launched our On-Time Pickup Promise as part of our Scheduled Rides product. The idea was simple but ambitious. If your ride to the airport didn't arrive within 10 minutes of your scheduled pickup time, we would pay you up to $100, no questions asked. When we launched this product, we set an extraordinary, almost unreasonably high expectation, or excuse me, standard for ourselves to deliver.

So high that we were even willing to cover the cost of a competitor's ride if we failed to deliver. The results have been remarkable. Of the more than 500,000 rides that have fallen directly under this guarantee, we have had to cover just 2% at a cost of less than 0.01% of gross bookings. Helped by this guarantee, scheduled rides to the airport grew 37% year-on-year during Thanksgiving week. Remember that remediation statistic of 2%? Over half of those riders took another Lyft ride in the following 30 days. Outcomes like these, particularly at our scale, are a testament to the level of operational excellence we are capable of and what the growth impact can be. The rideshare perfection is central to our plans to drive profitable growth in 2024 and beyond. Finally, partnership-driven growth.

Last year, approximately 20% of our rides had a direct connection to one of our partners. Lyft's ability to partner in mutually beneficial ways with other organizations is an underappreciated superpower that can unlock long-lasting new revenue streams, and often with very attractive margins. This becomes clear when you look at the relationships we've established and how they've expanded over time. For instance, our Delta Air Lines partnership began with riders rewards, where you can get points. But we now also support their flight crews with our Lyft Pass Commute solution. Universal Pictures bought media on our platform in Q4 to support the launch of Trolls 3, and now they're coming back to do even more in 2024. Our list of deep partnerships goes on and on, and includes world-class brands like Starbucks, Disney, Amazon, Apple, and we've seen similar expansion across all of those.

Partnering is rarely easy, but we've proven that we can be world-class at it. The work we're doing in each of these focus areas I just outlined, continuous innovation, rideshare perfection, and partnership-driven growth, will underpin our top-line growth and margin expansion in 2024 and set the stage for strong financial performance beyond. Now, before I turn the call over to Erin, we have two important pieces of news to share. The first is we're hosting our first Investor Day in early June. It's gonna be a great opportunity to see the incredible work we're doing and the amazing team behind it. And second, as lead-in to that event, we are providing directional commentary for our full year performance this year.

The headline is that in 2024, we expect Lyft to generate positive free cash flow on a full year basis for the first time in our company's history. It's a huge milestone for us. I am very proud of all Lyft has achieved in 2023 and the first few weeks of 2024. As I said in the beginning, this will be the year that we prove customer obsession leads to profitable growth. Over to you, Erin.

Erin Brewer (CFO)

Thanks, David. Good afternoon, everyone, and thanks for joining us today. I'm going to review our Q4 results as well as our Q1 outlook. I'll also share some directional commentary for the full year 2024. As a reminder, unless otherwise indicated, all income statement measures are non-GAAP and exclude select items which are detailed in our earnings materials. As David mentioned, 2023 was a year with some strong accomplishments at Lyft, and we continued to build on that momentum in Q4. We are prioritizing operational excellence and seeing great results. Driver Hours grew 47% year-over-year in Q4. This reflects strong engagement by existing driver, drivers and meaningful growth in new drivers. So even while rider demand continued to increase, we were able to convert more ride intents into completed rides.

The combination of these factors supported our accelerating rides growth, along with improving service levels, including significantly less Prime Time year-over-year and faster ETAs. We ended the year healthier and stronger, which is reflected in our financial performance. Now to our fourth quarter results, which are consistent with the outlook we provided on our Q3 earnings call on November eighth. We supported 191 million rides and 22.4 million active riders. Total rides grew 26% year-over-year, accelerating for the fourth quarter in a row, with strength across use cases, particularly commute and nights out. Ride frequency, referring to the average number of rides per active rider, grew double digits year-over-year, with rideshare-only frequency growing even faster. Gross bookings exceeded $3.7 billion, up 17% year-over-year.

This reflects strong rides growth, partially offset by lower prices year-over-year, given our competitive focus and improving health of our marketplace. Revenue exceeded $1.2 billion, up 4% year-over-year, reflecting those same dynamics. Cost of revenue was $736 million, down 3% year-over-year. As we lap the insurance reserve charge we took in the fourth quarter of 2022, that affected cost of revenue as well as G&A. Operating expenses were $450 million, down 35% year-over-year. As a percentage of gross bookings, operating expenses were 12%, reflecting an improvement of roughly 10 percentage points versus Q4 of 2022. As we lap the charge I just mentioned, along with savings from our recent cost restructuring actions.

Adjusted EBITDA was $67 million, which as a percentage of gross bookings, was 1.8%. I will remind you that our updated third-party insurance agreements went into effect at the beginning of Q4. The combination of higher rates, along with slightly higher ride volumes quarter-over-quarter, increased cost of revenue by approximately $100 million sequentially from the third quarter to the fourth quarter. However, we were able to offset around $75 million of these costs, with savings largely generated through our healthier, more efficient marketplace. For the full year 2023, we generated $13.8 billion in gross bookings, up 14% year-over-year. Our adjusted EBITDA was $222 million, which as a percentage of gross bookings, was 1.6%.

We entered 2024 with a solid cash position, with unrestricted cash, cash equivalents and short-term investments of approximately $1.7 billion. In the fourth quarter, we generated positive free cash flow for the second time in our company's history. Now, let me talk about what we expect in the first quarter. We expect gross bookings of $3.5-$3.6 billion, up 15%-18% year-over-year. We expect total ride growth of approximately 20% year-over-year. Consistent with the performance we saw in January, we expect healthy marketplace trends will result in a slight increase in the ratio of total revenue to total gross bookings in Q1. As we move through the remainder of the quarter, our plan assumes continued operational excellence and focused execution, particularly related to key events like Spring Break and St. Patrick's Day.

For the first quarter, we expect Adjusted EBITDA of approximately $50 million-$55 million, and an Adjusted EBITDA margin as a percentage of gross bookings of roughly 1.4%-1.5%. Next, I'm going to provide some directional commentary for full year 2024, to help you understand what we're working toward longer term. What we've seen over the past three quarters is people are getting out more and connecting with the world around them. They're commuting, traveling, heading to events, and gathering with family and friends. Based on what we're seeing and hearing, our expectation is that these trends will continue, and as a result of the rideshare backdrop, will remain healthy. As David discussed, we're working to give drivers and riders more great reasons to choose Lyft.

We believe this work will result in more efficient driver and rider acquisition, higher levels of retention and engagement, and incremental revenue streams with attractive margins. With these factors in mind, for the full year 2024, we expect total rides growth year-over-year to be in the mid-teens. Additionally, we expect modest growth in the ratio of gross bookings per ride as we continue to operate competitively with the market. As a result, we expect gross bookings in absolute terms will grow slightly faster than rides on a year-over-year basis. The combination of top-line growth, operational excellence, and continued cost discipline, with the full year impact of our more efficient cost structure, is expected to drive approximately 50 basis points of expansion in our Adjusted EBITDA margin as a percentage of gross bookings to 2.1%.

In 2024, we also expect to generate positive free cash flow for the full year for the first time. This is an important milestone for Lyft. Relative to 2023, there are three key drivers that support our free cash flow plan: higher levels of Adjusted EBITDA, reduced capital expenditures since our planned bike share fleet electrification upgrades are now mostly complete, and finally, reduced cash outflows related to the change in working capital, largely reflecting the maturity of our insurance program. Let me spend just one more moment on that last point.

Our current insurance risk transfer structure is entering its fifth year and we've now worked down the vast majority of our legacy exposure to periods where we were largely self-insured. As a result, we're now in a place where our insurance-related accruals and our insurance-related cash payments are expected to be more balanced than they've been over the past few years. I would note that our quarterly free cash flow trends will vary, so I'd encourage you to focus on the full year. To give you some sense of the level of free cash flow we anticipate for the full year 2024, we expect that roughly half of Adjusted EBITDA dollars will convert to free cash flow. With that, I'll bring our prepared remarks to a close. Our team did incredible work last year to establish a strong foundation for profitable growth. In 2024, our priorities are clear.

We're focused on drivers and riders, and we're excited to continue to build and innovate. It all adds up to one theme: We are building a customer-obsessed, financially strong business. I look forward to introducing you all to more of our management team and to having a more in-depth discussion at our Investor Day in June. Operator, we're now ready to take questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. We also ask that you limit yourself to one question and one follow-up, and for any additional questions, please re queue. Your first question comes from the line of Mark Mahaney from Evercore ISI. Please go ahead.

Mark Mahaney (Senior Managing Director and Head of Internet Research)

Okay, I'd like to ask two product questions. Please, this On-Time Pickup Promise, that sounds very promising, if you will. Sorry about that, but-

David Risher (CEO)

Mm-hmm.

Mark Mahaney (Senior Managing Director and Head of Internet Research)

Talk about the adoption of scheduled rides, the proliferation of scheduled rides, how big that is, and to what extent you want to try to push that, you know, broader because I think the economics are usually better for you, and there are good benefits in there for riders and for drivers. So talk about that. And then also on the ad side, I know that's very early stage for you, but do you want to help us think about how big, given the testing and the learning you've had so far, how big you think that could be for Lyft over time? Thank you very much.

David Risher (CEO)

Sure. I'll take it, Mark, and, yeah, Erin and I will tag team on some stuff, but this one I'll probably take. So Scheduled Rides, it's an amazing product, and it's one we've invested in a ton. And as you heard me say, you know, the fact that we can guarantee to sort of the 98%+ reliability level, a Scheduled Ride, I think speaks really well both to our operational excellence, but also to the potential of the product. So right now, only about 5% of our rides are scheduled. Great upside, because as you mentioned, it has nice economics. A disproportionate of those are to the airport. But if you think about it, you know, Monday morning comes around, you got to get to the office.

There's really no reason for you to be doing, you know, on-demand rideshare at that minute if you know the night before you have to get to the office. Bad weather comes around. We can forecast that just like you can. There's really no reason for you not to schedule a ride upfront there. So we actually see there are a lot more use cases building on this infrastructure we've built, and think there's a lot of upside, again, for riders, but also for drivers, because drivers do get paid more. In fact, quick aside, we just did a release last week, and we're now paying drivers to wait as well, which is something that drivers really care about. So it's a good win-win. On our second question, on media, again, so much opportunity. So much opportunity.

I think if I'm not mistaken, I think our Q4 media business was bigger than what it was in all of the prior year, 2022. The reason for that is brands are hungry for new ways to connect with their with their customers. From the moment a person asks for a Lyft, you know, you get sort of this matching screen, and if you've used Lyft recently, which of course I hope you have, you may well have seen an ad. We actually had a almost sold out, I think, ad run around Super Bowl and so on and so forth. Anyway, you get an ad there, and then if you're in the car, you know, you're in the car for some seven to 10 to 12 minutes, and people tend to check their app.

Actually, to be more precise, the average ride, the typical ride is more like 15 minutes, and people look at their phone about 9x during that 15 minutes. They're very sort of open and receptive to, to high-quality content, and so we're working really closely with, you know, the Disneys of the world, the Universals of the world, the Apple Computers of the world, and so on and so on, to, to produce very, very high-quality content. We've actually just released a video ad unit, as an example. But we think is going to be captivating, engaging, interesting to riders and, you know, obviously has good margin characteristics.

By the way, we hope to be able to share some of those economics back with drivers as well, particularly for the in-tablet or the in-car tablet use case, which we've got about 9,000 tablets out there. So anyway, a lot more to talk about here, but we're super excited about it. Just the numbers are fairly small now, but we've got, you know, big aspirations.

Mark Mahaney (Senior Managing Director and Head of Internet Research)

Thank you, David.

David Risher (CEO)

Sure.

Operator (participant)

Your next question comes from the line of Nikhil Devnani from Bernstein. Please go ahead.

Nikhil Devnani (Senior Analyst of US Emerging Internet)

Hi there. Thank you for taking the question. Thanks for the directional of 2024 commentary as well. Could we just please clarify the EBITDA margin expansion? I think the slide said 500 basis points, but Erin, you mentioned 50, so I think it is 50, but if you could just clarify that again, please. And then, can you talk about the underlying assumptions, even if it is 50, between kind of the gross margin and the OpEx levers at your disposal, where do you kind of see the most room for that leverage to come through?

Erin Brewer (CFO)

Thanks, Nikhil. This is Erin, and this is actually a correction from the press release. You're correct. In my prepared remarks, I referenced 50 basis points of margin expansion. So if you look at our full year performance for 2023 at 1.6%, you can translate that into approximately 2.1% in terms of our directional commentary in 2024. And so I think your second question was more about, you know, growth levers as we see them for 2024. And, I'm happy to talk about that, but I might also turn it over to David just to start and set the stage.

David Risher (CEO)

Yeah, why don't we tag team on this?

Erin Brewer (CFO)

Yep.

David Risher (CEO)

I hear from you, Nikhil. By the way, I read your report last week. So anyway, I'm gonna zoom out for a second because it sort of gives us the opportunity to speak a little big picture of where we're, where we're going, what we've seen and where we're going. And we'll talk about growth, broadly speaking. So, you know, at the top line, first of all, we see actually super healthy industry dynamics and frankly, you know, good sector growth. You know, back to work is definitely a thing, travel is definitely a thing. All the macro trends that you see, and, and we look pretty closely and try to detect any, any reasons to worry and really just can't. Again, not your question, but just to sort of set the stage, I really can't find much to worry about there.

A lot of, you know, a lot of sort of growth that's just coming, some from post-COVID and some from just the fact that we've got a great service and people are adopting it. So then when we sort of go down a level, and, you know, again, of course, I talked about the continuous innovation and rideshare perfection and the partnership-driven growth. I think each of those, both individually and collectively, really add to a very, very strong growth story on the side. Now, I think, Nikhil, and you'll have to refresh my memory because it's been a while already since you asked the question and we've been blabbing here. Maybe just rephrase the end of that question, and we'll sort of try to hit it up with a more directly.

Nikhil Devnani (Senior Analyst of US Emerging Internet)

Yeah. Yeah. Thanks, David, for the top-line color. Yeah, I was just trying to get a better sense of the core margin drivers at your disposal and really how you're thinking about the evolution of gross margin as well as OpEx leverage to kind of get to that 50 basis points of expansion as the year goes on.

David Risher (CEO)

Yeah, love it. Yeah, Erin will grab it now.

Erin Brewer (CFO)

Yeah. Thanks, Nikhil. So, you know, first and foremost, to reiterate a little bit of what David said, you know, as we, as we came through the back half of 2023, we saw real health building in the U.S. rideshare market, you know, with trends I mentioned related to travel, commute, et cetera. And against that backdrop, we executed really, really well. And so as we look into 2024, we see the same healthy backdrop as we think about rides growth, and David touched on some of the pillars and the way that we think about that overall. So we, we not only see that rides and gross bookings growth, but we see that growing in an efficient way. So I touched in some of my remarks on some of the trends we're seeing, both on the driver side, right?

Drivers choosing to drive more with Lyft, spending more hours with Lyft. That really contributes to the efficiency, the way that we efficiently run our marketplace. David touched on things like partners expanding with Lyft, and so those are areas that we continue to see growth overall. Then as you think about leverage, as we engage in a much more efficient way, that creates an opportunity. Then to your point, as we think about operating expenses, you know, we obviously took the significant cost reductions in 2023, and our directional comments for 2024 really are grounded in continued operating expense discipline. So even as we are able to grow the top line, engage more efficiently with the market, et cetera, we retain that operating expense discipline.

Our plan does contemplate, you know, on the insurance side, we have great visibility into the first nine months, given our renewals at the beginning of the fourth quarter of last year. But we are contemplating some increases in the back part of the year. That is fully contemplated in the directional guide that we've provided. But we think we have, you know, a number of different levers upon which we can continue to expand EBITDA margins into the full year.

David Risher (CEO)

Sorry, we just got- I'm going to go in a little wilder on this one. So because there's a lot of interesting opportunities. So, Mark asked a question about, Priority Pickup, and actually not Priority Pickup, Priority Scheduled Rides, which is a slightly higher margin, product. Priority Pickup is another, Extra Comfort is another. We've talked about that a couple of times. We launched that in October. It's a, it's a slightly premium priced product, so, you know, $1 or $2, call it. But our costs are not, significantly different. So if you look at mix, there's lots of opportunity there. And then again, back to the point of media, you know, that's a very high margin, business for us, as well as a lot of our partner-originated rides.

So, you know, I, I'd say a lot of our focus so far has really been on that, you know, growing top line in a very efficient way and in a sort of a structured and financially strong way. We've got real opportunity on the margin side, which is reflected in the, in the remarks that Erin just made.

Nikhil Devnani (Senior Analyst of US Emerging Internet)

Thank you both. Appreciate it.

David Risher (CEO)

Sure.

Operator (participant)

Your next question comes from the line of Doug Anmuth from JPMorgan. Please go ahead.

Doug Anmuth (Managing Director and Senior Equity Research Analyst)

Hey, this is Wes on for Doug. Thanks for taking the question. Guiding the rides growth mid-teens in 2024, how should we think about kind of the pace of, you know, deceleration from 20% from here?

Erin Brewer (CFO)

So, you know, Wes, thanks for the question. You know, we're not in a position really to talk about the quarterly sequencing, but we've talked about our assumption in terms of rides growth for the full year in the mid-teens, and we've also provided guidance for Q1, that rides will grow approximately 20% year-over-year. And just as a reminder, you know, we are lapping that 20% assumes lapping of the prior year, where we weren't fully operating in sort of the more competitive way that really started for the full quarter in the second quarter of 2023. So hopefully that gives you some context for how we guided to Q1, and maybe how to think about that in the context for the full year of 2024.

Doug Anmuth (Managing Director and Senior Equity Research Analyst)

Thanks. If I could ask just one more on Women+ Connect. We've seen a lot of success there, great to see. Are you seeing kind of any incremental, like, share gains? Like, whether that be on the driver side or, or, you know, rider side, kind of as a result, or, or maybe is that a little too early to tell?

David Risher (CEO)

Yeah, thanks for the question. A couple things there I'll just say, you know, sort of directionally. First, just to level set for everyone, you know, we launched it at the end of last year. It was first in five markets, then it was in 55 markets. Now, just as of today, it, you know, it's in over 200 markets. So, you know, obviously, from an overall volume perspective, you know, it's still fairly small. But from a product market fit perspective, it's super, super good, and, and, frankly, you know, sort of off the charts type of thing. There aren't many features that you launch, for example, that have something like a 98% driver acceptance rate, and, and, and no one turns it off once it's on. And so those are the types of early indicators we look for.

I mentioned the fact that drivers are now referring Lyft to other potential drivers. These are women drivers referring to potential new drivers. And back to that margin expansion point, you know, roughly speaking, if we have higher density, you know, we have higher margins because of the way, you know, the sort of the structure of rides go. So anyway, that's really good. I don't know if we mentioned we've done about 7 million rides so far on Women+ Connect, just in the last couple of months, just in those 55 markets. And we expect obviously that to accelerate, you know, quite a bit now that we're nationwide. So nothing specific to share, but really good product market fit.

You know, as I always say, if you look at the sort of the social media commentary or frankly, you know, ask your wife or your daughter or a woman in your life whether they think this is a good thing, you'll, I think, probably hear very good, very good response.

Doug Anmuth (Managing Director and Senior Equity Research Analyst)

Great. Thank you both.

David Risher (CEO)

Sure.

Operator (participant)

Your next question comes from the line of John Blackledge from TD Cowen. Please go ahead.

John Blackledge (Managing Director and Senior Internet Analyst)

Great, thanks. Two questions. First, on the 2024, free cash flow, can you just remind us again the drivers of the 50% EBITDA conversion, in the free cash flow in 2024? And is that, you know, kind of sustainable going forward, that conversion rate, or should we expect it to perhaps rise as we go forward? And then second question is on the customer experience, with the ETAs and Prime Time kind of improving, could we see further incremental improvements in both of those, consumer experience metrics in 2024? Thank you.

Erin Brewer (CFO)

Thanks so much, John. I'll start with the first question and then turn it over to David. As we mentioned in our prepared remarks, you know, very pleased to give this directional commentary on free cash flow for 2024. You know, from where we sit today, we believe we've reached a turning point, and it's an important milestone overall for our company. You know, in terms of what's driving that, you know, first and foremost, obviously, just operating a healthier business, right? We've got Adjusted EBITDA growth and expansion year-over-year. Then I talked a little bit about the transition with respect to our insurance program. There was a period of time in our history where we were largely fully self-insured. As insurance works, it can take up to seven years for claims to fully resolve.

Now, while we did transition to our, risk transfer structure about five years ago, and we are at the tail end of the legacy book, it's not fully resolved. And so, again, meaningful progress this year, but there's still some resolution of that legacy book to go. So I think you can think about that somewhat in the, free cash flow conversion, if you will, directional commentary we've given for 2024. You know, the last thing that I would say is, I obviously touched on our capital expenditures, moderating year over year. This is largely because, you know, we invested in 2023 in updating our bike fleet across our bike and scooters business, and we've got a much larger mix of e-bikes that allows us to... You know, first of all, riders love them.

Second of all, it allows us to be more efficient, and that's a higher margin ride overall, and just frankly, an overall better experience for riders. So while most of that investment and deployment happened in 2023, there's still some more to come in 2024. So hopefully that gives you some additional color on free cash flow and a little bit about, you know, how we're thinking of the conversion for 2024. But bottom line is, again, we feel we've reached a turning point, and we're very focused on improving from here.

David Risher (CEO)

Let me pick up on that, speaking of improving from here. So I'll give you some data about what we've seen and then, maybe directionally in the future. What we've seen on, and you mentioned ETA specifically as well as, prime time. So ETAs actually got faster in Q4, quarter-over-quarter and year-over-year, than they've been before. So we saw a really nice, directional improvement there. Prime Time, I can actually be more precise. We saw about a 40% reduction in the share of rides affected by Prime Time in Q4, again, year-over-year. So really significant, meaningful changes, in both. So then the question is: how much further is there to go? And this is an area, look, here's a little personal story.

I just finished a book recommended to me by a colleague here called Unreasonable Expectations, and my expectations are unreasonable. You know, I will continue to push us very hard in this, and the team, I hope, is energized by it because it, you know, as we've seen with things like the On-Time Pickup Promise, when we really focus on doing something, even at the scale we are, and just as a reminder, we're doing 2 million rides a day. One thing I sometimes comment on, a riff here is, you know, I look at an airline like Delta Air Lines, you might do 3,000 or 4,000 flights a day. Now, obviously, they're, they're shipping out a lot of people. Those are 180, 200 passenger jets, but still, the scale that we're working at is really quite large.

I remind our team, while it's large, we, it's no excuse. We still have to do just an unreasonably good job every day. You know, I don't want to speculate on how much further we can go, but I will say we're quite focused on perfection. That's not a word we chose cavalierly.

John Blackledge (Managing Director and Senior Internet Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Alec Brondolo from Wells Fargo. Please go ahead.

Alec Brondolo (Director of Equity Research in the Internet Sector)

Hey, thank you so much for the question. Two for me. I guess, why is now the right time to establish a 70% minimum driver payout threshold? It seems like all of the commentary suggests that industry supply trends are extremely healthy, and so I think that stands a little bit in contrast with increasing the payout. So just any, any commentary on the timing, I think, would be really interesting. And then maybe secondly, if I could ask one on insurance. You know, you guys indicated correctly that, you know, you've been mixing the business towards risk transfer. Obviously, in the U.S., your primary competitor, Uber, has been moving in the other direction. They've been shifting their business towards captive insurance. You know, I guess how can we explain the differential and strategy there?

Is there any concern that they're going to build, you know, a structural cost advantage over Lyft by, you know, leveraging the captive insurance, insurance muscle? Thank you.

David Risher (CEO)

Yeah, that's—we'll do one-on-one on that. I'll start with the first. So, I mean, a couple of things there. So the... Actually, I'll start with an old chestnut. You know, the best time to replace your roof is when the sun is shining. So we have strong driver preference for Lyft already, and that's been true for a long time, really since the earliest days of Lyft. I'd say it's one of the real sort of differentiators between Lyft and Uber on kind of a perception basis on the driver's side. And so we're leaning into that. We're leaning into that. And so behind the scenes, you might have seen the report that came out a couple weeks ago from Gridwise that sort of suggested that Uber drivers' earnings have been decreasing.

I think they estimated about 17%, whereas ours have been going up over the same period. I forget what the period was, I think two years, maybe a little over 2%. So, so in the background, we've been working quite hard at making sure that our drivers are paid as, as well as they can. And again, just for clarity, it's technically the riders who pay the drivers, and we just take a cut. So that's, that's kind of the, the mechanics of it. So, so then we say, given those mechanics, the riders are the drivers, and we take a cut, well, what can we do to address a very consistent set of pain points that drivers have communicated to me, often in quite personal ways, I might add, since the day I started? One is around transparency. You know, a question of fairness.

Are you taking too much? The second is a question of minimums, frankly. You know, why are there some rides where it feels like my rider pays $20, and I get, you know, barely barely anything? So it was a very deliberate strategy on our part. It's been for some period of time to say there are two customers in every car, there's a rider and a driver, and if we can drive preference on both, that's what ends up creating marketplace efficiency, which then in turn, you know, obviously increases service levels or improves service levels, but also increases top line and margin. So it's really quite a self-fulfilling prophecy. And back to your question, you know, around timing, you know, sort of if not now, when?

Like, you sort of want to do it when things are going pretty well rather than feeling like you're going to have to defend yourself. I'll say one last thing before I turn it over to Erin. There's a piece we published last week that I would encourage everyone to read. You know, the customer obsession doesn't just mean, you know, listening to customers. Of course, it means that, and trying to come up with things, innovating on their behalf. But it also means deeply, deeply understanding their needs so that the work that you're doing, you know, responds to those needs. We published a white paper about 10 days ago, or actually, I guess about a week ago, and it's called something like the Driver Transparency Earnings Report. I forget the exact name of it.

But it's really quite a nice piece of work, and I'm going to brag on the team for a second. The team, quite a large team, actually, across the company, spent a lot of energy looking not just at gross earnings, which is how much drivers get paid, you know, kind of off the top, but also net earnings. In other words, what they make after their expenses, their gasoline, their maintenance, their depreciation, even the cleaning of the car, all the marginal costs that you have when you drive for rideshare. And we did it for all kinds of reasons. Policymakers are interested in this, but frankly, so are we. We're really interested in understanding how much drivers take home.

On average, after all the expenses, the best we can see, and this is an average, you can see the quintiles in the report, but on average, $23.46 per engaged hour is what Lyft drivers make, and we're very proud of that. We think it stacks up really nicely against other potential ways people can earn money, particularly when you add the flexibility you get. So anyway, it's a very long answer, but really, I think it, I hope, reveals the way we think about driver supply, which is not just some generic number, 1 million drivers, you know, making $1 billion, whatever. But very specifically, why do drivers drive?

How much money do they make, and how can we give them a certain amount of assurance within the, you know, the context of our business model, that they're independent contractors, that their take is fair?

Erin Brewer (CFO)

And, Alec, I'll take your question overall on insurance. And so, you know, in last quarter's conference call, we talked a fair bit about insurance. But what I'd like to leave you with is, you know, insurance is priced per mile, right? So it's not as if there's a bulk discount as you think about that overall. And we continue to do a tremendous amount of work, you know, implementing our strategy here at Lyft as it relates to increasingly building in features in our product, you know, working across various policy initiatives, and doing a number of things that, you know, we believe, and we have demonstrated in the past, have a positive impact on the what has been a rate of increase, historically over time.

You know, I couldn't comment on our competitor's choice about how they structure their program, but what I can tell you is the thought that is behind how we've structured ours. And so we do risk transfer a majority of our business, which means there's a portion of it, a small portion, that is self-insured, and we like that mix. We think it's the right one for us, and let me tell you a little bit about why. So on the portion that we retain, we do that on a selective basis where we think it makes sense. And so that's a thoughtful approach. And then, as it relates to the portion of the business that we risk transfer, you know, there's a benefit there, in that there's some certainty and cash flows that's provided.

We think that's important. And then the second thing that I'd highlight is, you know, we work very closely with partners, and partners is a really important word here, because these are long-term partners that have been with us, you know, for a number of years, and they have deep expertise, deep expertise in the states where they operate. And so as we continue to work increasingly, sort of in a very collaborative way, we think this is, is the right way in terms of, you know, resolving claims in a timely fashion and in a reasonable fashion. So we like the mix of, of how we're structured today, and it works for us, and beyond that, I, I couldn't comment on, on what our competitor chooses.

David Risher (CEO)

I'm gonna say one more thing. I wanna say one more thing here, too, 'cause it gives us the chance to brag on our, our team a little bit. So, actually give a little preview to Investor Day. We mentioned we're gonna do an Investor Day. I think one of the things... This, this will sound strange, but if you come to Investor Day, and I hope you do, you know, and you get a chance to meet, Max Feldman, who heads up our insurance and risk management, the guy's a rock star, and it's just an incredible, incredible team we've got that focuses on risk management. I think you'll come away, you know, super both impressed, but also, you know, educated about how we think about this.

I'll also point out one of the newest additions to our board, Jill Beggs, who's the head of North American and Global Specialty Reinsurance for Everest Re, brings an enormous amount of insurance expertise to the company, enormous amount. And so as Erin said, we really like the sort of, the mix, and, yeah, but will be interested to see, you know, what the other guys do, but we, we feel pretty good about our strategy.

Alec Brondolo (Director of Equity Research in the Internet Sector)

Thanks so much.

Operator (participant)

Your next question comes from the line of Deepak Mathivanan from Wolfe Research. Please go ahead.

Deepak Mathivanan (Equity Research Analyst)

Great. Thanks for taking the question. First, David, with all the efforts to grow the portfolio of products and then bringing prices, service level on parity with this competition-

David Risher (CEO)

Mm-hmm.

Deepak Mathivanan (Equity Research Analyst)

Can you talk about the trends in active riders? I know there is some seasonal elements in 4Q, but how should we think about the importance of growing audience users to hit kind of like the mid-teens and potentially compound around that into the future? And then, sort of related to that, you know, on the cost side, how should we think about the level of investments that's required for headcount, maybe to expand on the scope of product initiatives as you think about kind of balancing the growth, you know, over the medium term? Thank you so much.

David Risher (CEO)

Sure. Hey, Deepak, I'll take the first part, and then, Erin and I will tag team on the- or Erin will take the second. So, first, yeah, good question about active riders, and definitely want to double down on something you alluded to, but it's good for, for everyone to understand, which is, you know, because our active riders is the sum of rideshare and bikes and scooters, you know, you see a bit of a sort of a switch in Q4, where obviously, when there's snow on the ground and cold, people don't take bikes very much. So there's a little bit of a switch there going under the covers. But broadly speaking, you know, here's the way we look at it. We... Let me sort of zoom out here a little bit.

Like, for us, every single time we get a rider, and I mentioned that 25% of our riders were new last year, it's very, very important that we work on our service levels, we work on obsessing over that ride and over that, that rider, because just to say the clichéd thing, it's so much easier, more efficient to hold on to an existing rider than to acquire a new one. And so our first order of business over the last couple of quarters has really been to focus on making sure that every time we get a rider, new or existing, we take good care.

What that translates to is higher frequency, and particularly when you look at our high-frequency riders, again, you know, riders come in all shapes and sizes, and there are all sorts of segments, but if you look at our high-frequency riders, you actually see a meaningful increase in frequency there. We think that's incredibly telling, because it's a really good leading indicator that when your biggest fans, who also tend to be your biggest critics, are positively, you know, responding to the work you've done, that has massive ripple effects. And so it means that over time, as we focus even more energy on rider acquisition through new product initiatives like Lyft Pass, Connect, some of these other things we do, every single one of those riders that comes in is effectively a more profitable rider for us, right?

Because we expect them to be a heavier user of Lyft. So that's sort of the focus. The focus is on really increasing, you know, working on those basics. That creates some good frequency things. If you do a good job of it, you see it earliest in high-frequency riders, because that's obviously where the data is the densest. And then you can sort of, over time, to the extent you want to or need to, you can do more customer acquisition, even in terms of products innovation or even, you know, marketing efforts or some combination of both. So that's kind of the structure. And then, yeah, and then I'll turn it over to Erin to talk about the cost.

Erin Brewer (CFO)

Yeah. So you're asking a little bit about cost overall and sort of how to think about initiatives into 2024. So I think you've specifically chatted about headcount. You know, we've talked about a real focus on operational excellence, and that absolutely includes a focus on cost discipline. And so we are not anticipating, you know, any material changes, if you will, in the overall level of headcount, et cetera. You know, although I would point out that even on flat headcount, you're going to expect some increases, you know, for merit and some inflation and cost of benefits, et cetera, year-over-year. But outside of things like that, you know, we are very, very disciplined as it relates to our sort of base cost structure.

You know, you asked about the cost of initiatives, and frankly, I think I'm gonna go back to the Driver Earnings Commitment, because I think it's a really good framework in the way that we think about investing in these types of initiatives. So first and foremost, just I want to emphasize, even though it's probably obvious, that everything associated with the Driver Earnings Commitment is included in our outlook for 2024. But you know, if you think about that at the heart, you know, we've published a lot of information here. Some of those things include things like, on average, drivers are taking about 88%. And then we announced this 70%, that you can think of as a floor.

So, you know, another way to consider this, these are edge cases that are really a pain point for drivers. While there is a cost to the promotion, the really important premise is that we're taking some of the biggest pain points for drivers off the table. If you step way back, that really allows us to engage with drivers overall in a much more efficient way. So, you know, hopefully, that gives you a framework for the way that we think about investing in things. This is a clear sort of customer obsession way to do that, and how, for our total business, it ends up being, over time, just a really efficient thing to do. So good for the customer, good for our business.

Deepak Mathivanan (Equity Research Analyst)

Thank you so much.

Operator (participant)

Your next question comes from the line of Benjamin Black from Deutsche Bank. Please go ahead.

Benjamin Black (Managing Director and Senior Equity Analyst)

Thank you for the question. Erin, for you, perhaps, I think you mentioned that the improvements in marketplace balance were able to offset 75% or so of your incremental insurance costs. So can you just dig into that a little bit more? Was that mostly a function of, you know, driver incentives coming down? And then secondly, so for your directional guidance for 2024 implies slightly faster bookings growth versus trip growth. So should we be expecting, pricing to potentially lever in 2024 as well? Thank you.

Erin Brewer (CFO)

Yeah. So thanks. I think you were talking about Q4, where we had the full impact of our third-party insurance renewals. And so, you're correct. If I mentioned, if you think about that, along with ride growth, you know, as we had anticipated and guided to, cost of revenue increased substantially in Q1. And so yes, we were largely able to offset that off operating, you know, more efficiently as you think about driving increased driver preference for Lyft. And I talked about the increase that we saw in Driver Hours, which were meaningful, you know, both in Q3 and Q4. That really allows us, again, to engage with that driver community in a much more efficient way. And it's good for riders as well, right? Our ETAs go down, et cetera.

So it becomes this sort of virtuous cycle, if you will, overall in the business. You're gonna have to repeat the second question for me, Benjamin.

Benjamin Black (Managing Director and Senior Equity Analyst)

Yeah. Gross bookings growing faster than trip growth in 2024. So curious if there's an assumption for pricing to be a catalyst in 2024.

Erin Brewer (CFO)

Yeah, thanks. Sorry. Thanks for repeating the question. Yes, so we did guide for gross bookings to grow slightly faster than rides growth in 2024. You know, I think it's important to remind everyone that, you know, gross bookings, you know, while a significant majority of that number is our core rideshare business, you know, important to remind that things like our bikes and scooter business, media, et cetera, are also flowing through our gross bookings, our gross bookings line. So I'd point that out. As it relates to pricing, you know, it's not a driving assumption in our 2024 guide, and so hopefully, that all just gives you some context. Our strategy remains to be price competitive overall.

Benjamin Black (Managing Director and Senior Equity Analyst)

Great. Thank you very much.

Operator (participant)

Your next question comes from the line of Michael Morton from MoffettNathanson. Please go ahead.

Michael Morton (Senior Research Analyst)

Hi, thanks for the question. I was wondering if we could talk some more about the directional guidance for 2024, and what the expectations are for the performance of the advertising business as part of that guide. I remember a little while ago on Yahoo Finance, David referenced the potential for a $500 million advertising business. So just trying to get a deeper understanding of the cadence of that advertising business, going forward. Thank you.

David Risher (CEO)

Yeah, sure. Hey, Michael, it's David. Yeah, that's one of those quotes that's come back at me a couple times. I've seen that one. Listen, so that was meant to be aspirational and long-term, to be clear. Who knows? Maybe we will get there sooner, maybe later. Team is working pretty hard. I think I hope I'm not saying anything out of line here, but last week, they had their biggest sales week ever in history. We just announced that on they just internally announced that on Friday. So what does that tell you? That tells you the business is growing fast, by definition. It tells you it's good product-market fit. It doesn't tell you the size, and we're being deliberate about it. It's not particularly large, you know, from a sort of overall total company perspective.

But again, we see really good fit with what our advertisers, our media partners are looking for. And you'll see a lot of innovation on our side when it comes to new ad units. Just as a quick reminder and just for big picture for one second, you know, we have advertising units that we sell in the Lyft app. We have advertising units that we sell on tablets, which are in cars. You've probably seen them if you've been in New York City recently. We have advertising units we sell on top of cars, and then we even have, thanks again to our bike and scooter business, we've got panels, some of which are old-school analog panels, some of which are increasingly digital electrified panels in some cities.

So, you know, we've got a really nice- and it's one of the reasons why, you know, on Super Bowl Sunday, for example, I mentioned- I think- I didn't mention Zillow. Zillow also did a big buy-out. And, you know, they tend to be, you know, sort of multi-channel buy-outs across these sort of multiple, you know, kind of ad outlets, sort of surround sound type things. And it's something that we can provide that, you know, there aren't a lot of other ways in the physical and digital world, and that's really quite interesting, right? Because the physical world still turns out to be quite important to a lot of people, and we're right there in front of them. So anyway, all that's really just kind of meant to be color.

In terms of the actual numbers, though, we're not releasing those yet, but for sure it'll be something you'll be hearing us talk more about. Over time, I do stand by my prediction, I'm just not putting a timeframe on it.

Michael Morton (Senior Research Analyst)

Thank you so much.

David Risher (CEO)

Sure.

Operator (participant)

Your next question comes from the line of Stephen Ju from UBS. Please go ahead.

Stephen Ju (Managing Director and Senior Equity Research Analyst)

Okay, thank you. David, I think you have, in the past, talked about the marketplace connecting of supply and demand as sort of the base-level service, and you were really looking forward to rolling out incremental value-added services. So,

David Risher (CEO)

Mm-hmm.

Stephen Ju (Managing Director and Senior Equity Research Analyst)

You know, any directional pointers you can share with us in how the product development has been progressing here? And maybe advertising, as you just alluded to, is one piece, but, you know, what else should we be thinking about? Thank you.

David Risher (CEO)

Yeah. This is always an area where I get frustrated as a, as just a, as just myself. Because, of course, I always wanna talk about all the things we've got in the pipeline, but it's not such a good idea. I think, you know, thus, I have to sort of, you know, keep talking about some of the same things. Let's look at Comfort+ for just a second. Comfort+, relatively small product from the portfolio, but I think we've given about 2 million rides or so since we've launched it. And, and that's wonderful, and it's not a product we've particularly marketed.

We, you know, play around with a little bit on on-site stuff, but, you know, there's more we can do there when people want either a slightly larger car, a slightly newer car, or at least in my case, sometimes a slightly quieter car, is another option we give there. So that's a sort of small example. On-Time Pickup Promise. Again, today, it's very focused on airports, right? But that doesn't necessarily have to be where you stop. With that, with a promise like that, you can imagine all sorts of ways that we can guarantee reliability and maybe charge a premium for it. So there's, you know, a lot more to do there. I wish I could get more specific, but I'm gonna have to sort of leave it there.

But I think one of the things that I just enjoy, frankly, about our, pardon me, my job and about the team, is how focused folks are on coming up with amazing new ideas for customers. You know, expect to see a lot more over time.

Stephen Ju (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Youssef Squali from Truist Securities. Please go ahead.

Youssef Squali (Head Managing Director of the Internet and Digital Media Research Group)

Great. Thank you, guys, for taking the questions. First, David, you said that 20% of the rides had a connection to partners back in 2023. I was wondering what it was in 2022, and as you look at 2024, are you expecting additional, or the guide bake in additional partners that have yet to be announced? And Erin, relative to that 50 basis point improvement in margins, 2024 versus 2023, as we look beyond, I know you're not guiding to beyond 2024 yet, just yet, but as we look beyond it from a modeling perspective, is it, what are the things that happened in 2024 that may actually preclude you from having that 50 basis point be sustainable beyond 2024?

If you can point to one or two, please.

David Risher (CEO)

Hey, Youssef, it's David. I'll start, and again, Erin will tag team with me. So, unfortunately, I have to disappoint you a little bit. We're not gonna give specifics on that percentage, how we expect it to change. But I will add a little color because I think it helps tell the story. The word partner is such a broad word. It's maybe helpful to have a bit of a framework. You might think of some of these partners, and let's use Chase as an example, of a fairly clear value proposition, where Chase is, you know, not the largest credit card issuer. I think they are actually the largest credit card issuer in North America.

You know, they have a very strategic and long-term relationship with them involving Chase Sapphire in particular, where people can earn points by using their Chase Sapphire card. And that's something, as a driver, I hear fairly regularly from my riders, that they say that's a reason that they choose Lyft. So those sorts of, and, you know, we have a similar relationship with Delta. We have similar relationships with Alaska Airlines. There's a lot more we can do with all of those. I mentioned briefly, by the way, that those partnerships sometimes start in one way, and then they morph to a different thing. So Alaska Airlines, excuse me, Delta Air Lines started as a points partnership. It's now evolved to be a commute partnership, right?

Because as I say, flight crews get transported by a Lyft to the airports. Let me give you some other examples, again, just purely for color. With Amazon, we have a relationship with them, where we're providing a certain amount of support for their distribution center workers, as well as some business travel. Starbucks, I mentioned early on, and so did I with Delta. FedEx. So FedEx, we help them get to and from their distribution centers, again, in kind of a commute context. And then similar with LinkedIn. LinkedIn actually had an interesting situation with return to office, where their parking lots actually ran out of space. And so, we now, with our Lyft Pass product, provide a commute solution for them.

So each of these, and you've heard us talk about healthcare in the past, which has had some nice growth. Again, these are relatively small individually, but collectively, they turn out to be quite meaningful. And so, again, without wanting to sort of get ahead of myself on exactly a percentage prediction, whatever it is, I would say it's a part of the business where we're making real investments, because we see a lot of opportunity. And they tend to be, by the way, quite sticky relationships, which is nice, right? If you're doing a good job for your partner, there's no reason for that partner to switch. And so that's that provides us some long-term stability as well as, you know, potentially higher margin and, and of course, incremental rides.

Erin Brewer (CFO)

Thanks. I'll take the question. You're right, I'm not gonna comment on things beyond the directional guide we gave for 2024. But to the extent it's helpful, I think it's interesting to think about, you know, in our remarks, and today in the Q&A, we've sort of touched on three key areas: continuous innovation, rideshare perfection, and sort of leaning into this partnership-driven growth. You know, I suppose the other element, as you think about expansion over time, would relate to cost discipline, which frankly, is the hallmark of any durable, profitable business. If you think about all of those four things, they're not meant to be sort of, you know, annual things that have an expiration date. These are sort of core ways that we think about, what it means to have a healthy business, right?

Innovation and continuous innovation. Rideshare perfection, if you think about what it takes to deliver great execution at scale, meaning millions and millions of rides every day, and doing all of those things with a laser focus, that's very much a continuous cycle as well. So, you know, those are some of the ways that I think I would think about. I think we've touched on sort of underpinnings of the way that we would, you know, are running the business in 2024, and they're all fairly durable themes.

Youssef Squali (Head Managing Director of the Internet and Digital Media Research Group)

That's helpful. Thank you both.

David Risher (CEO)

Sure.

Operator (participant)

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

David Risher (CEO)

I'll be brief. I really appreciate the opportunity. Thanks for joining us today, you all. You know, this business really has come a long way over the past year. You know, we are competing well, but we're executing really well for our riders and drivers, and I think growing some great new businesses and doing it, you know, dropping free cash through the whole statement. So super excited about where we've been. Here's where I want to end. Thank you to our shareholders for being, you know, such good partners for us over the years, and in particular, thanks to our team members. I know we have team members who sometimes log into these calls.

Really appreciate every single person on the call who's been working so hard on behalf of riders and drivers and making a great business. So thank you all. We look forward to keeping you up to date, and thanks again.

Operator (participant)

This concludes today's conference call. Thank you for your participation, and you may now disconnect.