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Lyft Inc (NASDAQ:LYFT)
Q2 2019 Earnings Call
Aug 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Lyft's Second Quarter 2019 Earnings Call. [Operator Instructions] Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]

I would now like to turn the conference over to Catherine Buan, VP of Investor Relations, you may begin.

Catherine Buan -- Vice President Investor Relations

Thank you. Good afternoon and welcome to the Lyft Earnings Call for the quarter ended June 30 2019, I'm Catherine Buan, VP of Investor Relations. Joining me today to discuss Lyft's results, are Co-Founder and CEO Logan Green; Co-founder and President John Zimmer, and Chief Financial Officer, Brian Roberts. Logan and John will give an update on our business and key initiatives and then Brian will review our Q2 financial results, as well as provide updated guidance.

This conference call will be available via webcast on our Investor Relations website at investor.lyft.com. I'd like to take this opportunity to remind you that during this call we will be making forward-looking statements, including statements relating to the expected performance of our business, future financial results, strategy, long-term growth and overall future prospects. 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 final prospectus for our initial public offering filed with the SEC on March 29, 2019 and the risk factors included in our Form 10-Q for the first quarter of 2019 filed on May 14, 2019 and our Form 10-Q for the second quarter of 2019 that will be filed by August 14, 2019. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and Lyft disclaims any obligation to update any forward-looking statements except as acquired by law.

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

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

Logan Green -- Chief Executive Officer, Co-Founder and Director

Thanks Catherine. Good afternoon everyone and thank you for joining our call today. We're pleased to report another very strong quarter. The market conditions continue to be increasingly favorable, and we are successfully executing on our plans to drive operating leverage and progress toward sustainable earnings. Revenue growth of 72% year-over-year was driven by healthy demand in the market and better monetization of our leading transportation platform.

Growth in both active riders and revenue per active rider exceeded our expectations. The number of active riders grew 41% year-over-year to 21.8 million, while revenue per active rider grew 22% year-over-year. As a result of our strong top line growth and an improving market environment, we generated significant operating leverage. This was a milestone quarter on our path to profitability. For more and more of our riders, Lyft is becoming a bigger part of how they get from point A to point B, for more affordable and efficient Shared Saver rides, to bikes that allow our riders to glide pass rush hour traffic, we're rapidly building a world where you can trade in your car keys and ride with Lyft.

We believe that Lyft will be the fastest and most accurate way to compare time and money across all relevant modes of transportation, and frictionlessly complete the transaction. This quarter's results are another significant step toward realizing that long-term vision. During our last earnings call, I talked about our Shared Saver product. As a reminder, Shared Saver offers a more affordable option to riders who're willing to wait a little longer or walk a short distance.

In Q2, we launched Shared Saver in six new markets, bringing our total coverage to nine markets. As we scale up this roll out, we're seeing improvements to systemwide efficiency and monetization. In Q2, we doubled down on our commitment to public transit by integrating real time transit data into the Lyft app. This is now live in eight markets, which collectively account for 78% of public transit trips in the US. This is exciting because Lyft can help extend the reach of public transit, which is often the fastest most affordable form of transportation, which can be combined with Lyft's ride sharing bikes and scooters to cover all of the different legs of a trip.

As a reminder, we own and operate the leading bike share programs in nine markets, including Citi Bike in New York, Blue Bike in Boston, Divvy in Chicago and Bay Wheels in the San Francisco Bay area. We've been bringing our bike and ride share networks together into one experience within the Lyft app, providing our riders with seamless access across all these modes, starting in New York City, San Francisco and Washington D.C.

Also, just a few weeks ago, we announced plans to expand our Citi Bike program, which will double our service area and triple our fleet size in New York between now and 2023. We continue to make strong progress on our scooter network as well. This past quarter, we introduced our next generation scooter that has a longer battery life, and better serviceability to help lower operating costs.

Scooters are now live in 16 markets. Collectively, we expect our bike and scooter investments to keep Lyft top of mind and increase both active riders and revenue per active rider. In the long term, we are confident bikes and scooters will contribute to our bottom line.

In addition to these exciting new modes, we continue to expand and improve the technology and operations behind our core ride sharing platform, enabling millions of daily trips in the real world, across hundreds of markets requires an extraordinarily robust digital and physical infrastructure.

Our product engineering and operations teams are innovating on every facet of our platform, week in and week out. This continuous effort is core to our ability to improve the experience for all of our communities. One recent launch that captures the tight partnership between our engineering team and local operations is the new feature called Fast Match. We've launched Fast Match in several markets to enable faster and more efficient pick ups at high volume locations like airports and large event venues.

So, instead of searching for your driver at often hectic pick up areas, we will direct you to a clearly marked Lyft pick up area where drivers queue up and passengers can take the next available car. This is now live at three airports, Chicago Midway, Portland International and LaGuardia. We believe this will help us grow overall volume of high margin airport rides.

And another enhancement to our platform, we started to roll out scheduled provides for Lux Black and XL available in many major markets. This allows riders to lock in availability and price up to a week in advance. So, if you've got an early morning flight, you can sleep easier knowing that you've already booked your Lyft ride to the airport. These types of improvements are how we're continuing to grow share in value modes like Lux Black and XL, which have attractive unit economics.

And finally, as you may have seen, we launched the first Waymo vehicles on Lyft in the Metro Phoenix area. This was achieved through close collaboration between the lift and Waymo teams, resulting in an exciting seamless integration of Waymo's self-driving vehicles into the Lyft out.

I'll now turn it over to John to talk about the work we're doing for our driver community and enterprises.

John Zimmer -- President, Co-Founder and Vice Chairman

Thanks Logan. I'm excited to highlight some of the great progress we made this quarter. Our driver community enables us to deliver on our mission to improve people's lives with the world's best transportation. By delivering more value to drivers, we are able to maintain strong retention and foster the best possible experience for our riders.

Our teams are constantly working on ways to improve the driver experience and help drivers earn more. We have added features that help drivers maximize their earnings by providing information about when and where is best to drive. Average hourly driver earnings are up more than 5% over the last two years. This quarter, we also began implementing work that will make driver earnings even more consistent on a week-to-week basis.

We'll be closely monitoring the results of these improvements as we work to best serve our driver community.

For drivers on the Lyft platform navigating between personal auto insurance and Lyft insurance can be complicated. We've rolled out a partnership with GEICO that helps reduce this friction. With GEICO's ride share policy Lyft drivers can buy coverage through GEICO that covers them whether the Lyft app is on or off.

In addition to giving drivers more peace of mind, drivers who sign up with this ride share policy may receive an additional $0.25 per ride on eligible rides. This program is a win-win, both drivers and Lyft save money.

Another opportunity to provide increased value to our driver community is helping them find affordable, convenient service and maintenance for their vehicles. We're expanding our driver centers in order to provide the best maintenance experience at the best price. While it's still very early days, our initial NPS scores are industry-leading. In addition to helping drivers with their personal vehicles, we're continuing to grow our Express Drive rental program to expand access to Lyft driving for more people.

We launched five new Express Drive market this quarter with our newest rental provider Avis Budget Group and are seeing strong utilization across the fleet. We're excited to continue to unlock earning opportunities for drivers across the country, as we launch more markets and increase access to rental vehicles.

I'd now like to turn to our work with enterprises through our program called Lyft Business. With Lyft Business we sell complex and large scale transportation challenges for our enterprise partners. By collaborating with organizations, we're able to leverage our product and platform investments across more users and more use cases.

Last quarter, Logan mentioned the exciting role that Lyft can play in the healthcare ecosystem. This quarter, we were approved to become enrolled Medicaid transportation provider in Arizona, following new state regulations. We're excited to collaborate with partners and policymakers to help modernize and improve healthcare access for millions of people.

This quarter, we also expanded our collaboration with Disney of becoming the official ride share of Walt Disney World Resort and Disneyland Resort. Together, we have already connected over a million guests with rides at Disney World Resort through Disney's minivan service. Aligned in our values of hospitality and guest experience, we plan to work together to continue to expand Lyft's presence and enhance the overall transportation experience at both parks.

In another example of creating transportation solutions for world-class venues, we announced an agreement to be the exclusive ride share bike and Scooter partner of 12 AEG venues across the US. Lyft will work with AEG to operate designated drop off and pick up Lyft spots for cars, bikes and scooters. The partnership illustrates the growing importance of providing a full suite of transportation solutions. With our partnership, fans can expect to have a more smooth experience getting to and from events.

Finally, starting in Q2, we launched an exciting partnership with Hilton. Ground travel has always been important to Hilton Honors members, and now members will be able to earn Hilton Honors Points when they with Lyft. Later this year, members will also be able to redeem these points for Lyft credits. This partnership is a great way for Lyft to engage tens of millions of Hilton Honors members who are constantly on the move.

We continue to find ways to expand and engage with our rider community and provide them with an elevated travel experience through our enterprise relationships. We strongly believe that our values and brand will continue to differentiate our service and unlock further opportunities for the business.

I'll now hand it off to Brian.

Brian Roberts -- Chief Financial Officer

Thanks, John, and good afternoon everyone. Our Q2 results reflect the health of the market and our ongoing success driving product, platform and operational excellence. Total revenue for the quarter increased 72% year-over-year to $867 million. Growth in revenue was driven by both an increase in active riders and revenue per active. We ended Q2 with a record 21.8 million active riders, up 41% year-over-year with the majority of new rider growth, driven organically.

We believe publicity surrounding Lyft's IPO positively impacted the number of active riders in the first half of 2019. Revenue per active rider was $39.77 up 22% year-over-year. Both of these growth drivers exceeded our expectations. It is important to note that we drove this exceptional growth, while significantly leveraging sales and marketing expense. I'll come back to this leverage later, but this is a huge signal of Lyft's growing brand preference and the improving market dynamics in the US ride sharing industry.

Now, before I move on, I want to note that unless otherwise indicated, all income statement measures that follow our non-GAAP and exclude stock-based compensation, and other select items. A reconciliation of 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 is available on our Investor Relations website.

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. Contribution in Q2 was $399 million, up 88% year-over-year. Contribution margin for Q2 was 46% up from 42% from the same period a year ago, as a result of monetization increases and our continued focus on expense leverage. Contribution increased in absolute dollars quarter-over-quarter, while as we guided contribution margin declined slightly on a sequential basis given our growth investments.

The biggest factor was related to our costs associated with the expansion of our network of shared bikes and scooters. However, based on the strength in our core ride sharing business, we now expect contribution margin to improve in Q3 and Q4 relative to Q2. In fact, in Q3 we anticipate a contribution margin may return to the 50% mark we achieved in Q1.

Now, as a reminder contribution excludes changes to the liabilities for insurance required by regulatory agencies attributable to historical periods. We experienced $141 million of adverse development this quarter. The adverse development is largely attributable to adjustments in reserves for historical auto losses, pre-dating our relationship with travelers our new third party administrator for insurance claims.

In terms of the go forward, we remain confident in our ability to leverage the cost of insurance given foundational investments we've been making this year to increase safety, reduce accidents and manage cost on the Lyft platform.

We expect that the cost of insurance required for ride sharing as a percentage of revenue will be lower in the third quarter than in the second quarter. Let's move to operating expenses. Operations and support expense for Q2 was $144 million or 17% of revenue, up from 13% in the same period a year ago, but better than guidance. The increase relative to the year ago period was primarily driven by our increased investments in bikes and scooters, local operations including driver hubs and driver centers, as well as Express Drive.

Our commitment to supporting local operations and delivering best-in-class support for drivers is an increasing competitive differentiator. Research and development expense was $122 million or 14% of revenue, slightly up from 13% from the same period a year ago, but better than guidance. Our investments in R&D are feeling key improvements in our product, platform and autonomous future.

As I mentioned, the sales and marketing leverage in the second quarter was truly exceptional. The outperformance was beyond our most optimistic forecast. As Logan said, market conditions continue to be increasingly favorable. As a percentage of revenue, sales and marketing was 19% in the second quarter, almost half of the 35% from the same period a year ago and the 19% is down 10 full points from the 29% in the first quarter.

Note, that as a percentage of revenue, incentives classified as sales and marketing declined nearly 40% in Q2 relative to Q1. General and administrative expense was $191 million or 22% of revenue, up from 19% in the same period a year ago, but better than guidance. Our significant revenue out performance, combined with strong expense leverage led to a significant beat in adjusted EBITDA relative to guidance.

Our adjusted EBITDA loss for the second quarter was $204 million compared to a loss of $191 million in the year ago period, and guidance for a loss between $270 million and $280 million. Adjusted EBITDA margins improved significantly to a loss of 24% versus 38% in the prior year, representing a 14 percentage point improvement year-over-year.

As of June 30, Lyft had over $3.3 billion of unrestricted cash, cash equivalents and short-term investments with no debt. As I will describe shortly in our outlook, we believe we have a clear path to profitability so our liquidity position remains extraordinarily strong. To summarize, Q2 was an outstanding quarter that significantly surpassed our guidance on both the top and bottom line. Our results benefited from strong market conditions, organic growth in riders, and the continued expansion of Lyft's transportation platform.

We exited the quarter with tremendous momentum and we're making a substantial increase in our guidance as a result. Our guidance incorporates modest price adjustments that went live toward the end of June. More specifically, we began to adjust prices on select routes and in select cities based on costs and demand elasticities. We expect that these changes will accelerate Lyft's path to profitability, and further, we believe these price adjustments reflect an industry trend.

In terms of our outlook let me start with revenue. We are significantly increasing our revenue outlook based on our strong Q2 results, improvements in monetization and continued evidence of healthy market dynamics in our core ride sharing business. For the third quarter of 2019, we anticipate revenue will be in the range of $900 million to $915 million representing a growth rate of 54% to 56% year-over-year.

For the full year 2019, we are increasing our revenue outlook by up to $200 million relative to our prior guidance. We anticipate that revenue will be in the range of $3.47 billion to $3.5 billion, representing annual growth between 61% and 62%.

Now, moving to adjusted EBITDA. We are extremely pleased with our success leveraging cost in the first half of the year and see continued evidence of an improving market environment. As a result, we are significantly improving our 2019 outlook for adjusted EBITDA. For the third quarter, we anticipate our adjusted EBITDA loss will be in the range of $190 million to $210 million. For the full year 2019, we anticipate our adjusted EBITDA loss will be in the range of $850 million to $875 million.

This is an improvement of $300 million or 26% versus our prior guidance. This means, we now anticipate that our 2019 adjusted EBITDA loss will be smaller than 2018 as we balance driving strong top line growth with demonstrating a clear path to profitability. We are incredibly encouraged by the strength of our business and the improving market conditions.

With that, let me turn it back to Logan for closing remarks.

Logan Green -- Chief Executive Officer, Co-Founder and Director

All right. Thanks Brian. We are excited about our strong performance this quarter, built on incredible effort across all of our teams. Our 72% revenue growth rate this quarter is exceptional at our scale. We are increasingly confident in the market outlook for US ride sharing as the competitive environment continues to show signs of improvement. We are making terrific progress on improving the efficiency of our business and generating operating leverage as Brian indicated.

Our Lyft business team is building partnerships with world-leading brands like Disney, leveraging our technology and expertise to deliver tailored solutions at scale. Finally, we're setting ourselves up for decades to come, by solidifying our position as the platform of choice for self-driving technology companies. Before moving on to questions, I want to spend a moment on our mission, which is to improve people's lives with the world's best transportation.

We're committed to building cities around people and addressing key problems our communities are facing through better access to transportation. It's estimated that over 23 million people in the US live in food deserts, areas where access to affordable healthy food options is limited or non-existent because grocery stores are too far away.To help address this serious challenge, we're significantly expanding the Lyft Grocery Access Program. Through this program we're partnering with local organizations and non-profits to provide flat fare rides to get low income families and seniors to and from grocery stores.

We've expanded this program to more than a dozen cities, including Atlanta and Miami and we're looking forward to rolling it out to more cities in the near future.

And now, we'd like to open it up for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Doug Anmuth of JPMorgan. Your line is open.

Doug Anmuth -- JPMorgan -- Analyst

Great. Thanks for taking the question. Brian, you've talked about 2019 as the peak loss year, is that still the case and then can you just help us understand how you think about the path to profitability over the next few years, we have to 2022 breakeven for example. And can you also just give us an update on core rides haring loss improvement relative to the losses in investments you're seeing in bikes and scooters and then also autonomous? Thanks.

Brian Roberts -- Chief Financial Officer

Sure. Thanks Doug. So, in terms of the investments we're making, we have previously said that 2019 would be our peak investment year. I think what's really important

really important to get out of this call is that we have changed our guidance for 2019 in terms of the adjusted EBITDA loss. We now expect it to be $300 million smaller. So, if you compare our guidance of $830 million, $875 million against last year's $943 million, it turns out last year was likely the peak loss in terms of adjusted EBITDA, so we're super excited in terms of the momentum we have right now and the overall platform that's driving that -- the smaller losses. In terms of break even, we'll be updating folks by later this year, in terms of our longer-term model in terms of break even points. But, I will say that we expect 2020 adjusted EBITDA to be smaller than 2019 as well.

Doug Anmuth -- JPMorgan -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Ross Sandler of Barclays. Your line is open.

Ross Sandler -- Barclays -- Analyst

Great. Guys, just two questions and then maybe a quick housekeeping one. Some of the data we've seen suggests that your utilization rate has gone up about 200 basis points over the last two years, and still trails your larger competitor by a little bit. So, how quickly do you think you can close that gap and then what kind of financial impact would that have on the business? And then second question is you mentioned the pricing changes that went through in June.

Can you talk about at a high-level how these changes might impact volume growth and take rate going forward? And then the housekeeping question is just on stock-based comp, how should we think about that, given the movement in the stock and that going forward. Thanks.

Logan Green -- Chief Executive Officer, Co-Founder and Director

Brian, you want to take the pricing question and we can comment on utilization.

Brian Roberts -- Chief Financial Officer

Sure. So, in terms of pricing -- the price adjustments that I describe went into effect at the very end of June. So, there was limited impact in Q2, and so I think the question -- what happened in Q2 and I think it's really a continuation of our strategy. We are focused on driving profitable growth, not growth at all costs. And we've been investing to grow our share of the more valuable rides, such as premium modes and airport rides, and that's why Lyft Business is so important to us.

We also enjoy success, improving the financial efficiency of shared rides in Q2, and finally, we were able to increase the efficiency and the effectiveness of driver incentives, as well as improve the algorithms that power pricing. So, in terms of Q2, it was really execution of our prior strategic initiatives that drove that monetization increase. Again, revenue per active rider grew 22% year-on-year to $39.77. In terms of the future, what I would say is we made modest price adjustments that went live toward the end of June, and we really began to adjust prices on select routes and in select markets based on cost and demand elasticities, and we try to pick routes in cities where the demand impact would be the smallest.

And as I mentioned, we believe these price adjustments reflect industry trend. So, we expect that both the mix shift as well as the price adjustments will increase revenue per active rider in Q3 and in Q4, and we expect that revenue per active rider could accelerate in Q3, upto 1% versus Q2. So, Q2 was up 22% year-on-year and we think Q3 could go up to about 23% year-on-year.

Let me answer that, the stock based comp question and then we'll address your utilization question. Virtually, all of our RSUs or restricted stock units granted before the IPO contained a performance-based and service-based vesting condition, including 15 million RSUs granted on March 27 that were valued for GAAP purposes at the IPO price. For accounting purposes, the company is required to use the accelerated attribution method to recognize SBC expense for our issues with a performance based condition, in addition to a service one.

So, in plain English SBC is front-loaded under the accelerated attribution method, and this is different from the treatment of our issues with just a simple service condition. The vast majority of our Q2 stock-based compensation expense is related to RSUs granted before the IPO. As I mentioned, the expense related to RSUs granted before the IPO is front-loaded so that portion of our SBC expense will come down as we go forward.

For the next two quarters, we expect stock-based comp to decline by roughly $25 million each quarter.

Logan Green -- Chief Executive Officer, Co-Founder and Director

And this is Logan. In terms of driver utilization, there are a lot of factors that influence what that is. On the last call, we talked about our global matching platform that has resulted in some significant efficiencies across the business. Other things that influence that number are improvements in our mapping platforms, so as we improve ETA at road speeds, city maps and how we match rides, those all drive utilization, as well as the driver experience that we're building. So, we're building better tools to show drivers -- make suggestions on when and where to drive and so drivers are driving in the busiest areas of the busiest time, utilization naturally increases.

That said, there are seasonal effects to that number. And so, you'll see that move back and forth a little bit as demand changes across the season.

Operator

Thank you. Our next question comes from the line of Brent Thill of Jefferies, your line is open.

Brent Thill -- Jefferies -- Analyst

Thanks. Brian. Given the significant raise, it'd be helpful to get more granularity on the line items in Q3, and there are a couple of quick follow-up questions about the true up in insurance costs, I'm curious if you could just address that. Thank you.

Logan Green -- Chief Executive Officer, Co-Founder and Director

Sure. So, let me start with sort of a detailed follow-up on our guidance and then I'll talk about insurance. And before I jump into the details on the guidance, I just want to reiterate how pleased we are with the performance of the business. I mean, Q2 was a milestone quarter and the substantial increase in our guidance reflects the tremendous momentum we have. I'll just start at the top. As you know, we have two revenue drivers, and I'll begin with revenue per active rider.

We had previously indicated that revenue per active rider would be relatively flat in 2019. We now expect revenue per active rider will grow sequentially in Q3 and Q4. And as I just mentioned, we anticipate that revenue per active rider could accelerate in Q3 by up to one full point to 23% growth year-over-year. This guidance incorporates the modest price adjustments that went live toward the end of June, as we began to adjust prices again on select routes and in select cities, based on costs and demand elasticities.

The price adjustments are modest, but we anticipate that these changes will increase revenue per active rider on both a quarter-over-quarter and year-over-year basis, and we expect that these changes will accelerate our path to profitability and further as I mentioned, we believe these price adjustments are an industry trend. In terms of active riders, we've enjoyed a huge benefit in the first half of 2019 related to the publicity from our IPO.

We believe we pulled forward a portion of rider activation. So, we are maintaining our prior implied Q3 and Q4 targets for active riders, notwithstanding the Q2 beat. I guess, it's worth mentioning that there are also some unique factors impacting Q3 and Q4. For Q3, we anticipate that active rider growth will face some demand elasticity headwinds from the modest price adjustments I just described.

We believe active riders will grow to roughly 22 million in Q3. For Q4, we'll also face the previously mentioned seasonal headwinds in bikes and scooters, people don't like to use scooters in snow, as well as ride sharing. And so, for Q4, we expect active riders will be in the range of 22.3 million to 22.4 million, which is in line with prior expectations.

But the $200 million increase in our 2019 revenue outlook is based on these expectations and trends. So let me move to expenses and remind everyone first, that unless otherwise indicated, all income statement measures that follow are non-GAAP and exclude SBC and other select items. Now, as I mentioned, we were very successful leveraging costs in the first half of this year and continue to see evidence of an improving market environment.

We expect that the momentum and the efficiencies we are realizing in our core ride sharing business, will enable us to make progress on our path to profitability and to be clear, we are not reducing our investments in key strategic initiatives including bikes and scooters, autonomous and driver centers. It's just the strength in momentum in ride sharing, it's helping offset the investments we're making.

So, let me just spend a moment talking through some of the key components for the second half of the year. As I mentioned in my prepared remarks, we expect contribution margin to improve in Q3 and Q4 relative to Q2 notwithstanding our investments in bikes and scooters. We anticipate that Q3 contribution margin will return to Q1's 50%, up four percentage points versus Q2 as we drive leverage and execute on key initiatives. In Q4, we anticipate that contribution margin will decline one point to 49% given seasonal trends, especially with bikes and scooters. The 50% and 49% contribution margin for Q3 and Q4 respectively is better than our prior guidance. Our operations and support expense in Q2 was 17% of revenue flat versus Q1, despite the investments we're making in areas like bikes and scooters.

Looking forward, we anticipate that the leverage in core ride sharing will drive a reduction in operations and support as a percentage of revenue, with both Q3 and Q4 down approximately one percentage point versus Q2 to 16%. This is significantly better than prior guidance.

Now, as we invest in our core platform, new strategic initiatives and our autonomous future, we expect that R&D as a percentage of revenue will increase over the remainder of 2019. We anticipate that Q3 R&D will be 15% of revenue up one percentage point versus Q2 with Q4 18% as we ramp hiring, which is consistent with prior guidance. The leverage we drove in sales and marketing in Q2 was truly exceptional.

For Q3, remember, there is seasonality given the forward investments in marketing to attract drivers for the important back-to-school season. We anticipate that sales and marketing, as a percentage of revenue will increase three percentage points in Q3 versus Q2, but realize that this Q3 guidance of 22% is nearly half of last year's 41%.

For Q4, we expect sales and marketing as a percentage of revenue to decline back to 20% as we continue to scale and drive leverage. This is an eight percentage point improvement versus our prior Q4 guidance.

Finally, as we continue to anticipate that the G&A expense as a percentage of revenue will increase in Q3 and Q4 relative to Q2 with the investments we're making to support our new strategic initiatives, as well as for SOX readiness. However, we expect this increase to be much more moderate than our prior guidance. We anticipate G&A expense in Q3 as a percentage of revenue will increase approximately one percentage point versus Q2 to 23% and an additional point in Q4 to 24%.

This updated guidance represents a three percentage point improvement versus our prior guidance for Q3 and Q4, and we anticipate that we can unlock G&A leverage beginning in 2020. To summarize, we are incredibly encouraged by the strength of our business and the improving market environment. Our updated guidance is a significant increase versus the outlook we've provided just 90 days ago. We are now demonstrating a clear path to profitability, while driving strong top line growth.

So, there are obviously a number of moving parts here. Hopefully this additional information, Brent is helpful to you as you develop your models. I think just to touch on your insurance question there were two components of adverse development. There was a $130 million related to ride sharing and $11 million related to bikes and scooters and the adverse development is largely attributable to historical auto losses that predate our relationship with travelers our new third-party administrator for insurance claims.

Some of this dates back as far as 2015. So, we are significantly increasing the size of our risk solutions team and are making operational and product changes, informed by billions of miles of data to reduce the frequency of accidents on the Lyft platform, and we're also being smarter about how to respond to claims when accidents do happen. So, in terms of the go forward, we remain confident in our ability to leverage the cost of insurance, given the foundational investments we've been making this year to increase safety, reduce accidents and manage costs.

And again, just it's worth repeating we expect that the cost of ride sharing insurance as a percentage of revenue will be lower in the third quarter than the second quarter, and will contribute to the increase in contribution margin back to 50%.

Operator

Thank you. Our next question comes from Stephen Ju of Credit Suisse. Your line is open.

Stephen Ju -- Credit Suisse -- Analyst

Okay. So, thank you. So Logan, John, would you add more color around your efforts to increase the use cases for Lyft and ride sharing in general and in particular, I'm talking about the business that you brought up several times during the call. You brought up education and healthcare as verticals before. Where are we now, in terms of getting more schools and providers and other enterprises to adopt Lyft as a designated service provider. Secondarily, I know this is but one market, but given a lot of investors live in New York City, there is a heavy amount of focus here. So, can you talk about the state of that particular market, what the regulatory framework maybe doing to consumers' willingness to use the service, and what you may be doing in the background to offset. Thank you.

John Zimmer -- President, Co-Founder and Vice Chairman

Sure. Thanks for the question, this is John. So, first on Lyft business, at a high level between corporate travel and non-emergency medical transportation, including education that you mentioned, we think the overall addressable opportunity is at least $25 billion. We are not breaking out the relative sizes of each aspect of our business or specifically within this business, which include those categories. Some highlights that we've established in the industry, we have exclusive deals with various healthcare brokers that give us a fantastic pipeline into those markets.

There was news out of Arizona that allows us to provide a better transportation for Arizona Medicaid participants which covers about 1.5 million participants, so a lot of great momentum there in all those categories. We also mentioned the Disney partnership expanding and the Hilton partnership which will address different portions of that market. Moving to New York, so specifically on the new regulations; the thing that's important to understand at the highest level, we are actually aligned with the stated goals, the policy goals that policymakers have of increasing driver earnings and lowering congestion, but we don't believe the rules as they're written today -- do the best for those two aspects and that they actually create negative consequences for both drivers and riders.

And so, we're working really hard with them to find those policy goals without the negative consequences. So, any increase in prices can lead to a decrease in driver work opportunities because of less rides. And that's the point that we're trying to get across there. And then, at a high level for overall context, policy whether it's New York or any other market is nothing new, as part of our business.

Actually, the origin of the company, I was working with policymakers to create new category, to adjust the category. We take it really seriously, we built a phenomenal team around former Secretary of Transportation Anthony Foxx, and so we will keep working to address those policy goals, but with policy that has a positive impact on the overall market.

Stephen Ju -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Benjamin Black of Evercore ISI, your question please.

Benjamin Black -- Evercore ISI -- Analyst

Thanks for the question guys. I was wondering if you could talk about the underlying core ride share contribution margin trends, excluding bikes and scooter investments and how you see that shaping up for the rest of the year? And secondly, I was wondering if you could talk about engagement trends across your active rider base. How has that trended and how do you see it progressing going forward, particularly in the face of the price increase. Thank you.

John Zimmer -- President, Co-Founder and Vice Chairman

Yes. So, let me take the first comment first. The question around contribution margin for core ride share again, we are a single segment company but, we have publicly stated we're making large investments, building out our network of shared bikes and scooters. And so, the guidance raise on contribution margin 50% in Q3 and 49% in Q4 is in light of the investments we're making. So, you should assume that there is very strong contribution margin trend in core ride sharing and that's just based on our strong execution, as well as the improving market environment.

Logan Green -- Chief Executive Officer, Co-Founder and Director

I think in terms of your question, in terms of engagement; in Q2 rides grew faster than our growth in active riders. But I think it's important that folks understand that all rides are not created equally, we're again focused on driving profitable growth, not growth at all costs and that's why we've been investing to grow our share the most valuable rides, such as premium modes and airport rides and that's why Lyft business that John talked about is so important. So, in terms of how this translates again the 22% increase in revenue per active rider year-over-year is a really good indicator of the monetization trends, and on top of that, we grew active riders by 41% year-over-year in Q2.

Benjamin Black -- Evercore ISI -- Analyst

Perfect. Thank you.

Operator

Thank you. Our next question comes from Mark Mahaney of RBC. Your line is open.

Mark Mahaney -- RBC -- Analyst

Okay, thanks. I'll ask two questions. Just, on this -- again on

this revenue per active riders. So, clearly you had some pricing that helped that. Just talk about the other part of that -- the prior person was asking about engagements, like how did you get the activity per rider to rise and what -- it looks like that happened for most of the quarters, just spend a little time on that. And then the second question is more of snatching defeat from the jaws of victory. It looks like your business is really doing well here, and you may well have a milestone and you raised your guidance, etc. So, why bring up the lock up expiration, just put some color around that. Thanks.

John Zimmer -- President, Co-Founder and Vice Chairman

Sure. So, let me take the first question. And we have been trying to grow our share of the more valuable rides, as I mentioned in terms of the premium modes and those airport rides. We also were very successful in Q2 on increasing the financial efficiency of shared rides, and Logan mentioned last time, the progress we made on the global matching platform, and so that unlocks the monetization benefits in Q2. And then finally, we were able to increase the efficiency and effectiveness of driver incentives, as well as improve the underlying algorithms that power pricing and all of this is before the adjustments in price that happened at the very end of the quarter.

So, the progress in Q2 and that growth in rides is, we have strong core growth in the US ride sharing industry.

I'm sure you look at the same surveys that we do in terms of what percentage of the US population have never tried ride sharing, and as we describe that, I think as you can see in our S1, it's one of those products that people will try it. For the first time, maybe they've had a drink too many on a weekend and they try ride sharing and then they just discover how much easier it is to use Lyft to go to the airport or use Lyft to go to a medical appointment etc. and it just -- we tend to see usage go up over time, but I think, Q2 is a really nice combination of driving usage as well as really prioritizing the more valuable rides. Can you repeat the other part of the question.

Mark Mahaney -- RBC -- Analyst

Yeah. Why bring up the lock up expiration?

John Zimmer -- President, Co-Founder and Vice Chairman

Yes. I mean the lock-up agreement was disclosed in the S1. It just turned out the time period was during a blackout period and per the language, it just pulls forward.

Mark Mahaney -- RBC -- Analyst

Okay, all right. Thank you.

Operator

Thank you. Our next question comes from John Blackledge of Cowen. Your line is open.

John Blackledge -- Cowen -- Analyst

Great, thanks. Just given the sales and marketing leverage could you discuss your thoughts on Lyft's competitive position in the US and would you expect this more rational trend and sales and marketing, particularly the decline in rider incentives to persist over the longer term. And then second question, just a quick update on the roll-out of driver centers, how many are out there and how many -- maybe in there, by the end of the year. Thank you.

Brian Roberts -- Chief Financial Officer

Sure. So, this is Brian. I'll take both of those questions. I think in terms of sales and marketing, one of the most important takeaways people should take from this call. If you look at sales and marketing as a percentage of revenue in Q1, it was 29% and in Q2 it dropped to 19% nearly -- and the key driver of that is looking at incentives that are classified as sales and marketing, generally better known as coupons.

If you look at between Q1 and Q2 incentives classified as sales and marketing as a percentage of revenue declined nearly 40% and so, when you look at our guide for later this year by Q4 we expect that sales and marketing will be roughly 20%. Now, that's an 8% or eight percentage point improvement versus our prior guidance, so we expect this environment has improved and again we're just -- we're focused on trying to win on brand preference and experience not coupons, and I think our actions in the market environment support that.

Shifting to your question on driver centers, we're still in the early period here. We're testing and we're learning, but we do plan to ramp this up in the second half of 2019. But, it will still be probably to a handful of sites because we just want to make sure where we're really executing and getting the exact formula right.

John Blackledge -- Cowen -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Itay Michaeli of Citi. Your line is open.

Itay Michaeli -- Citi -- Analyst

Great, thank you. Good afternoon. Just two questions, I was hoping you could firstly talk about the active rider growth this year in terms of regional distribution, how much are you seeing in some of your top markets relative to newer markets. And second, love to hear an update on just the autonomous vehicle development efforts at Lyft internally as well as with some of your other partners. Thanks.

Brian Roberts -- Chief Financial Officer

Sure. So, this is Brian. I'll take the first part of the question around active riders. So, we don't provide -- we don't segment that by city, but I will say it's really important to realize that we're focused on winning the most valuable riders, and that's why we're making the investments we are in the Lyft business. We want road warriors on the platform, and this is exactly why it's important to look at both of our drivers of revenue growth. Revenue per active rider provides a really good signal of the value of the active rider population. And additionally, we're investing on a multi-modal platform because we believe we can increase our addressable market and really build a more complete transportation as a service solution.

So, we're excited in terms of how we are expanding our addressable market, and in terms of our execution focus on really trying to win those really highly profitable business travelers.

Logan Green -- Chief Executive Officer, Co-Founder and Director

And then this is Logan, in terms of AV, autonomous vehicles, we have two major initiatives. One is our open platform strategy, and there is a couple of great partnerships that are live and out in the wild now. So, we talked about earlier on the call, the first vehicles are live from the Waymo platform in the Phoenix area, we're very excited about that. The two teams have been working closely together and created I think, a really exciting experience. Bottom line, we're both learning a lot from that partnership and very excited about it.

We also have had a long-standing partnership with Aptiv, which has been great, that's been live in Las Vegas for over a year. Now, of course, both of those, there is still a safety driver in the car, we're early in the testing process, want to make sure everybody understands this is autonomous vehicle development is a very long game. It's the future of the business, but it's of course many years out and we've done well over 50,000 rides on the Aptiv platform in Vegas. And then back to us, Lyft has a level-five engineering center down in Palo Alto, and what we think is really unique about our opportunity is two-fold, one driver less vehicles will first roll out on ride sharing platforms.

The first generation of autonomous vehicles will only be able to do a small percentage of trips, and they'll be critical that they're rolled out on a platform such as Lyft, so that the rest of the rides that are unable to be served by an autonomous vehicle, can be fulfilled by a driver. So, we think that gives us a significant advantage. And second is, all of the data from the miles traveled on the Lyft platform; and we're launching some really exciting tests using data collected from cameras on some Lyft vehicles and using that -- feeding that into the training of our own autonomous system. So, we think given the position we sit in, in the market, and all of the data that we can collect can really play to our advantage.

Itay Michaeli -- Citi -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Eric Sheridan of UBS, your question please.

Eric Sheridan -- UBS -- Analyst

Thanks, maybe two questions if I can. You highlighted some of the product innovation you're doing in a handful of markets. Wanted to understand a little bit better what you've seen from the consumer behavior as you've given the consumer more choice in the app, and more transportation choices, what that might do to stimulate usage. And sort of anecdotally, on the Smart Savings Plan, how widely deployed is that as a product to users and what do you see in terms of the elasticity of people once you're getting 10% off, but they'd become a subscriber to your platform, and what that does to drive incremental demand and incremental spend versus how widely deployed it might be. Thanks everyone.

Logan Green -- Chief Executive Officer, Co-Founder and Director

Yeah thanks. That's a great question. This is Logan. First is, we see a lot of incremental activity as we add new modes of transportation. We see very little cannibalism across modes, and we see a lot of incremental activity. So, by adding different modes that people may want to trade off against, it brings them into the Lyft app a lot more often. And I think being top of mind and being the first [Phonetic] app that's opened is very, very important from a strategic position. On subscriptions, in the long run we view a lot of the market moving to subscriptions. I think it will play an incredible role in the future. We often use the analogy of the wireless companies where you subscribe to a certain sort of bundle or minutes or maybe even an unlimited package. And we've launched hundreds of experiments across the country. A couple that we've rolled out a little more broadly. One is our All-Access pass that is, as close as -- sort of we've gotten to that unlimited package, and then the Smart Savings Plan was the other one that's $14.99 a month for a 10% off all rides.

And each package caters to a different type of user. I would say there is a lot of variability in terms of frequency across our users when you dig into the different cohorts. And so, there is not kind of a one-size fits-all plan. But, when we get some of these subscription packages that hit a particular cohort, and provide great value to them we do see incremental activity from that cohort. So, we're optimistic about it and we're going to continue testing and rolling out new initiatives in that space.

Eric Sheridan -- UBS -- Analyst

Great. Thank you, and thanks for all the color and detail on the call. Appreciate it.

Operator

Thank you. Our next question comes from Andy Hargreaves of KeyBanc. Your line is open.

Andy Hargreaves -- KeyBanc -- Analyst

Thanks. I wanted to ask a couple of questions on sort of the driver side. One, just wondering with all the volume you guys -- or the volume growth, you've had sort of where we are from a driver incentive efficiency standpoint, if there's more room for further efficiency there. And then, on driver pay you guys mentioned it being up, because it's obviously an area of a lot of controversy. So, I'm wondering if you could comment on CA AB-5 and what the impact from could be, but also just sort of how your sort of philosophy on [Indecipherable] I guess is evolving right now.

John Zimmer -- President, Co-Founder and Vice Chairman

Sounds good. This is John. I'll take most of that. So, on the driver side, as we said on the prepared remarks, our earnings are up 5% over the last two years -- more even, if you look back year-over-year. And overall, we continue to make a ton of investments to support the driver experience and are seeing continued increased demand for interest in signing up to drive on the platform.

I think society has -- there is a broader societal issues that certainly affect our industry, as we have millions of people working on ride share platforms and AB-5 is an opportunity, I believe for California to create a new model, and one that provides worker protections, while also providing flexibility. So, we are deep in conversations with various labor groups and lawmakers.

And as I said, policy has always been a big part of our business and an opportunity for us to continue to do more for drivers. And our philosophy from the beginning has been, when you take care of drivers, that drivers take care passengers and that's good for the business. So, there is a lot of coverage about driver earnings that's why we wanted to share the facts, because we think the facts are important, but there is always opportunities to improve now and we're serving millions of people. Any small thing on the platform that needs improvement affects thousands of people, and that's very important.

Brian Roberts -- Chief Financial Officer

Yeah. And this is Brian, let me comment on some of the trends in driver incentives. As a percentage of revenue, incentives that are classified as contra-revenue declined in Q2 versus Q1, as well as the year-ago period. I'm going to take this opportunity to encourage investors to avoid analyzing absolute driver incentives, in isolation because doing so ignores the economics of ride at high demand periods .

So, in terms of our strategy, we try to limit driver incentives to periods when rides are most valuable on the platform. So, during peak times when drivers can typically earn bonuses or incentives Lyft is also benefiting from higher rider demand, which can lead to higher prices and our service fee and commission is generally calculated as the difference between what a riders pays and what a driver earns, based on time and distance of a ride. So, revenue, which is calculated after subtracting contra-revenue incentives is a really clean metric to calculate the value of rides, net of driver payments.

Andy Hargreaves -- KeyBanc -- Analyst

Great. Thank you guys.

Operator

Thank you. Our final question will be from Ron Josey of JMP Securities Please go ahead.

Ron Josey -- JMP Securities -- Analyst

Thanks for squeezing me in. Just maybe, I want to follow up on Eric's question earlier on just multi-modal benefits and given what we heard about expanding usage, any more details on the time-frame or how you're thinking about expanding the 9% or so bike share markets and 15% or so scooter markets. And then, just on the GEICO partnership, are other insurance partners willing to offer a similar program and just curious to your thoughts there. Thank you. Great quarter.

John Zimmer -- President, Co-Founder and Vice Chairman

Thank you. This is John. We're not going to comment on the specific expansion plan for bikes and scooters, just to say that we're very happy with this growing part of our business. We're focused on the largest metro areas, the areas that will see the most rides, because we do think that scale when you're building infrastructure -- physical infrastructure especially is incredibly important.

One more stat that I think is exciting is that around bikes and scooters is that users that are new -- people that are using our bikes and scooters about 25% are actually new to the Lyft ecosystem, which is an exciting way for us to both create a new business and get broader new passenger, new rider acquisition.

And then what we see, as Logan talked about is that then, they use Lyft for more and more of their transportation needs that they find that we have transit ride share and bikes and scooters. So overall, that's something that we think goes with our overall mission of getting people away from car ownership and into transportation of the service.

Logan Green -- Chief Executive Officer, Co-Founder and Director

All right. So thanks again for joining us today. It was a milestone quarter for Lyft, and we look forward to seeing you all soon. Thanks so much.

John Zimmer -- President, Co-Founder and Vice Chairman

Thank you.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Catherine Buan -- Vice President Investor Relations

Logan Green -- Chief Executive Officer, Co-Founder and Director

John Zimmer -- President, Co-Founder and Vice Chairman

Brian Roberts -- Chief Financial Officer

Doug Anmuth -- JPMorgan -- Analyst

Ross Sandler -- Barclays -- Analyst

Brent Thill -- Jefferies -- Analyst

Stephen Ju -- Credit Suisse -- Analyst

Benjamin Black -- Evercore ISI -- Analyst

Mark Mahaney -- RBC -- Analyst

John Blackledge -- Cowen -- Analyst

Itay Michaeli -- Citi -- Analyst

Eric Sheridan -- UBS -- Analyst

Andy Hargreaves -- KeyBanc -- Analyst

Ron Josey -- JMP Securities -- Analyst

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