Lyft (LYFT) Q4 2023 Earnings Call Transcript

Lyft (LYFT 1.87%)
Q4 2023 Earnings Call
Feb 13, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Lyft fourth quarter and full year 2023 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. [Operator instructions] 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. And with that, I'll pass the call to David.

David Risher -- Chief Executive Officer

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 the goals, then we achieve 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 that 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 going to 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 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 external fees. Most of 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 discretion. Drivers and riders have very high standards. So, we've 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 ride product. The idea was simple but ambitious. If you arrive to the airport -- didn't arrive within 10 minutes of your schedule 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 standard for ourselves to deliver, so high that we were even willing to cover the cost of a competitor's ride if we fail to deliver. The results have been remarkable. Of the more than 0.5 million 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.

And 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 could 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 Airlines partnership began with Rider's Rewards, where you can get points.

but we now also support their flight crews with our Lyft Pass commute solution. Universal Pictures brought 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 going to be a great opportunity to see the incredible work we're doing and the amazing team behind it.

And second, as lead into 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 -- Chief Financial Officer

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 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. And now to our fourth quarter results, which are consistent with the outlook we provided on our Q3 earnings call on November 8.

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.

And 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 billion to $3.6 billion, up 15% to 18% year over year. We expect total rides growth of approximately 20% year on 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 to $55 million and an adjusted EBITDA margin as a percentage of gross bookings of roughly 1.4% to 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 are 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.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Mark Mahaney from Evercore ISI. Please go ahead.

Mark Mahaney -- Evercore ISI -- Analyst

OK. 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 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 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 -- Chief Executive Officer

I'll take it, Mark, and yeah, Aaron and I will tag team on some stuff, but this one I would not 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, the fact that we can guarantee to sort of the 98% plus reliability level. 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. Disproportion of those are to the airport. But if you think about it, Monday morning comes around, you got to get to the office.

There's really no reason for you to be doing 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. So, 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 built, and then 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.

And the reason for that is brands are hungry for new ways to connect with their -- with their customers. And for the moment a person asks for a Lyft, you get sort of this masking screen. And if you used Lyft recently, which, of course, I hope you have, you may well have seen an ad. We actually had almost sold out, I think, ad run around Super Bowl and so on and so forth.

So, anyway, you get an ad there. And then if you're in the car, 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 nine times during that 15 minutes. They're very sort of open and receptive to high-quality content.

And so, we're working really closely with the Disneys of the world, the Universals of the world, the Apple computers of the world, and so on and so on to produce very, very high-quality content. We've actually just released a video ad unit as an example, that we think is going to be captivating, engaging, interesting to riders, and 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 tablets 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 big aspirations.

Mark Mahaney -- Evercore ISI -- Analyst

Thank you, David.

David Risher -- Chief Executive Officer

Sure.

Operator

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

Nikhil Devnani -- AllianceBernstein -- Analyst

Hi there. Thank you for taking the question. Thanks for the directional '24 commentary as well. Can we just please clarify the EBITDA margin expansion? I think the slide says 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 -- Chief Financial Officer

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 of 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 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 -- Chief Executive Officer

Yeah. Why don't we tag team on this for you, Nikhil? By the way, I read your report last week. So, anyway, I'm going to zoom out for a second because it sort of gives us the opportunity to speak a little big picture of where we're going -- what we see and where we're going. And we talk about growth broadly speaking.

So, at the top line, first of all, we see actually super healthy industry dynamics and frankly, good sector growth. Back to work is definitely a thing, travel is definitely a thing, all the macro trends that you see, and we look pretty closely and try to detect 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 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 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, we've been a while already since you asked the question, we've been blabbing here. Maybe just rephrase the end of that question, we'll sort of kind of hit over that more directly.

Nikhil Devnani -- AllianceBernstein -- Analyst

Yeah. Thanks, David, for the top-line color. Yes, 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 -- Chief Executive Officer

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

Erin Brewer -- Chief Financial Officer

Yeah. Thanks, Nikhil. So, first and foremost, to reiterate a little bit of what David said. As we came through the back half of 2023, we saw real health building in the U.S.

rideshare market, with trends I mentioned related to travel, commute, etc. 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 not only see that rise in gross bookings growth, but we see that growing in an efficient way.

So, I touched on 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. And David touched on things like partners expanding with Lyft. And so, those are areas that we continue to see growth overall.

And then as you think about leverage as we engage in a much more efficient way, that creates an opportunity. And then to your point, as we think about operating expenses, 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, etc., we retain that operating expense discipline.

And our plan does contemplate 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 a number of different levers on which we can continue to expand EBITDA margins into the full year.

David Risher -- Chief Executive Officer

Sorry, I'm going to go a little wider on this one. So, because we just -- there's a lot of interesting opportunities. So, Mark asked a question about Priority Pickup and -- actually not Priority Pickup, for our scheduled rides, which is a slightly higher margin product. Priority Pickup, there's another -- Extra Comfort is another, we've talked about that a couple of times.

We launched that in October. It's a slightly premium-priced product, $1 or $2, call it, but our costs are not significantly different. So, if you look at mix, lots of opportunity there. And then, again, back to the point of media, that's a very high-margin business for us as well as a lot of our partner-originated rides.

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

Nikhil Devnani -- AllianceBernstein -- Analyst

Thank you both. Appreciate it.

Operator

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

Wesley Sanford -- JPMorgan Chase and Company -- Analyst

Hey, this is Wes on for Doug. Regarding the rides growth in mid-teens in '24, how should we think about kind of the pace of deceleration from 20% from here?

Erin Brewer -- Chief Financial Officer

Wes, thanks for the question. 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, we are lapping that 20% assumed 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.

Wesley Sanford -- JPMorgan Chase and Company -- Analyst

Thanks. If I could ask just one more on Women+ Connect, you'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 the rider side kind of as a result? Or maybe is that a little too early to tell?

David Risher -- Chief Executive Officer

Yeah. Thanks for the question. A couple of things there. I'll just say sort of directionally.

First just to level set for everyone. We launched it at the end of last year, it was first in five markets, and it was in 55 markets. Now, just as of today, it's in over 200 markets. So, obviously, from an overall volume perspective, it's still fairly small.

But from a product-market fit perspective, it's super, super good, and frankly, sort of off-the-charts type of thing. If there aren't many features that you launch, for example, that have something like a 98% driver acceptance rate, 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, roughly speaking, if we have higher density, we have higher margins because of the way the sort of the structure of rides go. So, anyway, that's very good. I don't know if we mentioned we've done about 7 million rides so far Women+ Connect just in the last couple of months, just in those 55 markets.

And we expect, obviously, that to accelerate quite a bit now that we're nationwide. So, nothing specific to share, but really good product-market fit. And as I always say, if you look at the sort of the social media commentary or frankly, 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 a very good, very good response.

Wesley Sanford -- JPMorgan Chase and Company -- Analyst

Great. Thank you both.

Operator

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

John Blackledge -- TD Cowen -- 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 into free cash flow in '24? And is that 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 Primetime kind of improving, could we see further incremental improvements in both of those consumer experience metrics in 2024? Thank you.

Erin Brewer -- Chief Financial Officer

Thanks so much, John, I'll start with the first question and then turn it over to David. So, as we mentioned in our prepared remarks, very pleased to give this directional commentary on free cash flow for 2024. From where we sit today, we believe we've reached a turning point, and it's an important milestone overall for our company. In terms of what's driving that, first and foremost, obviously, just operating a healthier business, right? We've got adjusted EBITDA growth and expansion year over year.

And then I talked a little bit about the transition with respect to our insurance program. So, 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. The last thing that I would say is, I obviously touched on our capital expenditures moderating year over year. This is largely because 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 -- 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 how we're thinking of the conversion for 2024.

The bottom line is, again, we feel we've reached a turning point and we're very focused on improving from here.

David Risher -- Chief Executive Officer

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 -- and you mentioned ETA specifically as well as Primetime. 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. Primetime, I can actually be more precise, we saw about a 40% reduction in the share of rides affected by Primetime in Q4, again year on year. So, really significant, meaningful changes in both. So, the other question is how much further is there to go? And this is an area -- look, there's a little personal story.

I just finished the book recommended to me by a colleague here called "Unreasonable Expectations." And my expectations are unreasonable. I will continue to push us very hard on this. And the team, I hope, is energized by it because as you've seen with things like the on-time pickup promise, when we really focus on doing something, even at the scale we are, like just as a reminder, we're doing 2 million rides a day. What I think I sometimes comment on the roof here is I look at an airline like a Delta Airlines, 2,000 or 3,000 or 4,000 flights a day.

Now, obviously, they're shipping on a lot of people. Those are 180-, 200-passenger jets. But still, the scale that we're working at is really quite large. And so, 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. So, I don't want to speculate 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 -- TD Cowen -- Analyst

Thank you.

Operator

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

Alec Brondolo -- Wells Fargo Securities -- Analyst

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 capacity.

So, just any commentary on the timing, I think, would be really interesting. And then maybe secondly, if I could ask one on insurance. You guys indicated correctly that you've been mixing the business toward risk transfer. Obviously, in the U.S., your primary competitor Uber has been moving in the other direction.

They've been shifting their business toward captive insurance. I guess how can we explain the differential in strategy there? I mean, is there any concern that they're going to build a structural cost advantage over Lyft by leveraging the captive insurance muscle? Thank you.

David Risher -- Chief Executive Officer

Yeah. Let's -- we'll do one-on-one on that. I'll start with the first. So, I mean, a couple of things there.

So, actually, I'll start with an old chest tide. 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 are kind of a perception basis on the driver 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 of 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 after the period was, I think, two years, maybe a little over 2%. So, in the background, we've been working quite hard at making sure that our drivers are paid 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 kind of the mechanics of it.

So, then we say, given those mechanics, the riders pay the drivers and we take a cut. Well, what can we do to address a very consistent set of pain points the drivers have communicated to me often in quite personal ways, I might add, since the day I started? One is around transparency. A question of fairness. Are you taking too much? And the second is a question of minimums, frankly.

Why are there some drives where it feels like my rider pays $20 and I get 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. It'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 obviously increase the service levels -- improved service levels, but also increases top line and margin.

So, it's really quite a self-fulfilling prophecy. And back to your question around timing, 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.

The customer obsession doesn't just mean listening to customers. Of course, it means that. And trying to come up with things innovating on their behalf. But it also moves deeply, deeply understanding their needs so that the work that you're doing in response 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. 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 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 and on average, after all the expenses, the best we can see, and this is an average, you can see the quartiles 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, it's a very long answer, but really, I think -- I hope it reveals the way we think about driver supply, which is not just some generic number, 1 million drivers making $1 billion, whatever. But very specifically, while drivers drive, how much money do they make? And how can we give them a certain amount of assurance within the context of our business partner -- their independent contractors that their take is fair?

Erin Brewer -- Chief Financial Officer

And Alec, I'll take your question overall on insurance. And so, in last quarter's conference call, we talked a fair bit about insurance. But what I'd like to leave you with is 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 implementing our strategy here at Lyft as it relates to increasingly building in features in our products, working across various policy initiatives, and doing a number of things that we believe, and we have demonstrated in the past, have a positive impact on what has been a rate of increase historically over time.

I couldn't comment on our competitors' 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, there's a benefit there and that there's some certainty in cash flows that's provided.

We think that's important. And then the second thing that I'd highlight is 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 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 the right way in terms of resolving claims in a timely fashion and in a reasonable fashion. So, we like the mix of how we're structured today, and it works for us.

And beyond that, I couldn't comment on what our competitor chooses.

David Risher -- Chief Executive Officer

Yes. I'm going to say one more thing -- I'm going to say one more thing here, too, because it gives us the chance to brag on our team a little bit and actually give a little preview to Investor Day. We mentioned we're going to do an Investor Day. I think one of the things -- this will sound strange.

But if you come to the Investor Day, and I hope you do, and you get a chance to meet Max Feldman, who is up our insurance and risk management. The guy is a rockstar. And it's just an incredible, incredible team we've got to focus on risk management. I think you'll come away super both impressed but also educated about how we think about this.

I'll also point out one of the newest additions to our board, Jill Beggs, who is 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 yes, we'll be interested to see what the other guys do, but we feel pretty good about our strategy.

Alec Brondolo -- Wells Fargo Securities -- Analyst

Thanks so much.

Operator

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

Deepak Mathivanan -- Wolfe Research -- Analyst

Great. Thanks for taking the question. So, first, David, with all the efforts to grow the portfolio of products and then bringing prices, service level on parity with this competition, 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 run that into the future? And then sort of related to that, 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 over the medium term? Thank you so much.

David Risher -- Chief Executive Officer

Sure. Hey, Deepak, I'll take the first part, and then Erin and I will tag-team -- Erin will take the second. So, first, yes, good question about active riders, and definitely want to double down on something you alluded to, but it's good for everyone to understand, which is because our active riders is a sum of rideshare and bikes and scooters, 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 going into the Comfort.

But broadly speaking, here's the way we look at it. I 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 rider because just to say the cliche thing, it's almost 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 the 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, 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 responding to the work you've done, that has lots of ripple effects. And so, it means that over time, as we focus even more energy on rider acquisition, through new product initiatives like Women+ 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 sort of focus -- the focus is on really increasing -- working on the basics, that creates some good frequency things. If we do a good job of it, you see it earliest in high-frequency riders because that's obviously that's 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 product innovation or even marketing efforts or some combination of both.

So, that's kind of the structure. And then I'll turn it over to Erin to talk about the cost.

Erin Brewer -- Chief Financial Officer

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. 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 any material changes, if you will, in the overall level of head count, etc. Although I would point out that even on flat head count, you're going to expect some increases for merit and some inflation and cost of benefits, etc., year over year. But outside of things like that, we are very, very disciplined as it relates to our sort of base cost structure. You asked about the cost of initiatives.

And frankly, I think I'm going to 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 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 if you think about that at the heart, we 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, another way to consider this are these are edge cases that are really a pain point for drivers. And so, 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. And if you step way back, that really allows us to engage with drivers overall in a much more efficient way.

And so, 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 -- Wolfe Research -- Analyst

Thank you so much.

Operator

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

Benjamin Black -- Deutsche Bank -- 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 driver incentives coming down? And then secondly, for your directional guidance for 2024, it implies slightly faster bookings growth versus trip growth. So, should we be expecting pricing to potentially a lever in 2024 as well? Thank you.

Erin Brewer -- Chief Financial Officer

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, as we had anticipated and guided to cost of revenue increased substantially in Q1. And so, yes, we were largely able to offset that operating 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 have been -- which were meaningful, 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, etc.

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

Benjamin Black -- Deutsche Bank -- 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 '24.

Erin Brewer -- Chief Financial Officer

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. I think it's important to remind everyone that gross bookings, while a significant majority of that number is our core rideshare business, important to remind that things like our bikes and scooter business, media, etc., are also flowing through our gross bookings line. So, I'd point that out. As it relates to pricing, 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 -- Deutsche Bank -- Analyst

Right. Thank you very much.

Operator

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

Michael Morton -- MoffettNathanson -- 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 $0.5 billion advertising business. So, just trying to get a deeper understanding of the cadence of that advertising business going forward. Thank you.

David Risher -- Chief Executive Officer

Yes, sir. Hey, Michael, it's David. Yes, that's one of those costs that has come back at me a couple of times. I've seen that one.

So, that was meant to be aspirational and long term, to be clear. Who knows, maybe we will get there sooner or 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 don't announce that onstage, just internally that's on a 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 from a sort of overall total company perspective.

But again, we see a really good fit with what our advertisers or 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. 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 you see 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 add-on panels, some of which are increasingly digital electrified panels in some cities.

So, we've got a really nice and it's one of the reasons why on Super Bowl Sunday for example, I mentioned, I think I didn't mention Zillow. Zillow also did a big buyout, and they tend to be sort of multi-channel buyouts across this sort of multiple kind of ad outlets, sort of Surround Sound type of things. And it's something that we can provide that 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 will be something you'll be hearing us talk more about. Over time, I do stand by my prediction. I'm just not putting a time frame on it.

Michael Morton -- MoffettNathanson -- Analyst

Thank you so much.

David Risher -- Chief Executive Officer

Sure.

Operator

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

Stephen Ju -- UBS -- Analyst

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

David Risher -- Chief Executive Officer

Yeah. This is always an area where I get frustrated as just myself because, of course, I always want to talk about all the things we've got out the pipeline, but it's not such a good idea. I think thus, I have to sort of keep talking about some of the same things. Let's look at Comfort Plus for just a second.

Comfort Plus, relatively small products in the portfolio, but I think we've given about 2 million rides or so since we've launched it. And that's wonderful. And it's not a product we've particularly marketed. We play around with a little bit on-site stuff.

But there's more we can do there when people want either a slightly larger car, slightly newer car, or at least in my case, sometimes it's slightly quieter car is another option we get 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 a lot more to do there. I wish I could get more specific, but I'm going to have to sort of leave it there. But I think one of the things that's really -- 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 our customers. We expect to see a lot more over time.

Stephen Ju -- UBS -- Analyst

Thank you.

Operator

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

Youssef Squali -- Truist Securities -- Analyst

Great. Thank you guys for taking the questions. First, David, you said that 20% of rides has a connection to partners back in 2023. One, I was wondering what it was in 2022.

And as you look at 2024, are you expect an additional or the guide baking 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 is a little beyond from a modeling perspective, is it -- what are the things that happening 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 -- Chief Executive Officer

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 going to 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. And 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 not the largest credit card issuer, I think they are actually the large credit card issuer in North America. They have -- we 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 cards.

And that's something as a driver, I hear fairly regularly from my riders that they say that's the reason that they choose Lyft. So, those sorts of -- and then we have a similar relationship with Delta. We have similar relationship with Alaska Airlines. There's a lot more we can do with all of those.

I mentioned briefly, by the way, those partnerships sometimes start in one way and then they morph into a different thing. So, Alaska Airlines -- or excuse me, Delta Airlines started as a points partnership. It's now evolved to be a commute partnership, right? So, because as I say, flight crews get transported by a Lyft to the airports. And 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. On the Starbucks, I mentioned early on and so I did 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 our instance 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 our percentage prediction or 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 potentially higher margin and, of course, incremental rides.

Erin Brewer -- Chief Financial Officer

Thanks. I'll take the question. You're right. I'm not going to 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 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. I suppose the other element, as you think about expansion over time would relate to cost discipline which, frankly, is a hallmark of any durable profitable business. If you think about all of those four things, they're not meant to be sort of 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, 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 -- are running the business in 2024, and they're all fairly durable themes.

Youssef Squali -- Truist Securities -- Analyst

That's helpful. Thank you both.

Operator

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 -- Chief Executive Officer

I'll be brief. I really appreciate the opportunity. Thanks for joining us today, you all. This business really has come a long way over the past year.

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 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 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 up to date.

And thanks again.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sonya Banerjee -- Head of Investor Relations

David Risher -- Chief Executive Officer

Erin Brewer -- Chief Financial Officer

Mark Mahaney -- Evercore ISI -- Analyst

Nikhil Devnani -- AllianceBernstein -- Analyst

Wesley Sanford -- JPMorgan Chase and Company -- Analyst

John Blackledge -- TD Cowen -- Analyst

Alec Brondolo -- Wells Fargo Securities -- Analyst

Deepak Mathivanan -- Wolfe Research -- Analyst

Benjamin Black -- Deutsche Bank -- Analyst

Michael Morton -- MoffettNathanson -- Analyst

Stephen Ju -- UBS -- Analyst

Youssef Squali -- Truist Securities -- Analyst

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