Good afternoon. Thank you for standing by, welcome to Lyft's conference call regarding the sale of its Level 5 self-driving division. At this time, all participants are in a listen only mode to prevent any background noise. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance, please press star zero on your touchtone telephone. As a reminder, this conference call is being recorded. I'd like to turn the conference over to Sonya Banerjee, Head of Investor Relations. You may begin.
Thank you. Welcome to today's conference call regarding Lyft's announced sale of our Level 5 self-driving division to Woven Planet Holdings, a subsidiary of Toyota. On the call today, we have our Co-Founder and CEO, Logan Green, Co-Founder and President, John Zimmer, and Chief Financial Officer, Brian Roberts. We'll start with remarks from John and Brian, and then host a brief Q&A session. A recording of this conference call will be available on our investor relations website at investor.lyft.com shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will be making forward-looking statements. This includes statements relating to the sale of our Level 5 self-driving division announced today, our expectations for the transaction, the expected timing for closing, and the potential impact.
We will also make statements relating to our expectations regarding profitability, autonomous vehicles, AV technology, our platform, and our strategies and vision, as well as our expectations for long-term growth and our 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 Form 10-K for the full year 2020, filed on March 1, 2021, as well as risks related to the closing of the transaction and the current uncertainty and unpredictability in our business, the markets, and economy. You should not rely on our forward-looking statements as predictions of future events.
All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and Lyft disclaims any obligation to update any forward-looking statements except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to, and not as a substitute for, or in isolation from, our GAAP financial measures. A reconciliation of our historical GAAP to non-GAAP metrics may 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 President, John Zimmer. John?
Thanks, Sonya. Thank you all for joining us on short notice to share news that we're quite excited about. We have signed a definitive agreement with Woven Planet Holdings, a subsidiary of Toyota, to acquire our Level 5 self-driving division. Lyft and Woven Planet will also enter into commercial agreements that allow Woven Planet to help advance the safety and commercialization of automated driving vehicles. Lyft will receive in total approximately $550 million in cash with this transaction, $200 million paid upfront subject to certain closing conditions, as well as $350 million in additional payments over a five-year period. We are also excited to announce that our Open Platform team, the engineers, product managers, and data scientists at Lyft focused on integrating self-driving cars into Lyft's network, has been renamed Lyft Autonomous.
The Lyft Autonomous team will continue to focus on the self-driving user experience, marketplace, and fleet services that ensure Lyft riders have access to the safest, most advanced self-driving technology on the market, and that our AV partners have access to the power of Lyft's network. Not only will the sale allow Lyft to focus on advancing our leading autonomous platform, this transaction will help pull in our profitability timeline. Including the financial impact of the transaction, we now expect we will achieve adjusted EBITDA profitability in the third quarter of this year. Now, I'd like to walk through the strategic rationale for this transaction. There were a number of companies interested in the Level 5 team and technology, and Woven Planet stood out.
Toyota is the largest automobile manufacturer in the world based on 2020 unit sales and has led with a strong vision over the course of its history. Woven Planet is the Toyota subsidiary dedicated to developing connected, automated, shared, and electrified technologies and smart cities. Together, we share a common belief in the importance of our team and technology and the critical role that Lyft's network can play in helping to advance their automated driving technologies. When the transaction closes, Level 5 will become Woven Planet's dedicated team focused on developing automated driving technology. When we opened our Level 5 engineering center in 2017, the main goal was to make sure we'd have access to affordable and reliable autonomous technology. At that time, it wasn't certain that there would be multiple well-funded autonomous vehicle programs.
In just four years, we built a world-class team and made remarkable progress developing a leading self-driving system. Level 5's differentiated approach to advancing autonomy, which we leaned in heavily on simulations and state-of-the-art machine learning techniques and the data collected from fleet vehicles at large scale. This helped speed up the development process and drove step changes in terms of capability. The team's rapid progress and industry-leading positioning are reflected in the California DMV's most recent disengagement reports. Relative to when we launched Level 5, the market for AV technology is in a very different place. There are now many more well-funded participants with a number of incredibly promising systems being developed. This means achieving our vision of integrating autonomous vehicles into our network and having access to a competitive market of providers no longer means we need to develop the technology ourselves.
Today's announcement further sets up another scaled, differentiated, and extremely well-funded participant. On our last earnings call, we began to discuss how AVs come to market on an existing transportation network. Going forward, we believe our approach puts us in the best position to win the AV transition. This is based on three foundational pillars. The need for a hybrid network that includes human drivers. Our marketplace engine, powered by our network technology. Our highly efficient fleet management capabilities. I'd like to provide a bit of background on each of these. With a hybrid network of human drivers and AVs, we can help partners maximize vehicle utilization, all while we introduce millions of riders to autonomous vehicles. Daily travel patterns don't resemble a static horizontal line.
They're closer to a heartbeat, with large spikes around morning and evening commutes, and a mix of peaks and valleys during other parts of the day. A scaled transportation network that combines AVs with human drivers is the best way to meet dynamic demand peaks while maximizing utilization. In fact, we don't see any way you could manage this demand for transportation without both drivers and AVs. Second, our marketplace engine can help maximize an autonomous vehicle's revenue per mile. Our data science, product, and engineering teams have been doing incredible work over nearly a decade to drive massive efficiency around demand prediction, vehicle positioning, routing, and other critical marketplace functions. While we work hard to give people an incredibly simple experience with a ride that shows up at the tap of a button, there's a lot going on below the surface.
Our systems dynamically determine pricing, matching, dispatching, and optimal routing to riders at scale in real time. We are able to do this in a way that maximizes returns by taking into account a multitude of complex inputs like conversion rate and unit economics. Third, you can't run an optimal AV operations without deeply understanding how to manage a fleet at scale. By offering a comprehensive set of tech-enabled fleet management services to AV partners, we will further maximize their economic returns by reducing operating costs. Each one of the elements I've outlined reflects the fundamental value of all the work we do across our network. Collectively, these factors differentiate Lyft from our competition. Our focus is clear, and we will continue to solve the most critical aspects and the critical business aspects of bringing AVs to market, maximizing revenue per mile and minimizing cost per mile.
Additionally, Lyft has aligned ourselves with our partners. We will not have significant ownership in a competing autonomous vehicle program. Lyft is committed to being a trusted partner that can be relied on to help self-driving providers improve the capabilities, safety, and success of their autonomous vehicles. Today, we already are the leading network for autonomous vehicles, with more than 100,000 paid AV rides on our network since 2018. We've announced our plans to deploy fully autonomous Motional vehicles on our network in multiple cities beginning in 2023, and we look forward to continuing to work with additional AV partners. I'll now turn it over to Brian to provide more details on the deal and an update on our business.
Thanks, John. Let me discuss some of the financial details. Lyft will receive approximately $550 million in cash in the aggregate, with $200 million paid upfront, subject to certain closing adjustments. In terms of the financial impact of the transaction, there are two key results. First, this transaction will reduce Lyft's non-GAAP operating expenses. After closing, we expect to remove $100 million of annualized operating expenses on a net basis, or roughly $25 million per quarter, primarily from reduced R&D spend. Second, there will be revenue related to the transaction. Revenue recognition will be determined after closing. Now, on our last earnings call, we shared that we could be adjusted EBITDA profitable with 80%-85% of the ride volume achieved in Q4 of 2019. Including the financial impact of the transaction, Lyft can now generate adjusted EBITDA profitability with two-thirds of the Q4 2019 rideshare ride volume.
As John shared, we are pulling in our profitability target by a full quarter. Assuming a continued COVID recovery, we now expect to achieve adjusted EBITDA profitability in the third quarter of this year. With that, I'll hand it back to John to close.
Thanks, Brian. Logan and I have been planning for and building a deep understanding of the transition from car ownership to transportation as a service since 2007. It's a transition where trillions of dollars of value will be created and where we have an opportunity to dramatically improve people's quality of life. AVs will be a key inflection point and one that we are very ready for. Operator, with that, we're now ready to take questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your touch-tone telephone. Again, that's star one on your touch-tone telephone to ask a question. To withdraw your question, press the pound key. Our first question comes from the line of Stephen Ju of Credit Suisse. Your line is open.
Okay. Thanks, guys. Congratulations on the deal. Can you update us on what else this team was working on? Because our recollection is that they were working on not only Level 5, but also other technologies and products that might have helped Lyft in other ways sooner versus the timeline of when Level 5 becomes more mainstream. We're just wondering if we're giving up any sort of core engineering competencies or products and setting ourselves up to be dependent on an external party at some point down the line. Thanks.
Yeah. I'll jump in and take that. This is Logan. No, there was a decent amount of technology transfer. All that technology transfer has been sort of fully transferred into Lyft infrastructure teams and Lyft product teams. There's not a dependency going forward. Those teams have picked up and run with the areas, where we were able to unlock those synergies. The key piece that John mentioned is we're rebranding the Open Platform team to the Lyft Autonomous team, and we're keeping all of that within Lyft. The group that's responsible for the rider experience within an autonomous vehicle and the whole experience of hailing one and going through the pickup and drop-off flow, that team will remain within Lyft, and they'll be working with all of our partners.
Thank you.
Thank you. Our next question comes from Spencer Tan of Evercore ISI. Your line is open.
Hey, everyone. Thanks for taking the question. Just really quickly, have you guys done any internal estimates on what autonomous can do to the cost per mile, and how that might be brought down over time, say, over the next three to five to 10 years? Thanks.
Sure. We have done that work, there's definitely opportunity to bring the cost down over the next, let's say, I think it'd be more like five years. The next three years is going to be bringing this to market. Brian, if you want to add anything to those economics, I'll let you do that. I think the other important point we wanted to make sure is understood are the three elements we said that are critical to operating AVs. You can't operate AVs anytime into the near future successfully, in our opinion, without complementary other cars with drivers in them. The economics that you're talking about will go out the window when if an all-AV provider tried to have how many vehicles you need at 9:00 A.M.
when there's rush hour versus how many vehicles you need at noon when people are eating lunch and not moving around, would create a really bad utilization and therefore high cost. We've done that work. I don't know, Brian, if you want to give any high-level view on it. Also want to emphasize that it is also important to have drivers as well.
Yeah. No, John, I think you captured it well. I think it's really important for investors to understand it's about how do you maximize revenue per mile as well as leverage the cost per mile. That's why we're so excited about our transportation network and what the underpinnings allow us to do for partners.
Okay. All right. Thank you.
Thank you. Our next question comes from the line of Brian Fitzgerald of Wells Fargo. Your line is open.
Thanks, guys. A couple quick ones. Brian, I know you mentioned, after the close, we'll get more information on timing. Any initial thoughts on how that 350 phases in? I'll try a quick one. Are you seeing the business pick up as vax rollout continues on the demand side? What can we see on the supply side, on the driver side? Did this predicate any of your decisioning in terms of, hey, it's time to make this move? Thanks.
Sure. Let me take the first piece, and then I'll hand it over to John Zimmer and Logan Green to give you an update in terms of the business, as well as on driver supply. In terms of the transaction, we will determine, as I mentioned, the revenue recognition after close. We have to allocate the payments between the asset sale and the commercial agreements. We just can't speculate on the financial impact of revenue until it's finalized with our auditors.
All right. Onto the second part of the question. We have seen increases in demand. As vaccinations roll out, as cities have opened up, people are getting more and more comfortable, and we're seeing that show up in the data and ride intents are increasing. This has led on the driver side to some of the highest earnings. In some markets they're hitting all-time records, way up, higher utilization. Because of the sort of broad-based under-supply situation, that translates to higher prices many times on the rider side. That's generating a surplus that we then reinvest in bringing drivers back onto the market. We are working quite hard to reinvest all that money to bring drivers on and serve as many riders as we can. We'll go into more detail on that in our Q1 update.
Thanks, guys.
Thanks.
Thank you. Once again, to ask a question, please press star one on your touch-tone telephone. Again, that's star one on your touch-tone telephone to ask a question. Our next question comes from the line of Youssef Squali of Truist Securities. Your line is open.
Congrats on the move. Two quick ones for me. One, does this change in any way the timing or scale? I think on the timing, it didn't seem like it based on what you said, but of your plans of having AVs in your network starting in 2023, do you know whose technology ultimately you'll be launching with? Second, maybe Brian Roberts, you're taking another $100 million in annual expenses out of the cost basis. How should we think about the long-term profitability of the business relative to how you guys looked at it maybe a couple of years ago before you started making some of these big moves? I think initially you had talked about margins in the mid-20s or higher. Just wanted to see where you guys are at at this point. Thanks.
Thanks, Youssef Squali. I'll take the first part. No major change because what we've announced, as you mentioned, 2023 was with a partner, and we always had what we used to call Open Platform and now Lyft Autonomous, as the main strategy for deployment being that we would work with multiple partners to bring that to market. I actually think this puts us in an even better position with partners because there's always that question, well, are you going to be biased towards your own technology? This clarifies it that we won't be. I expect those conversations to be even easier going forward. Brian, do you want to take the other piece?
Sure. For context, our long-term targets, which you mentioned at the time of our IPO, didn't assume top-line contribution from AV, but we did assume continued investments in AV across both Level 5 as well as Open Platform, now Lyft Autonomous, because, as we've been saying, autonomous is the breakthrough and really a key way that we will serve more of our $1 trillion+ TAM. We continue to believe that we will lead the industry on long-term margins. In terms of our North Star, we share the same financial objective as Amazon, which is to maximize long-term free cash flow growth per share. Free cash flow is operating cash flow less CapEx. We believe this is the metric most aligned with how to generate long-term shareholder value. Look, near term, we expect margins to increase.
We shared on our last earnings call that we expect to achieve record contribution margin later this year.
Okay. Thanks a lot, guys.
Sure.
Thank you.
Thanks.
Thank you. Our next question comes from Deepak Mathivanan of Wolfe Research. Your line is open.
Hey, guys. Thanks for taking the question. Just a couple of quick ones. First, the AV industry obviously is still evolving. Can you talk about how comfortable you are in entering these agreements at this point from economic standpoint? Maybe qualitatively, perhaps give some color on how you approach the agreements. Do you care about rev share or is it the non-exclusivity? What matters when you enter into these agreements? The second question, I wanted to follow up on the driver incentive side. You mentioned that it's being funded by consumer prices. It makes a lot of sense. Can you talk about how long do you expect these constraints to persist? Thank you.
Thanks, Deepak. I'll take the first part. On the AV industry evolving, the whole reason that we are doing this is because we feel extremely comfortable entering into these agreements and in our position. As I outlined those three, we'll be talking about it more and more. I think it has been underappreciated what it's going to take and how AVs will come to market, and we are very confident in our position with the marketplace, with the hybrid network of AVs and human drivers, and with the fleet management, something that we have been quietly building capability around. Is critical when you get into an autonomous vehicle world. You have to operate the maximum efficiency per mile. Again, Logan and I have been focused on solving this problem together for over a decade.
We're the founders of the company, the only founders leading in the U.S. rideshare business. We've been thinking about this and building this for a long time. We feel very confident about going into those agreements. You mentioned a couple aspects. I'm not going to probably get into the economic. We have a very specific view on how the economics should work, but I don't think it's to my benefit to talk about it. On exclusivity, yeah, it's important that we do not, at this point, when things are evolving, get into an exclusive relationship, and we are not doing that. We don't have any board positions or anything like that with one of the players. I feel extremely well positioned, better positioned than anyone else, and very confident in the value we're going to bring to these partners.
This is Logan. On the second piece regarding driver supply. We are extremely focused on it, doing everything we can to take care of the drivers that are on the road today and to get new drivers on the road, encourage former drivers to come back out. Again, like I said, it is a great time to be driving now. It's impossible for us to accurately predict exactly when a larger portion of supply will come back on the road. Obviously, the government stimulus program is probably having some impact, but it's hard for us to isolate that or to know the kind of shape of that. We aren't able to accurately kind of predict the timing, but we're doing everything possible, and we'll get into some more details when we do our Q1 update.
Got it. Thanks, guys.
Thanks.
Thank you. Our next question comes from Lloyd Walmsley of Deutsche Bank. Your line is open.
All right. Thanks. I've kind of got two that are closely related, I guess. The street consensus is about a loss of $18 million in 3Q. You're now firmly committed to profitability on what seems like a $25 million a quarter kind of lower expense base. The question is there anything else that's giving you that increased comfort for 3Q, whether that's the demand environment or other cost cuts? I guess the other way of asking the question would be, can you just help bridge us between the delta of the kind of 80%-85% of 4Q 2019 volume to the 2/3? The math I'm doing is the delta's about 16.5%. If you apply that to your 4Q 2019 contribution number, it's like a $90 billion-ish lower threshold, versus $25 a quarter. Am I thinking about it right?
Is there other math I should be doing? Help us kind of understand this pull forward and path to profitability. Thanks.
Sure. Thanks, Lloyd. We'll be reporting Q1 next Tuesday. The 66% is based on our current view in terms of the progress we made in Q1. When you think about Q4 2019, we're talking about 66% of the ride volume. Remember in Q4 of 2019, we lost $131 million. Now basically two-thirds of that ride volume are actually going to be profitable. It goes back to what we've been talking about in terms of driving progress, both in terms of how do we create more revenue for every single ride, as well as how do we take out costs on our platform and drive more scale. We're going to continue to deliver this year. We'll report next week, which will give investors another data point.
We are confident, with the continued COVID recovery and closing this transaction, we will be adjusted EBITDA profitable in Q3.
All right, well, thanks and congrats.
Thank you.
Thank you. Once again, to ask a question, please press star one on your touch-tone telephone. Next question comes from the line of Steven Fox of Fox Advisors. Your line is open.
Hi. Good afternoon. Thanks for taking my question. I understand why on your term you would have multiple partners, given the early days of autonomous vehicle development. Can you talk about how you think that shakes out maybe over a 5+ year period? Do you think it's more efficient to have one partner, or do you envision an environment where different parts of the networks would be optimized with uses of different technology? Thanks.
I think it's hard to predict. If the terms were right, I'm sure it could make sense to go deeper with a partner. Back to what I said, I think at this point, there's a lot unknown, and it makes sense to not be singularly focused or put up any walls to working with multiple parties. I just say, again, we're in such a great position. There are two networks in North America. We're the only one with fleet management, and there's several other factors that differentiate us and make us what we believe is the best partner. There's four, five, six extremely well-funded AV players. That dynamic is one we feel great about, again, which led us to this decision. Beyond that, I think it'll continue to play out. We've put all the right pieces in place.
Again, Logan and I think about this all the time. This is our life's work. We have belief with how this will play out for a while, and there's a lot we're doing under the surface to prepare to be in the best position. With that, I think that is our last question today. I just want to thank everyone for joining the call and just say that we really look forward to talking again with many of you next Tuesday on our earnings call. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.