Q3 2019 Earnings Call

Good afternoon, and welcome to the cars.

Third quarter 2019 earnings conference call.

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I would now let's turn the conference over to Mike weapon, Vice President Investor Relations. Please go ahead.

Thank you very good afternoon, ladies and gentlemen, thank you for joining us on Carvana third quarter 2019 earnings Conference call. Please note that this call will be simultaneously webcast on the Investor relations sections of the company's corporate web site at investors not Carvana Dot com. The third quarter shareholder letter is also posted on the IR website, joining me on the call.

Today, our Ernie Garcia, our Chief Executive Officer, and Mark Jenkins, Chief Financial Officer, before we start I would like to remind you that the following discussion contains forward looking statements within the meeting of the federal securities laws, including but not limited to carbon as market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from.

Those discussed here.

A detailed discussion the material factors may cause actual results to differ from forward looking statements can be found in the risk factor section of carbon his most recent Form 10-K and Form 10-Q . The forward looking statements of risk in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them, whether as a result, new developments or.

Otherwise our commentary today will include non-GAAP financial measures, including but not limited to X gift measures that exclude the impact of the 100000 milestone gift to our employees reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our investor life.

Seems website. Please note that all gross profit SDMA and EBITDA metrics mentioned bias on the call today are on an ex gift basis, and now with that said I'd like to turn over the call to Ernie Garcia Ernie.

Thank you Mike Thanks, everyone for joining the call.

Q3 was another great quarter for us on our mission to change the way people buy cars. It was our 23rd straight quarter of Triple digit revenue growth. We also saw nearly 250% growth in the number of cars, we bought from our customers 250%.

As a result of that growth, we bought 70% as many car smart customers as we sold to them and we source, 31% of our retail cars from other carvana customers.

Our rapid growth in both cars bought and sold led to total transaction growth of 143% in the quarter, which is the fastest rate of growth we've seen since late 2017.

That may not sound like that long ago, but at that time, we were a business roughly one fourth the size of the business. We are today, it's pretty exciting to still be growing as fast as we are at the scale of over $1 billion and revenue per quarter.

Our offering a buying cars from customers was a standout this quarter, so let's take a little extra time discussing it.

The annual growth is remarkable figure, but I think the quarterly growth was even more telling we grew corresponding customers by 40% quarter over quarter that is pretty exceptional in has unsurprisingly put some pressures on the business to quickly adapt does adaptations are well underway and include investments in several areas as well as additional preparations for another big growth you're in 2020.

We do the progress we are seeing and buying cars more customers as a significant improvement to our platform when reducing used car sales what they fundamentally are there simply slots between different customers do the mechanism of all the middleman institutions that make up automotive retail the more of that chain that we can integrate improve the more value can pass on to our customers and the better.

Business, we can build.

Now I'd like to turn to the current state of the business. When we lost Carvana. We felt like we had three simple questions that separated us from achieving our goals number one could we build an offering compelling enough the customers would by current a whole new way number two could we do that was strong unit economics.

And number three could we execute against that enormous opportunity.

Revisiting these questions a useful way to assess our progress. We believe the first question. It's been addressed the quality of our customer offering which drives our growth answers that the fact that in less than seven years, we've become a third largest retailer of used cars in the U.S. with a completely new offering answers. It resoundingly, we've built something that our customers love.

We believe the second question has been answered as well, we're not yet a profitable company and we remain intently focused on this goal, but on the question of unit economics, the data is pretty clear.

In the third quarter, 80% of our markets, which made up 97% of our sales were contribution positive and 14 markets, which made up 35% of our sales where EBITDA positive after fully allocating all logistics and corporate expenses.

The company level gains are every bit as powerful.

And just three years, we've taken GPU from about $1000 to about $3000 and we've improved our EBITDA margins by nearly 20%.

All that progress and leverage has come despite the investments required to go retail transactions, roughly 10 times and total transactions approximately 15 times over that same period.

We built the business that already has strong unit economics, and there's clear visibility to our long term model.

This leaves us with the third question can we execute against this incredible opportunity our execution. So far gives us confidence in about six in out years, we've gone from zero to 70000 transactions per quarter.

That said, there's a question that has never fully answered it just suddenly changes to can we continue to execute I believe we will continue that believe comes from the quality of the passionate people, we've assembled and the quality of experience is those passionate people delivered to our customers. Thank you to all of those passionate people.

Our goals our ambitious unclear we want to change the way people buy cars and become the largest and most profitable automotive retailer and we're still just getting started mark.

Thank you earnings and thank you all for joining us today.

Unless otherwise noted all comparisons are on a year over year basis.

We're pleased to report another quarter of exceptional growth in both retail units in revenue.

Retail units totaled 46413 in Q3, an increase of 83%.

Total revenue was 1.95 billion an increase of 105%.

This marks our 20 threerd consecutive quarter of triple digit revenue growth and the first in company history with more than 1 billion in revenue.

Total gross profit per unit was 20 996 in Q3, an increase of $694.

Retail GPU increased by $169, reflecting gains and acquiring car from customers.

Wholesale GPU increased by $61 driven by 165% growth in wholesale unit sold.

Finally, other GPU increased by $464, reflecting gains and finance monetization and increased attachment of ancillary products.

EBITDA margin was minus 5.1% in Q3 and improvement of 3.2%.

As for you in a levered by 1.6% despite investments made in the quarter can relieve pinch points support accelerating growth in buying cars from customers and prepare for growth in the first half of 2020.

We ended the quarter with 578 million in committed liquidity resources and held an incremental 110 million in real estate securities on our balance sheet.

Following quarter end, we also upsized our floor plan with ally increase our credit line to 950 million and adding flexibility to expand our inventory selection and buying more vehicles from customers.

As of September Thirtyth. This upsize would've unlocked an additional 73 million in liquidity based on inventory on our balance sheet.

Your total liquidity resources adjusting for the upsize to over 760 million.

With our nine new markets opening in Q3, we now serve 66.9% of the total U.S. population up from 58.6% at the end of 2018.

For the remainder of the year, we plan to turn our focus to preparing for growth in the first half of 2020 and for buying more vehicles from customers. We plan to resume of rapid pace of market openings in 2020.

Beginning next quarter, we plan to guide on growth in population coverage rather good growth in number of markets. As this metric will be more relevant as we move into smaller markets and fill in existing regions.

In Q3, we began construction on our eighth inspection and Reconditioning Center, a four line facility in North Carolina that we expect to add 67000 units of annual production capacity to our existing footprint of 350000 units at full utilization.

In addition, we have identified five ire see sites that we expect to become for line facilities overtime.

Continued to view IR sees a long term competitive advantage as we further expand our as soon as next day delivery infrastructure.

Q3 also marked another successful quarter for our finance platform on September 27th we closed our third auto loan securitization selling 600 million of principal balances and further diversifying our investor base.

Financed GPU was 10 78 in Q3, an increase of $373.

We're excited about what this progress means for our finance platform and expect to recognize additional gains over time on our way toward our long term financial model.

In terms of outlook, we're raising our full year guidance for retail units sold to 174000 to 176000 and total revenue to 3.85 billion to 3.95 billion based on another strong quarter results.

We're also raising our guidance for total GPU and fine tuning our guidance for EBITDA margin, reflecting incremental investments in our business a buying cars from customers and scaling retail unit volume. Both this year ended 2020.

As we look toward the end of 2019, we're excited about our progress toward our long term financial goals. Thank you for your attention will now take questions.

We will now begin to question and answer session.

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In order to give everyone an opportunity to ask questions analysts. Please limit yourself to one question and one follow up then you can go back into the Q.

The first question comes from Russia Gupta with JP Morgan. Please go ahead.

Hey.

Thanks for taking my question just wanted to follow up a little bit.

On the retail GPU number in Threeq.

Welcome to levels.

Good morning, what we saw last year, despite a higher mix or retail sourcing.

Is there a lag of the benefit that you could expect from retail sourcing or is that just normal seasonality that we should be expect we should be expecting going forward now to follow up thanks.

Sure. So we'd certainly benefited from retail sourcing from consumers in the third quarter relative to second quarter and also year over year that said there were a number of offsets if we look sequentially a those offsets included high wholesale prices in Q2 and the early part of Q3, followed by a relatively.

Hi, depreciation rates in the latter part of Q3, which definitely had an impact on our vehicle margin.

Moreover.

Another sequential change was a reduction in delivery revenues on a per unit basis that came along with us scaling inventory on the eastern half of the you asked with our Indianapolis.

Cleveland and Nashville, Rcs coming online.

Those those are some of the offsets in sequential retail GPU. Obviously, we're very excited about our progress overall retail GPU is up about $170 a year over year with with buying cars from customers definitely contributing that too that I think as we look forward, we see a lot of upside as we continue to source more retail cars from cost.

Summers and continue to optimize our bidding and pricing algorithms.

I'd say, we're at a very early stage and doing that so far and the four to a lot of upside in the future.

Got it but that doesn't make sense and just on the other costs within Diaz Jenny that did not lever up.

As much as expected and it's probably also the biggest bucket of opportunity longer term.

Sure as Jim said unit targets, you talked about some technology investments in that leaves was that was that more of a onetime step up that should not repeat going forward or was it related to the retail sourcing initiatives.

David could you give us some color on that and how should we expect that de lever going forward. That's it. Thank you.

Hey, let me open another big market come in with little more detail I think the simplest way to think about this is just that we really have grown this business of buying cars from customers largely over the last 12 months and I do think that doesn't show up in our revenue as clearly you'll many of those cars and appointee wholesale and we basically only see the gross profit portion of those and.

Avenue and then many of those cars go to retail and they basically to show up is lower cost of so when you're looking at kind of leverage on a percentage basis I think it's important keep in mind at the business has brought a lot in terms of the total number of customers that were servicing we actually grew transactions year over year by about 42000, which compares the 46000 total cars we sold.

That's a lot of growth that isn't flowing through revenue in isn't going to show up as percentage leverage despite all of that growth all that extra work. We have you in the business, we still did lever by 3.2%. So I think overall, we're pretty excited about that and Mark and give you a little more detail.

Yeah sure. So I think Ernie hit on some of the key points, but I.

I think the main things that we're focused on from an M&A perspective, our one alleviating pinch points into supporting the business of buying cars from customers, which is.

Growing at levels that certainly exceeded our expectations and and also you know we now expect to have more of an impact on the business in 2020 them. Then we previously anticipated and so we're investing.

On a number of dimensions.

For those two reasons first yeah, we're investing in staffing to help alleviate pinch points both in the short term and to make sure.

We don't see further pinch points in the first half of 2020 with this substantial transaction growth. It that we've been saying we're also investing in technology.

Really but the same purposes in mind working to make sure.

Both in the short term and as we move into 2020 on that we're making the investments to ensure we are providing a great customer experience and have the Bakken process efficiencies to support this level level of growth and then third point that I would raise this relates almost more to Q2 Q4, rather than that in Q3.

I think we.

Or planning to advertise a bit more than previously expected that further support building our brand as we.

And now have this fledgling, but but rapidly growing and now actually sizeable business in STC.

Got it that's great color I'll pass on thanks.

The next question is from Chris Bottiglieri with Wolfe Research. Please go ahead.

Hey, guys. Thanks, taking my questions.

Just first one is there going to elaborate in the bottlenecks at all they have any impact on kind of retail unit growth or right at the market level. It was it more in the Bakken side of the equation.

Okay.

Sure, Yes, so the primary pinch points that we had in the quarter. We're at the market level. I think you know if you think about the impacts that.

That that the business to buying cars from customers has on the business. Its certainly impacts last mile delivery, where we provide a great experience with the customers by going to pick up the car.

At our house after Weve appraised at and they've agreed to except our offer that takes delivery slots that can that impact the retail business and extend delivery times. There are other impacts throughout the business. You know, we're taking more calls we're getting more visit the website.

You know.

Yeah, I think there's it's running through everything that we do but I think the biggest pinch points that we felt acutely in the quarter were related to last mile delivery.

Got you. Okay. That's helpful and then on the credit business, you called out reaching more investors on the platform, hoping maybe elaborate a little bit more there did you see that the equity residual side as well and then maybe just kind of give us like how your thing about the direction of better monetizing.

Your side of the equation on equity central and excess no study helpful. Thank you.

Sure, Yes, so I think we think about better monetizing our loans.

You know through the securitization program by.

Our fluid number of channels I would say definitely continuing to educate the market about the quality of our loans and we've talked at length about this in the past, but our loans.

Performed significantly better than other sort of auto market loans conditional on on a credit factors because of our online model or deal structure.

And the number rather other factors and so I think educating the market about the quality of our loans continuing to.

Worked with existing investors, bringing new of investors across the entire capital structure.

Throughout the entire.

Tire securitization structure those are all certainly things that we're gonna stay focused on 'em, we feel like we've made great progress. So far here with 10 78, GPU this quarter and we'll look to make further gains in the future.

Thank you.

Your next question is from Tom Champion with Cowen. Please go ahead.

Hi, Good afternoon curious if you could just.

Elaborate a little bit more on on the rapid.

Rise in customer source ratio within retail sales to 31% of it it's just very.

Dramatic rise in what what changes had to be made need to be made to support this new.

Higher level of of direct customer sourcing. Thank you.

Sure. So I would start with the customer experience that we delivered to customers when they Bihar from us. So you'll notice was good our website in seconds, they get a value for their car and then they scheduled time and we can pick it up take it away and put money in their account. So it's a very very simple experience and it's an experience that we're uniquely positioned to provide because we've built a logistics network that enables.

That across all of our markets.

And we built the logistics network within a flow to do that very quickly and so I think that's where it starts and then once we start to advertise that offering customers become aware of it we start to drive a lot more volume, that's where we often talk about our growth in buying cars from customers generally before kind of separating which cars wholesale which are growing retail, yes, that's a business. They just can't.

He needs to grow very very quickly you know again this quarter that was 250% roughly at about 40% quarter over quarter I think thats just the strength of the offerings speaking.

And then once we buy those cars, we have to determine which of those cars fit our retail standards in which don't.

We would love for all of them to fit our retail standards, but we've got fairly tight standards on that side and so they don't all fit that and so some of them do go and get Wholesaled and and we monetize that in the wholesale line item.

And then those that do that our retail standards, we obviously retail.

And that's been growing very very quickly I think that's a number that they tend to have a little bit of momentum in it relative to the first number that they never being percentages of cars that we buy professors relative though that we sell because it takes us more time to turn the car retail and then go sell it to a consumer that it does too to buy it and then go wholesale it.

So we've had to make a bunch of adjustments across our entire type deal to handle that as mark talked to earlier, you get more customers calling into question about how they pay off.

You know their loan balance on our previous cardiac to handle the title transfer we have to increase our wholesale off we also tend to buy a slightly different kind of car. The cars you back from customers tend to have a bit of a broader distribution and cover more kind of make model year trend space. Then the cars can you get it auction and so that also has impacts.

Core pricing algorithms you know, we're just starting to really get to look at a lot of these cars and is there any get smarter, how we price them both on the buy side and on the sell side. So I think there's some changes there so across the entire business I think there's just a lot of changes that we have to make to continue to get a smart here and I think there's a lot of upside remaining we're very very excited about it but does that none.

We're being 31% is pretty exciting in early 2018 that number was approximately 7% and that's we really started to put effort behind this and then it's obviously grown very quickly from 17% last quarter, 31%. This quarter, we put out our long term financial model. Our goal range. There was 30 852, we've made a kind of progress against.

That and I do think that all this comes back down to the simple customer offering that we provide.

And then we're going to we're going to turns that it was cars retail as we possibly can adjust the business to handle that volume.

Thank you.

Your next question is from Seth Basham with Wedbush Securities. Please go ahead.

Thanks, a lot and good afternoon, my questions relate to buying cars from consumers or how should you dedicate to advertising to promote that business. This quarter I hear your basis relative to the extent of 10 million if I recall last quarter.

So I think last quarter, we outlined that it was approximately one fifth of our AD spend and this quarter I would say within a similar range in.

Until we update you you can probably anticipate being in a similar range going forward, but that's roughly what extent.

Got it and if you think about the gap and retail profitability in cars you source from consumers versus from other sources, how is that trended over the last couple of quarters.

So historically the incremental profits that we get much harder we buy from a customer relative to a car that we buy at auction. He has been similar on the magnitude to the wholesale profits if we get when we buy apart from a customer and then we saw sell it at auction site I think that's a pretty good mental model for approximately what the incremental profits.

Our obviously, there's little fluctuations quarter to quarter, but but that's roughly.

Good way to think about it.

Alright fair enough. Thank you.

Thank you.

Your next question is from Nat Schindler with Bank of America Merrill Lynch. Please go ahead.

Yes, Hi, just a couple of quick question one.

As I look at and I know these are biased because they only tend to report when there's a complaint but if I find complaints sites one of the things that arose saws Stark new change was a lot of complaints on title transfer and if that happened recently.

Is that related to the fact that you're suddenly buying so many new cars from consumers and making it more challenging in some cases to talk to do it and I don't believe this is happening in a significant right. It's just those are the complaints that I'm hearing that didn't see before.

Secondly, as on a different question, but as you look at 63% market coverage of the U.S. and you look at your oldest markets as they continue to gain share in those markets.

If you compare yourself to let's say Carmax, who sits at around 5% in markets, where it has car where it has stores and say that across call. It 63% of the U.S. you could realistically get to that kind to share within those markets.

Sure. So let's start with the first question so I think.

First question is a a fair question I think it's very valuable in general to drill into all the areas that you can improve but but just to start we continue to deliver very high quality customer experience and I'm very proud of of the offering that we provided customers, but theres no doubt there's areas, where we can always get better and I think the are you called out is probably a reasonable and when we have you know these pinch points.

Anywhere in the business that just creates a little extra friction a little extra time for things to go wrong and people are a little busier across the board and so I think those things can't emerge I think specifically the title cases, I'm I'm not aware of the specific in place you're pointing to you.

But I think it's probably pretty reasonable to assume that is coming from our growth in the bins of buying car from customers as we do need to transfer those titles and handle loan payoffs and all the other things you have to do any bicarbonate customer. So I think thats, probably the source of it and then I think.

That's where some of those investments are going to hire more people to make sure that were in good position to be able to resolve any customer issues that come up and to build better technology. So those are those issues come up less often.

So I think thats something that we're definitely focused on.

On the on the coverage and our goals for market share I think I would point to a long term goals try to sell 2 million plus cars per year.

That goal implies about a 5% market share around the country and that is something that we believe that we can achieve we think it's something that that there's a sufficient evidence today in the way Oliver codes are performing to believe it thats very possible.

And so that's our goal you know we are only a seven year old company and in that short period of time, we've become the third largest automotive retailer that speaks pretty clearly to customers response to our offering of buying cars online and then we also have a business it gets better as it gets bigger.

We put some information in the shareholder letter, where we recently launched two inspection centers in Indianapolis and Cleveland prior to that we didnt really have inspection centers.

In kind of the Midwest and so for many markets in the Midwest suddenly cars got a lot closer to them that meant the operating got better they had broader selection there faster delivery times, what we saw there as we saw 20% reduction in average miles traveled for all cars that were sold in those 10 markets that were near as those ideas and we also saw sales more than double or in those markets and grow over twice as much.

Path as we would've otherwise expected and so I think you know that just speaks the positive feedback and that's why I think our view is with everything that we're seeing the major question for us as can be continued to execute this increasing scale because we've got a business model customers Love. We've got unit economics that are really really positive and we've got positive is ER positive feedback in the business model.

So we're focused on execution, we think thats. The most important things we can work on.

Great and a quick follow up.

As you said that on there that you did this isn't a particular, calling from long, but it's something that could happen.

Just a square the circle here or whatever.

Have you seen any change as you've gone to 31% of your car sourced from consumers.

Is there been any change in your return rates or something like that.

Oh.

No cars source.

Source from consumers have very similar return rates to car sourced from any other source.

MPS scores sports scores are strong on cars source from consumers I think theres.

All the trends in the business or are very positive there.

Great. Thank you very much.

Thank you.

Next question is from Nick Jones with Citi. Please go ahead.

Hi, Thanks for taking my question I guess first can you talk about what drove a view that you'd like to reach 95% of the population in the U.S. from I think the original or was like maybe mid eightys, if you're looking at him essays over 200000.

Second on top of that is what are the delivery entity smaller markets look like is it flat bed other nine car haulers any color there would be helpful.

Sure. So I would say at a high level you we lost a lot of smaller markets in 2019, and we've seen really really positive response in no small markets I think we've always talked about the trends that you're seeing our cohorts of where you know generally speaking the older markets are still growing very quickly in the new markets go faster than that and then we've got smaller markets that.

Tend to grow faster than large markets that really has continued to be true and I think thats pretty exciting for the model because we think that unlocks. This additional population that we can have the serve very efficiently. We also tested it doesn't 19, you know many markets that we call virtual markets, which are basically marks that we deliver to from nearby markets not having to have a physical presence there.

And that also worked very well in was very cost effective.

And so I think you are those two things combined two to kind of increase the population that we believe that we will be able to effectively and efficiently serve and that's what led to us increasing our expectations there.

Great. Thank you.

Thanks next question is from Zack fade with Wells Fargo. Please go ahead.

Hi, This is Eric on for that Thanks for taking my question I ran it can you talk to that stepping up advertising in Q4, just claims can talk about what you're doing more this year and particularly as you look at sort of your cyber Monday promotions.

Sure. So so let me take those one of the time. So I think in terms of stepping up advertising Q4, you. There's a lag time from when you advertise until you see the response to that advertising and I think given the quality response, we're seeing in buying cars from customers.

We're feeling pretty good about that and we're trying to prepare the business for higher volumes of cars bottom customers than we were previously anticipated in 2020, and so that can take many forms one of those forms will be increased advertising.

Directed it at that offering.

So that's one on on cyber Monday promotion, we plan to run that again.

Rationale there is that it's an opportunity for us to kind of you have a different way to speak to customers and to continue to build the brand customers are accustomed to buying.

Items from from different retailers that are generally online during cyber Monday, and that's an opportunity to brand what we do selling if online being being a different offerings and so thats something that we plan to do again this year.

The next question is from Rick Nelson with Stephens. Please go ahead.

Thanks, Good afternoon.

To follow up on the retail.

Put back kind of bit sequentially.

If you could you know discounts again, the drivers there and what happened to average days.

Sale in the quarter.

Sure so adversely as a sale was 63 in the quarter and that was flat year over year.

I think average day sale.

Yes, right now.

Our kind of expectation is that we're very comfortable with the level above average day sale that we're operating at today, we see that bouncing around in a stable and reasonable range.

In the long term, we think we have lots of upside to our current you sort of how high fiftys low sixties range that we've been in over the last several quarters, but for now I think we're very comfortable with that range in terms of the drivers of the sequential change in.

GPU I think there were a few to point out.

One was that wholesale prices were relatively high in Q2 in Q3.

That has had an impact on car sold in Q3, particularly since depreciation rates were relatively high in late Q3, which also had an impact on sold GPU for cars that were sold in the quarter. The other thing that that I called out or that I would call out is we saw a decline.

Fine sequentially in shipping revenue per car and that was largely driven by.

The increase in inventory and our east East coast or eastern half Rcs, which came online in late 2018 early 2019, those being in the Cleveland and Nashville, which tended to have lower lower shipping season. So we saw a sequential decline and shipping revenue.

Catch and would you expect.

Some of the pressures caused by.

Higher auction prices and the depreciation.

Challenge that that will continue into the fourth quarter or can you address.

Pricing.

For those vehicles.

Well so the fourth quarter is typically weaker from a depreciation perspective over overall, we've certainly seen hi, seasonal depreciation rates really starting in September .

And so you know that definitely has historically and we'd expect the a factor in.

Retail GPU in every fourth quarter.

That said I think the flip side of high depreciation rates as a means wholesale prices are are lower than they were you know a month or two before so that can benefit.

Benefit.

You know benefit margins other things equal.

Hey.

Thanks, and good luck.

Thank you.

The next question is from Armintas sent a vicious with Morgan Stanley . Please go ahead.

Great. Thank you for taking the question.

When I look at the the market's available.

Or that you haven't yet access markets like Minneapolis, Portland, Seattle.

Are there any reason is there any reason to think that you won't enter those markets next year.

And if not.

How do you think about.

Rolling out the reconditioning centers and such to prepare for those launches, presumably that's something that we should be looking for it in advance of Ah you opening them.

Sure. So there's a couple of points I would make there I think one as it relates to RC expansion. So we definitely proven that we're capable of opening markets in regions, even without an Irish sea Theres, clearly a significant benefits to having RC closer to markets, which are already outlined.

A few of those key benefits earlier on this call in terms of expanding out to new regions. I think we'll we'll provide some update on our expansion plans as we go forward into into 2020, we provided some guidance that.

We plan to resume a relatively rapid pace of market openings in 2020.

And so what will provide some more color on that.

Looking forward.

Okay.

And then the other question I have is you have a nice chart here on.

Yes, you in a per retail unit by cohort.

You know looking out and it looks like it takes about.

Call. It four years for a further cohort to reach breakeven looking at the 2015 cohort and then you know it picks up call it 100 basis points a year.

Just trying to think through how I could extrapolate those to the entire business model is there any reason that we can't get the profitability within a year or two.

Sure. So I think this chart.

Definitely lends itself to thinking through how the entire business works I think there's a lot of things to cover there. So you can look at Sq Nay per unit, yeah, as you've outlined and obviously as you move to the right older cohorts that gets you a significantly better I think the other line. That's on that chart is the total GPU line, which is fundamentally important line because when that crosses over your your total US you know.

Hey, you're satisfied where that market is effectively EBITDA positive and so we've got those three cohorts that are that are performing very well in contributing positive cash and then you can be easily see the investments, we're making growth which is happening to the left in the newer cohorts, which you know those cohorts are ramping faster than the than the older cohorts, where at the same point in their life, but they are earlier in their life and.

So you know they continue to require.

Some additional cash before their their cash flow or seen before their EBITDA positive.

So I think thats, a really good way to think about it you can think about as we add more markets were shifting over to the left but then as time passes were shifting to the right. You. All those markets are kind of aging and moving you will further and further to the right as we make additional investments and improve GPU that Jeep you line is moving up on and as you make investments.

To make our I've seen a more efficient through different technology everything else. The entire line is kind of shifting down.

So I think you can kind of thinking about all those those different dynamics.

Yeah I play I also think it's important to think about the weighting of those different cohorts. So you know those those last three cohorts are positive. If we look at the market level. We have 14 markets that were EBITDA positive in the third quarter. Those 14 markets were representing 35% of our sales and yeah. That's a natural.

You know kind of overweight lean toward those older markets because they do tend to have a higher market shares, but I, but I think you can think about that as well. So yeah. Those are the three major dynamics not chart that I think are really useful we're always shifting to the right just with the passage of time, we're really focused on pushing GPU up and then as we get more efficient with all of our different technology, we're shifting that entire blue.

The wind down and I think that tells you how the whole business works effectively.

Is there any reason why the GP would be higher in any given market.

You know by by cohort or the GE or the Gpus fairly consistent.

They can vary so they're not going to be precisely the same but in general you know a benefit of our model is that all markets are sharing the same pool of inventory and so young consumers are picking the same inventory and they tend to select financing and warranties a very similar rates. So first order or the right assumption is basically flat GPU across all of our market.

Yeah.

Your next question is from Ron Josey with JMP Securities. Please go ahead.

Great. Thanks for taking the question I wanted to ask about just the progress on building the brand online specifically and I ask because I mean look your web traffic I think in the queue. You reached 6.3 million unique in the quarter, which is which is pretty substantial growth in as you get to that 95% coverage or or shall we say market expansion acceleration to 2020 can you just talk about those sorts of that.

Traffic I think FCO was a big focus at last year's analyst day, So trying to understand sort of where where are these units are coming from and and maybe as a secondary mark.

In your comments you talked about gains in retail GPU, specifically some benefits from external shipping revenue I'm wondering if that's delivery from cars outside of carbon as markets and maybe you put that altogether that that's a lot of a lot of traffic and delivering outside of your current markets that talks about acceleration. Thanks.

Sure. So I'll, let me hit traffic first then Mark enrolled hit the second question I I think traffic comes from many many source that the first place to start as we do have significant traffic now and I think it's very exciting, but we're also very very small compared to the traffic in the industry and there's just a lot of room for us to continue to build brand. So I think most importantly, we've got.

A real focus on brand building as being something it's really important the business to drive more traffic and just to give more customers who are aware of carvana in understand we're operating is that we can continue to grow sales I think that takes many forms you were obviously advertising on TV and we're advertising across the vast majority of of other channels that you would think of.

And we're testing constantly which which handles work better and which markets in which attributes of which markets tend to lend themselves to its channels and we've got a really really impressive team of highly quantitative analyst at focus a lot on that and so I think thats something that we're very proud of you specifically called out FCO.

As he always something we definitely focused on for probably the last.

Your so give or take.

And it's an area, where we are making progress undoubtedly as he was kind of interesting area because there's kind of many steps eat you tried to make here. The first you have to make sure that your site is probable and easily understandable by by all different search engines detecting you're trying to use makes you get all your pages index. The search engines are kind of aware of what pages, you have and that overtime.

You build credibility for each of those pages and really the payoff doesn't come until you start to make it into the first page of of search results. So you were seeing a lot of gains the background and I think we're starting to see some of the some of the nice gains that actually do drive traffic, but it feels like it's still a very very early days, there and so I would say across the board. It's it's early.

We were excited about our traffic it is growing very fast it's growing in lock step with our sales, but we all think there's just a ton of opportunity there across all different marketing channels across and brand building and across us here.

Sure and then on the point on incremental shipping revenue I'd say over the last year or so we've been testing in network shipping fees for cars.

That are typically far away from from customers.

It's relatively small but has been some incremental time contributor to GPU.

I think in the in the quarter looking sequentially.

We brought down shipping revenue in large part because of the inventories ramping and some of our eastern.

Higher so use particularly.

Andy Cleveland the Nashville.

Got it thank you guys.

Thank you next question is from Lee Crown with B. Riley FBR. Please go ahead.

Great. Thanks for taking my questions just first on iron see expansion.

Do you guys highlighted that you guys have five locations penciled out.

Do you kind of expect to roll out those locations at the same cadence. It took you to get to eight.

And then my second question.

Just talking about cohorts in terms of from a little bit different angle, but cohorts in terms of customers to which you source cars from curious how across the age of cohorts, whether or not you see a higher uptake of cars from customers.

Just based on either branding or familiarity with the product.

Sure.

So first of all these higher see cadence of what I would say that is it's really important for us to make sure that we stay ahead of our IR see pipeline because that's definitely the longest lead time part of the business and that's that's a big operational facility that we have to build to appeal to support our growth. So we're very excited that weve invested in a lot of effort in prepaid.

Caring for the next several years.

Growth in inspection centers and that team has many many sites that they're looking at and then the ones that you called out we've already making positive progress I think in general the when we think about RC is we want to make sure that we roll them out on in anticipation of coming growth.

So I think we need to be careful about telling you the cadence it which we plan to roll them out I think that starts with a lot like forward guidance, but what we're going to do is we're going to roll them out to support the growth if we anticipate coming.

And then on across market, our cross cohort dynamics in buying cars from customers that I think generally speaking.

We tend to see higher pennant penetration rates are higher overall volume.

In our in our older cohorts you.

You know not unlike retail sales patterns can be or the sort of overall levels could be slightly different the I think thats basically driven by brand awareness.

Well, we have more traffic coming to carve out of that come in older cohorts more familiarity with our brand and that drives increased volume.

Got it thanks.

The next question is from Brad Erickson with Needham and company. Please go ahead.

Hi, Thanks, just follow up on the cash flows can you walk through cash flow from UBS, where I think the burn ticked up a little bit quarter over quarter, maybe just talk about some of the meaningful inflows and outflows there, particularly around the financing business just kind of what we're seeing.

Sure, yes, so the some of the major drivers in cash flows operations that I'd start with EBITDA.

Which we've always mentioned is one of the key drivers of our cash.

Use I think that another is you mentioned finance receivables I think when you account for.

Okay.

The securities that we retained as part of the securitization, yes. It was roughly flat on total net change in finance receivables some of that.

I will.

Some of that flatness will come from change in financing activities were refinanced those retained securities.

That will show up in the cash from operations.

And then inventory at a small change obviously finance generally finance that with a floor plan liquidity and so I think the I think the mode for the most part when you take into consideration.

Finance ability of the operating cash flows EBITDA was really the big driver this quarter.

And then if you combine again with Financeability that offsets a lot of working capital cash flows I think as we think about liquidity in the big picture. It's always really important to think about working capital line availability.

I mentioned on.

Earlier proportionate as fall taking fully into consideration available on a short term working capital facilities as well as real estate on balance sheet.

Which gives us a lot of flexibility.

[noise].

The next question is from Colin Sebastian with Baird. Please go ahead.

Hi, Thanks. This is dalton on for calling on just one question. When you laid out in the letter talking about the impact of IR season, Indianapolis and Cleveland driving.

Lower logistics expense and faster sales growth how do you think about that in terms of the strategy of building out I Rcs moving forward and maybe how would be boost to the local markets might be offset by some of the lower shipping revenues you called out from shipping from further away markets and kind of if anything you've learned in the recent.

Build out influences any of your long term strategy any I or see build out moving forward.

Sure what I would say that I think it is empirically reinforces its I think many of these questions about how many inspections that or should we build you how big your inventory be how should we spend on marketing. There's there's a lot of positive feedback and all these different areas in the business beat because we do share a single inventory.

And then that means you as we grow inventory customers have access to.

Larger selection and as we increase inspection centers have shorter delivery time, then you as we invest in our brand it gets less expensive to enter a new market. So I think all these things feedback really positively and I think what's great is just that we're seeing that empirical feedback show up in real world data points like looking at the mid West where you are there weren't.

Back to centers nearby and we went in place and down and we saw the the effects that we would expect to see so I I don't think it changes our strategy I think it it reinforces what we believed in the first place and then I think in general.

Our goal is definitely to move as quickly as we can is quickly you responsibly can to continue to grow this model because he goes we've gotten offering that is exceptional the customers love in the business gets better at scale and so that's what we're seeking to do and and we're basically just trying to go as fast as we can.

Ill and making sure we keep the wheels on.

[noise].

Oh.

Operator, we have another one.

Yes. The next question is from Russia Gupta with JP Morgan. Please go ahead.

Hi, Thanks, where things were getting back on the key here.

Just another question on no just one follow up on the finance GPU.

Clearly the ABS realizations, increasing in the mix what are you still have you know DMT MDM PSC agreements.

Do you still think you would need to you know have those agreements longer term or or.

Are there any other revenue the monetization that would be considered apart from that.

Thanks.

Sure what will so I think your partner we've had for a long time that we sold receive we'll see that we generate our platform is ally and they've been a great partner for us for a long time and they're part of we really value.

And so I think we view that as a as a mutually beneficial relationship for sure to continue to have that that line open.

It's nice to have access to the securitization market, that's probably the most efficient market. There is for for monetizing finance receivables, especially once you kind of build liquidity of that market and familiarity there, but but theres something really nice about having another very high quality stable outlot through allies. So at this time, we don't plan to shift everything into I.

There were a either channel.

Got it.

That's helpful and this is one last one.

Full year revenue guide.

Implies flattish sales going from Threeq to Fourq you.

Are we are we to paying bedroom businesses and train more often than normal seasonal pattern now going forward.

Based on know what you're seeing different markets. Thanks, let bill.

Sure. So we're obviously very excited about our revenue growth in Q3 were very excited to raise guidance for the full year.

Significantly I think we feel great obviously about unit growth in revenue growth there are some small seasonal factors.

That play out in Q4, one examples of cyber Monday promotion.

Which is $1000 sticker price discount on cars.

That are sold during the promotion so there can be some small impact there, but obviously, we feel really great about where we're headed.

Got it thank you.

Thanks will actually have time for one more question from Sharon Backseat with William Blair. Please go ahead.

Hi, This is tiny Anderson for sure Yeah I just have a quick question on the customer acquisition costs were up for the first time year over year. This year what were the reasons for that.

I think the Theres, probably change that I would point to so one would be to make sure that you're thinking about customer acquisition cost not just in terms of retail units, but in terms of total transactions. We did start to invest in advertising that we buy cars from customers and right now that doesn't show up in units. So when you when you kind.

Divide by units year, you're missing that impact as I think thats, an important thing to look at and then I think.

That probably would have solved your question, but I think even beyond that we did generate pinch points in the quarter as we saw all of this growth in Bihar from customers and generally just saw great demand on the retail side and when we when we see those pinch points delivery times go out conversion rates tend to drop in so that kind of mechanically reduces.

Your your marketing effectiveness and increases your CAC and so I think that would probably be the other it back.

Okay. Thank you.

This concludes our question and answer session I would like to turn the conference back over to earnings our CEO for any closing remarks.

Thanks, everyone for joining the call and thanks, everyone on team Carvana, we had another incredible quarter and it's only happens if everything you do and all the passion energy bring to it we really appreciate it. Please keep it up thanks, a lot guys.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.