Q3 2021 Carvana Co Earnings Call

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Please note. This event is being recorded I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.

Thank you, Matt good afternoon, ladies and gentlemen, and thank you for joining us on Carvana is third quarter 2021 earnings Conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors Carvana Dot com. The third quarter shareholder letter is also posted on the IR website.

Joining me on the call today are Ernie Garcia, 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 meaning of the federal securities laws, including but not limited to carvana 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 of the material factors that cause actual results to differ from forward looking statements can be found in the risk factors section of <unk>. Most recent Form 10-K and Form 10-Q forward looking.

Payments and risks 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 of new developments or otherwise unless otherwise noted on today's call. All comparisons are on a year over year basis. Our commentary today will include non-GAAP financial measures 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 Relations website.

Millions of cars per year, while delivering the exceptional customer experiences we become known for give.

Given our opportunity. We believe this is clearly the right choice to have one across Carvana. It's worked so hard to make our continual progress possible. Thank you.

We've also recently entered into two exciting partnerships with route and with hurts that we discussed in more detail on a shareholder letter.

While the potential of these opportunities to significant they're both they're very early stages, we plan to share additional details on our product financial and scale ambitions with respect to these partnerships overtime and will not be providing meaningful additional color at this time.

These partnerships are each very exciting each has excellent underlying fundamentals and therefore excellent potential but they are also excited because of what they represent as we continue building the carvana platform to deliver exceptional customer experiences to handle the constantly increasing scale are horizontal and vertical opportunities continue to increase.

As has been the case since our inception to maximize our opportunity we must thoughtfully assess and continually increase the capacity of the business to effectively manage our growth and simultaneously explore these opportunities and then we must appropriately balance our ambition for both scale and scope with a focus necessary to make constant forward progress.

So far we'd like to thank our team has done a good job of building more capacity in the business attack these opportunities and managing these tradeoffs given the capacity we have.

To build carvana into what it can be will need to continue to spend energy getting this right in the future and we plan to.

Looking forward, we remain extremely excited we've reached the scale of over 100000 cars and $3.5 billion of revenue per quarter, we're still only approximately 1% of the overall market. Our focus today is the exact same as it was the very beginning it remains on our customers on the experiences we give them on maximizing the value we provide to them on leveraging.

Technology to minimize our costs on building for scale and I'm doing all of that with a long term perspective, we can maximise our opportunity.

The March continues mark.

Volume.

We remain on track to launch eight new Irc's by the end of 2022 and continue to focus on growing our IRC teams in preparation for future growth.

The explosive growth in buying cars from customers, we experienced in the past two quarters also placed significant constraints throughout our system in Q3.

To ease the pressure on our system, we began metering both retail units and cars bought from customers mid quarter to allow our operational capacity to catch up to demand.

Most notably to manage retail sales volume, we reduce the number of vehicles shown to customers in search results, which limited the benefits of higher immediately available inventory on retail units sold.

Can you Dimensionalize that and then I guess it sounds like you're hoping that'll be kind of all back to normal and early 'twenty two I just want to make sure I understood that commentary correctly.

Sure.

So let me start with the constraints that we've been facing and then we can kind of go from there.

I think the primary driver of constraints was definitely the very significant growth we saw in the entire business, but most notably buying cars from customers in Q2, which then has continued and put additional strain on the business I think it was accentuated by Covid, especially in the inspection centers and then when we found ourselves a little bit but.

Hi, It was probably a little bit harder to catch up and it might have otherwise been given the unique hiring environment and so I think that's kind of what's been going on from a constraint, which gives it to me to make that a bit clearer too there can be.

Increases in the total amount of work that are necessary inside of the business that are actually greater than the increases in transactions that we see and what I mean by that is if.

Transactions grow that moved more than we would have liked for it to move so we're in a position where we kind of chose to just take those same drivers.

Effectively a reduction of conversion, which there were several but the most notable of which was.

Choosing to be really surgical with what inventory was displayed in what places and we just reduce the amount of inventory the customers can see in certain places that ends up being a very powerful tool because we can reduce amount of inventory the people see.

In certain markets logistics legs to that market are very constrained we can reduce.

Certain classifications of vehicles and maybe have more work associated with them on average if we have certain groups that we need to alleviate pressure on and so that was a very effective tool for us to use and the effect from a customer perspective is just the average customer soft fewer cars than they would have otherwise seen and therefore, they are likely to find the car. They were looking for was lower.

In terms of quantifying it wouldn't want to precisely quantified that.

Wasn't effect it wasn't an overwhelming in fact I think the bigger effect is just kind of the the degree to which we've been behind in general over a longer period of time, but that certainly wasn't affecting the quarter and then that's the way that we implemented that tool set.

To put ourselves in a better position allow ourselves to catch up so that we can get back out in front of all the demand that we're seeing.

That's super helpful. I guess, when you think about all of this complexity.

And the cars from consumers and.

The weird environment that you're operating and just in general is this mainly a human.

Human issue at this point or you just behind where you wanted me on staff in or is it is it a tech issue.

It's.

It's first order a person issue.

And I think it extends.

Inside of Carvana across all of our different operational groups and then also outside of Carvana.

Many of the groups that we do when we buy cars from customers. For example were generally reaching out to a bank and we're dealing with the pay off and then we're asking for the title in return.

Many banks are understaffed as environment relatives, where they would like to be those process that can take longer. So I think it's it's first order a person issue inside a curve on an outside of <unk> on it and then I think that across time as we kind of outlined our priorities in the past it's customer experience first volume GPU and then expenses in it.

Expensive generally means building more technology to automate more of the process. So.

That's also part of it many of these processes. We can continue to further automate across time, but that's generally longer lead time, then the more immediate kind of fast acting solution of getting more people.

Our next question will come from Zach for them with Wells Fargo. Please go ahead.

A good afternoon. So I just want to follow up a bit on the last couple of questions just with all the metering and Delta Berrien and labor constraints in the quarter do you think the gap between your demand an actual unit sales widened or compressed in the quarter and then with your new IRC opening is there anything you can sure.

Share on timing or cadence of those irc's as we move through 2022.

Sure. So on the first I would think we believe a widened in the quarter and I think the kind of.

First way that we would articulate that is just in this quarter. We took additional steps to meet a demand that we're proactive and we're just kind of natural system balancing.

So I do think it widened now like I I also want to make sure you whenever we're sitting here talking about constraints.

I think I want to make sure and point out the success that we've had alleviate those concerns over time and the quality of work. Our team has done to do that so I said. This is my third remarks, but I got to repeat it we've been constrained over the last 18 months and get over the previous two years in terms of total transactions cars bought so the customers were drawn by three times over the last three years at a time so why.

We've been constrained relative to the demand that we're seeing we've also been scaling very quickly and I think the teams have done an exceptional job they've been under a lot of pressure.

With the demand that we've been seeing it and I think they've just continually fought very hard to catch up.

And so we are extremely grateful to them and I do believe that done a great job.

As it relates to the cadence of the inspections that are rollout, we've only kind of providing information that we expect that open eight by the end of 22.

And so we're going to stick with that for now for Ah for the kind of guidance that we're giving.

Got it and then I can let you off without asking about that hurts partnership as well as the route partnership but.

So many elements unpack and I just wanted to drill in on the sourcing side this appears to be away.

Mixing in a higher.

Source of new vehicles on your platform without having to go to auction. So just curious do you think this partnership and partnerships like it expand your addressable market and then on the unit economic side.

What extent do you believe you're marketplace offering could be added to the long term, 15% to 19% gross margin.

Sure. So let me start with this I think in anything that we do kind of independent as partnership or if it's something that we're building ourselves generally the framework that we used to evaluated we want to make sure that we can give a high quality differentiated customer experience, we want to make sure that we believe in the long term economics.

Whatever we're doing it and we want to make sure that we build it for scale because if those first few things are true then you're gonna want to go to scale. It over time and I think that that's the way that we generally think about all these opportunities I think.

From there you also have to have this question do you partner do you build something yourself and I think there's a lot of considerations bear I think when you can partner part of all kinds of assets that we might not have access to.

You can go faster.

There is sometimes a questions about alignment that you have to try to resolve them you have to come up with terms that are good for both sides unless there's all kinds of questions around whether or not a person makes sense I'll start with hurts I think as it relates to hurt they've got an incredible asset, which is a high quality flow of vehicles coming directly to manufacturer that've been utilized in their rental fleets and.

Then.

Ultimately make their way into the hands of another consumer so they've got a really high quality asset there and then I think that would be very hard for us to replicate on our own and then we would like to think at least that what we built which is a really high quality highly.

Highly scalable.

Platform to sell cars customers would be very hard for them to build and so we're natural partners network.

So we're excited about the partnership I think from a scalability perspective I think.

Directionally the way to think about these kinds of of partnerships is.

Is it means that there is a little bit less work per transaction.

And I think that's probably that's the most important part of what scalable means I think for someone to be scalable there has to be a lot of demand for it and then.

The next question is how much can you grow the amount of work with a company can do and then to get to a unit as a function of how much work is there per transaction. So I think that partnership reduces the total amount of work that we have to do to get a car to a customer and so in that way it's exciting now.

Extremely early.

And.

We've been testing this for a number of months and then we signed a broader deal.

With them in the last couple of weeks so.

This will take time for us to figure out and nailed, but I think there's a lot of interesting potential there.

Tried to touch on route I think we consider route in the same way as the insurance business is a very complicated business.

It's a business that has a lot more complication under the covers when you really kind of dig into that you might imagine from a distance and I think that they've done a great job building a high quality product over time. So we think that there are really natural partner we.

Sure of vision for what a solution is supposed to look like we share a view that it takes a ton of work to build anything great.

And I think that's really important because that means we can both poor work into it.

So I think that's also an exciting opportunity for us, but it's also very early.

So as it relates to both those partnerships, we're very excited about their potential but it's it's early and there's a lot of work to do to get those where we would like them to be so we'll be working hard to try to get those places we want.

Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.

Good afternoon.

Thanks for taking my questions.

So the first question I have it.

Just because it's a bit already but just with regard operational constraints.

Maybe just to understand better I mean are you starting to see some easy at all in the various aspects of that.

Recognized that'd be Brian with very fluid at this point, but.

Look at it now at what point do you think would you believe that these these constraints could could could wait up and what the business for much more naturally.

So.

That's hard right I mean, I would say.

Constraints show up when we do when we either don't accurately forecast the amount of work that needs to be done in the future or if we don't execute as well as we would like that's what that's when they show up and I think that when we look at where we I think that we've executed I would like to think at least we've executed very well through all of this I.

When we look at areas, where we maybe didn't accurately forecast, what's going to happen I think several especially the first several COVID-19 waves.

Didn't foresee and that led to a decrease in efficiency and therefore constraints I think.

Heading into the early part of this year in queue too I think we did not foresee all.

All of the growth that we would see as I said, most specifically in buying harsh customers and so we weren't prepared for it I think as long as we're prepared for it.

We again, we'd like to think that we have demonstrated the ability to execute to very high levels of.

Kind of growth.

And so I think.

Constraints really are about our ability to foresee what's going to happen and then our ability to plan to that and execute to that and so our continual hope is that this this will be the last meaningful COVID-19 way, we'll find out if that's true or not we don't quite know.

The the general kind of market across the board is in a bit of a unique spot right now I'm not sure that was totally foreseen and then as I said buying heartsome customers came fast and we would have otherwise thought so what I would say, we're clearly investing right now across the business as aggressively as we feel like we responsibly can to try to catch up because we do think there's a lot of of.

Excess demand there and so.

It's hard to predict exactly how all this one full but we're gonna be working hard to grow the capacity of business as quickly as we responsibly can.

Got it.

It's helpful. My follow up question with regard to the efforts to buy cars directly from consumer so you've been very successful. There's a number of other players now go online and offline also pushing aggressively this aspect of the business. So to say so are you see greater competition.

This is the fact that more players without pushing it.

Ultimately have an impact of where the consumer reacts.

So I.

I think that that's the smarter place to air and I think it's the right thing to assume I think empirically, we're we're buying more cars from customers than ever and we've seen a massive influx of demand in the last several quarters from an already very high level. So I think that that that speaks to the quality of the.

The offering of but I also think that it's never smart to.

Get comfortable and to stop building and well we believe we've got the highest quality customer offering today. We also believe we can make it a lot better than a lot of really important ways and we've got a great team, but his focus on that product.

Has.

All kinds of interesting plans to continually make it better so I think undoubtedly it's an area that's gotten more attention over the last several years. It probably will continue to get a lot more attention over the next several years and we will be continually building to to make sure that we keep a spread between the quality of our offering and what else is out there.

Our next question will come from Rick Nelson Stephens. Please go ahead.

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My parents came up.

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They've been on a rapid rise.

Route.

<unk> concerns Ernie about for your color affordability.

I need no potential pullback in the air cause them or private fingers could it.

Sure. So I can take that one so I do think higher used vehicle prices has an impact on demand through.

And affordability effect clearly there there's some customers that are targeting specific monthly payment that meets our budget and as used vehicle prices rise.

There is certain customers that are less likely to be able to meet that budget.

I do think if you look.

Industrywide I mean, we're obviously growing incredibly quickly with 74% year over year growth. Despite the constraints that Ernie talked about but if you. If you look industrywide various data sources have.

Total industry sales down call. It on the order of 10% to 15% in Q3, and so I do think there is an effect there.

We're growing.

Really really quickly despite that industry wide effects, which I think is a testament to all the demand that we are sick.

Okay.

So follow up.

How 'bout Grove.

Were saying during the quarter report you poke thing soon or <unk>.

And I guess what was her final straw.

Pet causes you to pull back mid quarter.

Sure. So I don't think we want to jump into the details of intra quarter growth.

What I would say the what drove the decision was just that we weren't catching up and I think that historically, we've been able to catch up faster than we just saw that big influx of demand show up and then.

We once you see that happen and once you're behind and then I'll suddenly face a situation where the amount of work per transaction can start to go up you run the risk of allowing yourself to get further behind even if demand stays flat because the further behind you get some more work for transaction there is and that can cycle on itself and so we decided to take a.

Proactive measures.

To give ourselves a little bit of breathing room, just so we could catch backed up it and that's what drove it.

And again I think we feel really good about the progress that we're making there we've given the status of the girls. We've made over the last several years, but even in the last several weeks, we continue to see improvement across all those major groups, whether we're looking at customer care, who the answering customer questions in handling a lot of the transaction.

Our service levels get better there. So we can get logistics, we've seen on that get better over the last several weeks. If we're looking at the inspection centers I think they really have done.

In amazing job.

Inspections, that's hard when you get behind the inspections venters, that's a big industrial undertaking it takes time to catch back up and they've caught up the build inventory in the quarter. Despite the fact that we face another COVID-19 way, which is really tough in general, but it's extremely tough when you have an assembly line structure. So they've done a great job market offices, which is which handles last mile delivery.

Has done a great job and we've seen service levels improve there. So I think we're seeing improvement, which is which is good but we remained behind the working hard to catch up.

Our next question will come from Rajat Gupta with J P. Morgan. Please go ahead.

Great. Thanks for taking the question.

A couple of questions I'd get the combo.

<unk> G U I guess, just a quarter over quarter bridge.

How should we think about the moving pieces.

<unk> <unk> <unk>.

We'd like to know what's in the second quarter, but was there any impact of higher week on labor calls.

Can that be sent to you that impacted that number sequentially.

And just like giving like pricing continued to remain so strong in the fourth quarter.

You talked about like a seasonal decline uhm.

<unk>. So I'm just curious as to why that would be the case.

And then just lastly, if you continue to face.

Big Rambles I R C.

Next year in the neighborhood environment is challenging.

It should be should we anticipate any it back to the G. P. A bridge.

Next year, maybe just raise inflation or you know just overnight overhead expenses.

And I have a follow up on that.

Sure. So let me let me let me take a stab at all of the questions in there. So first one I'm talking about Q3 retail Gpu's, we had a we had a strong quarter on retails you'd be you in Q3 came into 17 69, I think if we think back prior to Covid, we'd normally expect to see.

Some seasonal decline in retail GPU I think we saw that for a couple of years prior to Covid.

This year, we saw.

Slightly similar effect, even though the.

We're in a obviously a very unique environment, where we did see early in the quarter depreciation rate pick up a little bit relative to Q2, and so that definitely had an effect on the sequential change and GPU going from Q2 Q3. The other thing I would call out as we did see higher reconditioning cost on a per unit basis in the quarter.

That was driven in part by by Delta, which definitely impacted production efficiency, which increases your per unit cost and so those impacts we saw some sort of a similar dynamic late in 2020. The impacts are smaller this time, but they were they were there and part of that sequential.

Change now.

As we as we look forward.

You ask a couple of questions about retail GPU on a on a go forward basis. So.

Our assumptions for retail GPU.

In queue for our embedded in our guidance.

For the full year, we typically don't breakdown individual components of that guidance, but we give you some guidance on totaled total GPU.

And then looking out a bit further toward 2022, you asked about.

If possible.

Labor market effects on reconditioning costs, and there I would say, it's too early to say.

I think we can wait and see how that goes.

Looking out of 2022, but in any event.

Any sort of labor costs adjustments are likely to be relatively small compared.

Compared to the the overall magnitude of.

Retail GPU and overall reconditioning costs, so an area that.

That would be my thought on your third question.

Alright, great let's start sorry.

Yeah, just don't just don't find that in the third quarter.

Or my other G P U.

Coke corner.

Decline slight decline quarter over quarter.

Color wanted that was more finance driven or no service contracts and.

Just curious.

Broader.

Picture like Howard customer <unk> options looking for the business.

Have you started to move back to his normal or it could take many quarters.

Yeah, and how should we think about the trajectory going forward I moved back to you know just the the other junior thanks.

Sure.

Yeah, so other GPU.

Came in again at.

I believe you said 24 83.

It was down a little bit quarter over quarter, I think the sequential movement and other GPU as well within the normal range that we would expect.

From quarter to quarter.

Sort of well within normal.

Normal range of variability in this particular case I would say the biggest driver sequential change was.

Just.

In finance the some.

Optimizations that led to slightly lower interest rates.

That came on sort of late Q too early Q3.

It would be the largest driver of a relatively small change.

And then reach out if I could also maybe provide a little bit of perspective, as well I do think a useful exercise and kind of the way that we also have to think about the business and the way that we prioritize what we're doing internally because I think it can be very it can be very hard to predict exactly what's going to happen by line item by quarter.

We can I'm, sorry, I think a bigger view and so you can exercise that I would suggest is I think if you look at all the different public retailers and you go back in time 20 years and you plan on the graph there EBITDA margin.

Think what you'll find is an extreme amount of stability.

There is very very high level of stability across all these different retailers and very clear story start to emerge you can see some retailers performing a little bit better than other retailers over relatively long periods of time, which suggests you are relatively better execution, you can see what happened to the financial crisis.

You can see what's happening right now we're right now is a moment of interest in that 20 year graph, where you'll see that.

Many of the franchise.

Dealers are performing very well relative to history, and then you'll see that some of those that are completely riots on auction are performing very poorly compared to history and then those that have access to buying harsh and customers are generally performing if somewhat similarly.

Paired to history.

Which is somewhat interesting, but the reason I bring that up is because I do think that even going back to the reason that we start to report on total GPU. When we first went public agenda 17. The general idea. There was just there is a lot of valassis industry. There's tens of thousands of other dealers that are providing a fairly similar experiences of customers that have.

Very similar cost structures to one another and as a result, the industry sort of structure in a way where some of the profits across those different.

Ponant of the transaction tend to add up to cover their expenses and their cost of capital and once you get to that place where you kind of realize these lines have been very very stable over a 20 year period.

There is little squiggles kind of that you'll see in that chart from quarter to quarter, but they're probably not the most important thing is the most important thing is what is the quality of the customer experience that you are offering compared to everyone else. What's the quality of your variable economics, both on the revenue in the cost side and then if those things look good how scalable argue and so when we think about our prioritization.

That's the frame that we use and that's how we try to make sure that we're putting our time and energy of those things that are most important and I think too that frame. If you look at the last year or so we would like to think at least that our performance. It's very good if you compare the way that we've performed to the industry.

In any important way, we think that it looks very good and we think that that's the most important thing because.

You're looking at it kind of the bottom line it tends to be there's a pretty stable return in general.

In buying cars from customers and then there's some variation based on the way that business model structured and then it's about how you perform compared to everyone else and we think in the long run that's what really matters. The most.

Our next question will come from Chris Botta, Glary with P. M. B <unk> X eight please go ahead.

Hey, guys. Thanks for taking my question.

First thing was.

That's actually a question.

So it seems like your rebranded your third party reconditioning units as marketplace units at the same time, you're moving forward with her to the large third party seller.

So if you don't know your decision ran the recession units is there an opportunity to use these partners in conjunction with third party sellers like hurts, where do you foresee them weakness in their own.

Have you talked to that more please.

Oh, Chris I apologize so I don't think we've really answered one of your questions in like four or five quarters. So we definitely at least some answers at some point, but I do think it's early in.

The hurts partnership it's early in marketplace in General I think there's a lot of room for for those choices to continue to evolve and so I think we're not going to provide additional color at this time and I apologize.

Well at least you're keeping count I appreciate that let's move on let's move on to US. Today, then is there a way to bifurcate further bifurcate estimated costs between retail and wholesale so totally understand like how much incremental us today you incur.

Two wholesale a trade in versus retailing at like further if you buy a car from a customer but you don't sell went to a customer how different was yesterday profile of that transaction versus buying and selling to a customer just trying to understand how tradings is impacting your estimate per unit personal costs.

Sure Yeah. So I mean, I think if you start at a high level buying cars from customers.

Does incur additional.

Operational requirements and then it does incur additional costs.

Some of those costs show up in cost of goods sold that would be things like going out to the customers.

Door to pick up the car and bringing it back into our network either.

To be.

Recondition to go up on the site or what have you. So.

One set of cough, there's another set of cough does impact SG&A.

I think.

Just one example of that might be customers call in to talk about transaction, where they're selling their car took our border.

Rather than buying a carpet curtains from Carvana. So that's an example of a direct effect of buying cars from customers. The does show up in SG&A. There's also an ernie sort of touched on that.

Some of these concepts, but there are also some indirect costs of the very rapid growth that we experienced in.

Buying cars from customers in the last couple of quarters and that just takes the form of everything just being a bit less efficient.

So I think there's there's both of those direct costs and indirect cost.

That that are driven by buying cards from customers.

Our next question will come from John Blackledge with Cowan. Please go ahead.

Hi, This is Max on for John.

Just wondering if.

If you could talk us through the constraints on.

Building and the pace of rollout prior siebold, you've already given the guidance for the end of the year, but just looking forward what are the puts and takes on being able to roll out additional irc's and what's the balance there.

And then just just wondering if you could talk us through a little bit just inventory like is there a targeted inventory level that you'd like to get through.

Typically <unk> would be a build but <unk> might might be not building in a typical environment is that is that still true for next year, how should we think about that thank you.

Sure. So I mean, I think we we feel really good about our IRC trajectory, we expect to open eight more new irc's by the end of 2022 and then.

When it comes to the staffing those irc's, we are making continual progress I think many of the initiatives that we.

Have have kicked off.

Implemented.

Paying dividends and we're I think we're seeing nice progress there in terms of the second phase of scaling production capacity, which is building out the team.

And so I think I think we feel so good about all of that I think the.

On the on the inventory level I think the simplest way to say it is we.

On the on the inventory level I think the simplest way to say it is we.

We do want to build a selection of cars that are available to customers on our website. We made some progress there in Q3 climbing it to just over 16000 immediately available units up from.

Just under 13000 in queue too, but as we've talked about that that effect was was metered somewhat by.

The steps that we took to.

Command of sales.

And so I think we want to keep building that immediately available inventory, we do think selection as a driver of conversion and a driver of sales and.

Feel really good about continuing to March up that selection that we're making available to our customers, particularly.

Particularly as we make progress on relieving the other operational constraints throughout the system.

Thank you.

Our next question will come from Michael Baker with Davidson. Please go ahead.

Hey, Thanks to questions I'll off at the same time I guess, both related to GPU, one does reducing the inventory that's available for customers to see that metering process does that boost the GPU in any way in that.

You can show cars that are better margins, because they don't need as much work or or whatever the case may be it doesn't give a lift to GPU and then because of that.

Should we expect GPU to naturally declined and then I guess related to the GPU question I think inherent in the idea that retail units will equal revenues is that asp's farting out I think you've said that before and of course that didn't happen. This quarter is there any specific reason why we should expect.

To find out in the fourth quarter or is that just sort of the way.

You plan the business and it may or may not happen or is there anything that you specifically seeing thank you.

Sure Yeah. So on the on the first question the answer is no.

The cars, they get metered sort of the the algorithm that goes into deciding which cars to return and search results in which cars not too.

Is not is not related to the particular gpus on the card so that.

The answer to that first question has a straightforward no.

The.

On the second question.

The.

Terms of Aspie. So I think I think if we think about.

Revenue growth relative to retail unit growth, there's a couple of things that go into that.

One is retail asp's.

I do think that's a component and I think when when we give guidance on.

Revenue growth relative to retail unit growth.

That's one of the considerations that goes into it second consideration that goes into it is wholesale revenue will impact the ratio of total revenue to retail units.

And that's another consideration as well we did we did mention in queue.

Three we metered, both retail sales volume and buying cars from customers and then you might naturally expect metering buying cars from customers have an impact on wholesale volume in revenue.

Okay. Thank you that's very helpful.

Our next question will come from Nick Jones with City. Please go ahead.

Great. Thanks, Thanks for taking the questions I think there's a kind of large franchise competitive that's getting into other adjacencies like trying to handle some of the logistics Repower sports and maybe some other large heavy equipment type.

Logistics.

I guess kind of what are your thoughts on kind of a competitive reaction I mean do you think kind of Carvana success has caused some of the larger maybe more profitable incumbents too.

React and maybe get ahead of some of the direction Carvana, maybe going in the future.

Sure.

Okay, Alright, the first part of the question, but I think I got that so what I would say that I mean, I think there is.

Anytime you are lucky enough to be successful other people are going to see that.

And so I think the kind of the default assumption anytime you're building a business and you are lucky enough to be on the right path should be to assume that others are going to notice and and move in your direction and then I think that our job as a business is to keep getting better.

And I don't know really how much more color I can give you than that I think maybe.

Maybe one other thing that is notable and worthwhile would just be this is hard right and I do think that.

I don't mean to imply that you're making this mistake, but I think from a distance it can be easy to make the mistake that any given problem is easier than it actually is and so this is a very fundamentally difficult problem.

I'll start with talking about on the us side that you'll be able to quickly kind of adjust that for new product as well. When you are buying a car that is it varies in quality when you're running it through re manufacturing process.

Where you're putting a thousand dollars in parts and labor into that car when you're shipping that car around the country in order to give customers really broad selection when you're handling trade ins when you're when you're handling warranty. When you are providing hospital financing and you're verifying the information that they send over in financing. When you are registered cars across 50 states and all the different counties.

The very end their registration requirements. There's just so much work that goes into that and I think that it can be easy at first to start with.

Kind of visibility from a distance of maybe the buttons to get click on our website and then to to believe that that's something that's relatively straightforward to to replicate and I think our view would be that we worked really really hard running as fast as we possibly can with a bunch of incredible people that have been extremely motivated over a long period of time and we still.

Have a lot of running left to do so we think that our job is to keep getting better. We think that we should expect people to notice the success that we're having.

And we also think that the stuff that we built in the past that now sits behind US is a pretty big mode. And then there's a lot of stuff left that we're going to build the future that once we climbed that held I will turn into a mode as well. So I think we have to keep running our place I think.

Great. Thanks.

Our next question will come from Nevada Con with tourist Securities. Please go ahead.

Good afternoon. This is Robert Byrd. Thanks for taking my question I have one for Mark and one for Ernie.

Mark I think in your prepared remarks.

You said.

You guys expect operational constraints improve in the fourth quarter.

Is there any color you can give and how we should think about unique growth on the sequential basis.

And then actually either can answer this question, but.

Mark you did just touch on it on the wholesale side.

I was going to ask if.

If you are seeing increased throughput of vehicles into the wholesale channel.

Due to some of the operational constraints, but also are you guys seeing higher demand in the wholesale channel because there is demand to stockpile vehicles amid inventory supply constraint in the market right now.

Sure So yeah, I mean on the.

On the first point, yes, we expect to increase our operational capacity in queue for with a with an eye toward 2022. So it's.

It's always a goal and Q4 is always very significant investment period for us as we.

Work to to.

Ramp operational capacity in preparation for the first half of the following year and that's exactly our plan this year.

On the second question.

I think the.

So the.

The whole.

Our wholesale volume of has been very strong.

Our wholesale Gpus have been strong as well I do think.

That's partly due to a screw up particularly the gpus are partly due to a strong wholesale market there's been a lot of.

Commentary out there, which I'm sure you're aware of as well about the <unk>.

Seen a lot of appreciation in the wholesale market this year.

Some of the dynamics that you outlined are certainly playing out I think we've also made really great fundamental improvements in the way that we.

Are are able to buy cards from customers both from an awareness perspective as well as.

From a process and technology perspective, so that's certainly driving some of our volume as well.

Okay. Thank you.

Our next question will come from Seth Beauchamp with Wedbush Securities. Please go ahead.

Thanks, a lot and then good afternoon my questions around the metering again have you eaten a metering in the fourth quarter yet.

We have not materially eased on the metering.

There's a couple of there's a couple of steps that we took that we'd probably have pulled back on a bit, but but not materially and again I want to restate I do think the moves that we made to meter sales were real and they weren't impact, but the bigger impact is just the constraints that already existed in the system before so hopefully that at least directionally.

Helpful.

Okay. That's helpful and we found a lot of the metering at least as it relates to the number of units shown to customers on the west coast markets to be more severe than other areas of the country. What is the reason for that.

Lack of proximity to irc's or something else.

So.

I'm going to try to answer that question more generally what I would just say I do think.

As it relates to the particular move of.

Impacting the number of cars that show up in a search result.

We do have the ability to kind of.

Provide more relief to different groups based on the cars that we choose to suppress and so if we have really busy logistics legs.

Maybe cars that would need to traverse those logistics legs to get to a certain market. They may not not be displayed in that market. When we're when we're trying to handle situations like this if we have.

Certain classifications of cars that require more work from certain operational groups inside of customer care. Then we may be more inclined to suppress that inventory in more locations. So that less of that type of work needs to be done if that particular customer care group is behind and so we really can operate that.

I don't see perfectly surgically, but fairly surgically and so it's been it's a high quality tool for us to use in a situation like this.

And I do to get the degree to which we use it does vary.

By location and by classification of inventory type.

Our next question will come from John Colin Toonie with Jeffrey Please go ahead.

Thanks for the questions.

To just wanted to start with the consumer purchases, maybe you could talk about how much of the increase in consumer purchases is just out of necessity because of a tight wholesale market.

Versus your view that it just simply a more profitable and inefficient channel for inventory.

And related to that once new car manufacturing gets back on track do you envision pulling back on customer purchases, perhaps to a point, where it's back towards the levels that you're targeting at your Investor day as a percentage of total sales and I have a follow up.

Sure well, you're not adhering to the one plus a follow up real bad, but we'll do our best to answer so I think.

First of all and buying Carson customers.

Think.

Necessity would not be the way that I would describe it I think the way I would describe it it's better.

It allows us to provide high quality experience to a customer over by a far from and then it gives us access to higher quality pulled inventory that is on average more profitable and so.

We want to do as much of that as we possibly can we want to build the business capacity to be able to handle as.

As much of that as we possibly can now I do think that we're in a very unique market today, where acquisition channel is very very important and normally across time that you know if we go back to this kind of 20 year, because we talked about before if you look at different acquisition channels, you tend to see Mark.

<unk> that are available that are fairly stable there can be kind of idiosyncratic differences between the channels, but generally speaking there they're fairly stable I think today. The best source is probably customer lease returned.

Cox automotive keeps.

Index on the amount of of <unk>.

Equity that lease returns half and recently that numbers of clips $8000, which is an enormous number that numbers is normally closer to zero seven the customer's returning a car and kind of dropping off the keys and walk away from Elise.

That car has $8000 deposit equity in it so.

That's an enormously advantaged channel in this environment.

On the other sides have auction, which has been heavily constrained in this environment. There are many dealers that are constrained in inventory and as a result, many of the off lease cars for the reason that I suggested before and for the reason of dealers being constrained aren't making it all at auction. There has been a few of repose because there has been.

On the other sides have auction, which has been heavily constrained in this environment. There are many dealers that are constrained in inventory and as a result, many of the off lease cars for the reason that I suggested before and for the reason of dealers being constrained aren't making it all at auction. There has been a few of repose because there has been.

Really high quality customer credit performance. So there is less of that showing up in the market.

The rental fleets have struggled to get cars to have been the fleeting. So then less of that in the market and so that market has been very tight and as a result, the margins that are available in the in the auction market are very small.

And so that means that kind of the channel bipartisan customers.

Is even better today than normal.

Our expectation again, just just given the kind of very strong persistent forces. It a visit over very long period of time. This market would be that as all these idiosyncratic strange things that are going on in the world today start to normalize we'll probably see these markets move in more normal ways relative to one another.

<unk>.

Kind of how they have in the past.

I don't know that that changes a ton for us because I think today, we are in the lucky position to be able to acquire many carson customers and also have access to auction. So I'm not sure. It changes a time for us, but I think.

As that happens you I could imagine the best answers for shifting to some degree and will react as intelligently as we can in those moments.

Thank you and.

One quick one it looks like compensation expense per unit sold was up 30% year on year.

Just talk about it if that's a reflection of higher employee costs from the capabilities you're building around customer acquisitions.

And how we should think about that.

<unk> of compensation expenses. Thanks.

Sure. So the the largest component of the compensation expense per per retail unit.

That we saw in Q3 relative to last year. It really is just building.

The team.

Both in advance of 2022, and just making sure that we're prepared for the first half of 2022 and also for the long term I think we see so many opportunities throughout the business in so many places where we believe we can we can invest in the team that can help us scaled the business and help us take advantage of some.

These opportunities so those are definitely components I think.

Buying more cars from customers was a component as well as I mentioned there is some.

Compensation expenses, there that show up in Us SG&A and then.

Last thing that I would point too is.

We were operationally constrained.

And so when you're you're investing for next year and you're investing for the long term, but your operationally constrained in metered and meter sales as a result that can also lead to.

Per unit impact. So those are some of the primary points that I would call out.

Our last question will come from Edward Rumour with Keybanc capital markets. Please go ahead.

Hey, guys. Thanks for taking all the question do you guys have been really clear about some of the backlogs and reconditioning I wanted to ask for a little bit, though there's been some negative press around customer service issues.

Do you feel about the strength of the organization today as it relates to customer satisfaction and do you think that that's something you have to look at metering as well. Thanks.

Sure. So I think I think first and foremost delivering great customer experience is is is why we're here and it's the most important thing that we do.

So it's something that's always at the absolute top of our minded in everything we do I think.

Throughout these constrained periods, we've continued to deliver customer experiences they'd get rated.

Much higher than anything else in in automotive retailing.

And you're at level of on par with with some of the best customer experienced out there.

That said across time across the years and certainly recently as well when we are constrained and as to use the language I use earlier, our service levels get impacted that does lead to the directional impact that you would expect in customer experiences and so we have seen that and that also.

Absolutely went into the rationale for choosing to proactively meter sales, while we kind of reduced pressure and caught up and we've seen that have the effect that we would like to see we've seen.

Pretty strong move back towards the levels that we more traditionally have been at we still got a little bit of room to go there, but but we need a strong move so I think throughout the customer experienced in general have have been great.

But they definitely.

Are impacted by constraints when we when we have them and so it's our job to alleviate those constraints and to build a business in a way that puts no impact whatsoever on customers.

But but we have had some impact and of course, we can continue to get better.

Thanks, so much.

Thank you.

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

Perfect well. Thank you all for joining the call and thanks to everyone. A carvana team I I always say the same thing here and I apologize for not being more creative but this was another great quarter, we faced.

A number of challenges that we didn't foresee and once again <unk>.

The challenge and put us in a great spot and that's why we continue to be in the place that we're in and that's why we keep marching toward the goals that we mutually share. So thank you. So much for everything you're doing we wouldn't be here without you talk to your next quarter. Thanks.

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