Q2 2019 Earnings Call
Good day.
Welcome to the Carvana second quarter 2019 earnings conference call.
All participants will be in a listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
In the interest of time, we ask that you limit yourself to one question and one follow up before reentering the queue.
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 Sean.
Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana second quarter 2019 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 not Carvana Dot com. The second 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 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 of the material factors that cause actual results to differ from forward looking statements can be found in the risk factor section of coupon. Its most recent Form 10-K and Form 10-Q . The forward looking statements and 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 of 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 Relations website.
Please note that all gross profit SGN EBITDA metrics mentioned by us on the call today are on an ex gift basis, and now with that said I'd like to turn the call over to Ernie Garcia Ernie.
Thanks, Mike Thanks, all for joining the call.
Q2 was a pretty remarkable quarter for us, we continued making significant progress across the business and achieving our mission of changing the way people buy cars.
Notably the quarter included the very important and very visible milestone of crossing our mid term goal of 3000 dollar GPU.
Let's start by putting that in context in 2016, our fourth year of business and only three years ago. We achieved total GP you have $1023.
On our first public conference call in June 2017, we outlined our path to a 3000 dollar mid term targets.
We knew the business, we knew we had to do to generate those kinds of your economics, and we had a plan, but admittedly that goal seemed a long way off to Mary.
We sit here just two years later and couldn't be prouder to report $3175 total GPU.
So how did we get here the first up was a simple one to plan the heartland execute we built a customer centric company that has the technology operations and culture to deliver incredible customer experiences.
We are organized around the school customer Centricity isn't the compelling storyline for US is who we are and what we are built could be.
Secondly, we think long term, we don't let expediency in east pushes into mediocrity. We are building the best solutions, we can for our customers and we are afraid to make the investment those solutions require the more we learn what we appreciate just how important and just how big of a differentiator. This is.
Thirdly, we are thoughtfully designed the company to ensure great unit economics are possible the vertical integration of de leveraging technology, we are taking traditionally high variable cost and lowering in fixed income.
Next we prioritize our goals carefully through a lens of customer Centricity and long term. Thank you.
And finally, and very importantly, we have executed.
That path has led us to where we sit today. So whats next whats the next call we'll be focusing on.
From here, our folks will be squarely aimed at achieving our goals of delivering 2 million plus cars per year and hitting our long term financial model.
We arrive at these go through the same careful bottoms up analysis that led to our $3000 mid term GPU goal and we believe these older. Similarly achievable with similar risk, namely execution risk. If we continue to execute the way we have our future is extremely bright.
I believe we will continue to execute the primary reason for this but we have assembled a team that relentlessly strive to be a little bit better every day, we keep our eyes on tomorrow with the same scrappy tenacity, we did at the very beginning and have every intention of continuing to do so.
Seeing the quality of people, we have across functions and physical locations what drives my comp.
Mark more on units revenue GPU and EBITDA margin all of which were exceptional this quarter, but I would like to quickly call out one highlight.
For the first time in our history, we are decreasing year over year EBITDA dollar losses.
We did this while simultaneously pushing 95% unit growth, 108% revenue growth, 134% growth in our total number of customer service and 188% growth in buying cars from our customers.
This isn't easy to do and it isn't something that seemed very often.
We did all this while also accelerating our investments in our future through all the channels Youd expect.
This powered the most exciting product pipeline, we've ever had all the products. We have been building has been carefully considered and thoughtfully designed by passionate capable people. We don't yet know will come all the improvements we're building today, but we're excited by the prospects and we do know that many of the products. We have built over the last several years are starting to pay significant visible dividends now.
One of the most recent examples of this is buying cars from our customers.
In early 2018, we began discussing the investments we're making this area. Since Q1 2018, we have made steady progress toward growing total units purchased from our customers for about 4500 in that quarter to about 22800 in Q2.
During that time, we've moved from buying 24% as many cars from customers, we were selling to them to 52% in Q2.
That is pretty significant progress happening over just five quarters and it means that we are now buying as many cars from our customers as we were selling just one year ago.
The contribution of these efforts to our total GPU have been significant as well and played a major part and hitting our mid term target this quarter.
Just like on the retail side of the business. The root of this growth lies in a clean simple experience for our customers and just like in the retail business. We believe this is a powerful and fundamental root. We continue to believe it's an area. We are just beginning to really tap into and understand.
Knowing exactly where we'll end up here and exactly when we will get there is difficult at this stage, but theres no doubt we have a lot of momentum and there's a lot of unrealized potential.
I'll close the same way I think there is a pretty exceptional quarter across the business. While these results are extremely exciting what we believe is more exciting is moving out and looking at all the progress that is happening on a larger time scale.
First of all we are just a six year old company its worth pausing and thinking about all the implications of that much progress back quickly.
Over several year period units have grown exponentially and GPU and EBITDA margin have both improved linearly what drives. These results are incredible people delivering incredible experiences with a focus on the long term with the consistency of the results suggest that it's still very early days building into a very large opportunity. We are a team of builders and are excited by what we see in front of us well keep building experimenting and learning and we'll keep you informed along way Mark.
Thank you Ernie and thank you all for joining us today, unless otherwise noted all comparisons on a year over year basis.
We are pleased to report another quarter of exceptional growth in both retail units and revenue.
Retail units totaled 44000 in Q2, an increase of 95%.
Total revenue was $986.2 million an increase of 108%.
This marks our 22nd consecutive quarter of triple digit revenue growth.
Total gross profit per unit exceeded our mid term goal at 30 175 in Q2, an increase of $1002.
The second quarter continued our theme of broad based GPU growth with record GPU across all parts of the transaction.
Retail GPU increased by $302, reflecting gains acquiring carson customers incremental shipping revenue and lower average days to sale.
Wholesale GPU increased by $88 driven by 194% growth in wholesale units.
And a record gross profit per wholesale unit up $660.
Finally, other GPU increased by $613, reflecting gains unfinanced monetization and increased attachment of ancillary products.
Our gains and GPU this quarter were bolstered by significant growth in buying cars from customers.
To support this growth, we are making investments in advertising technology and operations related to this offering.
These investments are already paying dividends in the form of meaningful contributions to revenue and total GPU.
Even more importantly, we believe foreign cars from customers as a significant fundamental step toward achieving our long term goals.
EBITDA margin was negative 3.3% in Q2, an improvement of approximately 5.5 percentage points, reflecting gains in total GPU NSG today.
Our 3000, GPU milestone and record EBITDA margin make this a good time to look back at what we have accomplished over the past three years.
In 2016, the year before we went public we had an EBITDA margin of negative 23.2%.
This quarter it was negative 3.3%.
Over that time period, we improved EBITDA margin by nearly 20 percentage points, including a nearly nine percentage point improvement in gross margin and a more than 11 percentage point improvement and SGN AG.
We are proud of the progress that we've made and are excited about what this progress means for our goal of becoming the largest and most profitable auto retailer.
We ended the quarter with more than $750 million in committed liquidity resources and held an incremental $80 million in real estate and securities on our balance sheet, giving us substantial flexibility to execute our plan.
We opened 28 markets in Q2, bringing our current total to 137 up from 85 at year end.
We continue to expect to open 55 to 60 markets in 2019, bringing our year end total to 140 to 145.
After a record first half or market openings in the back half of the year, we plan to turn our focus to preparing for growth in the first half of 2020 and for buying more cars from customers.
In Q2, we began production at our seventh inspection and Reconditioning Center in Nashville, Tennessee.
Raising our production capacity to approximately 350000 vehicles per year at full utilization.
We continue to view inspection in reconditioning centers as a long term competitive advantage as we further expand our as soon as next day delivery infrastructure.
Q2 marked the most successful quarter to date for our finance platform.
On June 27, we closed our second auto loan securitization further expanding and diversifying our investor base.
Finance GPU was a record $1100 in Q2, an increase of $526.
This benefited from a 100 to 150 dollar impact from a decline in benchmark interest rates during the quarter, but was our highest ever by a significant margin both with and without this effect.
We are excited about what this means for our finance platform and expect to recognize additional gains over time.
In terms of outlook, we are raising our full year guidance for retail units sold to 167500 to 172500.
And total revenue to 3.6 to 3.7 billion.
We are also raising our guidance for total GPU and reiterate our guidance for EBITDA margin based on our strong results in the first half and our view of the many exciting opportunities ahead.
We expect approximately 155 million weighted average shares on a fully exchanged basis in Q3.
As we look forward to the remainder of 2019, we are excited about our progress toward our long term financial goals.
Thanks for your attention and we'll now take questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad. If you are using a speaker phone. Please pick up your handset before pressing the keys.
As a courtesy to make sure we receive all questions. Please limit yourself to one question and one follow up if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
Our first question today will come from Sharon Zackfia with William Blair.
Please go ahead.
Hi, good afternoon, and congratulations that was a really.
Big ramp up in profitability really quickly.
I guess.
Question sequentially, though so if I if I'm doing the math right I think the LNG to you.
Well decelerate by maybe 300 to $350 in the back half at the higher end.
Your EBITDA or I'm, sorry, your GPU guidance.
In addition to the finance or I guess, you are indicating a like a 100 to 150 may not be sustainable Where's that other kind of a couple of hundred bucks coming from sequentially in the back half.
Sure So yes decelerating.
Yes, sure. So I think Theres a couple of things that we're taking into consideration and our GPU guidance and obviously, we're very excited about where we came out in the quarter and very excited about.
Where we expect to come out for the year. The two things that were taking into consideration our one.
Seasonally.
The used car market is typically weaker in the back half than the front half of the year and that relates to typically dip depreciation rates and used vehicle market tend to be higher in the back half than in the first half and so we're taking that into consideration.
Moreover, we typically in Q4 have historically done cyber Monday promotion, which has an impact on retail GPU other things equal.
So I think I think thats. The first point the second point, you alluded to which is.
We think we benefited this quarter.
To the tune of approximately 100 to $150 and finance GPU due to a quick decline.
In benchmark interest rates within the quarter. So those would be two things I'd point to of course, we're obviously very excited with our GPU progress breaking through the 3000 midterm goal was a very exciting milestone this quarter I think increasing our guidance by $200.
On both ends for the year relative to where we expected to be at the beginning of the year I think is very excited.
I think we're looking at our third consecutive year of more than 500 dollar year over year GPU growth.
As a public company and so I think all of those trends are leaving us feeling very good right now yes, you're in and is there any all I would add is I think we improved by over $1000 year over year. This quarter, that's pretty incredible growth and it was driven by as Mark said.
Significant progress across all the different elements of GPU I do think when you look at it on a comp through the rest of the year last year in Q3, and Q4, we made some pretty significant positive moves as well and so it's important take that into account, but the moves we see from here our normal seasonal with the exception of that 100 150 dollar delta because of interest rates.
I think secondarily just a follow up early last year, you had talked quite a bit about.
Roadblocks that you had to overcome and growth.
I think a lot on the logistics side to fulfill customer demand I mean, where are you on that kind of road blocks at this point I mean, if you had.
To pinpoint where there are obstacles to growth I'd just be curious on what those are.
Sure. So I think the wait unit that certainly is last year was pinch points I think what we mean by that is basically throughout the business Theres a bunch of different operational areas that we need to make sure that were.
Tied on and executing well in order to deliver the best possible customer experience and so the best customer experience as they go to our website and they find the cars are looking for if were selling a lot more cars than we expected sometimes our inventory can get lighter and that can reduce sales versus what they otherwise might advance we need to have a logistics network that thats functioning well and is able to deliver cars quickly to customers everywhere. If there are parts of logistics network that are a little bit tight we may have delivery times that are a little longer than they otherwise would be and so that can reduce conversion. If we're getting a lot of calls into advocates with questions about how the process works are wanting to sell the car to us and were not able to handle that volume that can lead to reductions in volume. So there is a lot of places where that can show up that really exist not to continue on that it's not really a binary that exists anywhere and I think today, we're in a pretty good spot I do think that the 188% growth in in buying cars from our customers has been faster than we anticipated and so there are a couple of areas in a bit.
This is where we're probably not running quite as tightly as we wish but I think thats coming from a a really great place and I think in general we're in a good spot.
Okay. Thank you.
Our next question will come from Zack Fadem with Wells Fargo.
Please go ahead.
Hey, guys. Congrats on the progress first question on the guidance you took units sales and GPU all up for the full year curious if you could differentiate which areas of the increases are driven by flowing through the outperformance in the quarter and what part of the new outlook is driven by changes on your view on the back half of the year.
Sure I think across the board we saw a lot of progress in the first half in general and then specifically in Q2, there were very excited about so we raise units.
In Q1, and we are raising it again now youre passing through a big raise and GPU and then we're holding EBITDA margin everything across the board, it's really good to us, but I think it's important to walk through kind of the differentiators. There in units, we're seeing great volume across the board across cohorts across markets. It looks really strong and so we're very excited about that we're able to pass that through in GPU. I think there are several contributors one that is definitely worth calling out is buying cars from our customers.
We posted our largest never wholesale GPU contribution there and we've got a $160 give or take and then the other place that buying cars customers flows through to GPU is only buy cars from customers and sell those cars retail.
That can't be separately broken out in our financials.
But it's also a big contributor of somewhat similar size and so a big part of the beat in the quarter and a beat that we anticipate for the remainder of the year is coming from that business. The buying cars from customers that business is growing at 188% and it also involves some investment and some investment that we're accelerating now given the strength that we're seeing there. So on the order of our fifth give or take of our marketing budget.
He is now going towards the business of buying cars from customers. There are also ULE technology investments and then operational investments and costs as is running that business and so it's clearly contributing a lot of GPU. It also has expenses associated with it and that's why you're seeing the big GPU raised without.
In equivalent push through on EBITDA and overall, we view that is extremely positive.
Got it Thats really helpful. And then bigger picture question you plan to end the year at 67% population coverage basically where we are today curious if you could talk through what's what's holding you back from accelerating to that 80, 90% level and maybe talk about game plan for bridging the gap in the regions like the Pacific Northwest, where you may be under indexed.
Yes, So I think Evan we continue to see there is really strong both in terms of the way that those markets are responding that we're opening up and the ease with which and speed with which we're able to open those markets. So we opened over 50 markets in the first half.
And those markets, our fastest ramping markets that we've ever had in the Companys life. So we're very excited by that as we look forward to the first half next year, we do expect to see significant volume increases in 2020 and with all the progress that we're seeing in our business of buying cars from customers. We want to make sure that we're thoughtful if we don't put ourselves in a spot where we are really constrained on the operation side and so we're putting more of our focus today on preparing for that growth and preparing for all the growth and buying cars and customers and then we anticipate rapidly opening markets again thereafter, I think given what we've seen over the last year, if anything our eyes have gotten bigger for the percentage of population. We can ultimately serve and maybe even the speed at which we can serve it but for now we're going to slow down a bit and make sure. We stay focused on ops. So we don't get over our skis too far.
Got it makes sense to me I appreciate the time.
Thank you.
Our next question will come from Chris Bottiglieri with Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking the question.
The two part two part question one on financing so really impressive growth curious, though why you want to why you expect to get back to 100 150, when I look at the interest rate curves all I see is like a pretty steep slope and download can curve.
If rates stay where they are today I mean, another rate cut either.
Would you expect to still get back that one to 150.
Or is the message is that you are passing it back the customer if you are assuming lower.
How do you how do you balance that.
That's exactly right I think I think you hit the answer to your question at the end. So were we to hold rates flat move down in benchmark rates would cause that 100 150 per to persist.
But the reason we have called it out as being transitory as we passed a lot of that.
Rate decline along to customers.
Got you, Okay, and then big picture question last year.
For the debt holders you gave them is pretty impressive chart showing market contribution profitability. It showed Atlanta with just under $300 in EBITDA and a fully loaded.
EBITDA of little under 500.
Given your total GPU is a thousand dollars higher today.
Than it was when you gave that disclosure I'd be curious to hear.
Give us an update on Atlanta profitability.
The contribution level.
Sure. So I think at this point were 3.3% EBITDA margin loss for the entire business, obviously, showing a lot of leverage and I think we're going to keep our EBITDA level disclosures it at that level instead of diving into the market level, but you can you can go look at that chart and you know the way. It works is not all that complicated generally speaking the GPU is roughly shared across markets. So if we have gains in any given market. That's that's on average going to flow through to all the markets and then as we get bigger and lever corporate costs more that generally benefits and markets and that as we continue to lever marketing that tends to benefit the market. So I think when we look at it across the market Theres really really good story, there and we think the path to profitability is clear than it's ever been I think even kind of stepping back and saying why do we step to $3000 goal to begin with when we first came public in early 2017.
I think there are two reasons why we set that goal. One is we thought through it carefully we kind of felt like we understood. All the levers of the business, where would you go and get money and we felt that 3000 dollar for the a level that made sense. It was achievable given the business that we have built but two and really importantly, we thought the $3000 was a very significant level in terms of being a number where you could build a sustainable and very profitable business and we continue to believe that today.
So I think theres a lot of ways to look at our financials today I'll call out three one is just to look at the momentum and progress that Weve got Mark talked about levering nearly 20 points over the last three years and being at 3.3% EBITDA margin loss today.
That suggested that there is a lot of room that were very very excited about.
Other approaches just like we approached 3000 dollar GPU target, we can do a bottoms up analysis and that basically is our long term financial model. We went through that very carefully look at all the expense items of all the areas. We thought that we could add additional GPU and we put that together and I hope at least that from an objective perspective, you could go through into a similar bottoms up analysis and arrive at similar places that we have in our long term model and I think third and interestingly is do a relative comparison to dealerships out there. If you go look at any given dealership ending the public's with some of them. This compares will be very easy with some it's hard because you need to get the rest DNA per retail unit in kind of massage out service ops, but if you go look at that most dealerships are spending around $2300 nesting a per car. They sell in the quarter. We spent 4100 NFC in a per car we sell so EUR per car, we sold excuse me.
That gap is paying for 95% unit growth and 108% revenue growth and we are still significantly subscale, but even at that level. Our losses. If you take our EBITDA loss in the quarter and divide by sales. They were about $750 per car. If you basically assume the long run we can get to a cost structure look similar to dealerships theres, an $1800 benefit there and now you are suddenly a $1000 positive words about 5% EBITDA margin and obviously, we believe in the long run our cost structure looks a lot different than dealerships and it is much much better than than most dealerships. In addition, we still think there is a lot of room in GPU. So we're looking at that and feeling very very good. We think just given the clarity of the story now we're going to stick with speaking about it at a company level.
Got you that makes sense. Thank you for the color.
Yes. Thank you.
Our next question will come from Nick Jones with Citi. Please go ahead.
Hi, Thank you.
Letter to shareholders.
And the comment on certainly over 60000 customers in the quarter.
And then the 44000 retail units my guess is that that.
I interpreted that you maybe acquire more than 17%.
From customers and maybe there are some fixed.
Agencies, or Dave just a little bit longer.
Source vehicles, and then maybe where that kind of ratchet up that 78% without necessarily sourcing significantly more vehicles.
Can you help me unpack kind of that led to that and.
Sure there is a lot going on there so.
Let's start with what the 60000 number is so that's basically the sum of customers that we transacted with that includes all the customers that we sold cars to that 44000, and then also all the customers that we bought cars from that we Didnt also sell a car too. So those are kind of unique additional customers that are just selling as a car without also simultaneously buying one from us and you add that up you get to 60000 that number of total customers transacted with is the number that grew by 134% in the quarter.
So that's that's kind of what that number is the number of cars that we bought from customers and then sold to customers was 17% in the quarter up from 14% last quarter.
On average about this is a serious nexus is exactly right, but on average about half the cars that were buying from customers.
Meet our retail standards and can be sold to customers and in the quarter, we bought 52% as many cars from customers in total including cars will be bought without an associated sale and cars that were traded into us we about 52% as many cars as we sold to customers and so you would expect kind of the percentage of cars that were selling retail to be a little bit higher that 17%, but theres kind of a natural lag there because there is a lag time when we buy those cars until they make it to the reconditioning center and get up on the website originally purchased by customers and so theres some nice positive momentum there as well.
Got it thank you for taking my question.
Thank you.
Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and good afternoon.
Hey doing.
Good.
My first question is around the strength in the quarter units probably toss your internal plan can you give us a sense of how much of your internal plan.
And then secondly, what you think drove that upside that would be helpful.
So I think.
We're going to stick with the guidance we provided in the past I think the fact, we're raising does suggest that we outpaced what we were anticipating in our guidance and so I think thats great news and.
We think that whats driving it really in any given quarter I think you can zoom into all kinds of of little drivers, but what we think is most important is we're delivering differentiated very high quality experiences to customers, we're giving them a bigger selection if anywhere else, we're giving them more value they see anywhere else and the team is executing very well and thats showing up in broad based demand across the market I don't know that there was anything macro that felt unique that would that would raise the level of of being called out separately in the quarter.
Okay Fair enough and then secondly in terms of your financing Gpus, we think about a thousand dollars as your normalized run rate.
And then is there any change in penetration rate that you experienced in the quarter or anything else to affect that run rate other than the interest rate call. It.
Still we printed 1100 the quarter and then as we said there was that 100 150 dollar impact due to interest rate that we would not expect to persist. So that would get you down to about the range that you were talking about.
We think that there are also additional gains to be had from here.
Of the same flavor of the gains that we realized this quarter and so I think we would point to our long term financial model. There. We think there's probably a couple of hundred dollars of additional gains from Q2 levels.
But but we would expect to step back of 100 $150 meant to overtime continue our positive walk forward.
There's a number of drivers there.
In general Weve seen a very slow drift over time.
Positively in attachment rate of financing.
But the far more powerful drivers have been just getting better execution overtime.
As we've outlined before.
Thanks, a lot.
Thank you.
Our next question will come from Ron Josey with JMP Securities. Please go ahead.
Hi, This is Andrew been on for Ron.
Two questions. Please.
Trade ins just going really well can you talk about kind of the drivers there whether that's better conversion. The marketing campaign, just just whatever is behind that and then secondarily advertising came in a little ahead of us I understood.
The trade in campaign, but is there a cap for national advertising are you guys spending more on performance or is there anything there to call out. Thank you.
Great. So, let's start with buying cars and customers I mean, I think what's driving that at a high level is just that that experience is incredibly simple in that experience is also pretty easy to understand.
I think buying a car online is not a super easy thing to communicate to customers I think if you say what does buying hotline mean 200 customers you might get 100 different definitions.
But if you say you want to go to the website get value for your car and then we'll pick it up and drop will essentially money right away people kind of understand how that works and so that's a fairly straightforward thing to explain to customers and then the offering.
I think it's about as good as you could hope for you from a customer perspective, and so we think that thats. The route of whats driving it's a very simple experience and it's simple to understand it and we think that that's great.
If we zoom in a little bit more we're definitely making investments in telling that story and marketing and so that gets to your second question, we'll circle back to that we're definitely making investments in technology throughout the fund on the website experience, it's still very early days.
We're still learning meaningful things every time, we want to test on the web site that are changing the way that we're approaching this problem, we're still learning a lot about pricing.
We're not even leveraging all the depth of our data that we've got today to make sure that we're pricing as intelligently as we can and we still have a lot to learn because our historical volumes are pretty small compared to the volumes that we're we're seeing today. So we think theres tons gains to be had there we're still learning a lot on the operation side, we're making changes to our schedule or to make delivery and pickup simpler and faster for customers. So I think there is broad based gains all over the place and then I think you know just to circle back to the advertising question, we definitely are leaning into this.
And advertising more because it isn't simple story and because we are seeing incredible growth and when we look at kind of the unit economics of incremental advertising in the business of buying cars from our customers and then we compare that to the GPU gains that we're seeing we think it's a really good trade, especially we take into account all the growth that we're seeing and so thats definitely baked into our guidance for the remainder of the year is the expectation that we will continue to invest aggressively this offering that we've got.
Great. Thank you.
Thanks.
Our next question will come from Rick Nelson with Stephens. Please go ahead.
Thanks.
Good afternoon.
Choices you scores more cars from the customers.
Directly that with half of those feeding retail are you migrating to older higher mileage cars on your website and if thats the case.
Are you seeing any change in the number of vehicles returned or the proportion of vehicles returned.
Great question. So I think the answer the first part of the question.
He is largely yes, we are we're seeing a different distribution of cars that are available to us as a result of buying cars from customers.
I think they that particular channel does weekly push you toward having more access to lower cost inventory.
Which is great. We also generally see a broadening of the distribution of cars that were selling on the other side, what we're selling more expensive cars as well.
And so I do think that there is overall kind of a broadening of the cars that were selling which which is happening slowly but is this has been part of a continual migration over a longer period of time. It has certainly been.
Accelerated by buying more cars from customers.
In terms of return rates and then customer reviews, which are are those things that we monitor pretty closely at the at the car level to make sure that you were understanding how different classes of inventory are are causing different customers you get different experiences. We don't see anything material. There the directions tend to be what you'd expect we see very slightly higher return rates on older cars.
Oftentimes you see lower abuse on on older cars, but that that's not even a very strongly ship at all I'm not even sure I would I would commonly call out the direction there so.
In general through the broadening distribution of cars that we're selling we're just getting more confidence that we can sell a very broad as we should have cars to customers over time.
Okay and.
Hi, good outcomes.
Follow up it's as you grow this internal source and it's going to push more in cars to fail.
Is there a certain size that you need to get to two.
Operating our own auctions or is that part of the long term came plant.
So the definition question I mean, if the first.
There is clearly significant economics associated with selling a car wholesale Steven obviously, you don't own yes, theres, a buy to sell D, which can add up to three 400 Bucks Theres just transportation on both sides can be pretty significant so that's undoubtedly in area of opportunity. We also have great partnerships.
With the options with which we do business today and I think in general our instinct will always be to seek to work with our partners first in find arrangements that work out well for both of US. So we can stay focused on the many other exciting opportunities that we have in front of us.
So I think that would be our starting point and that's not an enormous strategic focus today, but but the point is a good one.
Thanks, and good luck.
Thank you.
Our next question will come from Colin Sebastian with Robert Baird. Please go ahead.
Oh, Thanks, good afternoon.
As you shift growth from new market openings to market penetration wondering how you will alter the approach in terms of engagement with potential customers and how much of the investment in the website and now are generating improved metrics such as conversion rates and I have one follow up thanks.
Sure.
There's there's I guess, there's a lot going on there I think I think as we start to as we opened up more markets, which to start with we think there's still quite a few more markets out there. There is still significant Swat population that we can service, but once we make it through that population we transitioned to is growing existing markets im not sure that fundamentally our engagement strategy changes materially we still remain at very very small small levels of awareness and understanding even our most mature markets.
So we think there is a lot of gains to be had there. There is there is a lot of advertising to be done and awareness to be accumulated over time, there's a lot of learning on our part to figure out how to communicate to broader swath of customers more efficiently. So I don't think that there is.
A ton that will change there I think it will be part of a continual migration in a continual learning on the marketing side, because we clearly does have a lot of headroom there.
We're making all kinds of changes all the time across the web site and I think I said in my prepared remarks, but I really do think at this point is oftentimes.
And we've lost a little bit we are a six year old company and that means that nothing we do is perfectly refined in any way shape or form. So we're still very much in a stage, where we roll out changes and we see big significant moves didnt matter move the needle and that happens at a pretty regular cadence and I don't think we've seen that cadence slow down because our offering is broad there's a lot of technology and customer experience associated with buying cars reconditioning cars offering logistics networks. We can deliver next day, giving them a good experience on the web site offering is simple finance experience there is a lot there.
And so there is so many areas for us to keep exploring and we've got great teams that are exploring all those areas and we're continually finding.
Significant improvements.
If you define conversion strictly as web site to sale.
That's a complicated measure for sure because the quality of traffic is constantly changing depending on what marketing channels are using and then depending on if we're making progress in areas like FCO, where oftentimes you are driving a lot of value, but you may be driving lower converting traffic. So I think when we think about conversion and all the comments I made about conversion before those comments are kind of holding web site traffic static and then overtime. Our website traffic is likely to move in both directions, I think as we get better things like FCO will probably drive.
More volume of traffic, but it may be a little bit lower quality.
And therefore, you may see lower conversion rates, when you're measuring it that way.
As we have other innovations that are more direct in hit in market.
Byers you may see conversion go up and so I think there are those two separable effects and I would just make sure that you're thinking about them separately exhibited theyre, they're pretty independent.
Okay. That's helpful and the clarification or the follow up is on the GP contribution from from the finance platform.
Just wanted to clarify outside of the impact from the lower benchmark rates should we expect the improvement in finance GPU to sustain itself on a sequential basis or where their benefits from the timing of securitizations or other factors mean that might be a little bit lumpy. Thanks.
Sure. So I mean, we called out the.
Benchmark interest rate impact.
All in our in our remarks, and I think also our questions I wouldn't go into more specifics.
In terms of breaking down our guidance for the rest of the year, but I would say that over time, we certainly see more opportunity to improve execution, we're still relatively early in our life as a securitization market participant.
And we think that that leads to a lot of opportunities as we look forward over time.
Okay. Thanks.
Our next question will come from Tom Champion with Cowen. Please go ahead.
Hi, good afternoon, thanks for taking the questions and apologies if you've already addressed this but I'm curious on the other side of the capital raise in May where you are really leaning in in terms of investment and it seems like this could be on the new market side or.
Yeah, Rcs or or logistics, just curious any comments on that and then.
Second maybe maybe dovetailing with the last question.
You completed your second ABS transaction and.
Can you can you talk about the implications of that and.
Your reliance on that channel as a part of your portfolio of financing sources. Thank you.
Sure so as it relates to the.
Yes, the capital we raised and then what Thats unlocking it clearly does unlock additional aggressive if we so chose.
I think so far we have not elected to to be more aggressive in any material areas. The one area, where I think we're being a little more aggressive today is buying cars from our customers, but that is largely self funding and paying for itself. So I don't think thats the incremental area of investment I think we thought about bringing that capital as just buying us a lot of financial flexibility.
And there were two forms of capital that we brought in there there is high yield debt and then there was.
Slugs of equity the high yield debt for us is very very efficient capital because it basically replaces on sale leaseback financing that we would use to finance our capex otherwise and it has a similar cost into shorter duration is just generally more flexible. So yes, we largely raise that for that purpose. It's just kind of a dominant form of capital.
That we like having on the balance sheet and then the equity we took on the order of two points of dilution give or take.
And I think we thought that was a smart thing to do just from a cushion perspective to make sure. We're prepared for bumps in the road. So we really havent changed.
Our tack there in any material way on the ABS transactions.
I think we're very excited about that in general the way that we like to think about our finance platform, because we want to optimize both the monetization of finance.
And the stability of our finance platform, our fans partners and I think in the quarter, we ended with the mix.
Oh, the ally and and the securitization market.
On the order of 99% of the loans that we sold in the quarter once those two purchasers.
And we think that that was a good mix because we've got a lot of stability and we were also able to show a lot of progress and monetization.
So we think that that looks good and I think looking forward, we will continue with our strategy of optimizing monetization and stability, but we don't want to commit specifically to any given channel.
Today, but we feel great about the flexibility we built into the program over the last several quarters.
Makes sense. Thank you.
Thank you.
Our next question comes from Armintas Sync, if you see us with Morgan Stanley . Please go ahead.
Great. Appreciate you taking the question.
When I look at $1500 of other GPU and I think this question has been asked in many different forms, but the 1500 versus.
The.
Roughly 1000 in the first quarter, so $500 sequential step up you mentioned the 100 150 from the benchmark, what's the other 350 to $400 related to for other gross profit per unit.
Sure, Yes, so I mean, it's primarily just better execution on our loans. So I think we're we introduced ourselves to the securitization market in the first quarter.
With our inaugural deal we went back the securitization market for the second time this quarter brought in more investors diversified or investor base and.
Soffe higher gain on loan sale that we saw in the previous quarter I think the better execution is the big driver. There is some other smaller drivers.
For example.
Fees per unit were lower.
As expected this quarter, because we had fewer first time deal expenses than we did a larger deal.
Just better execution on our loans was the biggest driver of the sequential increase in financial review.
Got it okay. So call. It the 350 to 400, then a sequential improvement ex the benchmark rates.
At the Investor Day, you talked about a five to 700 dollar improvement from lower cost of financing. So is this 350 to 400 part of that five to 700 or is this an apples and oranges.
You mentioned a couple of hundred dollars, which was sort of line up with the commentary from.
No the Investor day, a five to 700.
Yes, I I think I think you're thinking about that the right way I think we've made a nice step here.
Both including and excluding the inter quarter benchmark move, but certainly feel like we've got some.
Potential increases in the future as we mature in the in the securitization market continue to.
Demonstrate strong performance increase liquidity of our program et cetera.
Got it and then one more.
With the finance receivables last quarter that was about a 50 million burn.
For the quarter this quarter. It was a $90 million source of cash maybe you could talk about some of the puts and takes there on finance receivables.
And how to think about that as a source or use of cash going forward.
Sure.
So we use we view finance receivables is very similar to inventory there that's working capital.
The auto dealers or other auto industry participants.
Have as part of their.
Standard kind of operations of the business now.
Both inventory and finance receivables are heavily financeable with standard working capital facilities and so much like we've done with inventory over time, we expect to to the extent that finance receivables are moving up and down financed the vast majority of them with working capital liquidity from.
Short term working capital facilities.
Got it much appreciate it.
Thanks.
Our next question will come from Lee Crowdell with B. Riley FBR. Please go ahead.
Great. Thanks for taking my questions and congrats on a very solid quarter.
Two questions first just on the buying versus selling ratio obviously.
Doubling year over year and up from 40% last quarter to 52%.
You guys kind of highlighted that the opportunity out in the market from competitors is one to one kind of thoughts on if you believe that's achievable with Corona and if so maybe perhaps a timeline and the GPU implications of that.
Sure.
So I think you are the market leaders.
You buy from customers about as many cars they sell to customers.
And so that clearly achievable in a sense, it's been done before there is not.
What we know is that we are delivering great experiences to customers. It's growing very quickly. We're learning very fast there's clearly a lot of momentum. So when we look at what the market leaders are doing and say given what we've seen so far do we think that over time, there is the opportunity to buy as many cars for customers, we're selling and do we think that over time as the opportunity to make about $1000 give or take.
Per unit that we put some customers, we think that that looks very achievable from where we sit today. We also think that there is a lot of work left to do.
And so we made a lot of progress recently, we're going to keep working at it.
But I don't think we want to give any more concrete guidance that we provided at analyst day with our long term financial model, which which made those same assumptions that I just outlined.
Got it and then just on the locations increase obviously heavily weighted to the first half.
Kind of just your thoughts on.
The investments as it relates to fewer location openings in the second half and weather.
The dollar value of investments remains the same and its just allocated elsewhere internally.
Be it technology or marketing or if the dollar investments to scale the business step down.
So what I would tell you that I think we think about those is somewhat independent choice is the choice to to open markets more slowly in the back half is largely driven by operations and by preparing ourselves for the first half of 2020.
And wanting to make sure that we see in front of op, there and continue to deliver very high quality experience to customers. So so thats whats driving that the the investments that we make internally.
In process improvements or operations or technology will tend to make those pretty independently and we don't manage with like a quarter to quarter total investment budget in mind, we're trying to do the right thing for the business at all points in time, and then trying to recognize that we do have limited resources at our disposal and so we need to allocate them as intelligent as we can.
And so I think we think about those things separately, but in the back half of this year, we have elected to put more of our operational focus on preparing for growth in early 2020.
That that probably in a vacuum will not impact the way that we're thinking about investments in technology.
Got it.
That makes sense. Thank you for taking my questions.
Thank you.
Our final question will come from Dan Salmon with BMO capital markets. Please go ahead.
Afternoon, everyone.
Just curious is there any as you.
Really expand the footprint out in and cover a bigger part of the country.
Obviously, we're not going to talk about 2020, just yet but.
Expecting that your launch rate picks back up again after the preparation that youre doing for the first half next year, it's not very long I think before you do complete your goal of covering the entire U.S. footprint.
Or at least the sort of top 200 markets that you've talked about targeting traditionally.
With that goal, becoming increasingly insight do you have any different thoughts on.
Expansion beyond the U.S., even if it's just in North America or the Americas more broadly.
And then second just maybe Mark you could remind us that the long term financial goals.
And that target model, if I remember correctly was.
Just simply for the domestic footprint in mind that would not consider any sort of international expansion in it.
Correct.
So let me start with US I think we clearly are getting very close to that and as a model that we provided earlier about there being about 200 markets in the U.S. It had over 200000 people in those markets serving about 80% of users population.
We're approaching that pretty rapidly I would say that the experience that we're having in terms of our ability to open markets and the way. It goes marks are responding to us and the way that we're seeing smaller Mark's response is if anything I'm kind of broadening our ambitions about what we think is possible.
We will take the remainder of this year to think through carefully we think the right plan is but directionally if anything our ambitions are are being brought in there.
As it relates to things that are outside the us.
I think we've got a long way to go here you were this quarter were on the order of 0.5% less than 25%.
Oh, the used car market and we think there is just so much room to grow in our in our most mature market. We're still a relatively small part of car sales happening there we still have relatively low awareness and so we think we've got a lot of room to grow. So I think we've got a machine that works really really well.
And we think there's a lot of room to just continue to market that machine and tighten that machine out since we're only six year old company and to see a lot of growth. We also think that the business of buying cars from customers that has been effectively launched off of this infrastructure that we built.
Is good evidence of the types of things that we can do here domestically as well to to further monetize the transaction service all the need the customer has when they're buying or selling a car and give them a better experience and so I think our focus is going to definitely be there.
Before it moves outside of the boundaries of the U.S.
And that is what our long term model.
Presumed as well.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Alright, Thanks again for joining the call we really appreciate it and to everyone out there on team Carvana. Thank you. So much for everything you're doing this was an absolutely incredible quarter. Please take a moment and take pride in what we've built it's pretty incredible, but we've still got a lot of building left to do so you'll get a good night sleep and let's come back tomorrow keep on keeping on thank you guys.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.