Thank you, Hallie. Good afternoon ladies and gentlemen and thank you for joining us on Carvana's third quarter 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.com. The third quarter shareholder letter is also posted on the IR website. Joining me on this 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's 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 Carvana's most recent Form 10-K and Form 10-Q. The forward-looking statements 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, copy of which can be found on our Investor Relations website. And now with that said I'd like to turn the call over to Ernie Garcia. Ernie?

Thank you, Mike and thanks everyone for joining the call. The third quarter was an exceptional quarter for us financially and operationally. Let's start with the financial highlights. The biggest headline is that it was our first EBITDA positive quarter as a company. We also crossed $4,000 GPU for the first time. These are incredible milestones and both carry significant meaning and implications for our long-term financial performance and our strategic flexibility. The numbers themselves are exciting. We think they are even more remarkable when putting them in context. In the last four years, we've improved gross profit margin by almost 12%, SG&A as a percent of revenue by over 12%, and EBITDA margin by about 25%. We've made all of that progress while simultaneously making the investments necessary to grow the business more than 10x. In addition, the third quarter also saw incredible operational achievements. The first and most notable of these was that we bought more cars from our customers than we sold them for the first time in our history. This is an amazing accomplishment that was only made possible at the quality of experiences we deliver to our customers the quality brand we've created, the infrastructure we are building, and the Herculean effort put forth by our team. In the third quarter, we bought almost twice as many cars from our customers as we bought at our previous peak in Q1 of this year and over three times as many cars as we bought from our customers in the second quarter. That kind of sequential growth is pretty unbelievable, but we think it's even more impressive at our current scale. In order to achieve it our operations team had to handle a one quarter sequential increase in cars bought from customers of over 50,000 units. In addition, the ops team made quick progress toward alleviating our inventory constraints. During the quarter, production caught up for retail sales then grew further, enabling us to substantially increase our inventory by the end of the quarter. While this is impressive progress, we still ended the quarter with just half the inventory that was immediately available for our customers as we had prior to the pandemic. At our current demand levels we prefer to be much higher than we were even then and therefore still have a lot of work to do in this area. The team is doing an unbelievable job and we expect to continue to make rapid progress over the next several months to position us very well for another big growth year in 2021. Now, I'd like to take a step back. While the results of the third quarter are exciting and significant, it's important to maintain our perspective and to focus on what is underneath the numbers. Our progress over the last seven and a half years from a fledgling start-up in a single market that delivered one car to one of our customers once every several days to becoming the fastest-growing automotive retailer in the U.S. with $4,000 gross profit per unit and breakeven EBITDA has come from four powerful and persistent forces. One, our clear mission vision and values. We know where we are going and we know how we're going to get there. Two, our unwavering focus on our customers. We know that what really matters is making our customers' lives a little better. We know their expectations are always rising and we are always working to keep us and to surpass those expectations. Three, our long-term focus. We aren't afraid to lay the foundations today that are necessary to build big things tomorrow even when we don't see immediate results. And four, the strength of our team. Companies are collections of people. Our people choose to care. They believe in what we are doing and find meaning in it. They dream big, they aren't satisfied with what they've done, they don't think it's good enough, and they can't wait to make it better. These four forces are powerful. They're what really matter. They provide the relentless pressure that drives long-term progress. They are what brought us here. So, what does this mean for our future? Customer preferences have accelerated their shift in our direction. Our financial performance and positions are stronger than ever before. Our team is executing at the highest level in our history. We're delivering the best customer experiences available in buying or selling a car. We have a scalable offering to get better as it gets bigger. We've demonstrated the power of our mission, our customer-centricity, our long-term focus, and our incredible team. We couldn't ask to be in a better position. Our job is to keep marching. To never allow ourselves to be satisfied, to overcome the challenges that will continually arise along the way to always get better. If we do that, we're going to hit our goals of selling two million-plus cars per year and of becoming the largest and most profitable automotive retailer. And we're going to fulfill our mission of changing the way people buy cars. Mark?

Thank you, Ernie and thank you all for joining us today. Q3 was a record quarter for Carvana. We made significant progress on all key financial metrics and reached several exciting financial milestones. We achieved positive EBITDA for the first time in our company's history, a significant step on our path toward achieving our long-term goals. Retail units sold in Q3 totaled 64,414 an increase of 39%. Total revenue was $1.5 billion, an increase of 41%. Retail unit growth accelerated from 25% in Q2, but was nonetheless limited by constraints on production capacity which impacted the selection of vehicles available on our website throughout the quarter. Total gross profit per unit was $4056 in Q3, the highest level in company history and an increase of $1093 year-over-year. Our record GPU this quarter drove our gross margin to 16.9% near the midpoint of our long-term model. Retail GPU was $1857 in Q3, an increase of $552. Growth in retail GPU was driven by a significant increase in the share of our vehicles sourced from customers. Vehicles sourced from customers reached 56% of retail units sold in Q3 exceeding the high end of our long-term target laid out in November 2018. Total vehicles acquired from customers grew by 128% in Q3 leading us to buy 114% as many cars from customers as we sold to customers up from 69% a year ago. We believe the high-quality experience we provide to customers creates a sustainable sourcing advantage, which we expect to continue to benefit GPU over time. In Q4, we expect retail GPU to have a seasonal change that more closely resembles Q4 2018 than Q4 2019. Wholesale GPU was $266, an increase of $146. This was driven by record gross profit per wholesale unit sold of $1113 and record wholesale volumes. Record gross profit for wholesale units sold was primarily driven by strong industry-wide wholesale pricing. In Q4, we expect the wholesale market to transition to a more normalized depreciation environment accentuating normal seasonal trends in wholesale GPU. At a higher level, we continue to see improvements in our wholesale channel and expect gains over time toward our long-term goals. Other GPU was $1934 in Q3, an increase of $395. The gain in Other GPU was primarily due to a $337 increase in finance GPU to $1415 from $1078 driven by tightened credit standards and lower benchmark interest rates. EBITDA margin was positive 1.4% reflecting a nearly 7% improvement from a year ago. The significant milestone of positive EBITDA margin was driven by our progress in both GPU and SG&A. SG&A as a percentage of revenue levered by 1.6% in Q3 primarily reflecting benefits of increased volume and cost efficiencies gained during the pandemic partially offset by renewed investments in growth for 2021. Looking forward, we expect to make seasonal investments in SG&A expenses in Q4 as we have in past years to prepare the business for 2021 leading to a similar seasonal pattern while also continuing to show leverage versus 2019. In addition to strong GPU and SG&A leverage, EBITDA was positively impacted by a $10.8 million increase in the carrying values of finance receivable related assets on our balance sheet. This increase partially offsets the decrease in carrying values of these assets that impacted EBITDA in Q1. During the quarter, we opened our ninth inspection and reconditioning center or IRC near Columbus Ohio. And following quarter end, we opened our tenth IRC near Orlando, Florida. We also expect to open our 11th IRC by year-end increasing our total annual production capacity to approximately 600,000 vehicles at full utilization. IRCs play a key role in our model by allowing us to expand our selection while also speeding delivery times and increasing logistics network efficiency. We remain focused on our plan of building out our network of IRCs and scaling production capacity to meet demand for our offering. As we continue to focus on building inventory, we have elected not to run our Cyber Monday promotion this year. As a result, we expect retail unit growth to face a headwind around the time of Cyber Monday and a tailwind as we continue building selection on the website. Following quarter end, we issued $1.1 billion in new senior notes and redeemed $600 million of existing senior notes due 2023. The new notes reduced our annual interest rate by more than three percentage points and extended maturities to 2025 and 2028. As part of the refinancing, we incurred a one-time debt extinguishment expense of $33.7 million that we expect to be included in interest expense in Q4. Following the issuance of our senior notes, we had more than $1.8 billion in total liquidity resources on our balance sheet giving us significant flexibility to drive toward our goal of becoming the largest and most profitable auto retailer. Thank you for your attention. We'll now take questions.

Hey, guys. Thanks for taking my question and congrats on all the progress. So first question with respect to the inventory constraints and IRC bottlenecks that you've been dealing with. Curious if you're willing to comment on how much your demand outpaced vehicles on the website in Q3? And then could you talk about some of the things you're doing to return the inventory back to pre-pandemic levels? And if you think Q4 is the right time frame for your supply to catch up with that demand.

Sure. I'll try the best I can on that. So I think we wouldn't want to quantify precisely what demand would have been in the third quarter had we had significantly higher inventory levels, but there's no doubt that customers are sensitive to selection. And if you have more cars on the site they're more likely to find what they're looking for and therefore conversion goes up. And so I think there's little doubt that it impacted things in a pretty material way most likely. I think our inventory as we exited the third quarter in terms of cars that were available for a customer to buy that were kind of ready they could click on and start the purchase process with that was roughly half what it was pre-pandemic. Pre-pandemic we had significantly lower sales volumes than we have today. So our ideal inventory would be higher than we were pre-pandemic. And then we believe we have that inventory our sales would be higher still and so our ideal inventory would probably be higher again. So I think right now the goal is to build inventory as quickly as we can. The team has done an incredible job. We've made a ton of progress in the last three months. And I think we've laid the foundation to make even faster progress moving forward. Mark talked in his prepared remarks about everything that we're doing in terms of opening new facilities: we opened our ninth in the quarter; we opened our tenth at quarter end; we plan to open our 11th before year-end. So that's going to bring us to a total capacity of about 600,000 units. And then we're doing our best to staff up and train and get ready to build out as many units we possibly can to serve the demand that we expect to come in the future. So I think we're really optimistic about where we are. Right now we're focused on continuing to build out that capacity as quickly we can and to then fill it out with actual production. But I don't know that we want to yet quantify the precise impacts.

That makes sense. Thanks, Ernie. And then a quick one for Mark on the GPU line. I'm curious if there's any color that you can provide to bridge the gap from the Q3 GPU to your Q4 expectations. And to what extent you would describe any of the Q3 upside drivers or market forces as transitory across all of the various GPU buckets? And how would you go about quantifying those impacts?

Sure. Yes. So starting with Q3 retail GPU. I mean, I think we sort of looked at in a number of different ways bridging to previous historical period. So I think if you look back in Q3 2019, the biggest driver since then was our progress in buying more cars from customers. I think we saw a significant step-up to our best-ever 56% consumer sourcing rate this quarter which is a meaningful increase from a year ago. And we also saw strong margins on the cars that we source from customers this quarter. I think if you look to Q2 there's a couple of other dynamics that enter into the bridge. I think one averages sale move down meaningfully on the order of 30 days quarter-over-quarter as we started to resume purchasing and we began selling cars in a much more normalized pace following that peak pandemic period. I think bridging to Q1, if you do that I think in Q1 we were roughly $1,700 in retail GPU prior to our end of quarter COVID-related balance sheet adjustment. And so I think you're bridging from Q1 to Q3 sort of a similar story. I think most of the change, primarily driven by more success buying cars from customers. So I think that's sort of – I think the major drivers as we're looking from Q3 2020 retail GPU back at some previous periods. I think when – as we look forward to Q4, I think, the way we're currently thinking about is we're expecting seasonality that's more similar to Q4 2018 than Q4 2019 I think – in Q4 2019, we're still at the sort of early phases of optimizing our buying cars from customers, bidding and pricing. I think that led to some non-normalized dynamics. So when we're thinking about Q4, we're really thinking about seasonality that's more like Q4 2018 than Q4 2019.

When seasonality you mean as GPU or gross profit as a percentage of the year? I'm just trying to get a sense of what you mean by that seasonal step down?

Sure. I mean I think we're sort of thinking about it in terms of seasonal changes in retail GPU.

Driven by variation in depreciation rates, et cetera.

That makes sense. Appreciate the time guys.

Thank you.

Great. Thanks for taking my questions. The first one, focusing on the fourth quarter again, how would you rank the impact of the supply constraint on unit growth compared to not running the Cyber Monday deal? Does finding supply maybe overshadow the challenge from Cyber Monday? My second question is about the investment in IRCs and opening two in the fourth quarter. Is it fair to assume that from a profitability perspective, we might not see aggressive investment replicating what we experienced in the third quarter? Any insights would be appreciated. Thanks.

Sure. So first with Q4 volume, I think, the kind of outlook that we provided in the shareholder letter was that we expect normal seasonal trends across all the major line items and so that would also relate to retail units. And I think you outlined kind of two big differences that will be going on this year versus years prior. One we don't plan to run the Cyber Monday promotion as we focus more on building our inventory and preparing for a big first half 2021. And then two as we continue to build inventory we do expect that to be a tailwind to conversion. And so kind of that's what sits underneath our expectations for a similar seasonal shape to years past. And then as it relates to inspection centers, I think, we're clearly in investment mode in terms of trying to build out capacity to deliver cars to customers and produce cars that are ready for customers and have been for a while and that's been part of our long-term plan. Building out inspection centers is the most operationally intensive and kind of longest lead time lever in the business. And so in general we're always trying to stay out in front of that as best we can. Now from an investment perspective, as you're thinking about cash we've got a lot of different ways that we can finance that. We've obviously got roughly $1.8 billion of liquidity resource on the balance sheet so we can choose just to financial those with our own cash or we can choose to finance those in the sale-leaseback market if we don't want to use cash for that purpose. So I think we're flexible there. And then in terms of the way that it impacts earnings as we open more inspection centers there can be marginal impacts as that kind of the cost of those centers and the depreciation of the centers flows through fewer units, but that's not a super material driver. So I wouldn't expect that to be a huge part of our story.

Great. Thank you.

Thank you.

Hi. Thanks for taking the question. This is Andrew Boone on for Ron. If I think about the flywheel that you guys laid out of kind of great selection better conversion bringing more users to the platform, it seems that adding third-party inventory would accelerate this effect and really improve selection and therefore conversion. We're increasingly seeing third-party dealer inventory on your site. Can you just talk about Carvana's willingness kind of at a high level if not this test specifically to be more of a marketing platform for dealers? And then additionally now that you're acquiring more cars from sellers versus buyers, can you talk about your ability to convert those to a trade-in meaning you get the sale and the car buyer at the same time? As well as any marketing efficiencies you're seeing leading with a kind of will your car first message? Thank you.

Thank you for the question. We are very focused on expanding our business to consistently deliver exceptional customer experiences at a larger scale and to create a positive feedback loop that enhances our capabilities as we grow. This expansion can take many forms. In our letter, we mentioned increasing our inventory to offer customers more choices, placing inventory at more inspection centers, and reducing delivery times. There are numerous avenues we can explore. We will continue to invest in these initiatives and look for ways to enhance our offerings for our customers. Currently, we are testing several concepts that align with your description. In general, we evaluate these tests based on their impact on customer experience, scalability, and economics. Once we feel confident about the results from these perspectives, we will likely allocate more resources to them and discuss them more extensively, aiming to expand them similarly to how we have developed our car buying program. However, I don't believe we have any projects at that discussion level yet. Regarding your second question, there are significant opportunities ahead. We are still quite small relative to the retail market in terms of the number of customers purchasing cars from us and the market of customers selling their cars. These markets are somewhat independent but can connect when a customer opts for both transactions in a trade-in. Our goal is to ensure we provide the best offerings for customers on both sides of these transactions, whether they are looking to buy or sell a car. As we engage with customers, we have the chance to inform them about our other services. This could occur simultaneously as a trade-in, or there may be a delay where a seller becomes a buyer several months later, or vice versa. Ultimately, our primary focus is on our customers, ensuring they have excellent experiences and that our offerings are strong, all while scaling as rapidly as possible, given that we are still very small in relation to the overall market opportunity.

Thanks.

Hello everyone. Ernie, they say that imitation is the highest form of flattery. If you've listened to these franchise dealer calls or any other automotive retail discussions, it seems like they've really taken notice, right? They're constantly discussing omnichannel, digital, and touchless experiences. Have you noticed any impact from their early efforts, even though they may not be as developed as your operations? Have these attempts affected your business in any way, such as inventory acquisition or auction pressures?

I think the straightforward answer to that question is no. This shouldn't be surprising, as we are quite small in relation to this market. In the past quarter, depending on the perspective, we represent approximately 0.6% of the total transactions in the market. If we consider the competitors you mentioned and combine their shares, they might make up around 5% more market share at most. Therefore, even when summing up the larger players who are beginning to focus on this area, they still remain comparatively small in relation to the market size. The overall opportunity remains very large. We believe it’s essential to concentrate on our customers since they guide us on where to head next. We are continuing to prioritize that focus. As for market dynamics, which we have discussed previously, the fragmentation and the relatively few players with the capacity to make significant financial investments in building a true e-commerce platform indicate that we should not be primarily focused there. We believe we provide the best customer experience, have the most scalable model, and our current financial position enables us to invest in our offerings. Therefore, our primary focus is on ourselves, on execution, and on our customers. At this point, we do not perceive any impact from competitive actions.

Okay. Great. And my follow-up kind of is in the topic of these test buckets that you talked about. I know you guys look at a lot of different things to improve frequency and all sorts of different ways to improve experiences beyond just buying and selling of used cars. There are a lot of car companies with increasingly these electric car companies, start-ups and even some legacy companies that could get carved out and may want to engage with the consumer in a B2C way in a far better way than the traditional model right? And I'm just wondering if there's an opportunity and I know it doesn't exist right now, it's not part of the 2021 story perhaps. But are you even having discussions internally, if not externally with how the Carvana platform could help a new entrant into the U.S. market engage with the consumer in a digital vastly superior way? Is that an opportunity? We're thinking 5, 10 years out and is something relevant to talk about today? Thanks.

Thank you. Our focus has been and continues to be on providing excellent experiences to customers purchasing used cars. Our platform acts as a bridge between cars and customers. Everything we do is guided by our strategic goal of exploring various ways to acquire cars and ensure we have sufficient inventory for our customers, while also aiming to offer the best and simplest transaction process. There are interesting theoretical opportunities for the future, but it's crucial for any company to concentrate on the most important priorities at any given time as we work towards those goals. For us, that priority is delivering exceptional experiences to customers looking to buy or sell used cars.

Hey, thanks for taking the question. One and a follow-up, maybe another run at the retail GPU in 4Q, I guess based on the drivers of the outperformance in 3Q being more consumer sourcing faster sell-through and more reconditioning efficiency, I guess which one of those drivers would you expect to step back enough such that the depreciation schedules and things that you're talking about catching up and for you would actually drive some of that seasonality that you're expecting? Because at first glance it looks like all three of those should still be nice tailwinds for you in 4Q?

I would like to start by discussing typical seasonality. Generally, there are variations in depreciation rates throughout the year, with the fourth quarter usually experiencing the highest rates. Depreciation tends to happen over time, and the daily depreciation is most pronounced in the fourth quarter. When reviewing our historical data and adjusting for cars sold to customers and the days to sale, these trends become apparent. I believe this is the primary factor behind our expectations, and it is something we have observed consistently since we began in 2013.

Okay. Thanks. And then on finance GPU, obviously, really strong performance. Similar type question there, with the interest rate environment that we're in, any reason that the strength that you're seeing on the sale of the receivables there would deteriorate for any meaningful reason? And on a somewhat related note was there anything in the tighter credit standards that you felt like impacted conversion on the site in the quarter? Thanks.

Sure. I would start by saying that we provided some insights about our expectations for finance GPU in the shareholder letter, indicating that we expect it to follow typical seasonal patterns. There are various small factors at play, but I won't delve into all those specifics right now. Regarding what occurred this quarter with finance GPU, several elements shifted, so I'll quickly list them to help clarify what we believe will be sustainable long-term. First and foremost, we made fundamental improvements to our credit platform, enhancing credit scoring, pricing, and structuring, which has increased our efficiency in these areas. These enhancements are expected to persist. During the pandemic, we significantly tightened our credit standards, which we are still maintaining. When credit is tightened, you generally expect to originate more valuable loans while facing lower sales volumes. This tightening should positively influence finance GPU, although we may see adjustments as credit markets normalize and the current environment stabilizes, which could then be a positive factor for sales. The market has clearly improved regarding the execution of credit markets, which provided a positive shift from Q2 to Q3, moving towards more normal market functions. Interest rates have declined, and generally, lower interest rates and reduced benchmarks and spreads lead to increases in the value of finance receivables because consumer interest rates tend to be stickier than the underlying benchmarks. This trend may unfold over a longer period but isn’t expected to persist indefinitely. However, this improvement is somewhat countered by the fact that we did not monetize in the ABS markets this quarter. Most of what we originated was monetized through our partnership with Ally, which has been beneficial, offering flexibility, strength, and reliability throughout the pandemic. Still, this channel is generally less economically efficient than securitization, which negatively impacted our results this quarter. In the short term, several factors could affect our forecast, but assuming macro conditions remain stable, we expect to see normal seasonal trends from Q3 to Q4. Longer-term, our finance GPU position this quarter was at the high end of the long-term model we created in November 2018. We thoroughly reviewed those numbers at the time and believe they represent sustainable long-term expectations. While we anticipate some fluctuations along the way, we do not see anything clearly unsustainable in finance GPU for the long run.

Thanks, very helpful. Appreciate it.

Thank you.

Hi. Good afternoon. Good evening. Thanks for taking my question. Just a follow-up on the previous question on finance GPU. You mentioned the long-term target had high $1,400 at the high end. But I think when you put out those targets your benchmark rate assumptions were higher your spread assumptions were also higher. Both are much smaller and tighter now. So is it fair to assume that if rates stay lower for longer your upside potential there is meaningfully higher than that $1,400 or not? And I had a follow-up. Thanks.

First order, I think we haven't seen enough yet to make us think that we should materially change our long-term financial targets. I think that we should think about kind of the value of the loans being driven by the spread and capturable value between the consumer interest rate and the underlying benchmarks. And so as benchmarks move down the spread between those and kind of the loss adjusted kind of interest stream that we get it doesn't necessarily move. And so I think that when interest rates are moving that can have a short-term impact, but it probably shouldn't have a sustained long-term impact. So I think that in a vacuum would not be sufficient to change our long-term model.

Got it. Got it. Okay. Makes sense. And then just on SG&A leverage a nice progress here in the third quarter. Within the different buckets, are there any areas maybe around advertising or other overhead expenses where you might have tightened spend temporarily that should start to come back in the future? Or should we view it as being a more normalized level in the third quarter? Just curious as to the puts and takes there as we go forward. Thanks.

Sure. So I think on SG&A if we're during into the fourth quarter, I think we're expecting normal seasonal patterns in total SG&A as we start to ramp up for 2021 first half. And normally Q3 and Q4 are investment periods for us where we start the seasonal investment process to prepare for the next year. And so we'd expect that to be the case this year as well on total SG&A while also showing leverage over 2019. So I think that's sort of the leading pattern that I would suggest for Q4. I think in a bigger picture sense I think we're very excited about the leverage that we're now showing year-over-year now that we've moved a couple of steps away from COVID. We certainly expect to show more leverage looking forward into the future. I think one thing that we're very excited about is the patterns that we're seeing in SG&A in our cohorts where older markets tend to have significantly lower advertising expense per unit than newer markets, significantly lower last mile delivery and logistics expense per unit than newer markets, and then much higher market shares, which means lower overhead per unit. And all of that I think all those patterns that we're seeing in the cohorts I think give us a lot of excitement about where we expect SG&A to head over time.

Our next question comes from Colin Sebastian with Baird.

This is Dalton Kern on for Colin. Just another question on the reconditioning capacity looking forward to Q4. I know it sounds like just acquiring inventory and getting it through the pipeline seems like the primary constraint rather than absolute capacity in the network. But can you give a sense for how much if anything the Ohio and Orlando IRCs are going to be able to contribute near term? How long does that take to kind of ramp up and bring them online? And when should we expect that to start to help flow through? And then separately just on the topic of the cohort, profitability and SG&A specifically. A lot of the scale benefits in proximity make sense in terms of lower logistics expenses. But can you talk about how advertising in your older cohorts is trending relative to your long-term targets and kind of anything you've learned there that you think is applicable to your longer term strategy in driving advertising leverage? Thanks.

Sure. So on the new IRCs what I would say is we're working hard to make sure that we're laying out that facility capacity as quickly as we can. And then we have our goal is to ramp that up. We're working to make sure that we build the process to enable it to ramp it up as quickly as we can but it also becomes a choice on how quickly we ramp it up once we have those facilities up and running. Now right now it's a little harder to forecast than normal because I do think coronavirus has impacted things from a hiring perspective from a training perspective and in certain cases from an efficiency perspective. And I think that is more true when caseloads get higher, which we've seen recently. We haven't yet seen that impact the inspection centers today, but there's certainly some risk of that in the future. And so I don't know that we want to be forecasting precisely how quickly we'll be ramping inventory. Right now our expectation is that it will continue to ramp as it has over the last several months and potentially a little bit faster but I don't think we want to quantify it more than that. And Mark can I hand it over to you?

Sure. Yeah. And then on advertising expense in older cohorts, so I think we're feeling pretty good about the patterns that we're seeing there. I think we've always seen cohorts that are older and have had more time to accumulate awareness in word of mouth, have meaningfully lower advertising expense per unit or ad ex as a percent of revenue than newer cohorts where we're just getting ramped up in terms of raising awareness of our offering. I think what that means is our older cohorts are significantly closer to our long-term model than the company average as a whole or certainly newer cohorts that are in that early phase. I think in Q3 our older cohorts are probably on the order of maybe 50 basis points or so outside of our long-term target. And so I think obviously we feel pretty good about that just given all the opportunities for continued improvement and continued growth that we have. And as I was mentioning earlier I think we're very encouraged by the trends that we're seeing in cohort unit economics, which give us a lot of conviction about our path to the long-term model and SG&A.

Our next question comes from Chris Bottiglieri with Exane Paribas.

Hi. Thanks for taking the question. Congrats on your early profitability milestones. By my math, I have you your earliest markets with EBITDA margins of around 7% to 7.5%. If your overhead was at your long-term target you'd essentially be at the midpoint of your long-term margins. Yet your market share in these early markets it's still a little bit below your long-term targets. So I guess the question is with that backdrop, is there anything you've seen today that's made you more constructive or bullish on your long-term targets? Are there's sort of like certain segments or cost structures, where you have better visibility into than you might have had two years ago?

I think we're obviously extremely happy with, where we are. We're extremely happy with how the company has performed. We hit a bunch of milestones this quarter. I think the underlying cohorts look great. We're extremely happy about that. I also think, it's early to be focusing too much on, kind of raising the long-term model. I think that long-term model we put out there we put a lot of thought into. We believe we've got a very clear path there. And we think that path is becoming, clearer at least to the outside world all the time. We feel like, it's been clear for a while. But I think it's getting clear to the outside all the time. So we're going to keep marching toward that. At the company level, we still obviously have a lot of work to do as we continue to expand and lever that SG&A further. But I think things are looking really good. We're very confident. I'm not sure it would be prudent to raise the long-term financial model, at this point though.

Great. Thanks for taking my questions. First question, in the shareholder letter you mentioned consumer preference migration several times. I wondered to get a little bit more detail on that, particularly against the dynamics of kind of new versus used mix as we've seen it shift over the summer, but also just kind of the dynamic of purchasing digitally versus the dealership. What have you guys seen? What seems a little bit faster than expected? And what seems a little bit more durable versus kind of the near-term dynamics?

Sure. So I think it's probably a number of things that have happened. I think one is clearly is a move toward digital in everything, not just in buying a car, but in everything. I think as people choose to stay home more. And choose to distance more from others. I think just more things in general are happening online. And as more things happen online people get more comfortable doing things online. And I think that generates habit formation. I think generally speaking, the biggest inhibitor to change is pre-existing habits. And when, you go through something like this where habits are forced to change people try new things. They like new things. And new habits are created. And so, I think our expectation there would be that that is likely to be a persistent change. And it's an acceleration of trends that were already clearly underway, given the results that we've shown over the last 6.5 years prior to the last year. But I do think that's likely an acceleration, I think another thing that is happening is there seems to be a shift toward personal car ownership. I think it's hard to say exactly how persistent that will be over time. But that seems to be a trend that is real and seems fairly strong at the moment. It seems like the underlying drivers of that have a high likelihood of being able to persist over time. I think the shift from new to used is, most likely transitory. I think that the biggest driver is just the mechanical driver of there being fewer new cars, and production being impacted with the manufacturers. And then, that's just kind of putting a just cap on how many sales you actually can have. So that's probably the biggest driver. The other driver is generally speaking in periods of economic distress there tends to be substitution into less expensive cars. And so, that is probably also at play to a lesser degree. I think both of those we should think of as transitory. And those probably have implications for all kinds of different things, including the way that car prices will migrate over time. And I think it's hard to forecast. But I think those are the major trends. I think the other trend that was present early in the pandemic was basically a lack of other options. There just weren't other places to buy a car. I think we've moved through that. And so I think that was the most transitory of forces. But I think that one is behind us at this point.

Got it. And then, just a quick follow-up, obviously the priority is to scale inventory and broaden the offering. Could you maybe just talk about shifting from your core kind of center inventory out into the value and luxury type SKUs, that some of your competitors focus on and perhaps the GPU implications of those?

Sure. At a high level, going back to the spring we discussed earlier, we see our role as facilitating the best transactions between customers and cars. Our offering is not limited to any specific type of vehicle; we believe we can cater to both higher-end and more affordable cars. When customers are in the market for a vehicle, they seek a great selection, want to find the car they desire, expect a fair deal, prefer a straightforward process, and desire a quick transaction once they make a decision. They also want assurance that the car is in good condition and that they can return it if it doesn't fit their needs. These expectations are not tied to the specifics of any car, which is why we feel there is a significant opportunity to cater to a diverse range of customers looking for all types of vehicles over time. We are working diligently on our various priorities and managing our approach to these tasks. We have been gradually expanding our car offerings, particularly purchasing cars from customers, which has allowed us to access both less expensive and more diverse vehicles. This process is currently in motion, but we have plenty of room to grow. From a gross profit per unit perspective, at a high level, the cars we sell do not materially affect gross profit in a significant way. They do flow through retail, having a moderate impact based on the expense level of the car; generally, more expensive cars yield moderately higher gross profits, while cheaper cars tend to produce lower margins. However, this impact is not substantial, and a large part of our margins is fixed, with only a small portion varying according to the car's price. In terms of finance gross profit, this is more closely proportional to the vehicle's price, aligning with expected relationships. Wholesale and other categories do not significantly relate to specific cars, so they are not major drivers of gross profit. I do not anticipate these factors will significantly impact GPU shifts in the long run at the aggregate company level. However, as we broaden our offerings, there is an opportunity to positively impact more customers.

Hi. Thanks. Just a couple for me. I guess another one on the oldest five cohorts in Q3 you called out in the letter, which I guess were solidly EBITDA positive. Can you give us a sense of growth rates going on in those markets, just relative to corporate average? I get that they may be lower, just because inherently they're more mature, but just curious if that's wrong, any color you can provide there?

Sure. So, I think, generally that frame is correct. I would say, the trends we've historically seen is, newer markets tend to grow faster. They benefit from pre-existing awareness and a lot of inventory early in their life. And then older markets tend to grow slower. As they get bigger, they're just working off of a bigger base, so they continue to grow quickly. I think, right now, we're in an especially unique time. When you're looking at different markets, the different markets are impacted in different ways by the different operational constraints that we've got in the business. And so, I think, when we're looking at this internally, what we're always focused on is what's happening to underlying demand. And we can kind of massage out what's happening to underlying demand by looking at what's happening to sales and looking at the drivers of conversion that impacts sales, which include where inventory is how much inventory is close to different markets, what delivery times are in different markets, what our inventory distribution looks like relative to the distribution that is traditionally sold in different markets, what our credit policies are relative to the distribution of credits in different markets. There can be a lot of different drivers there that can impact things between those markets and that's why we generally, outside of annual and aggregating at the cohort level, we haven't provided a ton of detail on individual markets. But when you look at all that together and just say what's happening to demand, generally across the country, whether it's looking at newer cohorts and older cohorts or looking at different geos or anything else, we're seeing very consistent trends in demand growth.

Got it. That's helpful. And then, just wanted to follow up. I'm still a little confused on kind of what you're saying about the sustainability of the strong pricing you're seeing lately. So, on the one hand, like, it seems like some of the inventory constraints are going to persist a little bit here. You're not committing the sort of a magnitude of improvement in Q4. On the other hand, you mentioned wholesale channels should sort of display a little more normal back half depreciation characteristics. So can you just tell us like which of those is a more important force for pricing into Q4?

Sure. Let's begin with wholesale, which is simpler. There have been unusual dynamics in vehicle pricing over the last six months. The main factor appears to be the stimulus, which likely created additional demand for cars. With people spending more time at home and less on services, they had extra money to invest in vehicles, thus boosting demand. The trend towards personal ownership has also contributed. Additionally, manufacturers faced production capacity issues, leading to fewer new cars available, which benefited new car pricing and consequently affected used car prices as well. We have seen these unusual market dynamics, which we do not expect to continue long-term. Our wholesale profit per wholesale unit reached record levels in the third quarter. Moving into the fourth quarter, we anticipate a return to normal seasonal patterns, albeit more pronounced than usual. Typically, we see higher depreciation from Q3 to Q4, but this year, we expect that depreciation to be significantly steeper. In specific segments, there was even vehicle appreciation in the third quarter, so we anticipate a material increase in relative depreciation going forward. Although we believe the high profitability we demonstrated this quarter is achievable long-term, we expect to see a step down before gradually rebuilding, as we have been doing over recent years, because this has not been a typical environment. In terms of retail, the dynamics differ. They should theoretically be connected because when we purchase cars from customers, the additional margin aligns with the wholesale margin from cars bought for wholesale. However, this quarter, that relationship was not as strong due to different appreciation and depreciation rates across car segments. We also did not purchase cars during the lowest price period in late Q1 and early Q2, when buying would have yielded the most appreciation. Moreover, our pricing approach plays a role. We generally do not increase car prices even with appreciation, as we factor in time-based depreciation and how a car performs against others on our platform. This strategy offers greater stability and reduces exposure to wholesale market fluctuations. We expect retail to align with the typical seasonality witnessed in Q4 2018, but it will not drop back as sharply as wholesale, which we believe was influenced by atypical forces.

Our next question comes from Brian Nagel with Oppenheimer.

Good afternoon. Good evening. Thanks for taking my questions. So one question, I really want to ask just dive deeper into resisting the whole – the effort to buy more cars from customers. I mean, clearly a big driver here for a while particularly in the quarter. But how significant – how large could that become for Carvana? And as you continue to drive that effort stronger or higher are there incremental benefits to your company meaning are you going to be able to buy cars even better over time from customers?

Sure. So I think – at this point, I think the business of buying cars from customers that team has done an absolutely unbelievable job building out that customer experience, the technology that supports it, and the operational capacity to handle it. I really – I want to talk again about that stat that, I gave my prepared remarks. It's pretty remarkable when you think that from Q2 to Q3, we increased the number of cars bought from customers by 50,000 units in one quarter. That's a pretty incredible number. And I think the team just did an unbelievable job to enable us to do that. So that's really exciting. I think, because of all that growth, and because they were able to grow on top of the infrastructure that we've been building over the last several years to service the retail side of the business, they were able to catch up to retail really fast. We've only been really investing in this business for a couple of years and it's made a ton of progress. But I do think these businesses are in theory at least largely independent. As we discussed earlier, they're connected through trade-in, but the majority of the volume in both cases is independent. And so I think from here our goal is to grow each business as quickly as we possibly can and effectively have those businesses race each other, so everyone's winning I think is effectively, what we're trying to do. And so I think it's – when we're stating these businesses as a ratio of one other that's going to be a function of how one business is progressing relative to the other, but we're going to be trying to move them both forward as quickly as we possibly can because we're very small compared to both opportunities and so we're excited about that. As it relates to opportunity to get better, there's no doubt. I mean, I think across the entire business, there's opportunity to get better everywhere. And I think every group inside the business on the retail side and on the purchasing side, I think has one million things they want to get done and looks at what we currently have and is mildly embarrassed by, and really excited about what's about to come next. So I think there's a tremendous amount of opportunity. I think to some degree there's debatably even more opportunity in buying cars from customers just because that's a younger business. And so we haven't had as much time to invest in that offering as we've had to invest in retail. But I think we're very early in both. And then both businesses also benefit from volume. As we get more volume, we get smarter at bidding, and we get smarter at pricing, we get smarter at merchandising. So I think we get better at a lot of different things. So I do think volume will make us better. Thank you.

Yes. Hi, everyone. I appreciate you taking my questions. I have a couple of them. I don't want to dwell too much on this since I know you've addressed it already. However, could you provide more clarity on the GPU guidance? I understand you’re suggesting it will resemble Q4 2018 more than Q4 2019. But I need to clarify whether you're referring to gross profit per retail unit, including other revenue, which shows minimal difference in the sequential shifts from 2018 to 2019. In 2018, it dropped by 7% sequentially, and in 2019, it fell by 5%. Are you focusing on the retail sales, specifically the retail gross profit of the car? If so, that figure fell sequentially by 22% in Q4 2018, while it increased in 2019. So, are you indicating that you are only discussing the retail aspect? I believe that number was around $1,900. Is that figure expected to decrease similarly to its decline in Q4 2018 compared to Q3 2018?

First, so I'll take a crack at that. I think the biggest thing that we expect to see is that wholesale GPU per wholesale unit number to return to more normalized levels, which is a sort of accentuated seasonality relative to what we've seen in previous years, because the wholesale market we do think was in an abnormal depreciation environment through most of Q3, and we expect to see return to sort of normal seasonality. So I think – with that, I think we expect to see a change in wholesale GPU that's going to be driven by that wholesale gross profit per wholesale unit sold number. In retail, I think the way we're thinking about it is sort of within the range of normal seasonality and by normal seasonality what we mean by that is sort of just looking at sequential changes in retail GPU. And we think the normal seasonality is best reflected by 2018, because 2019 had a number of other factors going on with us scaling up buying cars from customers, for example, that we think led it to not have what sort of a normal seasonality in the retail component of GPU would look like. And so I think those are some of the trends. I think there is some seasonal trends that can happen in financial GPU as well, which Ernie pointed to. So I think like at a very high level we think generally speaking we expect to see normal seasonality. We expect to see sort of extends seasonality or accentuated seasonality in wholesale, gross profit per wholesale units sold. And when thinking about what historical seasonality looks like, we think 2018 is probably a better benchmark than 2019 on the retail side just because of the other dynamics that were impacting Q4 2019. That's hopefully a helpful summary.

I'm still confused. What I'm unsure about are the definitions being used. When you mention retail units sold, are you referring only to the car's retail sale and not including total retail gross profit which accounts for other revenue from financing? If that's the case, that figure fell sequentially by 22% in Q4 2018, but it grew in 2019. Are you saying you're only focusing on the retail aspect? That number, which I believe was around $1,900, is expected to decrease similarly to the drop in Q4 2018 compared to Q3 2018.

Yes. We're discussing the retail aspect of GPU, which is accurate. We also provided additional comments regarding wholesale GPU, which is a different category. Additionally, we shared some insights related to finance and other GPU as well.

That piece is related to the retail component GPU.

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

Thank you, everyone for joining the call. We really appreciate it. To everyone out there on Team Carvana, I hope you're proud of the achievements that we had this quarter. It's pretty remarkable for us to have our first EBITDA positive quarter as a company for us to hit $4000 GPU. But please remember that, as incredible as those achievements are, it's all a function of the things that we do every day and have been doing for the last many, many years. And it's all because of how much you choose to care and how you've made this mission your mission. So thank you so much. I hope you take a moment to enjoy the view and gloat a little bit, but then I hope we get back to it because we still have a lot of work to do. Thank you for all that you do.

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