Earnings Call Transcript - CVNA Q2 2025

Operator, Operator

Good afternoon, and welcome to the Carvana Second Quarter 2025 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Meg Kehan from Investor Relations. Please proceed.

Meg Kehan, Investor Relations

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Second Quarter 2025 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 second quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q2, which can be found on the Events and Presentations page of our 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 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 Forms 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. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA. 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 IR website. And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Ernest C. Garcia, CEO

Thanks, Meg, and thanks, everyone, for joining the call. The second quarter was another exciting quarter for Carvana. There are many financial highlights that we hit in the letter, and we will hit throughout the call, but I want to spend this time focusing on a subset and to discuss their implications for the future. We were once again the fastest-growing and most profitable automotive retailer, again by significant margins. Based on our best available data, the market grew by less than 5% in units in the quarter compared to our growth rate of 41%. We believe this growth rate speaks clearly to the desirability of our offering and our team's ongoing execution. When looking at our adjusted EBITDA margin, we once again set a new record for automotive retail and improved by 200 basis points year-over-year. This makes our model twice as profitable as other publicly reporting automotive retailers on this basis. Excitingly, not only with the most profitable adjusted EBITDA margin, but for the first time, we are also the most profitable as measured by GAAP operating income and net income dollars, another significant milestone along our path to becoming the largest and most profitable automotive retailer. Hitting these milestones and rapidly moving through the various definitions of profitability carry significant meaning. It means that when we set a completely different course for automotive retail 12 years and $10 billion ago, our underlying belief was correct. Customers were ready for something new and something tailor-made to serve their modern preferences generates a completely different customer response and completely different financial performance. That alone is extremely exciting and positions us very well for the future, but there's more to the story. Part of what is enabling this rapid growth at a scale of $4.8 billion of quarterly revenue and $500 million of quarterly GAAP operating income is that the market we are changing is enormous. We are currently about 1.5% of the U.S. used car market and approximately 1% of the total U.S. car market. We are also excited about the long runway and incredible potential we have. In addition, we benefit from unique competitive dynamics. Despite being so early in our maturation, we are already the second largest retailer of used cars with our eyes fixed firmly on becoming the largest soon. Our industry has structurally different and more favorable competitive dynamics than other large verticals, and we believe this bodes well for our ability to play a very outsized role in our industry in the long run. And lastly, what we are doing is hard. Hard is the ultimate competitive moat. Our business requires a complex mix of highly varied capabilities to deliver a simple and efficient customer experience. The difficulty of our business was a liability when we started, but today, it's a valuable asset. Big swings have always had that property, and we have always taken big swings. To drive our success over the long term, there are three primary areas where we will be putting our focus. Number one, driving significant growth over a long period of time. Number two, constantly improving the machine through fundamental gains across all areas of the business. Over time, we plan to share the majority of these gains with our customers, the same way many great consumer brands have before us. Number three, building additional foundational capabilities that will make our platform even stronger and will help us drive remarkable outcomes for our customers, our partners, and ourselves over the long term. These efforts will continue to drive us toward our next goal of selling 3 million cars per year and achieving a 13.5% adjusted EBITDA margin in the next 5 to 10 years. The path from here is straightforward. To call on the metaphor, we've made it from 0 to 1. Now we're focused on a very big end. To get there, we'll remain ambitious. We remain focused on giving customers the simplest, most efficient, most fun and most satisfying experience we can give them, and we'll continue to work hard with people that we're proud to work alongside. The march continues. Mark?

Mark Jenkins, CFO

Thank you, Ernie, and thank you all for joining us today. Our second quarter results once again showcased our team's ability to deliver fundamental improvements in operating efficiencies while also driving significant year-over-year growth. For the sixth sequential quarter, we earned positive net income, and we set new records for retail units sold, revenue, adjusted EBITDA, adjusted EBITDA margin, GAAP operating income, and GAAP operating margin. Unless otherwise noted, all comparisons will be on a year-over-year basis. Retail units sold totaled 143,280 in Q2, an increase of 41% and a new company record. Revenue was $4.84 billion, an increase of 42% and also a new company record. Consistent with past quarters, our growth in the second quarter was driven by our three key long-term drivers of growth: a continuously improving customer offering, increasing awareness, understanding, and trust, and increasing inventory selection and other benefits of scale. We believe as we continue on our path of profitable growth, each driver will improve, creating more positive feedback in the model. Our strong profitability results in Q2 were again driven by sustained and fundamental improvements in GPU and operations expenses as well as leveraging our overhead expenses. Non-GAAP retail GPU increased by $195. This change was primarily driven by reductions in reconditioning and inbound transport costs, and an approximately $100 benefit from tariff-related impacts. Non-GAAP wholesale GPU decreased by $85. This change was primarily driven by faster growth in retail units sold than wholesale marketplace units, partially offset by lower wholesale vehicle depreciation rates. Non-GAAP other GPU increased by $126. This change was primarily driven by better cost of funds as well as a higher attachment rate on vehicle service contracts, partially offset by a positive impact of approximately $100 in Q2 2024 from selling additional loans. Q2 was another strong quarter for demonstrating the power of our model to leverage SG&A expenses. Our 41% growth in retail units sold led to a $460 reduction in non-GAAP SG&A expense for retail units sold. The Carvana operations portion of SG&A expense decreased by $147 per retail unit sold, driven by our operational efficiency initiatives. The overhead portion of SG&A expense decreased by $328 per retail unit sold, driven by higher retail units sold. Advertising expense increased by $29 million or $44 per retail unit sold. On a sequential basis, advertising increased by $12 million. We believe we are still in the early days of automotive e-commerce adoption, and there is a significant opportunity to further invest in building awareness, understanding, and trust of our customer offering. As such, we expect a larger sequential increase in advertising spend in Q3 versus Q2. We continue to see opportunities for significant improvement in per unit SG&A expenses over time and as we scale, driven by both continued efficiency in operational expenses as well as leverage in the fixed components of our cost structure. We continue to pair industry-leading growth with industry-leading profitability, not only by adjusted EBITDA, but also for the first time by GAAP operating income and net income. Net income was $308 million, an increase of $260 million. Net income margin increased 5 points year-over-year to an industry-leading 6.4%. GAAP operating income was $511 million, an increase of $252 million and a new company record. GAAP operating margin was 10.6%, a 3 percentage point increase and a new company record. Adjusted EBITDA was $601 million in Q2, an increase of $246 million and a new company record. Adjusted EBITDA margin was 12.4% in Q1, a 2 percentage point increase on a new company record. As previously discussed, our adjusted EBITDA is very high quality compared to many rapidly growing companies due to our relatively low noncash expenses, which will continue to leverage with scale. We converted approximately 85% of adjusted EBITDA into GAAP operating income in Q2. This compares to adjusted EBITDA to GAAP operating income conversion of 73% in Q2 2024. As previously noted, we currently carry many expenses that support retail unit sales capacity of over 1 million units and expect our GAAP operating income to grow faster than adjusted EBITDA over time. Our results in Q1 and Q2 position us well for a strong Q3 and Q4. Looking forward, we expect the following as long as the environment remains stable: a sequential increase in retail units sold in Q3 compared to Q2, and adjusted EBITDA of $2.0 billion to $2.2 billion for the full year 2025, an increase from $1.38 billion last year. In conclusion, our results in Q2 were exceptional. Our team's focus is unwavering, and our opportunity remains clear. Thank you for your attention. We will now take questions.

Operator, Operator

Our first question today is from Daniela Haigian with Morgan Stanley.

Daniela Marina Haigian, Analyst

So my first question comes from incremental adjusted EBITDA margin. It came in at over 17% this quarter. Is there any reason why that wouldn't be indicative of future incremental margins?

Ernest C. Garcia, CEO

Daniela, I think that's obviously a great number. I think it reflects the general leverage in the business and the improvement that we've had. As discussed, we improved EBITDA margin year-over-year by about 200 basis points while growing at 41%. I think when that's true, your incremental margins, I think, have to be in a pretty good spot, and that was clearly the case. I think our goal is absolutely focused on getting to 3 million units and a 13.5% EBITDA margin, and I think we're excited by the potential of the business to keep getting fundamental gains to continue to print great margins and also to have significant value to share with our customers. So that's the plan, and we'll keep marching to it.

Daniela Marina Haigian, Analyst

Great. And then, Ernie, second one, a bit of a more longer-term question. I'm sure you saw Avis announced a partnership with Waymo this week as an autonomous mega fleet manager. While there's obvious synergies with Robotaxi and rentals and logistics, maintenance and infrastructure, ADESA gives you a hub-and-spoke network across the country. You've built out real reconditioning chops with digital integration. Do you see opportunity for Carvana's Total Addressable Market (TAM) to expand beyond used cars?

Ernest C. Garcia, CEO

Part of the sickness that, I think, we probably have is we always see opportunity everywhere. But I think part of what we try to do is stay focused and figure out where is the best place to put our energy. So I think we're extremely excited by what we see in front of us. That just requires blocking and tackling and continually making the customer experience better and getting more efficient all the time. So that is absolutely our primary focus. We'll always be paying attention to everything else, but that's what we're focused on.

Operator, Operator

The next question is from Jeff Lick with Stephens.

Jeffrey Francis Lick, Analyst

Absolutely magnificent quarter. You guys are keeping track of that. So in our work, it appears this quarter, you did some experimenting or just some toggling with APR raising price, and I was wondering if you could talk about that and if that's indeed true and what you're seeing there?

Ernest C. Garcia, CEO

Sure. I mean, I would say I think the way that we try to focus on this is we built a vertically integrated machine that I think has a lot of levers. And then I think we try to put a lot of effort into making sure that we're building intelligence into those levers that make intelligent decisions in any given environment, try to make sure that we're always moving forward and then we try to always make those levers a little bit smarter and make the business a little bit better. I think you can see some movements sometimes in the various GPU line items, but I think the goal is to always make progress. And I think that's where we would kind of push your attention. I think quarter-on-quarter, you can see things jump around, but the overall results are what we're focused on.

Jeffrey Francis Lick, Analyst

Mark, I have a question for you. Our analysis indicates that you have about a 300 to 400 basis point higher APR, yet you're only facing around 60 basis points of 61-day plus delinquency. I'm curious about how you are achieving that and what metrics are contributing to those results.

Mark Jenkins, CFO

I believe your question is about the strength of our vertically integrated finance platform. We've been excited about the advantages of vertically integrating finance and other parts of the transaction compared to a non-vertically integrated model. We've discussed some of these advantages before. We thoroughly understand the car we sell to the customer, having performed a 150-point inspection to ensure its quality, and we provide a 100-day limited warranty to guarantee that customers receive a great car. We also have a deep knowledge of our customers since we interact with them directly, rather than through intermediaries, which is often seen in indirect finance. This close relationship with our customers is a significant part of our vertically integrated business model related to financing. We've committed substantial resources to effectively utilize our data, which has allowed us to rapidly increase the number of transactions and enhance our finance platform data, leading to improved models over time. Consequently, there are substantial benefits to being vertically integrated at a large scale, which can result in strong outcomes for our finance platform.

Operator, Operator

The next question is from Brian Nagel with Oppenheimer.

Brian William Nagel, Analyst

Great quarter, congratulations. As we observe the volumes continuing to strengthen, how should we consider the balance of this year regarding the new reconditioning capacity coming online? What is your strategy with your legacy IRCs or the converted ADESA centers? How should we approach the pace of this development? Additionally, could you provide some insights on how the recent trends and oncoming capacities are helping to meet demand and boost sales?

Ernest C. Garcia, CEO

Sure. Well, I think at a high level, the simple answer is we're on plan. We feel very good about it. We grew sales by 41% year-over-year. We grew inventory available for our customers by 50%. So we're obviously growing production a little faster than we're growing sales. We now have 12 sites integrated with ADESA. We've been doing that at a pretty quick clip. We've been averaging on the order of three per quarter, give or take. I think we have a number of sites left to continue to integrate. I think the team is executing exceptionally well. You continue to see improvements across many parts of what they do that is leading to the gains that we're seeing in retail GPU. And I think excitingly, I think there's a lot more for them to do. I think we have this planned cadence where we aim for Q2, and we set a new set of projects and new set of goals, and we aim for the next Q2. And I think looking forward in our reconditioning group and in all the groups across the company, I think we continue to have ambitious but achievable and exciting goals that are clearly articulated with clear underlying projects behind them. So I think we feel like we're on path. We've got our eyes focus down the field. It's a $3 million goal, and we're just going to keep moving as fast as we can towards that milestone.

Brian William Nagel, Analyst

That's helpful. I appreciate it. I have one quick follow-up. I'm not sure if you addressed this in your comments or if I read it in the letter, but did you notice any fluctuations in demand as consumers might be reacting to the tariff situation?

Ernest C. Garcia, CEO

At a high level, I believe what is most important remains quite consistent. We included a chart in our shareholder letter that indicates that other public automotive retailers saw an average year-over-year growth of about 1%. Last quarter, that figure was roughly flat, suggesting that the seasonal trends for the full quarter were fairly stable. There was a slight pull forward followed by a bit of slowness right after. However, for the most part, it remained relatively flat. We highlighted a $100 retail GPU impact resulting from some pricing adjustments we implemented during that period. Our objective was to ensure that the operation was running as balanced as possible. There will be additional dynamics, catalysts, and minor fluctuations quarter-to-quarter in the future. The key thing for us is to keep moving forward effectively and create tools that allow us to handle any bumps and make necessary adjustments if they arise. Overall, nothing significantly material occurred, just a few minor fluctuations week-to-week, but nothing that impacts the quarter at a meaningful level.

Operator, Operator

Next question is from Sharon Zackfia with William Blair.

Sharon Zackfia, Analyst

I wanted to ask about the marketing efforts. It makes sense that you would be reinvesting in marketing, but I'm interested in your current national brand awareness. Do you have a figure for Atlanta? Also, if you want to provide information for Phoenix, that would be great. As we consider your marketing strategy, is it primarily focused on brand building, or is there a specific message you’re aiming to communicate in the new campaign?

Ernest C. Garcia, CEO

Sure. Well, so I think let's start with what's the goal of all this. I think the goal of all this is to make sure we're laying foundations for outsized growth for a long time. That's the general goal. And I think the fundamentals are we are now at a spot where the gap between our total GPU and our operating expenses is very, very large. And I think that suggests that there are lots of opportunities to lay those foundations. I think one of the things you can compare that gap to is just our advertising expense. And I think there's clearly a big gap between our advertising expense and the difference between those two numbers. So that suggests opportunity. We run various surveys every quarter that we update to try to get a sense of where all three of the considerations. So awareness, understanding, and trust is kind of the general frame that we use, but we try to understand where all that is. And I think what we see is we see constant progress, but we still see a lot of opportunity in all of those. I think there's significant opportunity in awareness and gets through across the country. I think it's true in many even parts of what we do. I think understanding there's even more opportunity. And then I think trust is mostly about making sure that we give customers a great experience one at a time. But I think we're leaning into marketing a little bit to test some things and to see how that works. I think there are many different marketing channels that exist on a spectrum from more direct marketing, where the response is pretty immediate to more brand marketing, where the response is long term. I think we're testing both. I think that marketing in general is something that's very difficult to precisely attribute to sales. I think it's a little easier on direct marketing and even harder on brand marketing. But as we discussed in the letter, we're putting out another brand campaign. We're testing a number of different channels. So I think we see that as one of the many areas of opportunity where we can continue to lay foundations for a lot of growth, and we'll see where that takes us, but we're excited.

Sharon Zackfia, Analyst

But Ernie, do you have any metrics for what aided brand awareness would be for Carvana versus maybe some of your peers?

Ernest C. Garcia, CEO

Of course we do, but we very purposely didn't provide them. And then you followed up and made it awkward.

Operator, Operator

The next question is from Brad Erickson with RBC.

Bradley D. Erickson, Analyst

I had two. First, just for the capacity expansion going forward. Mark, this might be a few. Can you give us a sense of just kind of what that might look like in terms of facility integrations and line expansions and so forth and just how to think about the investment necessary to do that? And then I have a follow-up.

Mark Jenkins, CFO

Sure, I can address that. Our current focus for production expansion revolves around integrating ADESA locations. We've successfully increased the number of integrated ADESA sites over the past year, and we plan to continue this integration through the latter half of the year, with expectations to extend into 2026. This process is relatively low in capital expenditure since we're leveraging existing infrastructure at ADESA facilities and incorporating Carvana's technology and retail reconditioning processes. This represents the initial phase of our strategy. As we advance our growth plans, we will begin to build out some of these ADESA locations more extensively to boost their capacity. When we acquired ADESA, we estimated the construction costs for all locations to be around $1 billion, but with some inflation since that estimate, the current cost may be a bit higher. Nonetheless, this provides a reasonable expectation for the investment required over the coming years.

Bradley D. Erickson, Analyst

Got it. That's helpful. And then how should we think about kind of your ability to source vehicles from consumers and you have more of these IRCs up and running? Like does that ramp up kind of in a linear fashion? Or anything else we should be thinking about kind of in the equation for supply acquisition as you grow your capacity?

Ernest C. Garcia, CEO

Sure. I'll take a swing on that one. I mean, I think it just makes things better and it makes the machine more efficient. I think we talked about in the letter, our inbound transport is down about 20% in terms of miles traveled. As we open more facilities that should continue to go down as we convert all these ADESA facilities, we have room for more than twice as many inventory pools as we have today. And when you think about kind of what that means for the reduction in distance of miles, the cars have to travel, that's meaningful, and that's kind of fundamental value that has to show up somewhere either in the bottom line or in bids where we're sharing it with customers. So I think that that's one of the areas where I think that there's fundamental gains that are because we make the system smarter or do things differently and more efficiently. There's also fundamental gains that just come directly from scaling the system and getting the benefits of positive feedback that exists in the model, and I think that there are many of those in this area. I also think that we just spoke about advertising and brands generally a moment ago. I think a number that is pretty interesting is in the last 2 years, we've grown retail sales by approximately 80%, give or take. And if you look at, say, wholesale to retail ratio, it's been approximately flat at that entire time. And I think that speaks to the fact that these 2 businesses generally grow together, but they also have completely separable product pipelines, right? There's different things that the different teams are working on to make those different experiences better. And I think those teams are both doing incredible things. But so far, we've remained very well in balance, and I think we're benefiting from continuing to scale and continue to open up additional sites. And as I said, I think that creates opportunity to share some of those gains with our customers over time, which we think can power growth even further.

Operator, Operator

The next question is from Andrew Boone with Citizens.

Andrew M. Boone, Analyst

I wanted to ask about retail GPUs in the quarter, had a really strong quarter. Mark, I know you called out the one-time $100 benefit. But is there anything else you can help us understand there? And then, Ernie, in the letter, you guys mentioned word of mouth. Understood you guys aren't going to disclose anything on awareness. But bigger picture, as you guys are just a bigger part of the car economy. Can you talk about the benefits of word of mouth and just having more people talk about the actual experience of Carvana is showing up in a driveway?

Mark Jenkins, CFO

Sure. Yes. Let me start with the first question. So retail GPU was up about $200 year-over-year on a non-GAAP basis. That really breaks down into two primary categories. One was just improvements in reconditioning and inbound transport costs. I think that's an area where we've had a focus for a long period of time and saw nice year-over-year gains there. I think some of those year-over-year gains were driven by continuing to integrate ADESA locations, which leads to lower inbound transport costs, which is one of those retail cost of sales. And so I think just fundamental gains in reconditioning costs and inbound transport cost was about half of that year-over-year gain. The other half was an impact where we saw in April where our April retail GPU was higher than the GPU we saw in the months and the remaining months of the quarter. We think, overall, that impacted the quarter by about $100 for the full quarter as a whole. That higher April retail GPU really linked to the announcements of auto tariffs in late March that drove stronger demand and higher margins.

Ernest C. Garcia, CEO

We are focused on enhancing word of mouth, which we consider crucial to our success. Building a better business is key to fostering that word of mouth. We have numerous initiatives and objectives, but one of our main priorities is to provide customers with the best selection, experience, and pricing. We believe we can continuously improve our system to offer all these elements. As we expand, many customers nationwide will likely find more cars available on Carvana than at various dealers in their local area. If we effectively simplify the car-search process, customers will be able to find their desired vehicle quicker, easier, and at a better price. We're implementing various measures to streamline the experience, such as faster delivery times and reducing the need for customers to call us. We aim to empower customers with tools that minimize their need for assistance, while still being available if they do want to reach out. We shared an example where a customer completed a transaction in just 38 minutes, receiving funds in their account shortly after getting a value on our site. We envision a future where millions of customers can experience similar transactions, where they have access to a wide range of fairly priced cars, all while enjoying a faster process than visiting a dealership. If we can create these discussions among customers, there's no reason we shouldn't be a strong contender for anyone considering buying a car anywhere in the country. Our primary objective is to establish a simple and effective system that encourages customers to share compelling experiences with each other, which ultimately benefits them. While we have made significant progress and take pride in the experiences we offer, we recognize there's still much work ahead. We're currently just 1.5% of the used car market, indicating substantial growth potential. We believe that the stories consumers share are of utmost importance, and we must ensure those narratives are truly compelling.

Operator, Operator

The next question is from Rajat Gupta with JPMorgan.

Rajat Gupta, Analyst

I think in the letter, you had a comment that you want to look at the business more holistically going forward, focusing just in units and EBITDA. Could you elaborate a little bit more on that? What that means, what those levers are? I think you talked about advertising as one. And maybe if you could just elaborate on what different kind of levers that you can manage within those different line items? And I have a quick follow-up.

Ernest C. Garcia, CEO

Sure. Well, I mean, that's a big opening to run through because I think that basically every number that we tried to provide in the letter is a lever that we're looking to improve. So again, I'll go to customer experience, a fast, fun, fair. Make the experience extremely fast, make it fun, make it fair, make sure that we're getting more intelligent all the time, make sure that we're utilizing all the data that our system kicks off to make better decisions about which cars we're buying and what price we're paying for those cars, and how we're pricing those cars, how we're merchandising those cars. Build tools and make it easier for customers to find those cars. I think all of those are things that we're continually working on. And I think every one of those items are levers that we have. We try to build systems that are intelligent and as autonomous as possible. But obviously, that have our oversight. So we decide on key levels like overall pricing level of any given lever, but we try to be intelligent and use analytics to determine where those prices are placed on various cars. And so I think continually improving those tools is an opportunity we've got. I mean, I think there are so many things to talk about there. We want to give customers simple experiences with an efficient machine that's getting smarter all the time. And I think every single thing inside that system is a lever for us.

Rajat Gupta, Analyst

Understood. Yes, I figured towards the end that it could have framed it differently. The other question was just on the cohort data. In the past, you've given us an anecdote around Atlanta, some of the early cohorts. Anything incrementally can give us how the Atlanta or like some of the 2013 or '14 cohorts performed relative to the overall company this quarter?

Ernest C. Garcia, CEO

I think we'll kind of stick with what we've said in the past, but all the trends that we discussed in the past remain there. I think it's been pretty consistent, broad-based progress across the country and across cohorts in every way.

Operator, Operator

The next question is from Michael McGovern with Bank of America.

Michael Peter McGovern, Analyst

On the really strong leverage in operations cost per unit, can you provide a little bit more detail on what exactly goes into that bucket of costs? Is that mostly labor and logistics? And what else is driving the bulk of that operational efficiency?

Mark Jenkins, CFO

Sure. Yes. So let me provide a quick breakdown. So I think some of the key categories of expenses that are in that operations expense line item are fulfillment expenses. So that would include our multicar hauler network that connects our IRCs to the markets where we serve our customers as well as our last-mile delivery network that delivers the cars to the customer store. It also includes customer care and title and registration expenses as well as limited warranty expenses and some miscellaneous other expenses as well. So those are some of the major categories. I think that over the last couple of years, we've certainly made gains across the board. I think we've talked about some of the efficiency gains in fulfillment, for example, that come from technology, and process as well as adding things like adding ADESA inventory pools, which puts cars closer to customers. We've talked a bit about some of our early efforts in using our large data sets to fuel AI models. I think we're still in the relatively early days of that. But some of the early applications have been in customer care, and document processing, where AI can really make us more efficient in the way that we communicate with the customer, improving customer experience and also lead to some cost efficiencies as well. And so those would be a few of the examples. I think operations expense per unit, it's an area where we've seen really strong gains over the past couple of years, but an area where we do see opportunities looking forward as well.

Michael Peter McGovern, Analyst

Got it. And you also called out you grew selection of 50% in the quarter versus last year. Can you provide a little bit more detail on what that means? Is that just a number of vehicles in your inventory? Or does that mean kind of breadth and depth in different makes and models or maybe more inventory of specific models that are really in demand? And where does that stand today relative to where you want it to be?

Mark Jenkins, CFO

Sure. What we mean is that we are referring to the count of units that are readily available for sale on the website as a measure of selection. Generally, an increase in inventory count also leads to greater breadth. This metric specifically highlights the inventory count of units that are immediately available, but breadth usually increases alongside this metric. In terms of our goal, we see a clear opportunity to enhance selection for our customers. We consider selection to be a significant long-term growth driver that interacts with other growth drivers to create positive feedback loops. For instance, having more selection on the website helps convert more customers, which in turn makes advertising more effective, allowing us to build understanding, awareness, and trust. This is just one example of how selection can create positive feedback. Regarding our current selection compared to long-term goals, we believe we are still small in relation to what we ultimately aim to achieve. The used car market has a unique characteristic, as it features a vast number of distinct SKUs based on various factors like year, make, model, mileage, trim, packages, and colors. This results in an extensive set of unique combinations. When we compare our current inventory to that extensive set, it is limited. Therefore, we view increasing our effective SKU count, which means expanding our inventory and its variety, as a vital long-term growth driver.

Operator, Operator

The next question is from Christopher Bottiglieri with BNP Paribas.

Christopher James Bottiglieri, Analyst

The first one is, can you talk more about the large build of inventory in the quarter? Does this primarily relate to the expansion selection or the change in the agreement with the commercial party just have an accounting impact that drove that balance higher? I just want to think if it's growth or just accounting that drove that?

Mark Jenkins, CFO

Sure. Yes. So there are three drivers that our inventory growth in the quarter. The first was just sales and selection growth, as you just alluded to. The second was a change in essentially the contract structure with a large retail marketplace partner that has us holding the inventory on our balance sheet rather than the partner holding the inventory on their balance sheet. And then the third that I would layer in is we did see our average selling prices/average cost of our vehicles increased in the quarter, which also was a driver of that quarter-over-quarter increase in inventory.

Christopher James Bottiglieri, Analyst

That actually leads me to my next question. Can you talk about the shift towards more expensive vehicles and what is happening there? I assume you are targeting more prime customers. Are you making any changes to the rates you charge for prime customers and shipping fees, or is this primarily an inventory initiative at this stage?

Mark Jenkins, CFO

Sure. Yes. So this is one of those areas that relates to Ernie's answer earlier, where I think we're not particularly focused on specific ASP. We're really focused on units and driving strong company-level outcomes. But we have some mix shift into more expensive vehicles. That's largely just driven by our algorithms that are tracking real-time demand trends, tracking real-time supply trends. And then selecting inventory on the basis of what they're seeing in supply and demand. That has led to an increase in ASP. We called out that we do expect a further increase in Q3 beyond where we were in Q2. But it wouldn't surprise me at all if after Q3, we saw it decline. I think it really just depends on what our models are telling us at any point in time. And I think most importantly, we're really focused on some of the bottom line metrics like growth in units and then also, obviously, our profitability metrics.

Operator, Operator

Your next question is from Michael Baker with D.A. Davidson.

Michael Allen Baker, Analyst

Congratulations guys on a good quarter. Can I ask about the guidance for the back half of the year? It implies about, at the midpoint, 30% EBITDA growth. So obviously, a little bit of a slowdown from the first half. I presume it's just the law of large numbers. But does it signal increased investments? You already talked about increasing the advertising investment, but does it signal increased investments around price or bids or anything else along that, or is it just simply we're coming up against big numbers from last year?

Ernest C. Garcia, CEO

Sure. To reiterate, our guidance anticipates a sequential increase in units in Q3 compared to Q2, and we expect EBITDA to reach between $2 billion and $2.2 billion for the full year 2025, which would be an increase from $1.38 billion last year. We're not providing much additional detail beyond that, but these figures are significant and encouraging. We experienced a 41% growth in Q2, and last year was a record year for EBITDA at just under $1.4 billion. These numbers suggest we are on a positive trajectory, and we will continue to progress. This is another milestone on our way to $3 million, which is just a stepping stone towards our future goals. We will keep striving through these various challenges and making improvements as we go along.

Michael Allen Baker, Analyst

Okay. Fair enough. Maybe one other one, and it will probably be the same type of answer. But to get to $3 million in 5 years, I understand you have a range of 5% to 10%. But to get there in 5 years, off of 2024, that's like a 48% annual growth rate. You're having a great year this year, but I think your unit growth rate year-over-year is up like 43%. So again, do you have to like add some investments? Or how do you get that to accelerate to get to that $3 million in 5 years?

Ernest C. Garcia, CEO

I think at a really high level, the 5-year timeline was approximately a 40% compounded growth rate, and the 10-year timeline is approximately a 20% compounded growth rate. We just printed 41%. We're excited about that. I think very importantly, we're 1.5% of the used car market and 1% of the overall car market. So I think there's a lot of headroom. I think our machine is getting simpler. We're adding additional locations to hold inventory and to recondition inventory. We're making it so there's less work per transaction. And I think all of that aids growth, and we're trying to push back value into the customer offering, which makes those stories customers tell even better. So I think we feel like we're on a very good path. There's no question that growing at 40% for 5 years is an ambitious target, but we're an ambitious group, and we're going to try to get there somewhere between that 5- and 10-year target and we're just going to go as fast as we can along the way.

Operator, Operator

The next question is from Christopher Alan Pierce with Needham.

Christopher Alan Pierce, Analyst

Just a quick question on other GPU, two of them actually. Just first, in the quarter, you talked about a higher VSC attach rate. I'd love to hear some comments about where you are on attach and warranty attach in general, how difficult it is to attach warranty online versus in person? Or maybe that's not true, just sort of runway and open space you have on warranty attached broadly?

Mark Jenkins, CFO

Sure. Yes. So I think the attach rate of ancillary products, and I would include VSC and also other ancillary products in that, is definitely an area where we've made progress over time. And through constant testing and iteration, I have been able to identify wins in the quality of our communication of those products, the way those products are structured, things like that. I think despite the gains that we have made, I certainly think there are opportunities for future fundamental gains really by running the same playbook on just constantly iterating and seeking to get better. One of the areas where we're always getting better is each year, we have more and more data. So we have more and more observations to help us evaluate what exactly our customers like in these products? What are they looking for? And that helps us improve attach through communication and product structure, things like that, that I mentioned previously. So to summarize that, it's definitely been an area where we've made gains. Customers definitely like and get value out of these products, but it's also an area where we see opportunities for future fundamental gains just like in other areas of the business.

Christopher Alan Pierce, Analyst

Okay. I have a big picture question regarding gains from loan sales. Prior to Carvana's entrance, there was a group of ABS investors focused on acquiring auto loans. You have identified new investors in this market. Can we conclude that as you discover more of these investors, you and other auto dealers will gain more pricing power in the loan sector, providing a boost to other GPU? Or is this an oversimplification considering your market share?

Ernest C. Garcia, CEO

That's an interesting question. I think we often hear a related but different question as well of are we going to outgrow that market. And so let me try to give you the way that we at least think about it. I think we are a small part right now, 1.5% of a large mature market where that large mature market kicks off a lot of very high-quality consumer loans in the form of auto loans. And those auto loans are being purchased by someone today through various different channels. And I think as we take market share and displace some of those originators, there are still hands that are hungry to hold those loans. And so I think we've been, in many ways, expanding that market as we've been kind of growing into it. I think we've also been expanding the buyer base more generally than just the ABS market. Sometimes we meet buyers through the ABS market that we then move on to pool sales, and it can go the other way as well. So I think our focus is, we believe that the receivables that we're generating are very high quality. We believe it's highly desirable to a lot of investors, many investors that have traditionally been buyers of auto loan assets and probably a number of investors that maybe traditionally haven't had access to them. So if anything, we think that there's room to expand the total buyer base for auto loans, and we think that that, could bode well. And I think we found that as we've gotten bigger and we've established more of a brand and people have seen more of our performance history, it's gotten easier to attract additional buyers. And as we've gotten bigger, it's gotten easier to be a meaningful partner to more buyers because we can originate enough volume to be meaningful for them just by the work that they do to start the relationship and evaluate a pool of loans. So I think as a general matter, that's another area where we're very optimistic, and we think our unique model and being vertically integrated, where there isn't slippage between the incentives of the retailer and the incentives of the finance company is a valuable thing, and it's allowing us to originate lots of very valuable receivables.

Operator, Operator

The next question is from Marvin Fong with BTIG.

Marvin Milton Fong, Analyst

Congratulations on a great quarter. Just maybe two around other GPU also looking into that topic. But you referenced a lower sell-through rate in the quarter. Was that related to, I think, another player in the space that commented that there were more cash buyers that kind of came up because of the tariffs in the quarter? Is that related to what you saw? Is that related to that dynamic? And has that sort of cycled out of what you're seeing? And then secondly, you cited improved cost of funds as benefiting other GPU. We just kind of love to just understand, obviously, we can always drive that lower. But if we sort of level set maybe in a 1- to 2-year horizon, how much more benefit do you think you can extract from lower cost of funds? And how could you kind of give us a relationship to how that translates to actual GPU? That would be great.

Mark Jenkins, CFO

Sure. Yes. Let me take that one. So I think on the lower sell-through rate, I think what we're calling out there is actually really an impact in Q2 2024 more so than an impact in Q2 2025. So in Q2 2024, we had stored some more loans in Q1 that we ended up selling in Q2. So we actually sold more loans than we originated in Q2. And I think that had a positive impact on the order of $100 per unit in Q2 2024. This quarter was relatively normal, give or take a small amount in terms of the ratio of loan sales to originations. And so nothing really to call out there in this quarter. That was really about approximately a $100 impact back in Q2 2024. That was a positive impact in that quarter. The question about cost of funds. So I think what are some drivers of cost of funds? One I think is the number of loan investors and buyers that we're selling loans to in the finance platform. That's been something that has steadily increased over time as more and more investors become aware of the quality of the assets that we're originating, do the relevant research, and start to invest in or buy the loans. So I think expanding the pool of buyers is a driver of cost of funds. Other drivers of cost of funds, I think, are just continued strong performance, and we talked about this earlier in the call, but our origination platform has generated assets that have performed very well, offering very strong returns to investors. And so I think continued strong performance from a vertically integrated platform is a driver of cost of funds gains as well.

Operator, Operator

Your next question is from Alex Potter with Piper Sandler.

Alexander Eugene Potter, Analyst

So you mentioned that 40% CAGR, if you're able to sustain that. Obviously, you've been doing very well recently, that sort of implicit in your comments earlier about that being a difficult thing to achieve in 5 years is that, obviously, 40% growth kind of year in, year out over time, something could break, right? I mean it's difficult operationally to sustain that sort of growth. So I'm wondering, obviously, you're growing at that pace now. What is it that you think in your system could break? Is there anything getting close to breaking with you sort of redlining at the top end of that growth range right now?

Ernest C. Garcia, CEO

Sure. That's a great question. I don't feel like we're pushing the limits right now, nor am I suggesting that we're about to accelerate growth significantly. It seems that our teams are performing well, confidently, and comfortably. We've mentioned before that in a general sense, the areas most susceptible to issues are those with the most tasks to manage, the largest teams to coordinate, or the highest volume of movement. Currently, reconditioning is likely our most operations-heavy area. The good news is that we're building a foundation for the future. In many ways, we are investing in future growth now. We could have easily expanded into our existing inspection centers, which would have supported our current growth. However, over the past year, we've integrated 12 ADESA sites, which represents a significant investment. The reward has been that we've expanded our inventory pools, allowing us to reduce travel distance. This investment meant we had to start these new sites, staff them, and operate them at lower capacity, making them a bit pricier. While this is reflected in our current results, it will lead to greater efficiency in the future, providing us with more locations to hire additional staff and produce more vehicles. Therefore, the work we’re doing in reconditioning, although challenging at present, not only supports the growth you're seeing but also sets the stage for smoother expansion in the future, which is both important and encouraging. In logistics, we've made significant improvements over the last few years, becoming more efficient and decreasing vehicle travel distance. Logistics is probably our second most complicated operational challenge. While we've reduced the total miles traveled, we need to ensure that we manage this effectively to sustain long-term growth. Our plans are in place, and our capable team has a clear strategy for continued progress. Market operations is likely our next most complex area, and we have solid plans there as well. That team is also executing extremely well and has recently focused on speeding up delivery times, which adds value for our customers. I'm pleased with that progress. In customer care, we've shared various data points showcasing our rapid advancements and increased efficiency. This suggests that over time, the growth of personnel and operations can be less than the overall growth we are achieving as a company by becoming more efficient. We have a solid plan in place, but real life is always challenging. There will be obstacles, and our performance will fluctuate, sometimes exceeding expectations and other times not meeting them. However, we have capable teams and clear strategies, and we aim to grow as quickly as we can responsibly.

Operator, Operator

The next question is from Ron Josey with Citi.

Ronald Victor Josey, Analyst

Two questions. Can you remind us, Ernie and Mark, when the mega sites or ADESA sites will come online, and how quickly they will reach full efficiency, comparable to the IRCs? Ernie, you mentioned some improvements in internal processes, but you also noted enhancements to the e-commerce experience to make it easier and more enjoyable. I would love to hear your thoughts on this or maybe highlight one or two changes that have positively impacted conversion rates.

Ernest C. Garcia, CEO

Sure. First, it will take some time for the ADESA sites to reach the efficiency of the existing Carvana sites. Currently, the Carvana sites are utilized at just under half of their capacity, while the ADESA sites are even less than that. Generally, utilization is a key indicator of cost efficiency. Right now, the ADESA sites are more costly, and investing in their growth is a bit different from focusing on the Carvana sites. However, for the reasons previously mentioned, we believe this investment is wise, and we expect to improve as we develop those sites over time. The same goes for logistics; having those sites allows us to travel fewer miles, but since they are underutilized, the cost per mile is higher. This will normalize as utilization approaches that of the Carvana inspection centers. The process of catching up is gradual and won't happen overnight, but so far, we are performing as expected or even slightly better. The teams are doing very well, and we are optimistic about the progress. We are achieving substantial gains while making investments that facilitate future growth, which suggests that the underlying improvements in the business may be greater than what is reflected in the financials. This is encouraging. Regarding making things enjoyable, we have focused significantly on enhancing efficiency over the last couple of years, which speeds up customer experiences and improves financial performance. There are still several areas for improvement, but your point about fun is spot on. We also aim to reduce "anti-fun," particularly in how we handle mistakes. When errors occur, we strive to treat customers exceptionally well. We are exploring various innovative ideas to enhance our customers' experiences, making them quicker and more enjoyable, but we prefer to keep those plans under wraps for now and discuss them in retrospect.

Operator, Operator

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

Ernest C. Garcia, CEO

Perfect. Well, thanks, everyone, for joining the call. Carvana team, awesome job. Truly incredible. I feel like I just keep saying the same thing every time on these calls, but the results that you've been able to put up over the last couple of years are something that nobody could have foreseen. I think this quarter is another example of it. Thank you so much. I hope that you're proud. I hope you find one another tonight and give each other over-aggressive high fives with some serious eye contact because you've absolutely earned it. And I think we've got a lot more to do. We've got more high fives to earn. So let's put our heads down tomorrow and go do it again. Thanks, everyone.

Operator, Operator

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