Earnings Call: Q3 2018

Nov 7, 2018

Afternoon, and welcome to the Carvana Third Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead. Thank you, Austin. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Q3 2018 earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. The 3rd quarter shareholder letter is also posted on the IR website. Would like to remind everyone that we will be webcasting our 1st Analyst Day later this month on November 29, where we plan to discuss our long term outlook and technology foundation. 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 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 Kibana's most recent Form 10 ks 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. 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 Q3 was great for us when evaluating through a number of important lenses. We performed well against our guidance in all respects. We executed well and relieved many of the operational pinch points in the business. We made significant progress in our preparation for the volume we expect heading into the seasonally stronger first half of twenty nineteen. We continue to invest in technology that we believe will further differentiate the quality of experience we're able to provide to our customers. We made significant progress in our business of buying cars from our customers. Most importantly, the sum of everything we saw in the quarter continued to increase our confidence in the size and economics of the long term opportunity that stands in front of us. We are building a fundamentally better solution to car buying for our customers. These fundamentals are playing out in many specific ways and revealing many opportunities. At this point, we strongly believe the biggest hurdle stands between us and achieving market share that has never been seen in automotive retail before is our ability to execute our plan. As a team, we couldn't ask for more and we are motivated to make that dream a reality. We had our 19th straight quarter of triple digit growth in units and revenue in the 3rd quarter. To illustrate the power of that compounding growth, we delivered more cars to our customers in the Q3 alone than we did in all of 2015 2016 combined. During the Q3, we continued to meaningfully expand our population coverage and importantly, we continue to see strong trends in market share penetration across our markets. The demand we are observing in our execution to date has only resulted in even greater optimism about the future we see in front of us. The progress we've made in GPU is also very exciting and lights the path to profitability more clearly than ever before. In the Q3, our GPU surpassed the SG and A per unit of many traditional used automotive retailers. The implications of that are significant and it deserves a moment of contemplation. It's a powerful step, but it's just one of the steps along the way. Our mid term goal of $3,000 is clearly in sight and we're beginning to get more concrete visibility beyond $3,000 This will be among the topics we will hit during our Analyst Day on 29th. We also continued our march toward profitability in our expense line items, even with our efforts to alleviate demand generated pinch points in the business and our investments in additional scalability to prepare for 2019. SG and A per unit ex gift decreased by $702 year over year with about $2.30 coming from leverage and customer acquisition costs and the remainder coming from non advertising SG and A. This allowed us to achieve 8.3 percent EBITDA margin ex gift in the quarter reducing those losses by over 7.50 basis points year over year. Given the quality of demand we are seeing from our customers, our focus on the further scalability of our business continues. This is taking many forms internally and is well underway. One visible sign of this is the acquisition of Propel AI, which we completed yesterday. Propel is an artificial intelligence powered communication platform that delivers automated conversations with customers via SMS, e mail and on-site chat. We expect this technology to improve our customer experiences further and to make us more efficient over time as it rolls out and is integrated into our platform. As part of this acquisition, we gained a highly experienced product and technology team that we are excited about and that will be joining Carvana full time. One of these leaders is Tom Tyra, Co Founder and ex Chief Product Officer at TrueCar. Tom immediately earned my respect several years ago when we first met in TrueCar's offices and I'm excited to finally get a chance to work with him every day. Initially, he will focus his efforts on integrating Propel and on our business of buying cars from our customers. As noted last quarter, we've been working hard to give our customers a better way to sell or trade in a car. We continue to see exciting progress in the Q3. The total number of cars we bought from our customers, including both retail trade ins and cars bought from customers that aren't buying from us, grew 2 73% year over year in the quarter. This now represents 37% as many cars as we are selling to customers, up from 21% 1 year ago. Many of these cars are certified at our inspection and reconditioning centers and are sold to our buying customers. In the Q3, 16% of the cars that we sold to customers were bought from other customers, up from 11% in the 2nd quarter and about 6% in the Q1 just 2 quarters ago. The remainder of these cars are sold at auction, and those cars flow through our wholesale line item. This is obviously very rapid progress and speaks to several underlying drivers, specifically our ability to give our customers an actionable value online in minutes and then pick the car up from them on their time is resonating. Our brand is attracting customers at scale that have an open mind to new offerings and trust us to deliver on those offerings. Our team is composed of high quality people who can rapidly execute when their energy is focused in a particular area, and there's a lot of low hanging fruit and latent opportunities in Carvana due to the fact that we are still less than a 6 year old company and haven't yet had the time to focus our energy in all the important optimization in front of it. While our Q3 progress has raised our confidence and expectations in this area, we want to continue to manage expectations carefully over the shorter term. We will remain focused on optimizing our understanding of how to best run this part of the business and this may lead to variability in both growth rates and margins. But make no mistake, there's enormous opportunity and we are focused on its massive long term potential. Looking forward, we are optimistic, confident, ambitious and energized. We have a product people love. We have nearly endless ideas about how to make it better. The unit economics of the business continue to prove out. We have clear visibility in the GPU and SG and A gains. We've executed for 19 straight quarters of triple digit growth and the team that delivered that growth over the last 5 years is motivated to keep delivering for the next 5 and beyond. Rarely in life do you outshoot your own ambitions. We started this journey with big ambitions and the data we are seeing and the people we are surrounded by have only emboldened us. We'll be working hard and having fun as we chase our goals and we'll continue to keep you informed along the way. Mark? Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons are on a year over year basis. We are pleased to announce another quarter of triple digit unit and revenue growth, increasing total GPU and improving EBITDA margin. Retail units sold totaled 25,324 in Q3, an increase of 116%. Total revenue was $534,900,000 an increase of 137%. In September, in recognition of Carvana selling its 100,000 vehicle earlier in the year, Ernie committed to giving all employees shares of his personal stock. We provided a lot of detail on this in our shareholder letter and to ensure investors have visibility into our key metrics excluding Ernie's gift, we will refer to several non GAAP measures presented as ex gift with reconciliations available in our materials. Unless otherwise noted, all gross profit, SG and A and EBITDA metrics mentioned by Ernie or I on this call are on an ex gift basis. Our guidance in past quarters has corresponded to ex Gift results, and we expect to provide guidance on ex Gift results going forward. Because the gift is awarded after each recipient's 1 year anniversary date, we expect it to impact our GAAP financials through the first half of twenty twenty. While this means readers of our future financial statements and shareholder letters will have to get used to some new terminology, we believe this gift was a very positive event for our company and its shareholders, and it very much reflects our commitment to one of our core values. We're all in this together. Returning to our Q3 results, total GPU including gift was 22.63 and total GPU ex gift was 2,302, an increase of $5.60 This increase in GPU was driven by a significant reduction in average days to sale to 63 days this quarter, down from 97 days a year ago, as well as gains in financing and ancillary product gross profit. EBITDA margin ex gift was negative 8.3%, an improvement of 7 60 basis points year over year. In addition to GPU gains, we are showing significant operating leverage while simultaneously expanding our geographic footprint. We opened 13 new markets in Q3 and have opened 4 more so far this quarter, bringing our total to 82. We now expect to open 40 new markets in 2018, bringing our end of year total to 84. We also made significant progress toward increasing our inspection and reconditioning center capacity in Q3. 5th IRC in Indianapolis remains on track to begin producing cars around the New Year and we are currently evaluating sites for additional centers in 2019. As awareness of our customer offering grows, we believe scaled nationwide reconditioning operations will be a key driver of our customer experience while also bolstering our path to profitability. Additional IRCs allow us to improve selection for the customer while also reducing delivery times and enhancing logistics network efficiency. On November 2, we upsized and extended our forward flow agreement with Ally, increasing their future funding commitment to 1,600,000,000 dollars We believe this transaction gives us significant flexibility to provide customers with our seamless online financing experience, while also enhancing our ability to monetize receivables that we originate over time. Deep knowledge and expertise of automotive financing is one of the core strengths of our company and we believe we are just scratching the surface of the financing and monetization opportunities in our business. Since our last call, we've also completed several transactions to maximize our financial flexibility. In September, we completed an offering of senior unsecured notes, generating net proceeds of $342,500,000 The notes have a 2 year no call period and mature in October 2023. In November, we upsized our floorplan credit facility to $650,000,000 from $350,000,000 and extended the term by 2 years. We believe these financings represent flexible and efficient sources of capital for us as we continue to execute our plan. In terms of outlook, for the Q4, we anticipate continued rapid growth in retail units and revenue. We expect retail units sold of 27,500 to 30,000, an increase of 103% to 122% and revenue of 570,000,000 to 630,000,000 an increase of 115% to 138%. We are also raising our outlook for the full year to 93,858 units to 96,358 units and $1,940,000,000 to $2,000,000,000 in total revenue. We expect total GPU X gift to be $2,000 to $2,250 in Q4. This reflects a normal seasonal decline in the 4th quarter, including the anticipated impacts of our annual Cyber Monday promotion. We are also raising and narrowing our GPU ex Gift outlook for the full year 2,100 to 2,175 versus 15.39 in 2017. This reflects the strong performance we have seen across multiple parts of the transaction as we march toward our mid term goal of $3,000 and beyond. We expect EBITDA margin ex GIP to be between negative 8.5% 10.5 percent in Q4, an improvement from negative 15.5% last year. This outlook reflects the impact of our recent acquisition, a higher share price on stock based compensation and increased investments in technology and logistics to prepare us for anticipated sales growth in the first half of twenty nineteen. You should use approximately 149,000,000 weighted average shares on a fully exchange basis in Q4 and approximately 150,000,000 in Q1 twenty nineteen. As we look forward to the first half of twenty nineteen, we expect continued improvement in total GPU and EBITDA margin and we are excited about continued rapid growth and progress toward our financial goals. Thank you for your attention. We will now take questions. Our first question will come from Sharon Zackfia with William Blair. Please go ahead. Hi, good afternoon. I guess just a few questions. On the acquisition of the AI business, could you kind of quantify what that meant for the Q4 versus your original outlook in terms of the incremental cost? And then secondarily, I'm not sure if you have another refinancing of receivables in the Q4. I thought that might be the case. And I'm curious just given the other refinancing, if you were able to get any kind of more advantageous terms with Ally? Yes. So first, Sharon, I'll take that. So on the PROPEL acquisition, we expect approximately $2,000,000 to run through expenses in the 4th quarter related to the PROPEL acquisition. I'll also just take the opportunity to kind of touch on that acquisition for a second. We're very excited about the acquisition. As we said, we've got a great team coming on board. Their technology is very, very interesting. They have the ability to parse any text inquiries from customers and then translate that into intents that our computer can understand. I think our vertical integration makes our ability to integrate that much, much more significant. We can basically take those inquiries and put them into all of the services we control around financing or trade in, the purchase process itself, any of those different processes, we're going to be able to integrate with this technology in ways that would be very, very difficult for other companies that don't kind of own the entire stack of the customer experience to do. So we're excited. We'll also be able to integrate that not just through SMS and text, but also on-site and on our website itself. So we're very excited about that. As I said, the team is great, so we're super excited. We did a refinancing acquisition in Q3 that did flow through the financials. We expect to do another in Q4, which will also flow through financials. The terms with Ally, I would say, 2 fold, very similar, would be first order, how I'd characterize it. And then I think there are some structural differences that make it a little easier for us to do more of these refinancing deals and deals that are similar to them, that should enable us to continue to improve our finance monetization over time. Although as we've said in the past, we're in relatively early phases of that and that could be somewhat chunky. But we're very optimistic about where that's headed as well. Okay. Thank you. Our next question comes from Chris Bottiglieri with Wolfe Research. Please go ahead. Hey guys, thanks for taking the question. What a follow-up on the retail GPU is pretty strong there. You seem to attribute it a lot to the lower day sales. Just curious just given like the pretty significant increases you saw in the customer trade in rate, Why that didn't translate into like supporting higher retail GPU? I guess, is the first part of the question. Sure. So retail GPU improved by about $3.25 year over year. That corresponded to a reduction in average days of sale from 97 last year to 63 days this year, which was really far and away the biggest driver of that 3 $25 incremental improvement. I think there were various puts and takes in retail GPU as well. I do think we saw benefit from buying more cars from customers. We do make solidly more on cars that we source directly from consumers than cars that we source from auction in our retail business. We also though in the quarter saw slightly higher retail COGS as we took over 2 inspection centers in their entirety, early in Q3 and then are also ramping up production looking toward the first half of twenty nineteen. Yes. And I'm going to jump in there too really quick because I think it's a good opportunity to talk a little bit about how we're thinking about the business of buying cars from our customers and how that's likely to flow through the financials in the future. So as I said in my prepared remarks, that flows through in 2 ways. 1, cars that we buy from our customers and then sell at auction. That shows up in wholesale GPU. And then cars, as you pointed out, cars that we buy from our customers and sell to other customers flow through in retail GPU in a way that isn't really separately visible to you. The reason we're very optimistic about this business, but the reason we want to manage expectations in the near term about how exactly that's going to flow through our financials is because if you look at our wholesale GPU per unit, for example, this quarter, it's about $3.55 If that number moves by $100 then you need to increase units by 30% just to offset it, right? So there's still kind of a fair amount of sensitivity there, given the size of those margins. And so we don't want to get into a place where there's an expectation that every single quarter where it's going to be kind of ratcheting that higher quarter after quarter. It may play out that way and it may not. And we want the freedom to be able to price the appropriate ways and learn from all those different pricing experiments, etcetera. So I just want to make sure we're kind of carefully managing that. But the opportunity is big and the progress was significant. Okay. So that makes sense. And then from a Blue Sky perspective, if you think about getting your DSIs down to 30 days over some indefinite period and getting your sourcing rate up another call it 30 points and hold your value discount, what does that retail GPU look like at majority? Is there a way to contextualize that? So I would just continue to point to the framework we've given in the past, which is every day that we reduce days of sale is worth approximately $10 of GPU all And that has some kind of seasonal fluctuations in it, but roughly speaking across the year, that's the right number. I think our 3,000 midterm GPU goal has always kind of had underneath it an implied turn time goal of 30 to 60 days. We're making a lot of progress against that and feel really, really positive about it. I think as we continue to grow across the country and build out more inspection centers, we have shorter inbound transit distances to those inspection centers, which goes into our days of sale. I think there's a lot of opportunity to improve there. I think the obvious area of improvement is just as we continue to grow sales against the fixed inventory, we can push down website days. And then the other bucket is basically days at the inspection center where there are probably some gains as well. So from a Blue Sky perspective, I think there's definitely upside potential. But I think we remain focused on kind of that mid term goal and we think 30 to 60 days is a good place for us to be aiming for now. Got you. Very thorough. Thank you. And the next question will come from Zach Fadem with Wells Fargo. Please go ahead. Hey, guys. On the unit growth guidance, could you talk a little bit about some of the Q4 dynamics around seasonality and promo? And mo? And specifically, do you expect the unit trends to be consistent throughout the quarter or are you anticipating an up tick around the holiday in November December? Yes. So I would say our guidance reflects our expectations would be kind of the highest order response to that question. I think if you're asking us to contextualize it versus last year, last year was a strange year. We had hurricane replacement. We are moving trucks around the country to try to alleviate that. We had some noise around our Cyber Monday promotion. We expect to do the Cyber Monday promotion again this year. So I don't think we want to get into kind of inter quarter guidance, but you can see what our overall expectations are. Got it. That makes sense. And with the NDIRC coming on in the end of the year, what should we keep in mind for modeling purposes as those new costs are layered in? And how should we think about the impact to volumes and days to sale as the facility is up fully and running? Yes, sure. So in terms of average days of sale, I don't think you should think of India as making kind of a meaningful difference. I think we have a global inventory and by global, I mean nationwide, where all of our customers are drawing on all of our IRCs. So I think in terms of moving on average days of sale, I don't think there's much to expect there. In terms of impact on sort of retail COGS, I think there could be a small impact there as we get things up and running and are a little bit less efficient early on, including we often start new IRCs with a little more outsourced kind of local services that we then in source over time. And so that can be a small headwind as we're getting that up and running. But I wouldn't think of that as being particularly large given that we've got 5 IRCs up and going now. Yes. And I would just add, in kind of a more medium term perspective, I think as that inspection center gets up and running, that means we have more cars located closer to all of our customers in the middle of the country, which just means that we're able to deliver cars country, which just means that we're able to deliver cars faster to customers, which has conversion rate impacts and they have to travel lower amounts of miles, which means that we have lower cost amounts of miles, which means that we have lower costs. So I think that's a it's an exciting development for sure through the medium term and in the short term, there will be the ramp up costs associated with it. Got it. That makes sense. Appreciate the time, guys. Thank you. And our next question comes from Mark May with Citi. Please go ahead. Hey, guys. This is Nick on for Mark. Just two questions. The first on retail ASP, I noticed that's kind of been creeping up year on year. Can you give an update on where you are compared to Kelley Blue Book there? And then the second question is on population coverage. You've called out around 200 markets with 200,000 people or more. Kind of my quick math shows that's about 78% population coverage. Is that kind of the long term bogey? And would we expect you guys kind of aggressively go after getting that coverage? Or will you reassess at the end of this year after you're about 57%, which is about 3 quarters of the way there? Sure. Yes. So our changes in ASP year over year are almost entirely mix. We talked a little bit about this in Q2. We're going from Q1 to Q2. We saw a meaningful increase in ASP due to mix. And we typically see an increase quarter over quarter going from Q1 to Q2 as newer cars and lower mileage cars sort of start hitting the used market. That has more or less maintained in Q3. I think ASP was down $200 quarter over quarter as we started to normalize our mix a bit. But and we do expect further normalization in mix over time. But I think the ASP, by far the largest driver of our ASP is mix and that in turn is driven in large part by what's happening in the market and also what our customers are demanding on the site. Yes. And just coming on your population coverage question, I think your math is right. If you take the 200 largest DMAs and add them up, 78% population coverage is approximately right. I think it's important to also note that in general, we have delivery radiuses around each of our markets that are larger than kind of the line drawn around the DMA. So with that number of markets, we'd be able to cover more of the population than that. But I think that that's a good framework to be starting with and that's probably a topic that we'll touch on at the Analyst Day on 29 as well. Okay. Thanks for taking the questions. Thank you. Thanks. And our next question comes from James Alberty with Consumer Edge. Please go ahead. Great. Thanks and good afternoon. Thanks for taking the question. I wanted to ask with your new IRC up and running, can you give any or can you help us delineate kind of what your aggregate capacity is in terms of processing vehicles in a perfect way? I know you're going to be building out over time and there's some there's a slope to that curve. But if you were to sort of put everything in through your facilities today, how much could you handle with that new IRC up and running? Sure. So the ND IRC is similarly sized to our previous 4 IRCs, which means it has about 50,000 units of annual production capacity at full utilization. And so combining that with the Ford that we are already operating from, that's 250,000 units of total annual capacity at full utilization. Understood. And I think related to that, as we've seen you grow out across the top DMAs across the country, SG and A is still somewhat higher, I think, than we had modeled in terms of the linearity of the quarter. Nevertheless, you're showing good leverage. I'm just wondering how quickly can that start to step down? And what is the right I'm not sure if you've ever shared publicly, but what's the right long term SG and A to units metric that we should be thinking about from a modeling perspective? Yes. So I would say we're pleased with our growth. We're definitely showing a lot of leverage. We expect to continue to show a lot of leverage. We're obviously investing in getting prepared for next year and kind of all the growth beyond that from a technology perspective, from an IRC perspective, from a logistics perspective. So there is investment in that that we will continue to make because we've got a much longer term game that we're playing here. So I think you'll continue to see investments. We haven't given a specific SG and A target as a percentage of revenue, but I think that's also something that we will likely discuss to some degree at Analyst Day. And then kind of on the other side of the economics on the gross profit side, I would just say that we continue to make a lot of progress toward our $3,000 midterm goal. We're very proud of that progress. And our expectations have only gotten stronger there in terms of what we think we'll be able to ultimately achieve. So we're excited about that as well. Understood. Thanks again and congratulations on the progress. Thank you. The next question comes from Sameet Sinha with B. Riley. Please go ahead. Yes, thank you. A couple of questions. First, considering that demand for used cars seems to be unseasonally strong as per industry data, it seems like you're still trying to have that Cyber Monday sale. What's the value of having that considering that at one on one hand you're stockpiling for a strong seasonally strong period just 2 to 3 months away. It seems kind of counterintuitive or maybe the strategy is to kind of sell that this way you get to sell some of those slow moving vehicles. And second question is, Mark, probably this is for you. CapEx came in slightly below expectations. Has there been some sort of push out or some sort of increased efficiency there? Yes. So I'll start with Sided Monday, and then Mark maybe you can come in on CapEx. So I think your framework for Sided Monday I think is right if we're optimizing for now or the next 6 to 12 months. We're heading into 2019 expecting to see lots of growth there. We want to have cars available for our customers there. We want to make sure that we are smart about managing our GPU lock. So I think if we're optimizing for the immediate term, that's right. I think the value that we find in Cyber Monday is that it's kind of the one time per year where we can do a promotion that cements our brand. I think in general, we like to be very careful about promotions because we think that promotions have been heavily associated over time in consumers' minds with less than transparent and simple transactions. And so we stay away from that outside of this one event where we feel like we're able to really kind of bang the drum of we're an online automotive retailer and we're able to tell our story through this promotion. And so I would think of it as a brand building effort and accordingly we're going to continue to do it. That's something that's playing out over a longer period of time in the next couple of quarters. Sure. And then Sameet on CapEx, our expectations for CapEx have not changed. I think there can be some fluctuations quarter to quarter. For example, in Q2, we had large outlay for the initial purchase of our in the IRC. And so things like that can cause some fluctuations, but overall, our expectations for CapEx have not changed. If I can sneak in one question. So in the shareholder letter, you're indicating you're staying close to existing markets as you open the new markets or staying close to the footprint. Is that a strategy that you plan to adopt even if you continue to head towards that kind of 200 market target? So I think as we continue to launch markets, I think it will be a mix of network expansion markets and network density markets. I think we have largely expanded coast to coast now. So there's still a few large network expansion markets left. But as we look forward after a couple of major network expansion markets, there will be a lot of network density markets as we're marching toward continued market openings over time. Great. Thank you. And our next question comes from Colin Sebastian with Robert W. Baird. Please go ahead. Hi. It's Ben on for Colin. First, I know you guys have provided average penetration rates across the markets before. Is there any update to provide there? Or would it be accurate to say that the markets that you've rolled out in 2018 are performing better at the same vintage or at the same stage as markets rolled out in 2017? And then I have a follow-up after that. Yes. So we've historically provided that data after the Q4, and we haven't provided it in between. But what we said in prepared remarks and I believe also in the shareholder letters, we continue to see consistent uptake and consistent patterns in the way those curves are unfolding. One of those patterns we called out in the past that newer markets are generally ramping faster than older markets and nothing significantly different there. Got it. And then secondly on GPU, you guys have been coming at the high end of that range over the last couple of quarters. I know on the last call, you mentioned some potential GPU headwinds from the scaling of the Dallas and Philadelphia facilities. Should we expect that to be more of a 4th quarter impact or is that kind of lumped in with the ND scaling as well? I think the way we talked about that on the last call and are still thinking about it is that's going to be a back half impact to a degree as we move into those two facilities, as we start getting the up and running as we discussed. There's some potential headwinds there on retail GPU that are built into our guidance. But overall, we're feeling very good about the way we're scaling these IRCs. We're looking toward the first half of twenty nineteen, making sure we're prepared to ramp up production, increase selection and be where we need to be there. Got it. Thanks, guys. Our next question comes from Nat Schindler with Bank of America Merrill Lynch. Please go ahead. Yes. Hi, guys. Thanks for taking my question. Can you help me out on what's the average FICO score of your buyers that are using financing on your site? And how has that trended since you as you've doubled since IPO or actually call it massively more than doubled? Also, can you it doesn't look like Ally is now taking all of your loans based on my calculations. Are you selling to others now as well? And if so, who and what type of loans are you selling to other people than Ally? Yes. So first on the FICO question, I would say our FICO continues to look a lot like the broader used car market. So if you look at other leading retailers or just kind of used car sales in general, we've got a very similar FICO distribution to any of those retailers and that's been very stable across time. Nothing to call out there. What I would say is Ally is buying many of our loans and then they're also providing financing to other buyers that were then able to refinance and refinancing transactions. That I would say is in concept somewhat similar to the way securitization market kind of works. And we'll probably continue to develop more of those financial buyers over time. And those are some of the structural changes that we're talking about that we believe we'll have access to over the next several quarters as we continue to bring more people in. But Ally remains our biggest partner by a long way. Great. Thank you. Thank you. And our next question comes from Gary Prestopino with Barrington Research. Please go ahead. Hi, good evening. Hey, could you maybe just talk a little bit about the profile of the car that you are retailing from consumers? I mean, they tend to be older cars, something like that in terms of mileage, things like that? In terms of the cars that we're acquiring from customers that we then retail? Right. Yes. Yes. So on average, they do tend to be a little bit older and a little bit higher mileage than cars that we source through our main auction channel. And I think that's fairly our understanding at least is that's fairly typical in the industry. Okay. Yes. And then what I would say Gary, just to add to that, I think one of the reasons we're so excited about this opportunity, it's obviously an enormous GPU opportunity. It's another way for us to touch more of our customers and give them a great experience, but also it's a way for us to get access to this fairly unique inventory that is hard to find. So for example, on average, these cars that we buy from customers do sell faster on our site than cars that we buy from auction because they are more unique relative to the rest of our inventory. And so we think that's another kind of hidden benefit of growth in this business. And our last question today comes from Ron Josey with JMP Securities. Please go ahead. Great. Thanks for taking the question. I just had 2 real quick. Last quarter, Ernie, we talked a lot about automating a lot of what are still very manual processes, processes, just and that's understandable given the relatively early days of the business. But just want to understand, if you could talk a little bit more about where you are in the automation. I'm sure it's still early days, but trying to understand sort of the progress here. Maybe you can give us some innings or something. And then, and apologies if you talked about this already, but you just give us some more content on the Ralph Breaks Internet campaign that you're doing? I think that's really interesting. Thank you. Sure. What inning are we in for automation? That's a hard question. Very early, I would say. I think as we talked about in the past, our kind of framework for prioritization has always been customer experience first and then our financial goals, 1, units, 2, GPU and then 3, kind of operating leverage, which I think the unique part of operating leverage is basically operating expenses. So I think that has always been kind of our lowest priority area of investment. And so it has not gotten as much attention as many other parts of the business. We started to invest more there over the last several quarters. And I think that the motivation there is partially financial. I think more than that, it's more about just getting the business to be even more scalable than it is as we look at kind of big growth in units and percentage terms and absolute terms looking forward. So I don't want to quantify what inning it is, but I would say very early. And I would also say PROPEL is a very interesting technology solution that is going to help us to organize a lot of our data and present it to customers in ways that are more self-service and also in ways that helps to automate some of the things that we're doing on our own side. So I think that that fits into that general theme. As it relates to Ralph Breaks the Internet, we're very excited about that collaboration. Obviously, Disney is an enormous company that we couldn't be more excited to be associated with and the movie itself is great. My kids are excited about it. And so I can't wait to go watch it with them and have our logo show up in there. So we think that that's really fun. We also think this is potentially a broader movement that may be kind of thematic, not just for us, but marketing in general, where there's more and more marketing built into content that people want to watch. And so this is our first foray into that. We're doing it in a pretty big way and we're very excited about it. We have no idea whatsoever what to expect. We'll be watching it closely and hopefully it's something we do again in the future. Got it. Thank you. Thank you. And we do actually have one final question today from Seth Basham with Wedbush Securities. Please go ahead. Thanks a lot and good afternoon. My question is around the costs, if you could elaborate for us. Your implied EBITDA guidance for 2018 went from negative $152,000,000 to negative $189,000,000 at the midpoint with GPAs not changing much. I presume that the biggest issue here is cost. You called out $2,000,000 extra cost for your acquisition in the Q4. What are the other large cost buckets driving that decline in EBITDA guidance? Sure. So I think there's a number of things to call out there. So I think at the midpoint of our current EBITDA guidance versus our previous EBITDA range, it was about $10,000,000 difference that we're building in versus that previous range. That basically boils down to a handful of things. So Ernie mentioned $2,000,000 for PROPEL. We also had about $2,000,000 in increased stock based compensation expense from the run up in stock price. We had about $2,000,000 versus our kind of previous expectations on logistics network expense and also engineering and technology hiring and then another $2,000,000 that was a smattering of other things. And so I think those were the major things to call out since our last call. And I think obviously, we feel like all those things are obviously intelligent things to be doing looking toward 2019. I think we're feeling really good overall about all the progress we've made this year, obviously levering SG and A. I think at the midpoint of our EBITDA guidance for the year, it's about 7.40 basis points of EBITDA improvement year over year from 2017 to 2018. That's actually higher than the amount of improvement we had going from 2016 to 2017. I think we feel great about continued margin improvement. I think as we're looking to 2019, we see EBITDA losses declining meaningfully looking to next year. And so I think we're feeling really great about all the progress we're making, while doubling markets, investing in technology for the long term and still showing substantial leverage while doing all of that. Yes, Stefan, this is Ernie. All I would add to is I think it's useful context to look back to the last 3 years. We've only levered from Q3 to Q4 in 1 year and that was last year. The previous 2 years we delevered because of these normal seasonal factors. You have higher depreciation rates, which impacts GPU. We have the Cyber Monday promotion. Generally speaking, across the industry, it's a little bit of a softer period. And then we're generally investing in preparation for all the sales that we see coming in the first half of next year. We, in our previous guidance, had implied that we would lever again this year, and we wanted to make sure that we did that while simultaneously preparing for next year. I think as we headed through the quarter and we made this acquisition and then we saw some weird quirks happen with the stock based compensation that impacted that a little bit. And then we have to make choices real time about how to scale and how to prepare for scale going into the next year. And we felt like a handful of 1,000,000 of dollars was not a difficult decision there, given what we expect going into next year. So that's what drove that decision and the change in guidance. Got it. Helpful context. And then my follow-up is on other GPU this quarter. Now, ex the $158 per unit that you earned from the $4,000,000 refinancing fee, Other GPU was flat with the Q2 and also we saw more limited gains year over year than the Q2 as well. What's going on there? Any change in the financing penetration rate or other factors impacting that other GPU this quarter? So, yes, I think the other GPU said it was roughly flat sequentially after kind of adjusting for the finance monetization fee. I think there's some small puts and takes there. Interest rates continue to rise, which has a little bit of an impact on finance premium. And then we've made some gains actually in attachment vehicle service contracts through some of the initiatives that we've undertaken, started to see some of those gains in the 3rd quarter and believe that will be a positive for us going forward. And Seth, I'm going to jump on top again. I apologize. The last point that I do think is important to make here is, I said in my prepared remarks, but I want to make sure that it's heard. I think our GPU this quarter being above the SG and A of many scaled used automotive retailers is a really interesting data point. I think that carries a lot of implications. And we still obviously believe there's lots of upside to our current GPU. And we believe that our cost structure is going to be meaningfully lower over the long run than other traditional automotive retailers. So we think that's a great signal and we're on that path and we're working as fast as we can against all these different line items. I appreciate it. Thank you very much. Thank you. And this will conclude our question and answer session. I would like to turn the conference back to management for any closing remarks. Thank you guys very much. Thanks everyone. Team Carvana, great quarter. We still got a lot of work in front of us, but we did a great job this last quarter. And then to investors and analysts, we look forward to speaking to you at Analyst Day. It should be a fun day. Thank you guys very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.