Good day, and welcome to the Carvana Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President, Investor Relations. Please go ahead.
Thank you, Matt. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Third Quarter 2021 Earnings Conference Call. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website at investors.carvana.com. The third quarter shareholder letter is also posted on the IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K and Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Unless otherwise noted on today's call, all comparisons are on a year-over-year basis. Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our investor relations website. Now, with that said, I'd like to turn the call over to Ernie Garcia. Ernie.
Thanks, Mike, and thanks, everyone, for joining the call. The third quarter was another great quarter for Carvana as we continued our march toward becoming the largest and most profitable automotive retailer. We sold over 110,000 cars to customers, recorded nearly $3.5 billion of revenue, grew total gross profit by 100%, and had our second consecutive quarter of positive EBITDA. Our team delivered these strong numbers despite entering the quarter with significant operational constraints, facing the Delta COVID wave that peaked late in the quarter, and despite making the choice to meter both retail and purchasing volume, which we implemented mid-quarter to ease pressure on the system while we operationally catch up to demand we're seeing. Since the onset of the pandemic, we found ourselves constrained in various parts of our operational chain.
While those constraints have held us back relative to where we might have otherwise been, our team has done an exceptional job and has made tremendous progress throughout. In fact, in the third quarter, we bought and sold over three times as many cars as we did in the third quarter of 2019 prior to the pandemic, and roughly eight times as many as we did in the third quarter of 2018. This has all been possible because we have continued to focus on the long term. We've continued to invest in the people, technology, and infrastructure that are necessary to buy and sell millions of cars per year while delivering the exceptional customer experiences we've become known for. Given our opportunity, we believe this is clearly the right choice. To everyone across Carvana who's worked so hard to make our continual progress possible, thank you.
We've also recently entered into two exciting partnerships with Root and with Hertz that we discuss in more detail in our shareholder letter. While the potential of these opportunities is significant, they're both at their very early stages, so we plan to share additional details on our product, financial, and scale ambitions with respect to these partnerships over time and will not be providing meaningful additional color at this time. These partnerships are each very exciting. Each has excellent underlying fundamentals and therefore excellent potential, but they're also exciting because of what they represent. As we continue building the Carvana platform to deliver exceptional customer experiences and to handle the constantly increasing scale, our horizontal and vertical opportunities continue to increase.
As has been the case since our inception, to maximize our opportunity, we must thoughtfully assess and continually increase the capacity of the business to effectively manage our growth and to simultaneously explore these opportunities. We must appropriately balance our ambition for both scale and scope with the focus necessary to make constant forward progress. So far, we'd like to think our team has done a good job at building more capacity in the business to tackle these opportunities and at managing these trade-offs given the capacity we have. To build Carvana into what it can be, we'll need to continue to spend energy getting this right in the future, and we plan to. Looking forward, we remain extremely excited.
We've reached the scale of over 100,000 cars and $3.5 billion of revenue per quarter, yet we're still only approximately 1% of the overall market. Our focus today is the exact same as it was at the very beginning. It remains on our customers, on the experiences we give them, on maximizing the value we provide to them, on leveraging technology to minimize our costs, on building for scale, and on doing all of that with a long-term perspective so we can maximize our opportunity. The march continues. Mark?
Thanks a lot, Ernie, and thank you all for joining us today. Q3 was another strong quarter for Carvana. Retail units sold totaled 111,949, an increase of 74%. Total revenue was $3.48 billion, an increase of 125%. Total gross profit per unit was $4,672, an increase of $616, and the second-highest quarter in our history. Retail GPU was $1,769, a decrease of $88. The change in Retail GPU was primarily driven by higher reconditioning costs, in part resulting from the impact of the Delta variant on production throughput and higher wholesale acquisition prices, partially offset by a higher customer sourcing ratio. Wholesale GPU was $420, an increase of $154.
This was driven by gross profit per wholesale unit of $936 and record wholesale unit volume.
Which grew 227% year-over-year due to buying more cars from customers. Other GPU was $2,483, an increase of $550. The increase in Other GPU was primarily driven by strong finance execution and a positive impact of higher industry-wide vehicle prices on average loan size. EBITDA margin was positive 0.2% in Q3. This marked our second consecutive quarter of both positive quarterly and trailing twelve-month EBITDA, despite significant investments for growth in 2022 and beyond. We ended the quarter with approximately $2.3 billion in total liquidity resources, giving us significant flexibility to execute our plan. We are executing well and remain focused on building our network and increasing our production capacity to meet demand.
We grew immediately available inventory to an average of 16,400 units in Q3, an increase from 12,800 units in Q2, despite the impact of the Delta variant on production volume. We remain on track to launch eight new IRCs by the end of 2022 and continue to focus on growing our IRC teams in preparation for future growth. The explosive growth in buying cars from customers we experienced in the past two quarters also placed significant constraints throughout our system in Q3. To ease the pressure on our system, we began metering both retail units and cars bought from customers mid-quarter to allow our operational capacity to catch up to demand. Most notably, to manage retail sales volume, we reduced the number of vehicles shown to customers in search results, which limited the benefits of higher immediately available inventory on retail units sold.
We expect to increase our operational capacity in Q4 with an eye toward 2022. Looking forward, we expect to complete a record year on retail units, revenue, total GPU and EBITDA margin in 2021. In Q4, we expect retail unit growth to continue to be governed primarily by our operational capacity. We expect revenue growth to be more closely aligned with retail unit growth in Q4 than it was in Q3. We expect total GPU in the low to mid $4,000s for the full year, marking our eighth consecutive year of substantial gains. We expect a seasonal pattern in total GPU in Q4, with Q4 lower than Q3.
Finally, we plan to continue to invest in the business both to catch up with current demand and to prepare for growth in 2022 and beyond, leading to a seasonal pattern in SG&A per retail unit in Q4 and close to break-even EBITDA margin for the full year. We are extremely proud of the progress we have made as a company in 2021, navigating the unique macro environment while delivering rapid growth and managing through operational constraints. Our results relative to the industry continue to leave us more excited than ever about our long-term model and the path toward our goal of delivering more than two million retail units per year and becoming the largest and most profitable auto retailer. Thank you for your attention. We'll now take questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. In the interest of time, please limit yourself to one question and one follow-up. If you have additional questions, you may rejoin the question queue. At this time, we will pause momentarily to assemble our first question will come from Sharon Zackfia with William Blair. Please go ahead.
Hey, good afternoon. I guess, can you provide some more color on the metering that you're talking about where you kind of took down the level of cars you were buying from customers and then the concurrent shift in the search results that consumers saw? I mean, how much of an impact was that to the quarter? Can you dimensionalize that? I guess it sounds like you're hoping that'll be kind of all back to normal in early 2022. I just wanna make sure I understood that commentary correctly.
Sure. So let me start with the constraints that we've been facing, and then we can kind of go from there. I think, you know, the primary driver of constraints was definitely the very significant growth we saw in the entire business, but most notably buying cars from customers in Q2, which then has continued and put additional strain on the business. I think it was accentuated by COVID, especially in the inspection centers. When we found ourselves a little bit behind, it was probably a little bit harder to catch up than it might have otherwise been given the unique hiring environment. I think that's kind of, you know, what's been going on from a constraint perspective.
To maybe make that a bit clearer too, there can be increases in the total amount of work that are necessary inside the business that are actually greater than the increases in transactions that we see. What I mean by that is if we get behind and it takes us a little bit longer to resolve, you know, a customer question, and we have to call them back, we'll see more customer calls. If we have a delivery that gets delayed because the logistics network is kind of really full on certain legs, we have to kind of reschedule that delivery, and it can put additional strain on the logistics network. You can actually see kind of, you know, total work necessary in the business grow more than just transactions.
We saw that, you know, starting in Q2 and then spilling over into Q3. Now, when we talk about the nature of constraints I think we faced throughout our life and maybe notably over the last eighteen months and most specifically over the last three or four.
In general, you know, web demand sort of starts at the top of the funnel. A customer shows up and is interested in buying a car, and the likelihood that that customer chooses to buy a car from us is a function of many things. It includes whether or not, you know, they find the car they're looking for from us. It includes if they have a question they want to call in and talk to someone, how long does it take us to answer the phone and answer their question. If they're looking for, you know, getting a car delivered, and they want to look at the delivery dates, how quickly can we deliver that car.
When we say that we're constrained, what we generally mean is that kind of the amount of demand that we're seeing is causing those service levels to be below where we historically have had them. Fewer customers would elect to go through the process with us, and therefore it crimps sales to some degree. I think that's been active, as I said, you know, throughout our life to varying degrees, and certainly over the last 18 months. The difference this quarter was, you know, normally that system can kind of balance itself out, and you'll see service levels kind of move out a little bit, and then that reduces the number of sales that you'll see conditional on demand.
Then, you know, we catch up and you know, it kind of gets back into balance or at least starts to approach balance. I think just with the speed that we saw total transactions grow, that moved more than we would've liked for it to have moved. We were in a position where we kind of chose to just take those same drivers, effectively reduction of conversion, which there were several, but the most notable of which was choosing to be really surgical with what inventory was displayed in what places, and we just reduced the amount of inventory that customers could see in certain places. That ends up being a very powerful tool because we can reduce the amount of inventory that people see in certain markets if the logistics legs to that market are very constrained.
We can reduce, you know, certain classifications of vehicles that maybe have more work associated with them on average if we have certain groups that we need to alleviate pressure on. That was a very effective tool for us to use. The effect from a customer perspective is just the average customer saw fewer cars than they would've otherwise seen, and therefore, their likelihood of finding the car they were looking for was lower. In terms of quantifying it, wouldn't want to precisely quantify that. It was an effect. It wasn't an overwhelming effect. I think the bigger effect is just kind of the degree to which we've been behind in general over a longer period of time.
That certainly was an effect in the quarter, and then that's the way that we implemented that tool set to put ourselves in a better position, allow ourselves to catch up, so that we can get back out in front of all the demand that we're seeing.
That's super helpful. I guess when you think about all this complexity of buying the cars from consumers and the weird environment that you're operating in just in general, is this mainly a human issue at this point? Are you just behind where you want to be on staffing, or is it a tech issue?
It's first order a person issue. I think it extends, you know, to inside of Carvana across all of our different operational groups and then also outside of Carvana. You know, many different groups that we deal. When we buy cars from customers, for example, we're generally reaching out to a bank, and we're dealing with a payoff, and then we're asking for the title in return. You know, many banks are understaffed in this environment relative to where they'd like to be. Those processes can take longer. I think it's first order a person issue inside of Carvana and outside of Carvana. I think that, you know, across time, as we kind of outlined our priorities in the past, it's, you know, customer experience first, volume, GPU, and then expenses.
Expenses generally means building more technology to automate more of the process. So, you know, that's also part of it. Many of these processes, you know, we can and continue to further automate across time, but that's generally longer lead time than the more immediate kind of fast-acting solution of getting more people.
Our next question will come from Zach Fadem with Wells Fargo. Please go ahead.
Hey, good afternoon. I just want to follow up a bit on the last couple questions. Just with all the mitigating and Delta variant and labor constraints in the quarter, do you think the gap between your demand and actual unit sales widened or compressed in the quarter? With your new IRC openings, is there anything you can share on timing or cadence of those IRCs as we move through 2022?
Sure. On the first, I would say we believe it widened in the quarter. I think the kind of, you know, first way that we would articulate that is just, you know, in this quarter, we took additional steps to meet our demand that were proactive and weren't just kind of natural system balancing. I do think it widened. Now, look, I also want to make sure, you know, whenever we're sitting here talking about constraints, I think I want to make sure and point out the success that we've had alleviating those constraints over time and the quality of work our team has done to do that. You know, I said this in my prepared remarks, but I got to repeat it.
You know, we've been constrained over the last 18 months, and yet over the previous two years, in terms of total transactions, cars bought and sold to customers, we've grown by 3 x. Over the last three years, it's 8 x. While we've been constrained relative to the demand that we're seeing, we've also been scaling very quickly. I think the teams have done an exceptional job. They've been under a lot of pressure with the demand that we've been seeing, and I think they've just, you know, continually fought very hard to catch up. We're extremely grateful to them, and I do believe they've done a great job.
As it relates to the cadence of the inspection center rollout, we've only kind of provided the information that we expect to open eight by the end of 2022. We're gonna stick with that for now for the kind of guidance that we're giving.
Got it. Then I can't let you off without asking about the Hertz Partnership, as well as the Root Partnership. You know, so many elements to unpack, and I just wanted to drill in on the sourcing side, as this appears to be a way of, you know, mixing in a higher, you know, source of new vehicles on your platform without having to go to auction. Just curious, do you think this partnership and partnerships like it expand your addressable market? Then on the unit economics side, to what extent do you believe your marketplace offering could be additive to the long-term 15%-19% gross margin?
Sure. Let me start with this. I think in anything that we do, kind of independent if it's partnership or if it's something that we're building ourselves, generally the framework that we use to evaluate it is we wanna make sure that we can give a high quality differentiated customer experience. We wanna make sure that we believe in the long-term economics of whatever we're doing, and then we wanna make sure that we build it for scale. Because if those first two things are true, then you're gonna wanna be able to scale it over time. And I think that that's the way that we, you know, generally think about all these opportunities. I think, you know, from there, you oftentimes have this question of, you know, do you partner or do you build something yourself?
I think there's a lot of considerations, you know, there. I think when you can partner, you know, partners oftentimes have assets that we might not have access to. You know, you can go faster. You know, there's sometimes questions about alignment that you have to try to resolve. You have to come up with terms that are good for both sides. There's all kinds of questions around, you know, whether or not a partnership makes sense. I'll start with Hertz. I think as it relates to Hertz, they've got an incredible asset, which is a high quality flow of vehicles coming directly from manufacturer that have been utilized in their rental fleets and then, you know, ultimately make their way into the hands of another consumer. They've got a really high quality asset there.
I think, you know, that would be very hard for us to replicate on our own. We would like to think at least that what we've built, which is a really high quality, you know, highly scalable, you know, platform to sell cars to customers, would be very hard for them to build. We're natural partners in that way. We're excited about the partnership. I think from a scalability perspective, I think, you know, directionally, the way to think about these kinds of partnerships is it means that there's a little bit less work per transaction. I think that probably that's the most important part of what scalable means. I think, you know, for something to be scalable, there has to be a lot of demand for it.
You know, the next question is how much kind of can you grow the amount of work that a company can do and, you know, to get to units, it's a function of how much work is there per transaction. I think, you know, that partnership reduces the total amount of work that we have to do to get a car to a customer. In that way, it's exciting. Now it's extremely early. You know, we've been testing this for a number of months, and then we signed a broader deal with them in the last couple weeks. You know, this will take time for us to figure out and nail, but I think there's a lot of interesting potential there.
To try to touch on Root, I think, you know, we consider Root in the same way. The insurance business is a very complicated business. It's a business that has a lot more complication under the covers when you really kind of dig in than you might imagine from a distance. I think that they've done a great job building a high-quality product over time. We think that they're a really natural partner. We share a vision for what a solution is supposed to look like. We share a view that it takes a ton of work to build anything great. I think that's really important because that means we can both pour work into it. I think that's also an exciting opportunity for us, but it's also very early.
As it relates to both those partnerships, we're very excited about their potential. It's early and, you know, there's a lot of work to do to get those to where we would like them to be. We'll be working hard to try to get those to the place that we want.
Our next question will come from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon. Thanks for taking my question.
Thanks.
The first question I have, and I know we discussed this a bit already, but just with regard to the operational constraints. David, just to understand better, I mean, are you starting to see some easing at all in the various aspects of that? You know, recognizing that the environment's very fluid at this point, but if you look at it now, at what point do you think that would you believe that these constraints could let up and let the business flow much more naturally?
That's hard, right? I mean, I would say, you know, constraints show up when we either don't accurately forecast the amount of work that needs to be done in the future or if we don't execute as well as we would like. That's what, you know, that's when they show up. I think that when we look at where we, I think that we've executed. I would like to think at least that we've executed very well through all of this. I think when we look at areas where we maybe didn't accurately forecast what was gonna happen. I think the, you know, several, especially the first several COVID waves, we didn't foresee and that, you know, led to a decrease in efficiency and therefore constraints.
I think, you know, heading into, you know, the early part of this year in Q2, I think, you know, we did not foresee all of the growth that we would see, as I said, most specifically in buying cars from customers. We weren't prepared for it. I think as long as we're prepared for it, you know, we again would like to think that we've demonstrated the ability to execute to very high levels of kind of growth. I think that, you know, constraints really are about our ability to foresee what's going to happen and then our ability to plan for that and execute to that. Our continual hope is that, you know, this will be the last meaningful COVID wave. You know, we'll find out if that's true or not.
We don't quite know. You know, the general kind of market across the board is in a bit of a unique spot right now. I'm not sure that was totally foreseen. As I said, buying cars from customers came faster than we would have otherwise thought. What I would say is, you know, we're clearly investing right now across the business as aggressively as we feel like we responsibly can to try to catch up, because we do think there's a lot of excess demand there. You know, it's hard to predict exactly how all this will unfold. You know, we're gonna be working hard to grow the capacity of the business as quickly as we responsibly can.
Got it. That's helpful. For my follow-up question with regard to, you know, the efforts to buy cars directly from consumers. You've been very successful. There's a number of other players now, both online and offline, also pushing aggressively into this aspect of the business, so to speak. Are you seeing greater competition? Does the fact that more players are now pushing this ultimately have an impact on where the consumer reacts?
I think that's the smarter place to err, and I think that's the right thing to assume. I think, you know, empirically we're buying more cars from customers than ever, and we've seen a massive influx of demand in the last, you know, several quarters, from an already very high level. I think that speaks to the quality of the offering. I also think that, you know, it's never smart to get comfortable and to stop building. While we believe we've got the highest quality customer offering today, we also believe we can make it a lot better in a lot of really important ways. We've got a great team that’s focused on that product, that has all kinds of interesting plans to continually make it better.
You know, I think undoubtedly it's an area that's gotten more attention over the last several years. It probably will continue to get a lot more attention over the next several years, and we'll be continually building to make sure that we keep a spread between the quality of our offering and what else is out there.
Our next question will come from Rick Nelson with Stephens. Please go ahead.
Thanks a lot. Good afternoon. I'd like to ask you about the ASPs. You know, they've been on a you know, rapid rise trajectory. Do you have any concerns, Ernie, about vehicle affordability and any you know, potential pullback in demand given where pricing is today?
Sure. I can take that one. You know, I do think higher used vehicle prices you know has an impact on demand through an affordability effect. You know, clearly there are some customers that are targeting a specific monthly payment that meets their budget. As used vehicle prices rise, you know, there are certain customers that you know are less likely to be able to meet that budget. I do think if you look industry-wide, I mean, we're obviously growing incredibly quickly with you know 74% year-over-year growth despite the constraints that Ernie talked about. If you look industry-wide, you know, various data sources have you know total industry sales down, call it on the order of 10%-15% in Q3.
I do think there's an effect there. You know, we're growing, you know, really quickly, despite that industry-wide effect, which I think is a testament to all the demand that we are seeing.
Okay. Got you. Thanks for that. As a follow-up, curious about the unit growth that you were seeing during the quarter before you pulled things in or metered things. I guess, what was the final straw that caused you to pull back mid-quarter?
Sure. I don't think we want to jump into the details of intra-quarter growth. What drove the decision was just that we weren't catching up. I think that historically we've been able to catch up faster, and we just saw that big influx of demand show up. Once you see that happen and once you're behind, and then all of a sudden you face a situation where the amount of work per transaction can start to go up, you run the risk of allowing yourself to get further behind, even if demand stays flat. Because the further behind you get, the more work per transaction there is, and that can cycle on itself.
You know, we decided to take the proactive measures to give ourselves a little bit of breathing room just so we could catch back up. You know, that's what drove it. Again, you know, I think we feel really good about the progress that we're making there. You know, we've given these stats of the growth we've made over the last several years. We've, you know, even in the last several weeks, you know, we continue to see improvement across all those major groups, whether we're looking at customer care, who's answering customer questions and handling a lot of the transaction. We've seen our service levels get better there. If we're looking at logistics, we've seen that get better over the last several weeks.
If we're looking at the inspection centers, I think they really have done an amazing job. I mean, the inspection centers, that's hard. When you get behind in inspection centers, that's a big industrial undertaking. It takes time to catch back up. You know, they've caught up. They built inventory in the quarter despite the fact that we faced another COVID wave, which is really tough in general, but it's extremely tough when you have an assembly line structure. They've done a great job. Market Ops, which handles last-mile delivery, has done a great job, and we've seen service levels improve there. I do think, you know, we're seeing improvement, which is good. You know, we remain behind, and we're working hard to catch up.
Our next question will come from Rajat Gupta with J.P. Morgan. Please go ahead.
Great. Thanks for taking the question. I had a couple questions on the GPU component. You know, on Retail GPU, I guess, you know, just the quarter-over-quarter bridge, you know, how should we think about the moving pieces? You know, the intra-quarter price benefit was likely lower versus the second quarter. But, you know, was there any impact of higher recon labor costs or any inefficiencies that impacted that number sequentially? And just like, given that pricing has continued to remain so strong in the fourth quarter. You know, you talked about like a seasonal decline in the fourth quarter. Just curious as to why that would be the case.
Just lastly, as you continue to face a big ramp of IRC next year and the labor environment remains challenging, I mean, should we anticipate any impacts to the GPU bridge next year and maybe just on wage inflation or, you know, just overhead expenses, you know, for the AC IRCs? I have a follow-up on F&I. Thanks.
Sure. Let me take a stab at all of the questions in there. First one talking about Q3 Retail GPU. We had a strong quarter on Retail GPU in Q3. It came in at $1,769. I think if we you know think back prior to COVID, we'd normally expect to see you know some seasonal decline in Retail GPU. I think we saw that you know for the couple of years prior to COVID. This year we saw a slightly similar effect even though the you know we're in an obviously very unique environment where we did see early in the quarter depreciation rates pick up a little bit relative to Q2.
That definitely had an effect on the sequential change in GPU going from Q2 to Q3. The other thing I'd call out is, you know, we did see higher reconditioning costs on a per unit basis in the quarter. That was driven in part by Delta which definitely impacted production efficiency, which then increases your per unit costs. You know, those impacts we saw sort of a similar dynamic late in 2020. The impacts were smaller this time, but they were there and part of that sequential change. Now, you know, as we look forward, you asked a couple of questions about Retail GPU on a go-forward basis.
You know, our assumptions for Retail GPU in Q4 are embedded in our guidance for the full year. We typically don't break down individual components of that guidance, but we gave you some guidance on total GPU. Then looking out a bit further toward 2022, you asked about the possible labor market effects on the reconditioning costs. There I would say it's too early to say. You know, I think we can wait and see how that goes, you know, looking out in 2022.
In any event, you know, any sort of labor cost adjustments are likely to be relatively small, compared to the, you know, the overall magnitude of, you know, Retail GPU, and overall reconditioning costs. That would be my thought on your third question.
Got it. Great. Sorry for lumping so many in one. You know, just on finance, you know, in the third quarter, you know, or like the Other GPU, you know, the third quarter decline, you know, slight decline quarter-over-quarter, any color on whether that was more finance driven or, you know, service contracts? Just curious, you know, broader picture like how are customer delinquency assumptions looking for the business? Have they started to move back towards normal, albeit it could take many quarters? And if yes, how should we think about the trajectory going forward and back to, you know, just the Other GPU? Thanks.
Sure. Yeah. Other GPU, you know, came in again at $2,483. It was down a little bit quarter-over-quarter. I think the sequential movement in Other GPU is well within the normal range that we would expect, you know, from quarter to quarter. So it's sort of well within sort of normal range of variability. In this particular case, I would say the biggest driver of the sequential change was just, you know, in finance some rate optimizations that led to slightly lower interest rates that came on sort of late Q2, early Q3, would be the largest driver of a relatively small change.
Rajat, if I could also maybe provide a little bit of perspective as well. I do think a useful exercise and kind of the way that we oftentimes think about the business and the way that we prioritize what we're doing internally, because I do think it can be very hard to predict exactly what's gonna happen by line item by quarter. We sometimes try to take a bigger view. An exercise that I would suggest is I think if you look at all the different public retailers and you go back in time 20 years and you plot on a graph their EBITDA margin, I think what you'll find is an extreme amount of stability.
There's very, very high levels of stability across all these different retailers. Very clear stories start to emerge. You can see some retailers performing a little bit better than other retailers over relatively long periods of time, which suggests, you know, relatively better execution. You can see what happens in the financial crisis. You can see what's happening right now, where right now is a moment of interest in that 20-year graph where you'll see that, you know, many of the franchise dealers are performing very well relative to history. You'll see that some of those that are completely reliant on auction are performing very poorly compared to history. Those that have access to buying cars from customers are generally performing, you know, somewhat similarly compared to history, which is somewhat interesting.
The reason I bring that up is because I do think that, you know, even going back to the reason that we started to report on Total GPU when we first went public in 2017, the general idea there was just that there is a lot of ballast in this industry. There's tens of thousands of other dealers that are providing, you know, a fairly similar experience to customers that have very similar cost structures to one another. As a result, you know, the industry is sort of structured in a way where the sum of the profits across those different components of the transaction tend to add up to cover their expenses and their cost of capital.
Once you get to that place where you kind of realize, you know, these lines have been very, very stable over a 20-year period.
Yeah, there is little squiggles kind of that you'll see in that chart from quarter to quarter, but they're probably not the most important thing. The most important thing is just what is the quality of the customer experience that you're offering compared to everyone else? What's the quality of your variable economics, both on the revenue and the cost side? Then if those things look good, how scalable are you? When we think about, you know, our prioritization, that's the frame that we use, and that's kind of how we try to make sure that we're putting our time and energy into the things that are most important. I think through that frame, if you look at the last, you know, year or so, we would like to think at least that our performance looks very good.
If you compare the way that we've performed to the industry in any important way, we think that it looks very good, and we think that that's the most important thing. Because even when you're looking at kind of the bottom line, it tends to be there's a pretty stable return in general in buying cars from customers. There's some, you know, variation based on the way the business model is structured, and then it's about how you perform compared to everyone else. We think in the long run, that's what really matters the most.
Our next question will come from Chris Bottiglieri with Exane BNP Paribas. Please go ahead.
Hey, guys. Thanks for taking the question. Sorry, just taking this. I'd like to ask you a question. It seems like you rebranded your third-party reconditioning units as marketplace units. At the same time, you're moving forward with Hertz as a large third-party seller. If you think about your decision to brand the reconditioning units, is there an opportunity to use these partners in conjunction with third-party sellers like Hertz, or do you foresee them reconditioning their own units? You know, maybe talk to that more, please.
Chris, I apologize. I don't think we've really answered one of your questions in, like, four or five quarters, so we definitely owe you some answers at some point. I do think it's early in the Hertz Partnership. It's early in marketplace in general. I think there's a lot of room for those choices to continue to evolve. I think we're not gonna provide additional color at this time, and I apologize.
Well, at least you're keeping count. I appreciate that. Let's move on to SG&A then. Is there a way to bifurcate further bifurcate SG&A costs between retail and wholesale? I'm trying to understand, like, how much incremental SG&A you incur in to wholesale a trade-in versus retailing it. Like further, if you buy a car from a customer but you don't sell one to a customer, like how different is the SG&A profile of that transaction versus buying and selling to a customer? Just trying to understand how trade-ins is impacting your SG&A per unit and personnel costs.
Sure. Yeah. I mean, I think if you start at a high level, buying cars from customers does incur additional you know, operational requirements, and then it does incur additional costs. Some of those costs show up in cost of goods sold. That would be things like going out to the customer's you know, door to pick up the car and bringing it back into our network, either you know, to be reconditioned to go up on the site or what have you. That's one set of costs. There's another set of costs that does impact SG&A.
You know, I think there, you know, just one example of that might be customers calling in to talk about a transaction where they're selling their car to Carvana, rather than buying a car from Carvana. So that's an example of a direct effect of buying cars from customers that does show up in SG&A. There's also you know, Ernie sort of touched on some of these concepts, but there are also some you know, indirect costs of the very rapid growth that we experienced in you know, buying cars from customers in the last couple of quarters. That just takes the form of everything just being a bit less efficient.
You know, I think there's both those direct costs and indirect costs, you know, that are driven by buying cars from customers.
Our next question will come from John Blackledge with Cowen. Please go ahead.
Hi, this is Max on for John. Just wondering, you know, if you could talk us through the constraints on building and the pace of rollout for IRC build. You've already given the guidance for the end of the year, but just looking forward, you know, what are the puts and takes on being able to roll out additional IRCs and what's the balance there? Just wondering if you could talk us through a little bit just inventory, like is there a targeted inventory level that you'd like to get to? Typically Q4 would be a build, but Q1 might be, you know, not building in a typical environment. Is that still true for next year? How should we think about that? Thank you.
Sure. I mean, I think we you know, we feel really good about our IRC trajectory. You know, we expect to open eight more new IRCs by the end of 2022. You know, with you know, when it comes to staffing those IRCs, you know, we are making continual progress. You know, I think many of the initiatives that we you know, have kicked off and you know, have implemented are you know, paying dividends and we're you know, I think we're seeing nice progress there in terms of the second phase of the scaling production capacity, which is building out the team. I think we feel good about all of that. I think the.
On the inventory level, I think the simplest way to say it is, you know, we do want to build the selection of cars that are available to customers on our website. You know, we made some progress there in Q3, climbing it to you know just over 16,000 immediately available units, up from you know just under 13,000 in Q2. You know, as we've talked about, that you know that effect was metered somewhat by you know the steps that we took to manage sales.
I think we wanna keep building that immediately available inventory. You know, we do think selection is a driver of conversion and a driver of sales, and you know feel you know really good about continuing to march up that selection that we're making available to our customers, you know, particularly as we make progress on relieving the other operational constraints throughout the system.
Thank you.
Our next question will come from Michael Baker with D.A. Davidson. Please go ahead.
Hey, thanks. Two questions. I'll ask at the same time, I guess both related to GPU. One, does reducing the inventory that's available for customers to see that metering process, does that boost the GPU in any way in that you can show cars that have better margins because they don't need as much work or whatever the case may be? Does it give a lift to GPU? Because of that, you know, should we expect GPU to naturally decline? I guess related to the GPU question, I think inherent in the idea that retail units will equal revenues is that ASPs flatten out. I think you've said that before, and of course that didn't happen this quarter.
Is there any specific reason why we should expect ASPs to flatten out in the fourth quarter? Or is that just sort of the way, you know, you plan the business and it may or may not happen? Or is there anything that you're specifically seeing? Thank you.
Sure. Yeah, so on the first question, the answer is no. You know, the cars that get metered, sort of the algorithm that goes into, you know, deciding which cars to return in search results and which cars not to, is not related to the particular GPUs on the cars. The answer to that first question is a straightforward no. On the second question, you know, in terms of ASP, so I think if we think about, you know, revenue growth relative to retail unit growth, there's a couple of things that go into that. You know, one is retail ASPs. You know, I do think that's a component.
I think when you know when we give guidance on you know revenue growth relative to retail unit growth, that's one of the considerations that goes into it. Second consideration that goes into it is wholesale revenue will impact the ratio of total revenue to retail units. That's another consideration as well. You know, we did mention in Q3, we metered both retail sales volume and buying cars from customers, and then you might naturally expect metering buying cars from customers to have an impact on wholesale volume and revenue.
Okay. Thank you. That was very helpful.
Our next question will come from Nick Jones with Citi. Please go ahead.
Great. Thanks for taking the questions. I think kinda there's a kinda large franchise competitor that's getting into other adjacencies, like trying to handle some of the logistics for power sports and maybe some other large heavy equipment type logistics. I guess kinda what are your thoughts on kinda the competitive reaction? I mean, do you think kind of Carvana's success has caused some of the larger, maybe more profitable incumbents to react and maybe get ahead of some of the direction Carvana may be going in the future? Thanks.
Sure. Okay, so I didn't hear the first part of your question, but I think I got it now. What I would say is, I mean, I think, listen, there's anytime you're lucky enough to be successful, other people are gonna see that. And so I think the kind of the default assumption anytime you're building a business and you're lucky enough to be on the right path should be to assume that others are gonna notice and you know, move in your direction. I think that you know, our job as a business is to keep getting better. And I you know, I don't know really how much more color I can give you than that. I think you maybe one other thing that's notable and worthwhile would just be, this is hard, right?
I do think that it can. I don't mean to imply that you're making this mistake, but I think from a distance it can be easy to make the mistake that any given problem is easier than it actually is. You, this is a very fundamentally difficult problem. You know, I'll start with talking about it on the used side, but you'll be able to quickly kind of adjust that for new product as well.
When you're, you know, buying a car that is that varies in quality, when you're running it through a remanufacturing process, you know, where you're putting $1,000 of parts and labor into that car, when you're shipping that car around the country in order to give customers a really broad selection, when you're handling trade-ins, when you're handling warranty, when you're providing customers with financing, and you're verifying the information that they send over in financing, when you're registering cars across 50 states and all the different counties that vary in their registration requirements, there's just so much work that goes into that, and I think that it can be easy at first to start with kind of visibility from a distance of maybe the buttons that get clicked on a website and then to believe that that's something that's relatively straightforward to replicate.
I think, you know, our view would be that, you know, we've worked really, really hard running as fast as we possibly can with a bunch of incredible people that have been extremely motivated over a long period of time, and we still have a lot of running left to do. You know, we think that that our job is to keep getting better. We think that we should expect people to notice the success that we're having. We also think that, you know, the stuff that we've built in the past that now sits behind us is a pretty big moat. Then there's a lot of stuff left that we're gonna build in the future that once we climb that hill, that'll turn into a moat as well. I think we just have to keep running our plays, I think.
Great. Thanks.
Our next question will come from Naved Khan with Truist Securities. Please go ahead.
Good afternoon. This is Robert on for Naved. Thanks for taking the question. I have one for Mark and one for Ernie. Mark, I think in your prepared remarks, you said you guys expect operational constraints to improve in the fourth quarter. Is there any color you can give on how we should think about unit growth on a sequential basis? Actually either can answer this question, but Mark, you did just touch on it on the wholesale side. Was going to ask if, you know, if you're seeing increased throughput of vehicles into the wholesale channel due to some of the operational constraints, but also are you guys seeing higher demand in the wholesale channel because there's, you know, demand to stockpile vehicles amid this inventory supply constraint in the market right now?
Sure. Yeah, I mean, on the first point, yeah, we expect to increase our operational capacity in Q4 with an eye toward 2022. You know, it's always a goal. You know, Q4 is always a very significant investment period for us as we you know work to ramp operational capacity in preparation for the first half of the following year, and that's exactly our plan this year. On the second question, you know, I think our wholesale volume has been you know very strong, and you know our wholesale GPUs have been strong as well.
I do think, you know, that's partly due to, well, particularly the GPUs are partly due to a strong wholesale market. You know, there's been a lot of commentary out there, which I'm sure you're aware of as well about, you know, we've seen a lot of appreciation in the wholesale market this year. You know, some of the dynamics that you outlined are certainly playing out. I think we've also made, you know, really great fundamental improvements in the way that we, you know, are able to buy cars from customers, both from an awareness perspective as well as, you know, from a process and technology perspective. That's certainly driving some of our volume as well.
Okay, thank you.
Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot, and good afternoon. My question is around the metering again. Have you eased on the metering in the fourth quarter yet?
We have not materially eased on the metering. There's a couple steps that we took that we probably have pulled back on a bit, but not materially. Again, I wanna restate, I do think the moves that we made to meter sales were real and they were an impact, but the bigger impact is just the constraints that already existed in the system before. Hopefully, that's at least directionally helpful.
Okay, that's helpful. We found a lot of the metering, at least as it relates to the number of units shown to customers on the West Coast markets, to be more severe than other areas of the country. What is the reason for that? Is that because of the lack of proximity to IRCs or something else?
I'm gonna try to answer that question more generally. What I would just say is I do think, as it relates to the particular move of impacting the number of cars that show up in a search result, we do have the ability to kind of provide more relief to different groups based on the cars that we choose to suppress. If we have really busy logistics legs, then maybe, you know, cars that would need to traverse those logistics legs to get to a certain market, they may not be displayed in that market when we're trying to handle a situation like this.
If we have certain classifications of cars that require more work from certain operational groups inside of customer care, then we may be more inclined to suppress that inventory in more locations, so that less of that type of work needs to be done if that particular customer care group is behind. And so we really can operate that, you know, I don't wanna say perfectly surgically, but fairly surgically. And so it's been a high-quality tool for us to use in a situation like this. And I do think it. The degree to which we use it does vary, by location and by classification of inventory type.
Our next question will come from John Colantuoni with Jefferies. Please go ahead.
Thanks for the questions. I have two. Just wanted to start with consumer purchases. Maybe you could talk about how much of the increase in consumer purchases is just out of necessity because of a tight wholesale market you've versus your view that it's just simply a more profitable and efficient channel for inventory. Related to that, once new car manufacturing gets back on track, do you envision pulling back on customer purchases, perhaps to a point where it's back towards the levels that you were targeting at your Investor Day as a percentage of total sales? I have a follow-up.
Sure. Well, you're not adhering to the one-plus-a-follow-up rule then, but we'll do our best to answer. I think first and foremost, on buying cars from customers, necessity would not be the way that I would describe it. I think the way that I would describe it is it's better. It allows us to provide a high quality experience to a customer that we're buying a car from, and then it gets us access to a higher quality pool of inventory that is on average, more profitable. You know, we want to do as much of that as we possibly can, and we wanna build the business capacity to be able to handle as much of that as we possibly can.
Now, I do think that we're in a very unique market today where acquisition channel is very, very important. Normally, you know, across time, you know, if we go back to this kind of 20-year view that we talked about before, if you look at different acquisition channels, you tend to see margins that are available that are fairly stable. There can be kind of idiosyncratic differences between the channels but generally speaking, they're fairly stable. I think today, you know, the best source is probably customer lease returns. You know, Cox Automotive keeps an index on the amount of equity that lease returns have, and recently that number's eclipsed $8,000, which is an enormous number. That number is normally closer to zero.
That means the customer's returning a car and kind of dropping off the keys and walking away from a lease, that car has $8,000 of positive equity in it. That's an enormously advantaged channel in this environment. On the other side, you have auction, which has been heavily constrained in this environment. There are many dealers that are constrained in inventory, and as a result, many of the off-lease cars, for the reason that I suggested before and for the reason of dealers being constrained, aren't making it all the way to auction. There's been fewer repos because there's been you know really high-quality customer credit performance. There's less of that showing up in the market.
You know, the rental fleets have struggled to get cars, so they haven't been de-fleeting, so there's been less of that in the market. That market has been very tight, and as a result, the margins that are available in the auction market are very small. You know, that means that kind of the channel of buying cars from customers is even better today than normal.
Our expectation, again, just given the kind of very strong persistent forces that have existed over a very long period of time in this market, would be that, you know, as all these idiosyncratic, you know, strange things that are going on in the world today start to normalize, we'll probably see these markets move in more normal ways relative to one another, kind of to how they have in the past. I don't know that changes a ton for us because I think today we're in the lucky position to be able to acquire many cars from customers, and also to have access to auctions.
I'm not sure it changes a ton for us, but I think that, as that happens, you know, I could imagine that the best answers for us shifting to some degree, and we'll react as intelligently as we can in those moments.
Thank you. One quick one. It looks like compensation expense per unit sold was up 30% year-over-year. Just talk about if that's a reflection of higher employee costs from the capabilities you're building around customer acquisitions, and how we should think about the trajectory of compensation expenses. Thanks.
Sure. The largest component of the compensation expense per retail unit, you know, that we saw in Q3 relative to last year, it really is just, you know, building the team both in advance of 2022 and just making sure that we're prepared for the first half of 2022, and also, you know, for the long term. I think we see so many opportunities throughout the business, and so many places where we believe we can invest in the team that can, you know, help us scale the business and help us take advantage of some of these opportunities. Those were definitely components. I think, you know, buying more cars from customers was a component as well.
As I mentioned, there's some, you know, compensation expenses there that show up in SG&A. Then the last thing that I would point to is, you know, we were operationally constrained. When you're, you know, you're investing for next year and you're investing for the long term, but you're, you know, operationally constrained in market sales as a result, that can also lead to a per unit impact. Those are some of the primary points that I would call out.
Our last question will come from Edward Yruma with KeyBanc Capital Markets. Please go ahead.
Hey, guys. Thanks for taking all the questions. You guys have been really clear about some of the backlogs and reconditioning. I wanted to ask a little bit, though. There's been some negative press around customer service issues. How do you feel about the strength of the organization today as it relates to customer satisfaction? And do you think that that's something you have to look at monitoring as well? Thanks.
Sure. I think, you know, first and foremost, delivering great customer experiences is why we're here, and it's the most important thing that we do. It's something that's always at the absolute top of our mind in everything we do. I think, you know, throughout these constrained periods, we've continued to deliver customer experiences that get rated, you know, much higher than anything else in automotive retail and, you know, at levels on par with some of the best customer experiences out there. That said, across time, across the years, and certainly recently as well, when we are constrained and, you know, to use the language I used earlier, our service levels get impacted, that does lead to the directional impact that you would expect in customer experiences.
You know, we have seen that and that also absolutely went into the rationale for choosing to proactively meter sales, while we kind of, you know, reduced pressure and caught up. And we've seen that have the effect that we would like to see. We've seen a pretty strong move back toward the levels that we more traditionally have been at. We still got a little bit of room to go there, but we've seen a strong move. I think throughout the customer experience in general have been great. But they definitely, you know, are impacted by constraints when we have them. It's our job to alleviate those constraints and to build the business in a way that puts no impact whatsoever on customers.
We have had some impacts and of course, we can continue to get better.
Thanks so much.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Perfect. Well, thanks everyone for joining the call and thanks everyone on the Carvana team. I always say the same thing here, and I apologize for not being more creative, but this was another great quarter. We faced a number of challenges that we didn't foresee, and once again you rose to the challenge and put us in a great spot. That's why we continue to be in the place that we're in. That's why we keep marching toward the goals that we mutually share. Thank you so much for everything that you're doing. We wouldn't be here without you. Talk to everyone next quarter. Thanks.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.