Carvana Co. Class A Stock

Great. Thanks, everyone. My name is Rajat Gupta, member of the Automotive Equity Research team. Very pleased to have with us CFO of Carvana, Mark Jenkins. And thanks, Mark, for being here.

Yes. It's great to be here. I think Rajat mentioned that it's our sixth consecutive year at the conference. So always great to be here and happy to be speaking with you all. Okay. So I thought today, I would start with just a few slides about what's happening in the business today. Where are we from a growth perspective? And what are some of the key drivers of that growth? It will be a relatively short discussion, then we'll hand it over to Rajat for Q&A. So we have -- and that's the typical safe harbor on the first slide.

Okay. So we're having a very strong growth year so far. I think there's a few different ways to look at our growth performance and I think I can start just by comparing our growth within our industry. So we're now at the scale where we're selling around 800,000 used vehicles per year, just under that run rate in Q2, and we're growing at 38% year-over-year. So that's very significant growth at very significant scale within our industry. And moreover, we achieved that growth in Q2 of 38% retail units sold growth year-over-year in an industry that was down low to mid-single digits year-over-year.

So we're really making very significant share gains. We have a model that's built to scale, and we're growing very, very quickly. I think taking a look outside our industry, we're also performing very well. Our offering is resonating with customers, and we're growing very, very quickly even if you look across multiple industries. So I called out in my prepared remarks on our earnings call, based on organic growth in the most recent quarter, we're in the top 5% of companies within the S&P 500 Index. So we're growing very, very quickly looking across a broad base of companies and industries.

Finally, adding a little bit more context for that. We think at this scale, the $20 billion revenue scale, we got here very quickly. One of the faster companies to achieve the $20 billion revenue scale when we look out across similar e-commerce or other disruptors. And now today, growing at the $20 billion, moving to $30 billion revenue scale, continuing to grow at very strong rate. So most important message, I think, so far this year is this offering that we have, buying and selling used cars online, it's really resonating with customers. We have a model that is built to scale and can scale very effectively even at very significant unit and revenue levels, and we're growing very, very quickly.

Now a natural question from that might be, okay, what is driving this outsized growth, 40 points faster than industry, one of the leading growth companies in the S&P 500 Index and performing well against some very meaningful historical benchmarks. Well, I think it starts with the customer experience. And so we have a truly online customer experience for buying and selling a used car. It starts with the shopping experience. These are mobile images up here because you can do all this from the palm of your hand, but it starts with searching through many tens of thousands of cars from the palm of your hand.

You can pick one and do further research on it, taking advantage of our proprietary 360-degree photo booth technology to really get to know the car before you order it and have it shipped to you. You can do all aspects of the used car transaction, whether it's getting a trade-in, attaching financing or ancillary products, completing the entire transaction all the way through signing contracts with your thumb on your phone. You can do this all in a true e-commerce experience while sitting in your living room watching TV. That's a great experience.

After you order the car, we deliver it to you using our proprietary logistics network. It's a first-party logistics network that's backed with our own first-party technology to ensure that we can get the car to your door quickly, cost effectively and reliably. And then finally, we'll provide great customer care, whether you want a phone and chat or text with us, we'll provide great customer care to make sure that purchase is exactly what you're looking for. So this is a full "soup-to-nuts" e-commerce experience and one that is resonating very, very strongly with customers. So that's the first part of the story on where this growth is coming from.

The second part of the story is our operational chain. And so I think in Q2 -- I think one of the things that I really appreciated about the data in Q2 is that it's showing very strong evidence that where we scale the business, we see the strongest growth. And so I think this chart on the left, this bar chart shows production growth and production is basically where are we growing the process of inspecting, reconditioning and putting cars up on the website. And in the region, the top 2 regions making up around 1/3 of the country, where we grew production the most, we also grew sales the most.

So almost 55% growth in the Midwest and Northeast regions where we grew production. And I think that -- what that illustrates is, hey, the model is really working. We scale the operational chain. That creates sources of positive feedback that drive very strong growth. And so the fact that in 1/3 of the country, we were growing at 55% because we grew production around 55% or just over in that region. I think it's a very powerful testament to the fact that there is very significant positive feedback and the model is performing very well from an operational and demand fulfillment perspective.

Just to say a little word about that, how does that positive feedback actually work functionally? I think there's a few key drivers. So one, when we add more production, we have more selection on the site, that increases conversion. When we add selection in more locations, that puts more cars closer to customers, which lowers the delivery time to those customers, which also increases conversion. Both of those things increase conversion to sales but in addition to that, as conversion increases, our marketing efficiency increases, we can spend more on marketing in an efficient way that further drives sales, which in turn gives us more incentive to further add production lines and increase production.

And so this positive feedback cycle is something that we've seen over the life of the business, but I think it was particularly evident in Q2 just with the really strong outsized growth that we saw in the regions, the Midwest and Northeast, where we grew production the most and saw the most powerful effects of this positive feedback cycle. So a natural follow-on from that then is if production is demonstrating itself to be a key driver of sales growth, and again, this is sales growth that's happening at very high rates and at a very large scale, a natural question might be, okay, so how are you scaling production capacity?

And we are executing a 3-part plan today to scale production capacity. Part 1 is to increase the number of lines by -- so basically, you can think of our production facilities as like factories where the traditional footprint facility has 8 different lines that we can run cars through at any given time, 4 lines wide by 2 shifts deep. And so staffing existing facilities to add more production lines in existing facilities is lever #1 for production growth. A second is integrating ADESA locations.

ADESA is a large national wholesale auction business that we acquired in 2022. And one of the advantages of that ADESA business is that it has great real estate and the ability to add retail reconditioning capacity to the ADESA auction locations. That's something that we started doing in mid-2024. Since mid-2024, we've integrated 19 ADESA locations into the Carvana retail reconditioning network. Integrating those locations primarily means adding software and Carvana management processes to deliver Carvana style retail reconditioning. That has successfully helped us grow production and is a strategy we'll continue to pursue.

And then finally is full build-out of ADESA locations. So again, when we acquired ADESA in 2022, it came with 56 nationwide sites that have a significant real estate footprint and capacity for us to build more retail reconditioning facilities. We kicked off construction of the first full build-out of an ADESA facility in the second quarter. That will be a third component of our overall production growth plan. So 3-part plan for continuing to grow production, production in turn is a key driver of our sales growth, as I pointed to on the previous slides. But it's not the only driver. As we scale production, we also need to scale the other 3 key parts of our operational chain, which is long-haul logistics, which connects our inspection and reconditioning centers out to customers' markets.

Second, we need to scale our last mile delivery network, which allows us to take those cars to the customer's door. And finally, we need to central -- we need to continue to scale our centralized customer care and transaction processing functions, which are based in Tempe. And so scaling this operational chain is the key strategic focus for us at the moment. We're seeing strong evidence that when we scale the operational chain, we support very strong growth and differentiated customer experiences.

So the last point that I'll make on this is I think we're very excited about where the business is today, but we view ourselves as very early in the overall story of selling cars online. And just one data point on that, that we've talked about in past years and this year is the economy as a whole, the retail sector within the economy as a whole now has around a 20% e-commerce penetration. And think of that as you can buy the good online and have it delivered to your door in a seamless integrated experience.

Auto retail is far earlier than that in, call it, the low single digits of e-commerce penetration with Carvana being the primary experience where customers can get a true e-commerce experience and so we view ourselves as just very, very early in the overall story with a long runway for growth, and we plan to pursue that growth by focusing on strong execution across the operations of the business and driving a very strong customer experience that I pointed to on the second slide. And that's our main story. Main takeaway today, growing incredibly strongly, going to continue to focus on execution, and we're really in the early days of seeing this all play out. So thank you for that, and happy to take questions.

Thanks, Mark. Maybe I'll start off with like just the most recent quarter. You were pretty fired up on the call. Was it the aftermarket reaction that led that? And was it something that you felt like was not being appreciated in the results that you put out?

Sure. So I do think this was a great quarter. I don't know if this can go backwards. I only see forwards on this. But if I could, I would click back to that regional bar chart that I showed. So the thing that energized me -- nice job. The thing that energized me about the quarter is just the fact that at today's scale and what does today's scale mean, our run rate revenue in the second quarter was around the $30 billion level. Our run rate adjusted EBITDA in the second quarter was around the $3 billion level. So we're operating now at very significant scale.

And the fact that at that scale, we actually have a large portion of the country where we are growing by 55%. To me, is just a very exciting stat and I think because it's very rare. I think everyone in this room has studied more companies than we have time to study. But based on what we know, these levels of growth rates at the $30 billion revenue scale, it's just -- it's very rare and I think points to the strength of our customer offering as well as the scalability of our business model.

And so the fact that -- and then if you zoom in further and within certain regions, that growth rate was 55%, and that 55% was just really tightly correlated with how much were we able to increase production capacity year-over-year in the quarter. To me, that's a very powerful story. And again, just speaks to the strength of the customer offering and the scalability of the business model.

Got it. That makes sense. Maybe let's go back to December when the reconditioning issues had surfaced. I'm curious like if you could help us visualize what that looked like inside the organization. How do those issues impact just the broader system or the machine? And where are you with those constraints today?

Sure. Yes. So I think on the topic of production growth you're pointing to, in late 2025, early 2026, we faced some production headwinds that caused production costs to rise and caused production throughput to be below our targeted production throughput. I think the primary driver of that was between mid-'24 and late 2025, we added 16 new facilities. That was on a base -- starting base of 18 facilities. So we saw over an 18-month period, very significant growth in the number of facilities that we are managing. And I think that, in turn, gave us some catching up to do on just making sure that all facilities were operating at the target level of efficiency.

I think so far this year, we've made great strides. So on the cost front, labor hours per unit produced have really normalized, and we saw some of our best ever levels in the second quarter on that metric. In addition, we're starting to see the year-over-year growth rate in production across the company as a whole move off of its lows from earlier this year. And so I think there have been some really good trends after expansive growth in the number of locations we are managing, which caused some cost to rise and throughput to fall relative to target. I think we've seen some really nice trends recently on that rebounding.

What are those driven by? It's really operational intensity, better processes, and we're also in the early phases of rolling out a second phase of major software improvements across the centers that are really focused on helping managers simplify the job of managing these complex reconditioning centers.

Got it. And when you talked about like those 3 phases on the earnings call, the Phase 1 is done like on the cost side. Phase 2 is production ramping up. Phase 3 is like just the mix realigning. Are you like close to the end of Phase 2? Or are you in the middle of Phase 2? Has Phase 3 started in some ways? Where are we in that trajectory?

Yes, sure. Yes. So I think, yes, the 3 phases are normalized labor efficiencies to get costs in line; two is increase total throughput. And then three is increase total throughput with the sort of normalized mix of cars. And so there, I would say we still have room to further increase production growth and further normalize mix going through the inspection and reconditioning centers but we're -- the trends are positive there, and we're moving in the right direction on both increasing year-over-year growth in production as well as starting to normalize mix. But that will all be a continual process where we'll look to make further gains on that over time.

Got it. And maybe like going -- double-clicking a little deeper into the second quarter. Could you help us understand like what were the sacrifices or, I would say, unit economics like decisions you had to make in that quarter. There were a lot of things moving around. You had your own constraints that you were working through. We had the FTC guidelines where dealers had to add back all their fees and the advertised pricing. You were already entering the year with cuts to your Prime APR. Just help us understand like all the different aspects of the business that you had to flex in the second quarter to put up the results you did?

Sure. Yes. So I think the second quarter was a very strong quarter from a profitability perspective, over $750 million of adjusted EBITDA, over $500 million of net income, record profitability levels, excluding onetime items in the case of net income that we've seen as a company. So we're growing those profitability metrics very, very quickly as well, as we're growing units. I think the -- from a different driver perspective, there's a number of different things going on in the quarter. So one, fuel prices are up. We estimate that had a roughly $75 per car impact on our bottom line economics in the second quarter.

In addition, benchmark rates are going up. That also had an impact on our bottom line economics in the quarter because we are impacted when rates are moving quickly; when they're moving quickly up, has a negative impact; when they're moving quickly down, has a positive impact, other things being equal. And so there are a couple of external drivers in the quarter that impacted profit per unit. But overall, we had a very strong profitability quarter. In terms of different levers we're managing, we have lots of different levers to manage in the business to drive our targeted balance of volume and profitability. A really powerful one I talked about, growing production is a very powerful lever.

But also we have levers that we can adjust, whether it's the sticker prices of cars that we're listing on the site, interest rates, trade-in offers, shipping fees, we have lots of different levers that we can adjust. Marketing is another one. And we'll adjust those from quarter-to-quarter just based on the dynamics we're seeing. But overall, I think those things are less important than the overall results, which are very strong unit revenue growth and very strong growth in bottom line profitability metrics.

Got it. And following up on the FTC dynamic, I mean, if you did like a like-for-like comparison of what this meant for the industry or the 96% of independent dealers out there, on average, they would have to raise their prices or advertise prices by $400 to $500, which would mean your prices look that much more attractive. Help us think through like the decision of not maybe taking more advantage of that. A deliberate decision or you just didn't want to show a big increase on your website. And we could see small increments of this come through the P&L, which seems like should be a direct benefit to at least retail GPU?

Yes, sure. Yes. So some people in this room, maybe everyone in this room is aware in really starting in the second quarter, the FTC started to really communicate stronger enforcement of the idea that dealers, if they have doc or dealer fees that they are charging at the tail end of a transaction, they really need to start including those fees in their headline price that they list online. And so over the course of the second quarter, we saw more -- based on our data, more and more dealers comply with that FTC commentary. And as a result, we saw appreciation in retail sticker prices, those headline sticker prices that you see if you're shopping for a car online. We saw those drift up more than they typically would in the second quarter. So in the second quarter, you can either see appreciation or depreciation depending on the year. Last year, we saw a little bit of appreciation. This year, we saw stronger appreciation, which we link to dealers' efforts to comply with this.

Now a notable fact is Carvana has never charged doc or dealer fees. And so directionally, we would expect that -- as dealers have to incorporate those more into headline prices, we would expect that to be a long-term benefit to our offering, which never had doc or dealer fees. How big of a benefit? I think it's hard to say. At one end of the spectrum, customers always perfectly understood doc and dealer fees. And so there's no real change in the economics that customers are evaluating when they're shopping online.

At the other end of the spectrum, customers really didn't incorporate doc and dealer fees in their early shopping decisions. Likely, the truth is somewhere in between. And I think it's hard for us to say exactly where. But at least conceptually, we think this change should have a long-term benefit for us as a dealer that has never charged doc and dealer fees.

And both like from demand and profitability, I would imagine, right?

So conceptually, you can -- yes, you can always do one or the other or some mix of both.

Okay. Got it. Just wanted to pause for a second to see if any question in the audience. There we go.

You're obviously running your own game or program and doing an excellent job. But when you think about some of the factors beyond your control, some of the vehicle demographics and the supply of used that's going to be available to you, particularly on the younger vehicle side, what does that do for Carvana from a, we'll call it, a 3-plus year old -- 3- to 7-year-old vehicle demographic that should inflect positively starting in the back half of this year?

Sure. So on industry supply dynamics, I, first and foremost, think of those as affecting the industry as a whole and also affecting customers. So in particular, if there's more supply of used vehicles available, in theory, that allows the price of used cars to actually come down a bit, making them more affordable for customers, and that's a good [indiscernible] who do care about affordability. And if it's a good thing for customers, I think overall, we would view it as a good thing for us because there's more cars -- there's more customers that are finding used vehicles affordable now if there's more supply available. So that would be the #1 way I would think about more supply coming back online as it has the opportunity to make used cars a little bit more affordable for customers, which is a positive for industry demand, other things being equal.

Looks like you launched your Prime deal this morning. We -- I think it's been a while since we've seen APRs actually go back up. I'm curious if this is just more a reflection of some of the benchmark rate increases that we've seen over the last 6 months? And do you feel like this is the right time to maybe start passing those on because you're a little more comfortable when it comes to some of the other constraints operationally that you had in 2Q not repeating in 3Q?

Sure. Yes. So I mean, I think -- the way we think about interest rates in the finance platform is benchmarks are a key driver. And I think the 2-year Treasury rate is a key benchmark rate that impacts the customer-facing rate on auto loans. And I think that's broadly an industry effect, but we're very focused on the 2-year Treasury rate. And generally speaking, our approach is to -- as the 2-year Treasury rate moves, we generally speaking, look to pass on that rate into our customer rates.

Now that may happen to a varying degree. It may happen with varying degrees of delay. It may not always be instantaneous. But as an overall thought process and approach, we generally think of passing on changes in the 2-year Treasury rate into our customer rates, again, with some variability in the precise ratio of pass-through and the timing of pass-through.

Got it. And the reason, like, you did not do it in the second quarter is because you had some of this, like, pricing appreciation and you didn't want to, like, do both rate increases and pricing at the same time. Is this kind of like a toggle like -- is this a very deliberate approach, not just from a customer standpoint, but also internal, like just to keep putting pressure on your operating team. Just help us think through the decision there, both externally and internally on not making broad-based changes to the customer monthly payment, for example?

Yes. So I mean, I do think in operating a business at this scale and growth rate, managing some degree of stability in levers is valuable. So I think the -- I do think we are always testing and trying to learn and continue to optimize the business. But making big moves, multiple big moves at the same time, I think we have a little bit of pull against that, we may do it, but I do think having some degree of stability is helpful, like when we're managing the business on a day-to-day basis. In addition to that, I think, yes, the way we're thinking about managing the business today is really, we have multiyear goals that then flow into an operational plan.

And we work really hard, all the teams around Carvana, whether it's in the production centers, in the logistics network, last-mile delivery network, customer care centers or in the product engineering, analytic functions that are managing pricing and marketing and different dynamics from our home office. We really work hard to stick to our operational plan and just make sure that all the elements of the business are moving as closely in lockstep as possible as we march down the path to our multiyear goals.

Got it. And if you look at your guidance for this year, even at the high end, it would imply that margins are down year-over-year or we can look at EBITDA per unit that's likely to be down year-over-year. And your plan to 13.5% margin obviously implies a pretty sizable lift from here on. Can you help us think through like 2 or 3 big drivers or levers in the cost structure or the gross margin side that can help you like get there? What is going to be like the top 3 drivers? Maybe you can rank order them.

Sure. Yes. So I think where we are in the business today, there's significant opportunity for operating leverage in the future, and that operating leverage takes a variety of forms. Another word we use to describe it as for future fundamental gains, but let me talk through a few of those. So one is just continuing to lever overhead expenses. We have a large fixed cost base that takes the form of technology expenses, corporate expenses and facilities expenses that span across the country. That fixed cost base is underutilized today. We have meaningful opportunity to continue to push more units through that -- our existing physical infrastructure as well as to have our corporate and technology functions support significantly higher volumes of units than we're selling today.

So I think overhead leverage, fixed cost leverage is a key driver over time. That's something we've really demonstrated in the past and expect to demonstrate in the future. A second is in advertising leverage. So we believe advertising is a key part of our 3 driver growth plan, which includes continue to improve the product offering; increase awareness, understanding and trust, and scale selection and other benefits of scale. Advertising is a component of that second pillar. But in the fullness of time, we believe advertising expense per unit will be much lower than what it is today. And the data point that we look toward there is advertising per unit has been several hundred dollars lower than today's company-wide levels in our more mature markets.

So I think advertising leverage is a second driver. I could go on and on, but just to give a couple more. So I think if you then start to look at some of the more operational expenses, I think there's meaningful opportunities for leverage in the more variable components of our cost structure. I think those come from additional scale benefits. I think there's network density benefits of adding more inventory pools and continuing to increase utilization in the multi-car as well as the last mile delivery network. There's gains from -- there from network density. In addition, AI continues to be an opportunity for driving costs lower. I think it can continue to help us with things like centralized customer care as well as the various aspects of transaction processing, title and registration, et cetera. I think we've made gains there, but there's opportunity for further gains. So that's just a list of places I see opportunity in the cost structure.

Moving on to GPU, we also see opportunity for fundamental gains. There's opportunities to sell more ancillary products in the checkout flow and increase attachment. There's opportunities for further fundamental gains in the finance and wholesale platforms as well as in aspects of retail GPU. So much like we have seen in the past, we really see opportunities across all elements of the cost structure to further drive fundamental gains and operating leverage.

Understood. So since we have CFO here, I wanted to make sure I ask some of the balance sheet questions. You upsized the deal, got priced last -- yesterday. You're refinancing all the 2030s. It looks like you're going to save $45 million-ish like annual interest expense from that deal. Are you moving closer to maybe more talking about EPS versus EBITDA going forward? Do you think we're at that stage as a company?

Sure. Yes. So a few points on that. First of all, a shout out to Mike and Meg who are not here today, but led this week's Term Loan B deal, outstanding reception. We're refinancing just under $1.7 billion of senior secured notes at just under 3-point lower interest rate, leading to the approximately $45 million in interest cost savings. That's a big win. There was very strong demand for the notes. And I think it's another point of evidence of the sources of positive feedback in the model. As we get bigger, we get better and having lower cost of capital is another example of how as we get bigger, we get better plays out. And so there, I think -- anyway, that was a really nice win, and I appreciate you mentioning it.

I think going to your point about, hey, how are you looking at profitability of the business, we're showing very strong leverage in line items below adjusted EBITDA. So operating growth, sorry, operating income growth in the second quarter was even faster than adjusted EBITDA growth and net income growth in the quarter was approaching 70%, much faster than line items that were further up the income statement. And I think what that speaks to, right, a 70% year-over-year growth in net income is there's a lot of leverage through the entire cost structure, not just the operating expense line items that lead up to adjusted EBITDA, the non-GAAP operating expense line items, but also in those additional GAAP expenses such as depreciation and interest. We're showing very strong leverage through those. So that's a great thing for shareholders, net income growth growing at that rate, obviously, is a benefit.

Understood. No, I think we're out of time here, sir. Thanks, everyone, for listening. Thanks, Mark.

Thank you, Rajat. Really appreciate it.

Hello, and welcome to the Carvana Second Quarter 2026 Earnings Call. [Operator Instructions] I will now turn the conference over to Meg Kehan, Investor Relations. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Second Quarter 2026 Earnings Conference Call. Please note that this call is being webcast and can be accessed along with our Q2 shareholder letter and supplemental financial tables, on the Investor Relations section of the company's corporate website at investors.carvana.com.

Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Jenkins, Chief Financial Officer. Before we get started, I would like to remind you that this 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 these factors can be found in the Risk Factors section of Carvana's most recent Forms 10-K and 10-Q. These forward-looking statements are based on current expectations as of today, and Carbon assumes no obligation to update or revise them. Our commentary today will include non-GAAP financial metrics. GAAP reconciliations can be found in the shareholder letter posted on our IR website.

And with that said, I'd like to turn the call over to Ernest Garcia. Ernie?

Thanks, Meg, and thanks, everyone, for joining the call. The second quarter was another exciting quarter for Carvana. We sold almost 200,000 cars in the quarter. The power of compounding is clear in that number as it is almost double the number of cars we sold just 2 years ago. That sales volume puts us at just 2% market share of the used car market and 1.5% of the auto retail market as a whole. These numbers make the size of our opportunity exceedingly clear.

In Q2, we also crossed over $3 billion adjusted EBITDA annual run rate for the first time. And that adjusted EBITDA isn't your typical growth company variety as is the parent based on how much flows further down the income statement. Our operating income and net income run rates were about $2.7 billion and $2 billion, respectively. In the shareholder letter there's some simple data related to the inventory growth and sales growth by region that looks detailed at first, but it tells a much bigger story.

Over the last couple of years, we've been rapidly adding retail production capacity to ADESA sites and existing inspection centers. This has led to variation in inventory growth rates in different of the country. The 2 regions where we added the most production capacity, the Midwest and the Northeast grew inventory by 57%. In those markets, sales grew in the second quarter by where we added the least incremental production capacity over the last year. The West and the Southeast, we grew the net by 17%.

In those regions, sales grew by 30% in the second quarter. The middle 2 regions are also reported in the letter and validate this strong correlation. The relation of this data is driven by the positive feedback in our model we've discussed so many times before a conceptual form. When we grew inventory, any given customer is more likely to find a car they love and converting goes up. When conversion goes up, marketing dollars get more efficient, and as a result, our marketing algorithms allocate more dollars to these markets and more customers in these markets come to our site.

With more cars closer to more customers, delivery times go down, think fees reduced logistics suffice goes up and conversion goes up again, restarting a loop as this caused us to grow inventory further. These simple data points clearly show all that positive feedback matches. It's only possible because of the machine we've built and it drives our strategy and prioritization, building this machine and the unmatched customer experience it delivers is the key to our future success.

And the bigger it is, the light or the moat. Our midterm goal is to build this machine to sell 3 million cars per year at 13.5% adjusted EBITDA margin by 2030 to 2035. When we announced this goal with our Q1 '25 results, we needed to be to about 6x our scale in order to achieve it. Now 5 quarters later, we need to grow to under 4x the current scale in order to achieve it. The path is very clear and there's a lot of execution to do. We have to be building. We have to keep hiring. We have to keep craining. We have to keep caring and we have to continually improve every part of the machine. We've been doing all those things for the last 13 years. We are going to stop. We are still just getting started as the march continues. Mark?

Thanks, Ernie, and thank you all for joining us today. Is note that all comparisons will be on a year-over-year basis. Q2 was another strong quarter, reflecting our team's continued focus on profitable growth and operational execution. We set new company records for retail and sold, revenue, gross profit, SG&A expense per retail unit sold, GAAP operating income and adjusted EBITDA. Retail units sold totaled $197,000 [indiscernible] in Q2, an increase of 38% and a new company record. .

Revenue was $7.376 billion, an increase of 52% and a new company record. Revenue growth exceeded to old growth primarily due to traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner, higher industry-wide prices and mix shift into newer and higher-cost vehicles. The gross revenue treatment change will no longer impact year-over-year comparisons beginning in Q3, and we expect revenue growth to be more in line with retail unit growth in Q3.

Consistent with past quarters, our growth in the second quarter was driven by our 3 long-term drivers of growth, a continuously improving customer offering, increasing awareness, understanding and trust and increasing inventory selection and other benefits of scale. Even beyond automotive retail, our growth continues to stand out. Our organic revenue growth in our most recent quarter ranks in the top 5% of S&P 500 companies making us 1 of the fastest-growing large profitable companies across all industries.

Second quarter marked our tenth consecutive quarter of industry-leading retail unit growth and adjusted EBITDA margin. Non-GAAP retail GPU decreased by $105 primarily driven by lapping the approximately $100 benefit from tariff-related effects last year. On vehicle costs were higher, primarily due to inbound transport fuel prices more than offset by higher retail appreciation. Non-GAAP wholesale GPU decreased by $158 driven by our 38% retail units sold growth outpacing wholesale gross profit.

Non-GAAP other GP decreased by $192 primarily driven by our decision, give back to customers in the form of lower interest rates as well as higher benchmark rates, partially offset by lower cost of funds, higher average amount of finance and higher finance attach rates. Total GPU, a lot of our expectations with the shift in allocation between retail and other components driven primarily by industry retail pricing dynamics and benchmark rate increases, respectively.

Q2 was another strong quarter for levering SG&A expenses. Our 38% growth in retail units sold led to a $157 reduction in non-GAAP SG&A expense per retail unit sold $272 reduction in overhead expenses, partially offset by an $88 increase in operations expenses, primarily due to higher fuel prices. Advertising expense increased by $27 per retail unit sold as we continue to invest in building awareness, understanding and trust in our offering. We expect an increase in advertising expense dollars in Q3.

We continue to see opportunities for significant SG&A expense leverage over time and as we scale, driven by both continued improvements in operational expenses as well as leverage in the fixed component of our cost structure. Net income was $513 million, an increase of $205 million. Net income margin was 7%, an increase from 6.4%.

Adjusted EBITDA was a record $769 million, an increase of $168 million year-over-year rate exceeded $3 billion for the first time, marking another company milestone. Adjusted EBITDA margin was 10.4%, a decrease from 12.4%, primarily driven by increased retail revenue per unit resulting from the traditional gross revenue treatment mentioned previously. GAAP operating income was $680 million or 88% of adjusted EBITDA, an increase of $169 million and a new company record.

As discussed in prior quarters, we continue to drive toward investment-grade quality credit ratios over time. In Q2, we again reduced our net debt to trailing 12-month adjusted EBITDA ratio to 1.0x, our strongest financial position ever. Our results in Q1 and Q2 position us well for a strong Q3 and Q4. Looking forward, we expect the following as long as the environment remains stable. One, a sequential increase in retail units sold in Q3 compared to Q2, and two, adjusted EBITDA of $2.7 billion to $3.0 billion for the full year 2026, an increase from $2.24 billion last year.

In closing, we are excited about what our team accomplished in Q2. We remain focused on executing at a high level, delivering profitable growth and making steady progress toward our long-term goals of becoming the largest and most profitable auto retailer and buying and selling millions of cars. Thanks for your attention. We'll now take questions.

[Operator Instructions] First question comes from the line of Daniela Haigian of Morgan Stanley.

For what it's worth, I do think the webcast is out, so you might get some questions there. First question is on what's the progress update on reconditioning operations specifically? That was something a lot of people were speaking about in the first half of the year. Can you disaggregate how much of the recent retail GPU dynamic is coming from gains there versus a supportive or favorable used car pricing environment?

Sure. So I think, first of all, we're working on the webcast. The team is aware of that. So thanks for the heads up. So I would say, yes, I think the team has done a great job. As we spoke last time, they worked really quickly in a couple of months, got costs. new place. I think that was step 1 of the plan step 2 of the plan back to growth. Our inventory growth slowed a bit there as we were focused on costs. And I think around mid-Q2, the team started to get our kind of inventory growth moving back in line with sales growth. So I think that's great.

And then step 3, we plan now to shift to cars that are closer to our traditional mix in terms of age of cars and mileage, et cetera. We've been moving up a little bit in car price and do a little bit more near age cars as we've gone through over the last couple of months. So I think that's all going and is right on track. I think the retail strength I think had the most. The simplest and probably most dramatic part of that is during the quarter, the FTC put out guidance to all dealers that they were required to update their pricing to include dock fees and also any products required to be purchased with Car.

Brotobviousl that has no impact. We haven't had dealer fees and we don't have product required to purchase with a car. But for many dealers, that was certainly a change. And as a result, over the subsequent several months, basically from April through June. Many dealers were adjusting to that change and then that was changing the underlying data that we were seeing that powers our pricing algorithms. We've been making those adjustments and kind of figuring out the implications of that.

But as those teams were being made, we were following the market, and that led to some of the outsized gains. I think there's a couple of other puts and takes. But for the most part, I think things are operating as expected there.

And then my second question is on the financing piece. How do you think about the outlook on financing margins as you have changes in benchmark rates how much of the risk is hedged? And how do you think about holding margin versus holding rates steady for consumers?

Yes. I would put that back in the context of the previous answer a little bit. So I think -- the way that we try to think about this is we're trying to build a big machine, and that machine delivers great experiences and then it kicks off great unit economics. And I think this quarter gave a great example of the flexibility of that machine. So when we saw these price changes that were flowing through to higher retail GPUs -- and then we also saw the increase in benchmark rates.

We basically paused our postmark rates to make sure that we are understanding the sum of those 2 changes, just have fewer moving pieces. And I think that, that's the kind of flexibility that we have. But overall, I think total GPU when you add the 2 up, came in right as we would have expected. And I think, again, just kind of demonstrates the overall flexibility of the model.

Your next question comes from the line of John Colantuoni of Jefferies.

Just wanted to come back to the pricing versus rates dynamic. Can you talk to your strategy of keeping consumer-facing interest rates stable despite higher benchmark rates rather than maintaining retail prices? I'm curious if you're seeing a higher ROI investments into rates rather than investments into pricing? And then I have a follow-up after that.

Sure. I would, again -- I think the way that we try to think about these things in general is make the machine as efficient as possible overall across all line items. And then we are separately trying to make as much progress as possible in making that machine better in the form of fundamental gains and foundational capabilities we've talked about in the past.

I think other GPU is a great place to look at exactly those kind of fundamental gains and to see the types of choices that we're making. Year-over-year, I think other GPU to some degree as a result of the effects we just spoke about, was down just shy of 2 others. During that sitting period, we passed back over 100 basis points of rate to our customers. I think if you do the math on passing back rate to customers, it's probably a good estimate is maybe $4 to $5 per basis point that we pass back to our customers in rate.

Given all the rates that we pass back, all else constant, you probably would have expected something closer to a $500 reduction in other GPU, but we actually saw it was 200. That's because there's, give or take $3 of fundamental gains there. And then we take those fundamental gains. We try to figure out what's the best thing to do for the business and our customers in the long run, and we've elected to pass those back over time as we think that that's the right thing to do on our path to $3 million and $13.5 million.

Okay. Great. And second, with labor hours per unit approaching all-time best levels since April. I'm curious if you're expecting to see an incremental tailwind to retail GPU from this dynamic in the third quarter given you don't record the lower reconditioning costs until the cars are actually sold.

I think that conceptually holds -- and then I think we are also at a place where our hours per unit is in a very good spot. And I think the realistic variability in those rates aren't huge dollars. So they're not dollars that we would really want you to kind of take in 1 direction or the other. I think there's more noise than just building a machine of this complexity at the pace that we're building it than there is kind of, I think, certainty that any given move there will flow through to the bottom line in any given period. .

But I think there's clearly opportunity for us there over time, and we will seek to get it as quickly as we possibly can, but I think given the way the business is performing and the unit economics, it kicks off. The most important thing we can do is just make sure our costs are on a really good hot and then continue to build the machine. So I think today in step 2, and step 3 of that inventory plan we discussed earlier, we're really focused on making sure we get nventory growth back up.

It's -- inventory has undergrown sales over the last several months, and that certainly creates a headwind to just like the overall business. The team has got a great plan and we're confident they'll catch up and hopefully surpass it in not just in the future, but we got to make sure we do that and execute. And that, I would say, is the primary objective today in that group.

Your next question comes from the line of Rajat Gupta of JPMorgan.

So Ernie, in the past, you have inked that EBITDA per unit is an important metric that you care about and know investors do as well. I mean, the used car industry will continue to have the pricing fluctuations like the 2-year rate fluctuations. We had 3 quarters of lower EBITDA per unit in a row. I'm curious if you can give us a sense of when investors would expect that to return to growth? Do you think it can happen like later this year? Is it the 2027 story? Any color on that would be helpful. And I have a quick follow-up.

Sure. I'm going to again go back to the framework of -- I think it's all part of the big machine that we're trying to build, and we're trying to make as much progress in both growth and EBITDA dollars per unit as we possibly can. I think when you look year-over-year, I think this quarter, we were down about $300 in EBITDA dollars per unit. Quarter-over-quarter, I think we were up about $300 if you break it down this quarter, I think there's some pretty clear year-over-year impact. .

Last year, we had a tariff benefit that was around $100 gas prices moved up pretty dramatically throughout the quarter, and that probably cost us something on the order of $75 across the entirety of the income statement. I think there were a couple of things that kind of flowed through that helped to explain that. Benchmark rates moving certainly didn't help us in the quarter. So I think those things are moving around a little bit.

But I think we're extremely happy that we were able to deliver 38% growth, still be there with a map that's that clean. And we did at a time when our inventory wasn't growing as fast as we wish it were I spoke in my prepared remarks about those graphs that kind of show the extremely strong relationship between inventory growth and sales growth in all these different regions. When you kind of extrapolate that to the company as a whole, that obviously has a large impact as well.

And we clearly undergrew sales during the quarter. As I said, the teams got that back on track, and we're starting to catch up, but we have not yet caught up. That put the headwind on the business that has to show up in some way, either is going to show up in lower sales or lower profitability overall, but that's just kind of again, part of building that machine and balancing it. So I think the team's growing machines, scaling it, adding fundamental gains we just discussed in other we're on a great path. And I think we just got to mark and execute. I think the hardest stuff that we have to do is make sure that we're executing across every different operational part of the business. And if we do that, the demand is clearly there as it shows up in those graphs.

Understood. That's clear. Just as a follow-up. So I think 2025 was a pretty clean year in terms of specific cadence of the business. In the second half of '25, you actually grew EBITDA versus the first half despite a pretty challenging fourth quarter. The guidance would imply a step down this time despite the fact that you're actually now catching up to production better in the second quarter, more better run rate on production in the second half versus the first half. So just curious like what's driving that condos? Or is there anything that we are missing in terms of the dynamics between first half and second half level last year, when it looks like things are actually getting better from an execution standpoint.

Yes. I think we got to stick with guidance. I think once we start giving guidance on guidance, I think it gets complicated. But I think -- listen, I think we said this in the opening of the shareholder letter and also in my prepared remarks, the most important thing is execution. And I think the -- it is very likely clear. Again, I'm going to call back to those graphs. When you look at those graphs, and you really think about the implications of those graphs.

It's pretty clear if we build the machine we deliver great experiences, the demand is available. If demand is available, it will show up in some combination of growth and improving unit economics. That's just -- the demand has to do that. So I think the question looking forward is generally is about our ability to execute. And I think the team has done an incredible job executing, but I don't think that the execution is always uncertain as we look forward several months.

And so we're always going to take that into account as we're looking forward. But we're confident we're executing really well. The question is how well do we go out the machine because the machine generates the demand and creates the unit economics.

Your next question comes from the line of Ron Josey of Citi.

Great. Ernie, I wanted to go back to the execute and execute and specifically understand a little bit more about Roll and meter hubs. I'm wondering, can you give us some insights on whether that's been fully rolled out across the IRCs and -- is that what's needed for inventory to get to that level that the team needs to drive continued growth. That was question one. And then with all the comments on AI and with Sebastian being used more and more, just in insights on conversion rates given just greater uses of Sebastian?

Yes. Okay. So on the inventory plan, no, our new tools are not fully rolled out everywhere, and I think that's certainly the opportunity. I think the team has rolled out process improvements everywhere, even though the technology is not yet fully rolled out. I think we're seeing very strong results. So you're seeing that in our HPU costs and in the fact that we started to grow inventory again in the middle of the quarter. So I think there's good stuff in front of us, and I think it's a function of how what we execute.

And then I think the progress that we're seeing across the entire business enabled by AI, whether it's just every product in the business, being able to move more quickly or if it's customer experience is getting better and simpler. I think that's exceedingly quick. I think that may take the form of Sebastian that may happen in kind of chat or may take the form of different kind of features that we've built throughout the website that either pull customers into Subasio provide information that Sebastian would have otherwise provided.

I think a reason way to think about that is just to think about what is the customer care cost over the last several years and what's happening there? I think if the website is infinitely intelligent and can answer every customer question on its own through whatever tool you put in front of them, then there would not be calls into customer care and our customer care expenses would be -- if we just look at kind of what's happened over the last several years, 3 years ago, customer care costs went down 40% year-over-year. From 2 years ago, it went down an additional 30% year-over-year. One year ago, it went down 20% year-over-year. This year, we went down an additional 10% year-over-year.

So I think the some of the effects of those compound gains is clearly showing up. And I think we've got a lot of great ideas and a lot of great work still in front of us that we need to make sure we execute on and unlock the fundamental games that come with it.

Just a quick follow-up. You said not fully rolled out for [indiscernible] hub. Any insights on like how close we are or are we on penetration there or plan to maybe fully rolled out? .

Yes, we'll be rolling it out over the coming quarters.

Your next question comes from the line of Brian Nagel of Opheimer.

The question I want to ask, maybe it's kind of basic. But just with regard to the guidance that was laid out for the balance of 26%. So 1 so now you're providing at least a range of the EBITDA guidance. That's a new way. So the question we ask is, why is the guidance now? And then probably more importantly, as you think about that guidance, the parameters around that guidance or maybe the that's behind that guidance, are you signaling any type of change in the business from what we've seen here in the first half of the year, either from the sales or from more importantly, a profit standpoint?

Sure. Let me take that one. So I think as a starting point, we're very excited about Q2 results, as Ernie pointed out, a record quarter across many dimensions. I think as we think about the guidance, it's actually the same style of guidance that we've applied the last 3 years. So typically, in the first half of the year, this is speaking back I think, '24, '25 time frame. We give some sequential color just to understand -- allow everybody to understand the seasonality and where we take the business is heading.

And then when we reach midyear here, we actually give more specific guidance on adjusted EBITDA the goal there is just to let people know some guardrails around what we're expecting in the second half and that res our philosophy. And again, basically, the identical philosophy that we've applied the last couple of years. I will say that overall, I think we're feeling very good about the trajectory of the business. I think, like I said, this is a very strong quarter driving 38% in retail unit growth. That is against an indisackdrop where the industry is down, call it, on the or of 4 points year-over-year.

So I think that 38% growth is a notch more impressive in light of that industry backdrop. The other thing that I just get very excited about this quarter is the fact that in 2 large regions, representing approximately 1/3 of the country. We grew 54%, and we're growing at 54% in those very large regions. Despite the fact that at the company level, we're almost taking over $30 billion annual revenue run rate. We've ticked over over a $3 billion adjusted EBITDA run rate, more than $2 billion run rate of net income in the second is a good quarter.

But that just says we're at real scale here. And the fact that we're at this scale and level of profitability, and we've got major regions that are growing at 54%. To me, it just got me very, very fired up this quarter. I think why is that happening? It's is building the machine. It's basically all the sources of positive feedback. So we grew selection in that region. That did allow our customers to choose cars that were closer to them.

In addition, as we had more cards, it made sense to market more in those regions. And as we marketed more, we drew more customers to the site who then converted on the cars that we had available. And it just served as a really good example of how the whole model works and why it's so valuable for us to just continue to march down our execution path, continue to build this machine that involves ramping production, in last mile and multi-car logistics capacity to connect that production to consumers, continuing to drive the customer experiences.

And I think 1 thing Ernie may have mentioned, but we had a great quarter on customer experience as well. We've seen that marching up as we've been growing at these levels. And so when we put all that together, it just -- it was a really, really great quarter and it was a quarter where I think we just have data points that give us very high conviction about the growth trajectory that we're on and the long-term sustainability of the trajectory. So those would be some of my thoughts.

Your next question comes from the line of Sharon Zackfia of William Blair.

I have a GPU question. Given the degradation we've seen kind of over the past year, which I think has run between $200 to $150 a quarter. Do you expect that to narrow as we get into the third quarter. It seems like you might have still some other GP compression, but perhaps the retail side is now getting better. I just would love to get some color on how you're thinking in the third quarter might shape up there.

Sure. I think at a high level, we're going to stick with our guidance on this. I think we've -- you can look at our results, there's a bit of seasonality in the different GPU line items that is kind of reasonable to assume could be somewhat similar in the future as to what it was in the past. But I think we're going to stick with our guidance and try to stay away from giving too much detail line item by line item color.

And can I ask a follow-up? Just given the West and the Southeast are lagging and production increases. As you think about the ADESA conversions, if I remember correctly, part of the real estate advantage there was that there were quite a few deos that were in kind of very favorable locations in the West, particularly in California. What does the slate look like for conversions geographically? kind of over the next 18 months?

Yes. I think we've got opportunities all over the place. And I think the team has a very clear kind of build-out plan and it works basically 2 ways. One way is where is the optimal place for us to put inventory on the map, given where we have opportunity. And then 1 way is, what are the inspection centers or regions where we've got the management teams that are executing at the highest level.

And I think that we are constantly trying to balance those 2 things out. So I think, for example, the 2 regions where we grew inventory the most, the Midwest and the Northeast. The Northeast is definitely pretty heavily impacted by the ADESA footprint that we were able to open up. The Midwest is also impacted, but that was a place we already had some strength I think looking forward, we plan to balance those 2 considerations. But we plan to open.

And then in addition, we also are just beginning work on a fresh build site as well. So the way the team determines where fresh builds will go is they look beyond $3 million, and they say, where are the gaps in the map that would be optimal for us to fill in. And then those are the sites that we look at there. So I think we'll continue to kind of run that I'd say the first wave is basically conceptually. It's just like what is the best place in the map to grow inventory.

And the second way is practically where are we executing the best. And I think we'll try to continually balance those 2 considerations. One thing I want to add to Mark's previous comments because when markets fired up, I get fired up, and I kind of think everyone the whole company gets fired up. So to go back to those charts for a second. Not only is kind of inventory growth driving sales, it really truly does drive the entire machine.

In those same regions where we have more production and then we have more sales have more cars that we buy from customers. We have marketing that is more efficient than the rest of the country. We have profitability that looks very similar to the rest of the country. There's not variability in profitability across those markets. So anyway, I do want to keep pushing on that because I think we try to make this point that execution is the most important. And I think the evidence that the variability in growth rates around the country provided us is very helpful, but I think the evidence has always been there across time. But to see it laid out so clearly at the same moment to see it across the entire business playing out that clearly, we think is really exciting. And so that makes it, again, an execution story, and we just want to make sure we execute.

Your next question comes from the line of Andrew Boone of Citizens.

Ernie, I wanted to go back to the last comment that you just made about production and more inventory coming online and what that means. You guys made a decision earlier this year to reinvest appointment back into financing costs. And so I guess, just from a higher level, like why is that the right decision versus investing in the labor or some other choke point that you guys have to drive more production? Like why did you guys make that? And then how do we think about what you're saying today and where you guys allocate investments and costs going forward?

Yes, perfect. Yes, I think that's a great question. So let me answer like the kind of labor versus anything else first. I think I think the reality is like the financial returns on growing the machine are extreme. It's not a financial question. Like if we could write a check and have the machine be bigger, it would be very straightforward that we would want to do that at extreme speed. It's much more about the execution of building out the facilities, hiring people, training people, making sure people execute well, that people care that is the thing that I think is much harder.

And it's the thing that unlocks much larger returns and more enduring returns. As a general matter, we are working to get as fast as we reasonably can. I think occasionally, you'll see bumps in the road I think, kind of Q4 into early Q1 in Recon, we had bumps in the road. And I think kind of idealized execution would never have a bump, but I think real-world practical execution. I think the best you can hope for is that when you hit a bump, you recover quickly.

And I think that team is recovering very quickly. So those execution type investments we want to make as quickly as we possibly can, and it's just about making sure that we execute. I think that's the big question there. On financial kind of investments, I think that's a very good question that is I think, interesting and points to at least apparent contradiction a bit in some of the things that we're seeing. So we've invested a bunch back in the customer offering, right? We've given fundamental back to customers.

We've done that at the same time that we are constrained, right? We're showing you these graphs, we're constrained. We're telling you that inventory less than we wish -- why would you kind of give money back to customers in the face of those constraints? And the answer is that we expect to relieve those constraints. And we're trying to make sure that we build the business in the best way that we can over the long term.

I think any time we do like customer-facing optimization, you can kind of do it 2 ways. You can view what are the starting economics that we've got and what are elasticities and what are the smart things that we should do to maximize the value to customers and to ourselves, if we were not constrained at all. If we could press button get car and the whole system just kind of worked. And that's 1 way to kind of do the math.

Another way you can do the math is you can say, okay, we're constrained -- and as a result, all fundamental gains should just flow straight through to us. I think in '22 and '23 when we were making sure that we put ourselves in a spot where we were completely financially independent, it was very clear what choice we should make. I think where we are today, where we're extraordinarily financially independent, where we're generating enormous cash flow that is accruing our balance sheet quarter after quarter, and we're compounding and growing.

I think we are in a position that we're excited to be in where we feel like we can make longer-term choices there and do what's right for the customers. So it is likely the case giving back to customers in the form of rates over the last year is not something that we've been fully paid back for in growth. The fact that our inventory is tight sort of makes it clear that we didn't get fully paid back forward in growth because if inventory gets tight, your conversion rates go down.

So we probably didn't get fully paid for it. but it puts pressure on the machine. It will cause us to build. And then we got to make sure that we execute, and we're in a great spot anyway. So we're going to try to do what's right for us and our customers over the long run.

And then just as my follow-up question, I wanted to ask about the cash generation. You guys are now at 1x kind of leverage what should we be thinking about or considering before you guys start to think about capital returns or some other form of return of cash taker .

Sure. Well, I think the most important things that I think of when I think about you what to do with our cash, it really comes down to investing in the business and generating returns and building the machine for the long term, just to give an example of that. So -- our trailing 12-month operating income was just over $22 billion. We generated that $2.2 billion of operating income on only about $7.5 billion of net operating assets. And so we're talking about on the order of 30% operating return on net operating assets, which is a pretty great business and a business that you really want to invest in.

And so that's a little bit of a different angle on some of the things that we're excited about in the business, including our growth, including our customer experience and including our industry-leading margins, but the way that we're now earning returns on the capital that we invest in building the machine, I think it's also very exciting. And so first and foremost, where our head goes on, hey, what do you want to do with the cash that you're generating. It's invest in this machine that we're building that delivers great customer experiences and has shown the capability to grow very quickly in a sustained way over a long period of time. So those are my major thoughts on that.

Your next question comes from the line of Jeff Lick of Stephens.

I think I'm going to ask Sharon's question maybe in a different way. But last quarter, you talked about kind of the $200 to $300 of GPU headwinds. As you look at how things have unfolded it does appear that supply has maybe come back online to be a little faster than demand. Do you see that, that $200 to $300 maybe hasn't really played out and it's a little better environment than at this point?

I mean, I would go back to what we said before. I think the highest level, we want to kind of stick with overall guidance and not give too much too much detailed color on every line item. I think there's some clear year-over-year things that we're dealing with. I think we spoke about some of those whatever gas as interest rates, tariffs, et cetera. And I think that the 1 that like probably matters the most today to the machine that is not our control and isn't just kind of 1 of those macro speed bumps that you absorb is that our inventory in the quarter was less than we wish. And when your inventory is less than you wish, going to show up as lower conversion and lower conversion means either lower sales or lower economics, all else constant. Like those 2 things are very directly tradable.

And so if we build the machine to generate kind of the maximum demand and maximum conversion and we get to decide how to express it. But I think we've been dealing with those headwinds a little bit over the last quarter or so. And I think that we also had less inventory than we would like and team's got a great plan and working quickly to resolve that.

And then 1 follow-up. Your inventory, your average list price we showed, and I guess it's not your number was above 28,000, it looks like a 4% increase year-over-year, which last year was a big increase as well. I'm just curious, it would appear that you're on the margin getting a higher price point. And if you look at your offering, maybe you're getting as you go up the demand curve a slightly better customer or a customer that has options. I'm just curious, are you learning anything new as you cater to a customer maybe that has a bit more options?

Yes. So I think that's another very interesting and we would like to think exciting like deep point with interesting implications. So for sure, our ASP is up. So going back to the inventory plan, step one, drive down recognition cost. Step two, turn back to growth, but do it on cars that all else content required less reconditioning, so we could turn that on faster. That meant that we went toward more expensive cars and newer cars.

Step three, continue to grow and move back to a more traditional ASP. And all that bundle is happening in the context of market prices are going up a little bit anyway, which makes that situation a little bit fuzzier, but that's the plan. I would say we are heading into step 3 today. Now as a result of leaning into more expensive inventory, there's been some interesting findings though. So for example, if you look at customers with over $100,000 of income, our year-over-year growth in that segment was a little more than 60% of year-over-year. So that's showing you that when the cars are there for that customer segment, the growth is there.

And so I think, again, all of the signs point to us they just say, if we can build the cars that our customers want, whether we think about that in aggregate or if we think about that in segments, if we can build the cars that they want, and we can deliver great experience to them through our machine, the demand is there and the economics are there. And this is very much an execution story where we just have to make sure that we keep building this machine.

And I think that it's the best thing, the worst thing about Carvana is that we've got a big complicated machine, it means that it's hard. It means sometimes we're going to hit a bump. It means that there's going to be $100 that bounce around here or there. And people are going to look for clear explanations. And a lot of times, the explanation is going to be something a little more complicated. It's going to be a function of us building this really big complicated machine we're balancing logistics routes, and we're balancing building cars in different parts of the country, and we're balancing last mile of delivery and customer care.

And so I think that's the reality of what we've got to do and build. I think that we're extremely proud of the consistency of the results that we've been able to demonstrate for years in a row here. We're going to continue to keep working hard to do that, but -- in our minds, this is just -- it's an execution question. And we just got to make sure that we execute and build this big machine. And then the good news is when we build that big machine there's a behind us that nobody else wants to run across. And so I think, like I said, there's good things and there's bad things. We think on net, it's good, and we think we're up to the task.

Your next question comes from the line of Tom Babcock of Barclays.

I think just, first of all, you talked about investing more in advertising over the balance of this year. Are there other areas you're also planning to invest in from an SG&A standpoint?

I think we pointed to that 1 because that's our expectation in the near term. And again, I would point back to that goes back basically at the simplest level to this inventory point. Inventory is a little lighter relative to where we wish it were today, all else constant, that's impacting conversion a bit. We want to make sure we keep building the machine at a very consistent pace. We expect to get inventory back in line relatively quickly. A good way to fill in that gap is marketing dollars. So I think that's basically the near-term plan there. .

And then you were talking just recently about the -- how the growth with income is above $100,000. Just kind of curious, are there income groups that are growing more slowly at this juncture? Like which ones are more challenged really, I guess, is what I'm getting at.

Yes. It's -- I mean, in order to have 60 on a big population, you have to have less than your average on the remaining population. And so I would say the groups that are more challenged are basically the cars that we're not producing, which I think is great. I think what's happening is as we lean into more expensive cars.

And as we handed right back to customers, it was more focused in the prime area. I think that led to more demand there, and that demand caused our machine to build more of those cars and crowded out some of the less expensive cars and crowded out some of the sales that we would have seen in those other areas. So I think our view is we are seeing less express demand in the kind of like lower income bands in terms of the growth in sales, but likely not lower actual demand. If the cars were there, we would expect the sales to be there as well.

And then I was wondering if you might be able to give some update in terms of how things are going in July so far? And by this, I mean, just generally from a GPU standpoint because obviously, I imagine there's some reconditioning cost improvement as you're starting to roll out those systems across your other sites on top of that I don't know how we should maybe think about fuel costs, maybe fuel costs are flat, maybe higher. I'm not 100% sure there. Are there things you could maybe help us bridge kind of June to July with a little bit?

So on that one, I would just point to our outlook. Our outlook for the rest of the year gives us a good sense of what we're thinking. And I wouldn't go into more detail than that on a specific one. .

Your next question comes from the line of Marvin Fong of BTIG.

Great -- good evening. Thanks for my. Most have been answered here. But I did want to go back to just the mixing into slightly into newer cars. Have you done that in response to sort of reducing the pressure on your reconditioning -- and what I'm getting at is, is this a structural change we should expect? Or might you kind of rebalance a little bit once you get the recon under control and as well as being able to source that lower price point inventory that you just sort of mentioned. And then should we think about kind of the newer car having any different GPU profile from an absolute dollar standpoint compared to maybe a 4- to 6-year-old bucket or in that.

Yes. So I would say definitely not structural. I think there's been 2 drivers of that shift. I think 1 is we have passed back rates to customers, and that has been disproportionately to prime customers, which, on average, kind of demand a more expensive car. So all else constant, that kind of shifts the way all the algorithms work toward purchasing more expensive cars. And then I think as part of step 2 of the inventory plan, we also did lean into newer cars that would be able to be reconditioned more quickly to get us back to growth.

So I think that some of those 2 things are what's causing that shift in the supply of cars that we're putting in front of customers. We very much do not view that as structural. I think over time, we expect all of our metrics to move toward the average car buyer we plan to play a very big role in this industry. And to do so, we want to make sure that we're offering the broadest selection we possibly can to customers.

But I think in moments like that, we're working to quickly get cost back in line and get operations tight we will make adjustments. And I think that we're in the exciting position of having sufficient and across every part of the customer spectrum that even as we make those choices, it doesn't really show up in the aggregate business results because the cars get absorbed by the different groups.

Got you. And if I could do 1 quick follow-up. I mean, on the FC dynamic that you mentioned is that still ongoing benefit to you? Or do you feel like all dealers have pretty much invested their advertised pricing now?

We believe most dealers have adjusted their pricing. I think there are 2 components to that, 1 was the requirement of the inclusion of dealer fees and 1 was the requirement of the inclusion of different products that were required to be bought in order to get the car. I think that it looks to us like most of those have probably been passed through. Some of the latter may still be kind of like lagging in -- we certainly expect over time for that to be a positive for us.

I think in the immediate moment, our algorithms needed to adapt to that new world because kind of dollars meant different things and they meant different things for different dealers at different points in time. And so that took a second for everything to adapt and for us to fully figure out. Yes, certainly, for most dealers, let's say that there's -- their prices on their website just want a $500 or $600 and ours didn't move. That should be a tailwind in the grand scheme of things once all that settles out.

Your next question comes from the line of Joseph Spak of UBS.

Look, I know seasonality is difficult when you've been growing like you've been growing. But over the past 4 years, the back half profitability has always been stronger. And I hear you're talking about inventory availability and some investment. But I guess it's still just a little bit unclear to me like with the second half profitability sort of close to the first half. Is this more comp driven or more cost driven? Or it's pretty balanced between the 2?

I think we're going to stick with our guidance. I think, yes, we try to be consistent there and thoughts about what we put out there. And then I think we think the remainder of the year is a function of how well we execute. We think we've got a great plan, and I think we have an opportunity to have an awesome year. But always, we're going to have to execute on that, I think, is the biggest question for how the results will come out. .

Okay. And then just to follow up on a question mark, I don't know if I understood the answer. So is -- with the introduction of this EBITDA guidance, is that something you do plan on continuing to do more regularly or sort of at certain points in the year when you have better visibility? Or what's just the go-forward communication strategy there?

The -- to just put it in historical context, this type of outlook is exactly what we provided in Q3 of 2025 and Q3 of 2024. So we are just following the same playbook we fall.

Okay. And then last one, just Ernie, I know you've been pretty reluctant to talk a lot about the new dealership strategy. And so I won't press there. But just in terms, maybe you could just sort of comment if it's at all paying any early dividends on that inventory ability challenge that you mentioned.

Yes, sir. I think it remains very early, and I think we still are going to wait until we have, I think, a lot more data to share a lot more with you all. But I will say that the early signs are very clear. The customer experiences are great. And I think that, that's exciting. I think we track our NPS closely in every possible dimension, whether it's different customer attributes, different transaction attributes, the way the customer went through the flow or different car attributes.

And it's pretty clear that new car NPS is very high. And in a discontinuous sort of way. So I think that's great. The most important thing, whenever you're testing anything is make sure you're delivering an experience that customers love because that's the fuel that ultimately powers everything -- so I think that's exciting. And then I think it's still very early days. But obviously, the operational implications of new cars are very different than used cars. In used cars, we need to kind of remanufacture those in new cars, you're outsourcing manufacturing to somebody else. So it's a simpler operational problem for us.

Right. But I guess the question -- sorry to be more direct, like is having those new dealerships helping with used your used inventory at all there.

I think it's early for any of those types of comments. .

Your next question comes from the line of Michael McGovern of Bank of America.

Given the big gap in production growth across regions, how are the challenges different between investing in a higher production growth region versus a low-growth region where you might have unit growth outpacing production, which might create its own set of challenges or limit your unit sales growth there if you have selection issues or anything else?

Yes. So I think I think general matter, we want to grow as quickly as we can everywhere. And then I think the sort of good news is sort of a self metering problem. If we have less production in a region, and we have demand that kind of outstrips our ability to produce cars than our kind of local inventory shrinks. And so that all else constant, would reduce kind of demand in that region. And then the opposite is also true. So I think those problems do resolve to some degree on their own. And it's more about just how quickly can we open production in these different regions and how well can we execute.

Got it. And then I have a follow-up quickly on the new car discussion. NPS is very high. Are there any key differences within the NPS for these new car customers versus you? And can you discuss any sort of initial learnings on what the GPU expectation would look like for new versus used?

I think the NPS is clearly high. I think there's nothing too concrete to call it that's different. The experience is very similar. I think there's anything too con free to call out. And then I think it's early for a ton of detail. New cars are profitable for us today. But beyond that, there's not a ton of detail that we're ready to provide. .

And your next on the line of Chris Pierce of Ham.

Just 1 on the inventory, you're going to grow here. How do you I guess, with the machine, how do you make sure that you don't have the same problems you had last year, the end of last year in the IRC, like what safeguards put in place to make sure that you're growing inventory that gets up on the website at a normal pace?

Well, first of all, thank you for adopting the word machine. That's the most important thing. And then I think the -- these are operational problems, and I think they exist in every part of the group. I think we in many of our conversations with these different groups, there's always a site somewhere that we're focused on, whether it's in recon or logistics or customer care or anything. There's always a number of groups inside the company that we are focused on making sure we make progress where we're not doing as well as we would like to do. We're not moving as quickly as we would like to move.

I think most of those things come and go, and there's never public awareness of it. I think in the case of reconditioning costs in Q4, I think that rose the level or it was apparent and so we discussed it. But I think that's the reality of execution in a complicated machine. I think there will always be areas where we're working on different problems. And I think the more problems that we and put behind us, the more resilient we get and the better we get at resolving whatever the next problem is, whether that's hiring or training or building or permitting or whatever the problem ends up being.

But there are constantly little issues that pop up. And our team has done a very good job of taking those problems on as they show up and getting them behind us and having it not show up at all in the results. And I think you see that in the consistency of the results over a very long period of time. So we hope to continue to execute at that same level, but it's always work.

Okay. And then just 1 more on the machine. If you kind of said, I don't want to -- how much try to paraphrase, hey, we lowered rates 100 bps, GP should be down $400 to $500, but it's only down $200, we had efficiency gains. What are some of those efficiency gains that you're still able to drive to that magnitude of $200, $300 another GPU? Is it more demand for these loans from other parties? Or is it something internal you're doing? -- or if I got that math totally wrong to correct me as well.

So yes, I think you've got it right. I think it's -- it's all the things that we've talked about, fundamental gains in the past. So it can take the form of lower rates. -- can take the form of higher finance attach. If you take the form of longer duration, but the prepayment rates are different. It can take the form of better credit models that help to monetize those things. You can take the form of improvements in our underlying credit pricing. -- that will allow us to better monetize kind of variation in loan value across customers.

So I think there are many things that go into that. But yes, I mean, if you do the math simply we should be down several hundred dollars more than we are, and we're not. And that gap is fundamental gains. And I think that in finance, those are some areas where we're discussing those right now, but those exist throughout the business. And the opportunities also exist throughout the business, and it's our job to make sure we go pick those up as quickly as we can.

That's all the time we have for questions for today. I would now like to take this time to turn the call back over to CEO, Earnings for closing remarks.

Awesome. Well, thank you for joining the call. Really appreciate it. Team Carvana, another awesome quarter. I'm glad we got Mark fired up there for a second. Sometimes the crowd cheers and sometimes they don't. But we're going to bend them to our will and make them sure eventually. So let's just keep doing us. We're going to be all right. Thanks, everyone. I appreciate it.

This concludes today's conference call. You may now disconnect.

Good afternoon, and welcome to the Carvana First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead.

Thank you, Gary. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's first quarter 2026 earnings conference call. Please note that this call is being webcast and can be accessed along with our Q1 shareholder letter and supplemental financial tables on the Investor Relations section of the company's corporate website at investors.carvana.com. 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 this 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 these factors can be found in the Risk Factors section of Carvana's most recent Form 10-K. These forward-looking statements are based on current expectations as of today, and Carvana assumes no obligation to update or revise them. Our commentary today will include non-GAAP financial metrics. GAAP reconciliations can be found in the shareholder letter posted on our IR website.

And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thanks, Meg, and thanks, everyone, for joining the call. The first quarter was another outstanding quarter for Carvana. It was another quarter full of records, including a record 187,000 cars sold in a single quarter, a record GAAP operating income of $581 million and record adjusted EBITDA of $672 million, and it was our ninth straight quarter of being the most profitable and fastest-growing automotive retailer as well as our sixth straight quarter of 40% year-over-year growth. The quality of our customer offering, the fact that it naturally gets better as we get bigger and our experience over the last 13 years lead us to believe the demand is available at the speed that we are able to scale the business effectively. As it has been since the beginning, we expect our execution will be the biggest determinant of the speed and degree of our success. Execution in a complex operational scaled business like Carvana that is growing at 40% is an inherently difficult problem. While the best-case scenario in a vacuum is to avoid bumps in the road, those bumps are a reality of building ambitiously.

This means success requires building a better system with better scaling properties and assembling a team and building a culture that drives intensity, focus, accountability and resilience. With the right team and culture, the bumps in the road create pressure that makes us better. In the fourth quarter, we hit a bump in recon that gave us another chance to prove that we assembled just such a team. The Recon team is using that pressure to make us better. When we realize we are off track a bit, the first thing the team did was turn out the operational intensity across the network, setting higher expectations for each facility and leaning into the operational structures we've built over the last several years. This allowed us to make rapid progress nationwide. In addition, they quickly assess the underlying cause of the variation in facility performance, most notably newer managers that could use more detailed directions and more powerful tools to help them execute at the level we were aiming for and adjusted their road map to prioritize building the tools that mattered most immediately.

Over the last couple of months, they built additional data integrations, developed tools to help managers make faster, higher quality decisions, and how they staff their lines, and how they optimize flow through their paint lines and implemented a productivity tracker to ensure feedback reaches the right groups quickly. To accomplish all this and to ensure the tools address real-world operational needs, the product team spent weeks on the ground in the facilities that needed it most, rolling out testing and iterating with the operators until they are making a real measurable difference. We'll continue to iterate on these tools, and we'll roll them out to the rest of the facilities over the coming months. The result is that, so far in April, we are operating just shy of our all-time best and labor efficiency throughout the network. This will take a little time to flow through to the financials as cars carry the cost of reconditioning at the time they were produced, not at the time they were sold. We still have a ton of work to do across reconditioning and other operational and technology teams, but every time a team reacts that quickly to a problem that excites us. Once again, the people on team Carvana have proven that they are exceptional that they're resilient that they are up to the challenges we will inevitably face as we scale Carvana to millions of transactions per year. We remain firmly on the path of achieving our mission of changing the way people buy and sell cars and is selling 3 million cars per year to 13.5% adjusted EBITDA margin by 2030 to 2035. The March continues, Mark?

Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons will be on a year-over-year basis. Q1 was a strong quarter driven by our team's continued focus on profitable growth and strong execution. We set new company records for retail units sold, revenue gross profit, SG&A expense per retail units sold, GAAP operating income and adjusted EBITDA. Retail units sold totaled 187,393 in Q1, an increase of 40%, and a new company record. Revenue was $6.432 billion, an increase of 52%. Revenue growth exceeded retail units sold growth primarily due to traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner. Consistent with past quarters, our growth in the first quarter was driven by our three long-term drivers of growth, a continuously improving customer offering, increase awareness, understanding and trust and increasing inventory selection and other benefits of scale. The first quarter marked our ninth consecutive quarter of industry-leading retail unit growth and margins. Non-GAAP retail GPU decreased by $58, primarily driven by higher non-vehicle costs and lower shipping fees.

Looking ahead to Q2, we expect retail GPU to increase sequentially, but to decrease year-over-year due to approximately $100 of tariff-related benefits last year, lower shipping fees and higher non-vehicle costs this year and approximately $100 to $200 of impact from narrower industry-wide wholesale to retail spreads this year. Non-GAAP wholesale GPU decreased by $83, primarily driven by increased wholesale vehicle volume and gross profit per unit that was more than offset by lower wholesale marketplace gross profit and growth in retail units that outpaced wholesale gross profit. Non-GAAP other GPU decreased by $88 primarily driven by our decision to give back to customers in the form of lower interest rates, partially offset by higher finance and VSC attach rates.

Q1 was another strong quarter for levering SG&A expenses. Our 40% growth in retail units sold led to a $170 reduction in non-GAAP SG&A expense per retail unit sold, including a $36 reduction in operations expenses and a $226 reduction in overhead expenses. Advertising expense increased by $92 per retail unit sold as we continue to invest in building awareness, understanding and trust in our customer offering. With a nearly 2% market share in the U.S. used vehicle retail market compared to approximately 20% e-commerce adoption in non-automotive retail verticals, we believe we are in the early days of customer awareness and adoption of our model. We continue to see opportunities for significant SG&A expense leverage over time and as we scale, driven by both continued improvements in operational expenses as well as leverage in the fixed components of our cost structure.

Net income was $405 million in Q1, an increase of $32 million. Net income margin was 6.3%, a decrease from 8.8%. Adjusted EBITDA was $672 million, an increase of $184 million and a new company record. Adjusted EBITDA margin was 10.4%, a decrease from 11.5%, primarily driven by increased retail revenue per unit, resulting from the traditional gross revenue treatment mentioned previously. GAAP operating income was $581 million or 86% of adjusted EBITDA, an increase of $187 million and a new company record. As discussed in prior quarters, we continue to drive toward investment-grade quality credit ratios over time. In Q1, we again reduced our net debt to trailing 12-month adjusted EBITDA ratio to 1.1x, our strongest financial position ever. Q1 was a record quarter that again demonstrated the significant power of our business model.

Looking toward Q2 and assuming the environment remains stable, we expect a sequential increase in both retail units sold and adjusted EBITDA, leading to all-time company records on both metrics. We remain on track to deliver significant growth in both retail units sold and adjusted EBITDA in full year 2026.

In conclusion, our Q1 results were outstanding. Our team is intently focused on driving profitable growth. And we remain excited about progressing toward our goals of becoming the largest and most profitable audit retailer and buying and selling millions of cars.

Thank you for your attention. We'll now take questions.

[Operator Instructions] The first question today is from Chris Pearce with Needham.

Ernie, in your remarks, you said -- you talked about new tools at underperforming sites where there are new managers. I just want to understand, do these tools -- these are brand-new, and these could help top-performing sites further improve, or these are to bring those underperforming sites in line with the -- your top performing sites.

Sure. Well, first, I want to start with just giving gratitude and credit to the reconditioning team. I think they took it very personally and hard when we didn't have a perfect fourth quarter, and they reacted extremely effectively. And that's why I wanted to make sure that I spent some time in our comments, giving them credit. I'm extremely impressed and proud of how hard they work, and how quickly they made a difference. I think there were a number of things that were done. The new tools that were discussed are net new tools. And those are tools that we hope will drive additional fundamental gains over time. I think that will take time, and we'll see how powerful that ends up being. But I think they're fundamentally value-added tools that are not in the vast majority of our facilities yet. So we'll roll those out over time. And I think to me, the way that -- we hope that this goes over the next many years as we're scaling a big business, it's operationally complex very quickly. I think we're inevitably going to run into bumps in the road. And every time you run into a bump, I think it's a chance to reevaluate what you're doing and to try to learn from that and get a little better. And I think the team dug in. I think they reevaluated their road map. I think they found new opportunities that are potentially bigger, and I think they focused and made a huge difference quickly, and I think we're very excited about those opportunities. So to me, I wouldn't want to set expectations too high beyond. We think we're very much back on track, but I think if we had to pick a direction, the tooling that we're building, I think, is exciting, and it's more room for fundamental gains over time.

Okay. Perfect. And then just kind of a bigger picture question. New vehicle prices, tariffs, gas prices, do you think there's some portion of people tapping out and dropping down to use? And could we see when off-supply and more supply comes back used go north of 40 million units for a couple of years because of this? And if that did happen, would that affect other GPU as you guys tilt more prime versus subprime, or -- I just would love to hear your thoughts on that.

Sure. I think I mean car prices are high. I think these numbers won't be exactly right, but the last number that I remember is kind of pre-pandemic. I think general consumer goods are up 25%, give or take, and I think cars are up 35% to 40%. So I think car prices at all else constant, are and that has to be impacting people. I think generally, the kind of elasticities for cars at like the aggregate level are not super high. People need cars to live their lives and they get hired the car they own. And so I think you generally see aggregate transactions that are relatively stable. I think there is room, though. All the things you pointed to are things that are probably directional positives for the overall market size over time. But I think realistically, the scale of those positives relative to the sale of our growth is just very small. And so I think our view is that most things that happened to the market are going to impact us in a proportionate way. But what we are doing ourselves is dramatically more powerful than that. And so we try to stay really focused on all the fundamental tools that we're building and just making sure that we're delivering great customer experiences and doing all the hard operational work to make sure we can scale effectively. And then I think on your last point on rates and shifting between prime and non-prime customers, I think, first of all, our balance of customer credit is pretty similar to the market overall. And then I think the profitability per retail unit sold for prime versus non-prime is not different enough to where moves in those distributions matter all that much to the overall other GPU. So generally speaking, I think that would fit in the same category. We think it's -- those things can move around. There will always be a little macro effects that move things around by tens of dollars, give or take. But in general, the most important thing is that we keep delivering great customer experiences and stay focused on us. And so that's where our focus remains.

The next question is from Daniela Haigian with Morgan Stanley.

So my first one is on SG&A leverage. Most line items this quarter, including logistics, came in lower as a percentage of sales versus the run rate we've been seeing in the last few quarters. How should we be thinking about operating leverage in fixed costs, Mark, you mentioned that? And then more near term, how should investors think about logistics expense in a rising fuel cost environment.

Sure. I can hit that. So I think it's helpful to break that down into a couple of different categories. So one, operations expense, that's the expenses associated with executing the transaction, providing customer service, filling the transaction via our logistics network and last mile delivery network and all of those sort of expenses that are more variable in nature. I think we had a strong quarter on that front with operating expenses, down slightly year-over-year. I think in the longer term, we definitely see an opportunity to march those down further on a per retail unit basis. In any given quarter, they can be impacted. You mentioned fuel prices, that would definitely have an impact because because logistics is part of that operations expense. I wouldn't expect that impact to be particularly large, but there's some impact there. Then the second category of expenses is overhead expenses there, that's an area where we've shown a lot of strong leverage. I think overhead expenses are expenses that are more fixed in nature. They can grow due to investments that we make. For example, we're making some investments now in additional technology, including AI-related technology that would be in that overhead expense number. So that can grow. But it's much more fixed in nature, and we do expect to see significant leverage in that overhead line item over time. So those are two of the big categories to stay at the third. We have been marching up advertising spend. We think given where we are in our company's life, we think there's still a lot we can do to continue to raise that understanding, awareness and trust of our offering. We're in the relatively early days of online auto retail adoption. Obviously, we're playing a big role in telling that story, and we think there's a lot of value to us continuing to invest in advertising. So those would be the three big categories, and I've walked you through some of the dynamics.

Mark, that's helpful. Second question, a bit longer term on CapEx long term. So recognizing you're only 20% utilized on your current real estate capacity of $3 million. But at this rate of growth, you're going to need to think about build beyond that over the next few years. And you had a helpful exhibit in last quarter's investor letter on eventually building out greenfield production. What would that look like? What's the team's philosophy on building that capacity?

Sure. So the way I think about our production growth plan, and I think a lot of our capital investment is really related to just growing production and production facilities. Right now, there's multiple ways that we're doing that. One is just adding staffing into existing facilities. That's no CapEx. A second is we're integrating ADESA locations, which basically means going into existing ADESA buildings that have already been constructed implementing our car lead proprietary software system to do inventory and reconditioning management in those centers, adding some equipment. And that's a very CapEx-light way to add production capacity. The third way is to actually start doing full build-outs of existing ADESA facilities. The way to think about that is we've got the land, but we can expand the buildings and structures in order to add more production lines into those facilities. We did talk a little bit about that in our last letter. We think those are very high-quality investments to be making and expect to start making those investments over the course of this year. And then last is greenfield IRCs. That's not a priority at this time. I think the I think our bigger priority is executing those first three types of production expansion. Up to this point, we've been really focused on the first two ramping capacity in existing facilities and integrations. This year is the year where we'll start doing some of those full build-outs, which we think make a lot of sense.

Next question is from Rajat Gupta with JPMorgan.

Great congrats on the execution around the reconditioning costs. I had a question on the wholesale retail spread comment, Mark, that you made in the prepared remarks, is that impact that you're already feeling in the month of April based on how retail prices are tracking? Or is that more of an expectation around May and June or baking in some sort of slowdown in demand because of gas prices and just sentiment tied to the war. Any more color around that 100 to 200 wholesale retail spread headwind would be helpful. And I have a quick follow-up.

Sure. Yes. So I think the -- what we're seeing on spreads and what we've seen year-to-date, it really starts with a very hot wholesale market in Q1. So I think wholesale prices really appreciated in Q1, and that appreciation can happen in any given year as a lead up to tax season, but the appreciation in the wholesale prices that we saw early this year at both started earlier and it was of a larger magnitude than we've typically seen in past Q1. And so I think a strong wholesale market, which did benefit us, we had one of our highest quarters ever on wholesale vehicle gross profit per wholesale unit sold in Q1, commensurate with that hot wholesale market. But I think what we're seeing is that wholesale appreciation wasn't fully passed on into retail prices, and that's causing a little bit of that wholesale to retail spread compression that we're pointing to.

Got it. Got it. That's clear. And just to follow up on the previous question around SG&A. Did the sequential pickup in the overhead expenses. It's just the other the yard cost is probably the highest we have seen in a while from 40 to 1Q, particularly since the turnaround. You mentioned some investments around AI and stuff. Any way you could double click on that, give us a little more detail around what's going on. Are there any one-timers, maybe some of the new car acquisitions? Just a little more grounded there would be helpful. And any color on overhead expenses for the year would be helpful.

Yes, sure. Yes. So I think there are some seasonal or onetime components in there as well as some investments. So we typically see -- Q1 is a high quarter for payroll expense related to share-based compensation because we typically have large vesting of share-based compensation in Q1 larger than some other quarters. In addition, the weather events in Q1 actually did have some impact on overhead expenses, where we spent much more than a typical winter quarter on snow plowing and removal. And so that is in that number. There are ongoing investments, things that I wouldn't think of as seasonal or one time, including technology investments, some incremental investments in facilities. That, I think, will have us operating at a higher level on overhead expenses than we were in 2025. But I would not expect to see overhead expenses to increase at a rate like that. I think thinking of Q1 is something more like a new level is probably more appropriate.

The next question is from Sharon Zackfia with William Blair.

Congratulations on getting wholesale ops back up and running. I guess -- well, it was running, but more and more optimized. I guess with that, it sounds like you might be positioned to hold retail GPU for the full year. And I'm curious on your thoughts on that in terms of seeing an improvement in the back half of the year again?

Sure. I think we try to stay away from giving too much precise color there, but I think all the things that we've generally kind of set in the past, we continue to believe. I think there's a little bit of seasonality in those numbers. And then I think we have fundamental gains that we're going to continue to seek to attack. And then I think across the sum of the GPU line items plus expenses, we feel like we've got clear visibility to 13.5% adjusted EBITDA margin, which is our goal. So yes, I think there's been -- there's always like a couple of little interesting stories that pop up from time to time, whether it's gas prices or impacts from Iran or Recon expense or whatever it is. But I think as a general matter, we think we're in an environment that looks similar to the past, and we're just going to keep chugging forward.

I think secondarily, sorry, I'm losing my voice. For the OBB, there have been kind of a lot of talk about tax refunds and the benefit that you might see in your business that happened right around the time the war broke out and obviously, gas prices spiked. So I'm curious, as you went throughout the quarter, did you see any change in the complexion of your customers across income cohorts, or those all look very similar to what you were seeing in 2025.

Sure. Well, I would say we grew by 40% in the quarter. So overall, I would say we're extremely happy with the way the business performed and the way the team operated during the quarter. I think it's a little hard to massage out some of those effects. I think there was an expectation that tax dollars would be larger. I think that did play out, like there's data out there that suggests that, that is true. And that, that may lead to additional vehicle demand. I think we only see our own data and that did coincide very closely with the Iran situation. So I think it's hard to disentangle. But I would say our view would be that it probably was not as strong as I expect in terms of converting to vehicle demand and was probably more similar and maybe even a touch softer than years past. But I think overall, not really a huge event for the quarter. And I think hard to separate the tax season effect from the gas price effect. Since then, it feels like things are operating in the way that we'd expect. And I think that's true. Almost any way you look at the business, whether it's volume or seasonality or distribution of customers or anything like that.

The next question is from Brian Nagel with Oppenheimer.

Great quarter, congratulations, very nice. The course I know that -- and look, I know that this has been asked before, so I apologize you being repetitive. But just with respect to gas prices, I mean, clearly, the straight you've had a very strong quarter. The commentary in Q2 has been very strong as well. But as you think about gas prices and the potential impacts to our consumer and then maybe you look over time, over prior spikes in gas prices. I mean how should we be thinking about that? I mean have you noticed over time that your consumer acts different when gas prices spike?

I think -- sure. I think maybe there's two potential impacts. One is what happens to aggregate sales and one is, what happens to mix of sales. I think what we've seen in the past is that the impact to aggregate sales is usually pretty small and over any reasonable period of time, I think largely massage is out. I think in terms of mix of sales, we do see some movement. You see expected things. I think over the last couple of months, we saw large SUVs kind of decrease as a percentage of sales a little bit. And we saw EVs kind of increase again as a percent of sales. I think even over the last several weeks, we've seen that normalize or kind of go back to closer to baseline, not all the way to baseline, but closer to baseline. I'm sure those things will continue to migrate. I think the way that we try to manage that is we try to make sure that we build a system that's adaptive, and we've got all the cars that customers could want in front of them. And then based on the demand signals we see every day. We're adjusting what we're buying every day to try to match what that demand is. And given how quick our turn times are, generally, the system adapts very quickly. So I think our view would be that there will be impacts, and they will generally be directionally as would be expected. But we don't expect them to be a central part of the story unless the impacts were to get much, much larger.

That's very helpful. I appreciate that. And then my second question, just with regard to the commentary on the narrowing spreads between retail and wholesale. So I just want to understand, but as you look at this and what's happened here, is this more of a short-term phenomena where it maybe started a couple of quarters ago and now is correcting, or do you think there's actually some type of longer term or multi-quarter shift happening within the marketplace?

Yes. I think our pretty strong view would be this is a transitory impact. I think it's hard to know exactly what drives these movements, but I think the kind of wholesale retail spread that we mentioned a lot, I think generally, that follows a pretty clear seasonal pattern. And I think in any given quarter, it tends to bounce around a little bit around the normal seasonal expectation. I do think that this year heading into the year and heading into tax season, wholesale market was really strong. And then the way the market would normally react to that is the retail market would just kind of catch up on a 30- to 60-day lag. And seems like the retail market is catching up, but it's catching up on a little bit longer lag. And so I think there's room for that to normalize relatively quickly, and there's room for it to kind of hold where it is. And either way, we don't think it will be a central part of the story. But as we look at it today, the wholesale market is ahead of the retail market, and so that led to the call out.

The next question is from Jeff Lick with Stephens Inc.

Of course, I was wondering if you could talk just unpack a little bit deeper as you guys become bigger, you become a bigger part of the entire used ecosystem, they're not just retail but wholesale. And just looking at your wholesale numbers, wholesaled less as a percentage of your retail down to 44.6% from 47.4%. I know your marketplace were actually down, and then you were -- Mark, as you pointed out, your wholesale DTU was $1,327. So I'm just curious kind of how that dynamic is playing out in terms of your ability to source your decisions that you're making as to why you might -- as you would think almost if you can get that much money wholesaling, you might have wholesale more, but it appears that you retailed more. So just -- can you maybe talk a little bit more about the dynamics there?

Sure. Yes. I think we're extremely excited with how the business is operating overall. And I think -- keep in mind, I think one of the central things that we're always trying to balance is making sure that we're managing the business operationally as best we can while growing at these very high rates. And the wholesale side of the business does have operational impacts on the overall business, most notably in last mile logistics, which is an important part of our system that we've got to carefully manage to make sure we can handle the growth. So I think we're always making trade-offs there and trying to make sure that we're doing smart things. But in general, all the signs that we see are very good, and the teams are executing extremely well. I think the wholesale team continues to unlock fundamental gains and is doing great. I think you see that in the wholesale vehicle results. And then I think in wholesale marketplace, I think we're also building a lot of fundamental value there that feels very exciting. I think we made a comment in the letter that we feel like ADESA Clear, which is our digital platform is now a best-in-class platform. And we've got a lot of reasons for believing that, but that's pretty exciting. We think that we've built something there that is extremely high quality, and it's growing very quickly, and it's adding value to the ADESA system and to the Carvana system as we buy cars wholesale and and dispose of most of them through that platform. And then you kind of saw in the letter we shared a number of speed stats that I think are fund reductions of the rate at which we can kind of move cars through the system. We've talked about it before, but the goal of building the entirety of the Carvana system is to deliver incredible customer experience on both sides of the transaction and to minimize the expense that is necessary to allow customers to trade cars with each other. And I think if you look at the cars that we're buying retail and then putting through our system and selling to a different customer, that entire process in the fastest case took place in just under 5 days, which I think is remarkable. I mean it's -- forgive me for walking through that. But that means the customer goes to our site, get a value for their car, decides they want to sell it. They go through a verification process, go through all the title work, schedule time to drop off the car to us or for us to pick it up, we get the car. We landed at our hub. We put it on a multicar hauler. We drive it to an inspection center. We inspected. We run it through the reconditioning process after figuring out what needs to be fixed on the car, photograph it, put it up on the site, price it in an automated way. And another customer finds it, decides they want to buy it, they go through the entire purchase process, schedule their delivery. We put it on a truck, deliver to them, and it's theirs, and that took 4.8 days, which is pretty exciting. So I think the system overall, we're making a lot of investments to make sure it's very tight, and we're getting a lot of fundamental value out of that, and we think that, that's going to unlock a lot of value over time. So I think, overall, we're very excited about how the system is performing overall.

That's an amazing anecdote. Thanks for sharing that. Congrats and best of luck for Q2.

Thank you. Appreciate it.

The next question is from John Colantuoni with Jefferies

Just wanted to ask about other GPU. Can you give us a sense if you sort of see an opportunity to incrementally invest some of the financing GPU into growth as you've done in recent quarters? Or is that reinvestment largely behind you so that other sort of is more or less hit a run rate level at this point.

Yes. Thank you. I would say -- I mean, let's start with -- in the quarter, we are 10.4% adjusted EBITDA margin. I think in the past, we've provided these walks that we think are relatively straightforward to get to our goal of 13.5% that basically include leverage and fixed costs and then include getting to marketing dollar per unit spend that is similar to our more mature cohorts. And I think if you do that walk, it continues today to be pretty straightforward and the math is approximately the same. And then I think what that leads from there is basically, we've got room for any place where we make fundamental gains, whether we get more efficient in any of the GPU line items, or we get more efficient in any of the variable cost line items, that gives us room to share value with customers. And I think where we share value with customers will not necessarily always be in the exact places that we unlock it, but we are seeking to unlock it in every part of the business. We've got projects that we're very excited about in every single one of those line items, every expense line item, every revenue line item. And they're all credible projects that we think have a real impact to make meaningful differences in the business. But we haven't done them yet, so we got to go unlock that value. And then as we unlock it, we -- our plan is to share that with customers. So we do think that there's going to be value that or share with customers. We think that if we execute really well, it could be significant. And we think even with doing that, we can hit our goals, which overall has us excited, it means there's a lot of work to do.

Okay. Great. And I wanted to ask one about advertising. Mark, you talked about spending more. Just be curious if you could give us a sense for what advertising channels you're seeing the best returns? And how you sort of think about advertising fitting into your broader growth strategy over time? Is there sort of a near-term ramp in spend in a particular market? And then once you hit a level of mind share, you sort of can pull back. I just made that up. But just curious to get your perspective on sort of how you think about advertising fitting into your long-term growth strategy over time?

Sure. Absolutely. Well, let me just start with that long-term growth strategy. We've talked about the three pillars of that growth strategy. One is continuing to improve the product and customer experience. That's a place where we've made and hope to continue to make significant gains. Second is building increased awareness, understanding and trust. That is the growth pillar. Obviously, where advertiser plays a role, advertising is not. The only component of that, great customer experiences, word-of-mouth, repeat customers. There's a number of different ways to do that, but advertising is certainly a component of it. And then just to round out that framework. Third is increasing collection and other benefits of scale, including adding more inventory pools to put more cars closer to customers. So on the advertising component of that leg, as I mentioned in my remarks, we still feel like we're in the relatively early days of telling our story. So we do see opportunities to continue to advertise more. I would expect that advertising to be very broad-based across many different channels as we seek to reach different audiences and meet them where they are. I think in the very near term, we haven't provided too much commentary on our advertising outlook. But I think if you look over the last 2, 3 quarters or so, you'll see relatively consistent advertising expense per unit, and I think that's a reasonable way to think about where we are today.

The next question is from John Healy with Northcoast Research.

Just wanted to see if we could switch gears just a little bit and talk about your priorities on the new car side. I think you guys are up to maybe 6 or 7 Chrysler dealerships. There's a lot of the dealerships now. Any kind of updated perspective on where you're seeing benefits, and I know you said in the past, it's a learning process, but with the pace of these acquisitions continue, I was hoping you could provide some more context there.

Thank you. I'm going to apologize in advance, and you are welcome to ask another question, but I think our answer remains the same. It's still early. So stay tuned. We'll share more when it's time to share more. And as I said, if you've got another question, you're more than welcome to ask it.

Understood. And I guess I'll stick on the other businesses as well. Obviously, we continue to see mobility and autonomous offerings rolling out in more cities. Obviously, you have a really good asset, and we've talked about capacity at the reconditioning centers. Have you guys game planned out any more that you could talk to us about maybe how you see yourself maybe facilitating those, that business potentially as being a service provider there? And kind of any updated thoughts maybe on evolution of the business model.

Sure. Yes, I would say we're always paying attention, and I think we try to always be thoughtful about what opportunities exist out there given the assets that we've built. But I think we try to balance that with where is the best place to put our focus. And I think we've clearly got an opportunity here to continue to grow a lot very quickly, and it clearly takes a lot of operational discipline and operational effort. So I think that will continue to be our primary focus for the foreseeable future, but we're always paying attention.

The next question is from Marvin Fong with BTIG.

Congratulations. I think this quarter, I mentioned the top new car dealer in the country. Question on just kind of inventory. I was taking that from the 2Q? It looks like it grew quite a bit less than sales. And I just wanted your take on -- was that partly a function of just kind of bringing the operational efficiency up and getting recon in order? And then just secondarily, how should we kind of think about having what looks like a pretty lean inventory relative to your sales growth rate. So kind of how do we think about that in terms of your pricing power acknowledging what you said about spread, but it would seem to me that you have pretty good ability to exercise and pricing power with this level in.

Sure. Yes. So I think last quarter, I think, our inventory was up approximately 40% year-over-year. I think this quarter, it was up a little over 30% year-over-year. So I think that directional change is correct, and that kind of means that our implied turn times have gotten a bit faster. I think that can generally be not surprising seasonal move as you had kind of right out of tax season, where you tend to have like the biggest discrete change in sales rates and so you can kind of quickly eat through inventory that you're building up prior to that. So I think that's not a totally unexpected change, but I think there's no question that if we could press the inventory button and have tens of thousands of more cars, I think we likely would. And I think that would probably result in additional sales as long as we were able to manage kind of all that recon and operational complexity. But I think that, that's just part of building this machine. I think we got to keep building the machine as we keep building it, we'll keep getting to bigger scales. And as we get to bigger scale, we'll have more inventory, more selection for our customers, and that will result in better conversion rates. And I think that that's kind of the flywheel of the Carvana business that we just got to keep working hard to make sure we continue to unlock.

Great. And if I could do a follow-up here. Just -- how would you characterize just the pricing environment? I think one of -- at least one competitor is kind of out there discounting. And obviously, it's a famine market, but just what's your view on pricing discipline across the industry?

I think nothing too notable to call out. I think in a way that's sort of implicit in the wholesale retail spread that we talk about. When we measure that, we're looking at various wholesale market indicators and then we're looking at various retail market indicators, and that sort of captures where pricing is for the industry in some total. So I think I think there -- we noted some mild differences there versus average, but would not necessarily associate that with pricing. I think it's more just kind of the evolution of the way the last couple of months have played out. And so nothing notable to call out there.

Your next question is from Andrew Boone with Citizens.

Ernie, I wanted to go back to some of the tools you guys rolled out this quarter at IRCs, specifically centralized planning. Can you talk about maybe moving some of your maybe lower-performing IRCs more towards best-in-class performance just through more centralized planning. What's the unlock there? And how do you guys really create more of a uniform system across all IRCs? And then in the letter, very specifically, you called out ADESA Clear as a best-in-class digital auction. Can you speak to the longer-term opportunity of what you guys may be thinking about Clear and the broader potential for that asset?

Sure. I think we're extremely excited about the way the team executed the way the Recon team executed in this last quarter and the tools they built. I think the tools that they built that are enable more centralized planning are, I think, very exciting in concept. I think the early signs are good. I think we'll be rolling them out over the next several months. And then we'll get a better sense of the near- and medium-term kind of quantitative benefits of those things, but we certainly think that there are benefits there that can show up over time. One of those benefits is what you discussed, which is just trying to kind of collapse the distribution of performance across different locations, which is driven by differences in quality of execution across locations. It's also driven partially by differences in the scale of various locations. But I think last quarter, we talked about there being a couple of hundred dollar spread between our top quartile and bottom quartile performers. And I think that's spread despite the fact that we improved the overall number this quarter, that spread remains about the same. So I think opportunity is certainly there and then just getting fundamentally better across the sum of the facilities is there as well. But unlocking that takes time, and it's hard to do while you're also simultaneously growing at 40%. So I would put that in the category of clear opportunity and hard to make sure that we execute well enough to unlock, but very much something that we're always paying close attention to and seeking to unlock as quickly as we can. I think with Clear, we're very excited by what we've done there. I think in order to make progress in anything, you have to decide what you're going to focus on. And I think in Clear, we built what we believe is a best-in-class platform. And we've built that by focusing a lot on the buy side of the equation. I think when you're building these tools, there's seller side tools, and there's buyer side tools. It's enabled us to make the problem simpler by using ourselves as the primary seller. And so we're not required to build as many sell-side tools. And we've been able to build a platform for the buy side that we think is highly differentiated, and where there's room to differentiate it further from here. And we think that's showing up in the results. We think that, that has positively contributed to our wholesale vehicle gross profit per wholesale unit, for example. We think that is identifiable positive contributor to the performance there. So that's super exciting. And then we think the sum of that, plus our retail platform, plus our -- the general ADESA business and our ability to wholesale cars physically means that in aggregate, we're we think, the most economic buyer for cars for any seller that is selling pools of cars. And that's a fundamentally valuable thing that we're very well positioned to provide as a service and to benefit from as a business. So I think there will be a long road map of making sure that we make all those tools fit together really well, and they reduced the simple offerings for our customers and that, that then results in great business performance. But I think the foundations have been laid and are continuing to be late, and we think that it's an exciting capability add to our overall system.

The next question is from John Babcock with Barclays.

I just want to go back to some of the discussion on the retail GPU. I know you gave a little bit of color for the upcoming quarter, which is helpful, but I also want to reconcile that a little bit to effectively like how you performed really from 4Q into 1Q. So I think last quarter, you talked about headwinds from reconditioning costs and also depreciation. Out of curiosity, how did 1Q end up relative to that? And also what factors in addition to those might have impacted GPU? So in other words, I know there was some strength on the used vehicle side of things. Did that come into play and did that contribute perhaps to some performance there. So any commentary you could provide on that would be useful.

Sure. Yes. So I mean retail GPU was down slightly. It was pretty close to flat, but down slightly on a year-over-year basis in Q1. I think a couple of the key drivers there are things that we did talk about in Q4 as well. So one, we're having great success in our logistics network, getting cars to customers even faster and with shorter distances. I think that manifested in Q1 with I believe an all-time low logistics expense per retail unit sold. We did -- as we brought down distances, for outbound shipping, we also brought down our shipping revenue and just pass those gains on to customers. And so I think that was an impact. It was great for customers, but it had a negative impact on retail GPU both in Q4 and Q1. We've also talked a lot about elevated retail reconditioning costs, where we've made lots of progress, as Ernie has discussed at length. So those are a couple of the key drivers, applied both to Q4 and Q1. Hopefully, that's some helpful additional commentary.

Okay. And did depreciation change much from 4Q to 1Q?

I don't think we feel like we had major unusual seasonal patterns there, if I remember correctly.

Okay. And then just back to reconditioning costs. You talked about centralizing that a little bit. Are you pretty comfortable doing that? Do you think there's going to be any added -- because I'm sure you guys are pretty cognizant in terms of how you're doing this and trying to avoid any unnecessary bureaucracy or adding any time inappropriately to certain channels. But I'm just kind of wondering, are there -- do you generally view this as a positive to do that? Are there any concerns you have in terms of doing that? Are you still maintaining pretty good flexibility at the recommissioning center level to ensure that they have the ability to make decisions quickly. I don't know if you could talk about that a little bit, but that would be useful.

Yes, sure. Yes. So I think it's really important there to strike a balance. I think the teams on the ground, they're there every day. They are hands on with the dynamics in the cars flowing through and all the people that are there, and their various strengths and abilities. And so I think it's important to have a lot of on-the-ground input into the way the reconditioning centers function. At the same time, there's a lot of very quantitative decisions that can help reconditioning centers run better. So for example, if you have a given number of people after reconditioning center, on any given day, with a given distribution of skill sets, what's the optimal way to distribute that team that you have on the ground that day across the various stations and the reconditioning process. And you can do that by hand, and you can do it on the ground manually. But on the other hand, it's also -- that's a problem that can be solved with algorithms data and pairing those two things together, very strong quantitative focus via software and via making even better use of all the data that we're collecting in the centers and then pairing that more effectively with the teams on the ground. That's where we think the special sauce is. We have been investing in reconditioning technology over a period of several years, but we haven't solved that problem yet, and that's a place that we've been focusing.

Next question is from Michael McGovern with Bank of America.

I was just curious on the labor hours per unit metric that you gave. It seems like it's really efficient right now. So I'm just curious how much more efficiency you can gain there longer term? Which parts of the chain have decreased the most in terms of labor hours per unit, and how does that flow through into GPU longer term?

Sure. I think we've talked in the past about our expense per unit in recon. And I think the #1 driver of those expenses labor. It's a big part of the direct cost and then it also is highly correlated with the other costs. And so when we're looking for operational metrics that move very quickly so that we can manage and make quick decisions. That's a metric that we tend to look at. And I think it's clearly gotten better. I think the kind of numbers that we discussed in terms of cost that we drifted in Q4, that was driven largely by a drift in HPU. And I think we're back now to where we were last year in Q2, which was our all-time best. And I think -- as we said, I think there's clearly room that we can see for additional improvement from here that room exists both by improving the sum of all centers and by getting the centers to operate more like our best centers. So I think there's opportunity there that can matter that is meaningful dollars, but it does take time. We don't want expectations that's coming in the next couple of quarters. I think that will take time for us to unlock and get the full benefit of it. But it is there, and I think it's exciting and meaningful. It just has to be done at the same time that we're also executing well enough to grow at very high rates of speed. And some of those two things are hard to do together, but I think the team is up to it.

Got it. Just a quick follow-up on that. To your point of how hard it is it seems like your recon headcount growth is still pretty elevated. So from here, is there some sort of shift in just how efficiently you're able to train these new reconditioning hires and keep that growth elevated in reconditioning headcount while also keeping new employees really efficient?

Yes. I think Mark talked a lot about centralization and automation. And I think that can also just be thought of as reducing the complexity and the learning curve in a lot of these different positions. And so I think as a general matter, we're trying to -- we've built these centers in a way where you can take a focused skill set and have people that really know how to do something really well, do that over again and then you can train them in new skills and kind of move them to different parts of the line. And that gives us access to a pool of talent that is broader than many other companies that are trying to to provide similar functions. And so we think that's an advantage. And then we think as we continue to build out Carli that makes the systems inside Carli that make the individual operators more efficient and as we continue to build out these manager tools that make manager decision-making more straightforward, so they can focus on the other parts of management, making sure they're identifying their best performers and keeping people motivated and keeping the system moving. We think that generally just makes things a bit easier to learn and makes it easier to train people. We also are definitely investing in the tools that allow us to hire people more quickly and to get them up to speed more quickly. That's another area that the team has been focused on for a long time. So I think that's all part of continual improvement. And I think we've made a ton of gains there over the last many years, but there's clearly a ton of room for us to continue to make gains, and that's what the team is focused on every day.

The next question is from Michael Montani with Evercore ISI.

I was going to ask if I could, just to start on the diesel front. I was wondering if you could help us to understand any exposure that you might have there. Obviously, impressive improvement on logistics side this quarter. So definitely appreciate that. But we were thinking about it as potentially like a low single-digit earnings headwind in isolation. So wondering if you'd comment there. And the other question I had was more just strategic, which was obviously, you continue to have some underlying gains in GPUs. I know there's some quarterly noise going on, but how should we think about Ernie, the propensity to kind of reinvest those gains to further accelerate share versus you kind of happy at these levels with this kind of unit growth to just kind of pass some of that through.

I can take the first one. So I do think there is an impact of fuel prices on the operations of our business. I think that takes a couple of different forms. One, there's a cost of sales impact for inbound transport and then there's also an SG&A expense impact, which is in this operations expense, broader sort of variable cost category down in SG&A. In some -- I would expect to see some impact from the higher fuel prices in the second quarter, but not one that's particularly large and one that I think of as being in sort of the normal range of quarter-to-quarter fluctuations that we see things move around quarter-to-quarter. So at any rate, I think there will be an impact. But based on what we see right now, we don't expect it to be particularly large.

And then on reinvesting gains, I think we're trying to be not too repetitive from previous answers, I think we do think that we have opportunities across the entire business, and we think that the path from where we are today to 13.5% adjusted EBITDA margin is pretty straightforward with leverage and advertising expense. And so we think the gains that we make, we can largely pass through to customers. And we think the opportunities are many, but like anything hard, we got to go actually do it. And when we actually do it, we'll find out how fast we can do it, and how big those gains are, but we do expect to share additional gains with customers over time and hopefully, meaningfully while still marching toward our goal.

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

Great. Well, thanks everyone for joining the call. Carvana team, awesome job. Another great quarter. You have a lot to be proud of. Recon team, in particular, awesome, awesome job. Thank you for reacting the way that you did. I think to everyone across the business when we hit a bump, let's react the way Recon did. No one can stop us but us. Let's just keep margin. Thanks, everyone.

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

All right. Welcome back, Ernie. Thank you for joining us out here. Last time you were here, was March 2024. Your stock price was around $70. Your units were growing 16% year-over-year. Fast forward today...

Exact same relative position today.

So can you give us a little bit of sense of what was that turnaround like? And how do you keep that momentum going?

Wow, that's a big picture opening. Talk for hours and make it look bored. I think the most important takeaway from that, I think we've worked for the last -- what has it been now? 13 years, 14 years, to build a customer offering, it's really different. And I think -- it's been a ton of work, and I think there's been a ton of good days and there's been several bad days. And those were some of the good days along the way, but there were certainly bad ones that preceded it.

But I think we built something that we think is really, really different that there's no obvious comp to and that if we keep doing a good job, we're going to keep having really great results. But I think we also have grown fast, and we've got a big operational business, which I think has good things and bad things. And sometimes along the way means there can be a little bumps. But yes, in general, I think we're in a very similar spots where we've always been and we just going to keep going.

All right. All right. I love the momentum. On the industry, what are you seeing in the used car market? Year-to-date, have you seen any changes in supply or competition? How is consumer demand evolved? Delinquencies are high but not rocketing? Yes, any shifts that you like to call out?

I think I'm going to be a boring interview on this one, too. I think nothing too notable. I think the way that we always try to define our market is that it's a huge market that's, I think, pretty static on average, and we think the reason for that is just massively fragmented suppliers of dealers that are providing the service of selling cars to customers that have a very similar cost structure, no ability to absorb losses. And so I think there can be macro changes, but those macro changes tend to be relatively small because people need cars. So we see things maybe 6 months ago, I think credit was like a big topic.

Today, it's less of a topic. I think if we look over the last 15 years, I think supply has been a topic, demand has been a topic, credit's been a topic. There are always different topics, but I think they tend to be relatively short-lived and it just comes back down to how well we're re-executing and with our customer offering because the industry itself is so stable. So I think we probably spend a lot less time super focused on macro than many other companies probably do. We just try to make our offering better.

Great. And more near term, can you help us think through potential headwinds from the winter storms and then potential tailwinds from the tax refund season. Just any kind of commentary on how you're seeing that trend over the past month or so.

Yes. I think as a general matter, like we're probably a little more impacted by storms because we have logistics. So if you have a storm in one market like impacts cars passing through those markets. But that's usually kind of more week-to-week impact with maybe like a tiny actual persistent conversion impact. I don't think there's anything too interesting there. I think like at the level of even a month or 2, I think you you're unlikely to see huge things that result from the storm. It's a little bit of a headwind. It makes like operations a little bit tougher, sometimes there can be extra expense because we got to move snow around and people have a couple of inefficient days, but I don't think those are things that end up being huge topics.

Got it. And this is a big topic that I'm sure you're hearing a lot about with your meetings today, but retail GPU, right? That was a big focus area coming out of the quarter. Can you unpack what's driving that? What are the main issues driving the managers not being able to control those reconditioning costs and kind of talk through.

I think this is another one that I always think is like useful to put in perspective. And so I think -- if you go back and just like ask GPT or whatever you use to go summarize like the last -- how long have we been public now? 9 years of us being public, there will be several moments where we have very similar conversations where I think we run into operational hiccups in different groups. I think the most common one historically has been recon. The next most common has been logistics.

But we've run into little hiccups all over the place. And I think -- like I said, I think that's part of having a big complex business where we have lots of people, and things were moving around. I wish that we had no bumps in the road ever, but I think we have, and we probably will again in the future. I think this is an example of that. I think investors are right to ask questions about is there something structural or is there something fundamental? Or do you cross some threshold where now this is like the new normal? And I think there are several reasons why we don't believe that's the case. We believe it's kind of a down the middle operational issue.

I think we had a number of sites that just didn't perform quite as well as we'd like. And Q4 is a period of time when we're accumulating a lot of inventory. It's a period of time when there's a lot more holidays, there was some weather that matters a little bit. And I think most importantly, we just had a couple of sites that didn't execute as well as we would like as we were expanding a number of sites and moving management around. And so that is what it is. I think in the grand scheme of things that probably won't be a huge central story. And I think our goal is to turn that into energy, which I think that team is doing an excellent job of today. I think there's no doubt in my mind that the last, whatever, couple of months have been the best couple of months for that group in the last year plus.

And I think that's just because when you have a little miss that's clear, it gives you a little extra energy to go figure out what you can do better. And so they're, I think, handling it very well, and I think we're optimistic we'll resolve it pretty quick.

And when you speak to what specifically was driving that? And how do you turn that around? What are the tools you've put in place? You've talked about software? And then what kind of timeline do you think about for getting that back up and running?

So I would say it's things that happen at a level of detail that I think is sometimes maybe like not as exciting to talk about, but like for example, let's say, like Talison is the nearest inspection center that we have to Phoenix. So it's one where -- that's like the one where, if I'm going down there, I'm going to -- I'm most likely to spend the most time there. In that center, our constraint has tended to be the paint booth. If in the morning, a couple of people who are assigned the paint booth don't show up, then ideally, what you want to do is you want to find people that are downstream in the paint booth and you want to move them into the paint booth and you want to rebalance the whole system. And if there's too many people prior to the paint booth, you might want to offer time off for those people. That's like a normal management process that just happens every day, but I think that can be executed incredibly well or it can be executed in a way that is a bit imperfect, and that causes bubbles to form and for us to get further out of balance.

And as bubbles form, because you're accumulating cars prior to paint, you get more and more out of balance. And then all of a sudden, you have less and less utilized labor, and then people try to make up for it and push cars through and you have more stuff that fails QC or whatever else. So I think it's stuff like that is basically what can start to happen in a facility. And we're building tools now. We built tools for a long time to try to make all of the line level operators in any given functional area of the inspections that are more efficient. And we've kind of relied on managers to basically make all of these game time adjustments inside the facility, kind of intra line.

And I think now we're building more of that data into the system, and we're just starting to scratch the surface of taking more of the kind of logical part of that decision-making and pushing it into systems. So a manager can kind of come in the morning and get four bullet points of like, this is exactly what you should do right now. And the goal of that is to just kind of bring the ceiling of -- sorry, the floor of execution up, whereas most of the line level stuff is about building the kind of ceiling up.

So it's integrating into Carli, getting the managers up to speed on using that system.

Yes, building manager modules in Carli.

Got it. Okay. Okay, financing. So like I said, the auto credit fears flare up every now and then financing business had a great result in the quarter. Gain on sale has been quite stable over the past several quarters. How should investors be thinking about the opportunities and the risks with that business? And how does Carvana insulate that gain on sale and that financing margin from potential future volatility in auto credit?

So I think financing is I think it is inherently more volatile than other line items. I think it is less volatile than people think. And I think when it is volatile, it tends to be like paired with like narrative moments that make it extra impactful. But I think that looking at the historical actual results is a good way to evaluate what that volatility actually looks like. And I think that, that volatility across time has been pretty low. I think that we did a deal immediately post-COVID when there was like a real concern of like structural market breakdown in that kind of immediate moment post-COVID.

And I think our finance GPU that quarter was around half of what it was the preceding quarter and the quarter after it. Of, I think many finance businesses went through 2008, you can look at what that looks like. And I think for businesses that didn't hold a big credit book, but we don't hold a big credit book, there was generally a reduction in the yield of originating finance assets, but it wasn't a massive reduction. And I think in the -- in the financial position that we're in now and where our business model is and the way it produces like contribution margin relative to our peers.

We can absorb those moments and still being a really good cash position. So I think from our perspective of like business builders, the question is, do you want to be in the finance business at all? And I think for us, that feels obvious for lots of reasons. And then I think it's how do you manage it as best you possibly can and what matters is the average finance environment. And so I think we're building the business to be the best it possibly can be across those -- or in the average environment, and then we think that we've got tons of cushion to be in a good spot in tough environments. And I think there's still room for lots of fundamental gains, some of which are I think, very straightforward and easy for investors to buy into and some of which are less straightforward, but we'll be working on both types.

Great. And so last quarter, you added a third financing partner on the other whole loan sales segment. Can you help quantify how much finance receivables are now guaranteed an offtake? And how do investors essentially think about those different channels, how you flex those channels as you continue to grow?

Yes. So we've got three agreements that are basically $4 billion each over 2 years, so $2 billion per year for each of those agreements. And then we have one $6 billion year-long agreement. So that gives us lot of capacity. And then I think generally speaking, the way that we are trying to manage that is I think, as we add these partners, first order, I think the simplest way to think about it is that they're basically structured to be market deals, but they are market deals that are recurring. And so they're doing the same work every quarter. We're doing the same work every quarter, and we're kind of getting accustomed to working together and just makes it easier to kind of keep moving things along. We still have access to and access the securitization markets.

And then I think over time, there's room for us to add additional partners as well. I think there's been a recurring question since day 1. It's like another one that's fun to go back and just kind of like look at all the transcripts and like evaluate the path of potentially prologue to the future, where people have asked all these questions about, will finance GPU go down as you have to grow this and you have to sell it to more finance buyers? And is the residual market large enough to support you and everything else?

As a general matter, what we've seen is as we keep getting bigger, we're able to work with more counterparties who enter the market, and we've seen our cost of capital go down. And so I think that there is reason to be helpful that those sorts of trends can continue over time.

Yes. We've gotten questions about do you ever saturate the ABS market with the level of growth that you see. And I think continue to prove out that you do add these alternative sources of funding? Is there any difference in profitability across these channels?

There's little variation but not materially. Yes. Generally speaking, I would say, it's all very similar.

So, shifting to more medium term, longer term on your guide, 3 million units, 13.5% adjusted EBITDA next 5 to 10 years now, 4 to 9 years. On the unit side, how do investors think about bridging to that $3 million? Are there any gating factors logistically labor-wise. Essentially, what controls your level of growth until once you get there?

I think the way that we think about it is we've got to -- on the demand side, we got to make sure we keep delivering high-quality customer experiences. And as long as we do that, we think the demand will be there. And then I think on the supply side, we've got to make sure we grow the system. And I think that's really hard because you've got all the reconditioning and all the logistics in the last mile and all of the other kind of labor intensive customer care things we have to do. And so I think we put a ton of effort into just making sure that we're scaling that system economically and efficiently and at high customer experience quality. So we think that's the #1 gating factor and that, that will be something that will be effortful the entire time through.

And then on the EBITDA margin guide. How do we think about bridging those extra 200 basis points of margin expansion? Is there room for gains in GPU? Is it all fixed cost leverage? What are the levers you can pull to get there? or upside to that, I guess.

Yes. I think so from where we are right now, I think -- if you just take a reasonable fixed cost leverage assumptions, you can get close probably not quite there depending on how much leverage you're assuming. And then I think if we look at things that we've shared in the past, like our marketing spend in more mature markets relative to less mature markets, if we just had kind of marketing spend that's the same in all markets as in our more mature markets, that would get to the rest of the way.

Then we still think that we've got lots of fundamental gains in every GPU line item in every expense line item. And so I think our plan and our goal is to go unlock those fundamental gains, some of which has come from scale, some of which come from product enhancements, some of which come from things that are sort of related to scale like adding more inventory pools. But go unlock those fundamental gains and then pass that value back to customers, which will just be additional fuel for growth. I think what's exciting about that is pretty much all of the growth that we've seen in Carvana, basically across our life, but certainly for the public period, has been happening with like an offering quality that is pretty consistent.

We haven't really changed our competitive stance relative to market. And I think if we execute the way that we hope to and unlock the fundamental gains that we hope to, I think we have the ability over the next several years to actually improve our economics relative to market. We're already in a great spot, but I think we can even get better. And so ideally, that separates us further. I think in real life, there will be execution. We'll be like another variable in that equation. But our goal is going to be to make linear progress and keep getting better everywhere.

And on that ad spend, you spoke to it. It varies across markets. If you made it like-for-like with your more mature markets. I guess, how do you think about customer acquisition costs and growing your advertising spend on an absolute basis as you continue to scale? Is it brand awareness or any other decisions that go into that?

More recently, we've leaned more into brand awareness. And I think like the unit economics of marketing work, just like the variable customer cost is low relative to the contribution margins that we see. So you can economically defend a decent amount of spend. But I think we've also, generally speaking, we've been more constrained on the supply side. So we have it like fully leaned into just like what the math would tell you to do there.

And then I think more recently, we've invested a little bit more in brand with the idea being that it's branded, I think inherently much harder to like reduce to an ROI calc than kind of like direct marketing, but it's also something that has like a long tail and probably a bigger potential payoff. And so we've invested more on that because we think -- like I said earlier, our view is if we deliver great customer experiences over and over again and you just get people to a place where they're confident that if they buy from Carvana, they're going to get a good experience and a good car, and they don't have to worry that they make a mistake that there's going to be a lot of demand.

And so I think generally speaking the most important thing we can do is deliver great experiences, but another thing we can add on top of that is tell our story through trusted voices. And so I think we've done a little bit more in brand spend.

On capital intensity, you spoke to being somewhat supply constrained, right? Your level of growth is contingent, how quickly you can grow logistics and fulfillment and reconditioning, you have real estate capacity for 3 million units. But as we get to that 3 million unit mark, you have to think about growing beyond that. You are quite capital-light now in terms of your CapEx as a percentage of sales. So how should investors think about once you get to that stage of adding capacity, whether it's greenfield CapEx, brownfield buying something like an ADESA, just helping frame what are the guardrails to add more capacity beyond the 3 million.

I think the return on capital is going to be really, really good. I mean, so like if we think about -- if we think about like a large-scale facility being able to produce on the order of 60,000-plus cars per year. And then you think about the contribution margins that come out of that on an annualized basis, and then you compare that to the cost of building those facilities like math is not going to be the issue.

The question is just going to be can we build the rest of the machine out to sustain that kind of volume? And can we do it while delivering good customer experiences. But I think the good news is we've kind of already laid half the tracks for our path to 3 million in CapEx.

So it's -- the CapEx has even higher return until you get there. But the return is going to look very good. As long as you believe that our economics are in a similar spot to where they are today on a contribution margin basis and demand is present. I don't think that's going to be like a math problem. That's going to be an execution problem.

And to that point, I guess, there are inefficiency or efficiencies when you think about acquiring an existing site versus building, let's say, an IRC from the ground up. Are there different levels of capital intensity that you think about there? Or is that not something you really looked at, at this stage because you still have a lot of runway?

I think there is. The more a facility is ready to go, the more that there's already give you surprise, there's a lot of cost in just putting down the asphalt and building out buildings, then you can build a lot inside of an existing building. So the more that's already built, the easier it's going to be on like an incremental CapEx perspective, but the sum total probably doesn't vary by enough to matter in that equation either. I think it's more about do we execute well? Is the demand there? And can we find sites less about the math afterwards.

Short report, I have to give you another opportunity to address.

You make it more effective every time you bring it up.

It's something we still get questions on. I know you've addressed it, but just giving you another opportunity to clarify related party transactions, Carvana does not sell to who?

We don't do anything manipulative. We don't do anything that's not disclosed properly. I don't know how to say it. It's like I've got three kids and their arguments all the time reduced to you're a liar, no you're a liar. And that's basically where we find ourselves in these things is it's like I don't know what to do because there's not words we can say that fix it. So I don't know. We're going to keep doing our thing. Please keep paying attention. If you think we're doing those things, you should definitely sell the stock. And if you don't, what other people do, maybe check it out.

Had to ask.

Yes, we're good.

Okay. Another big topic is AI, right? We're at our tech conference. We have a lot of big players here. There's been a lot of market concern around Agentic AI, disintermediating these e-commerce winners. Carvana seems to have been bucketed in that category. How -- why is that wrong? Why should Carvana not be considered as one of those kind of incumbent players that lose that?

Oh, man. Incumbent? I was kind of okay with like the theoretical conceptual market doesn't like you thing, but calling us an incumbent that really stung.

Winner. E-commerce winner.

I think -- I mean, I think investors are smart. You guys are well positioned to figure these things out. I think the way that we try to think about it is we think that we exist in a very large market where away from us, there aren't deterministic systems that are well positioned to benefit from AI. We think that we exist in a very big system were away from us. There's not many cultures that are well positioned to rapidly adopt these different technologies.

And then we think that many of the conversations that we've had over time that end up being limiting conversations and much of what we've talked about so far in this conversation, are like real physical world problems where you've got people and things you got to move around. So we think we're really well positioned. And then I think -- the last thing I would say is that our market is very, very big, even relative to our dreams.

So even in worlds where like there is an imagined outcome of like a couple hypercompetitive players like competing away some meaningful portion of the margins that exist. There can't be that many winners in that game, and it's a $40 million a year unit market. So I think in all the like reasonable cases that we can think of, we feel like we're in a good spot, but that's for investors to decide. And over time, it will get figured out.

All right. Autonomous, another big topic. We're here in SS. There's Waymos on every other block. How does the evolution of autonomous driving impact your business, right? There's two angles. You can kind of go about it with it. There's the idea that you have this physical infrastructure and reconditioning capabilities that can make you a fleet manager partner. But then there's also the argument that we've heard a few times that the growth in shared autonomy can then limit the need for buying a car over time.

That $40 million per year used car TAM and no longer being the TAM is that argument. So how do you think about that future?

So we've got a dog in the fight, but like I think our view is that, that future is maybe less likely than people presume. And so I think several reasons for that. One reason is it seems increasingly likely that: A, autonomy will come to pass; and b, that it may not be that expensive on like a per unit basis because the underlying, like set of sensors you need are not that expensive and there may be many people that have technology that is above the bar as we move forward.

And so it's not like there's a market concentration issue that arises. Then I think when you start to think about consumers consuming miles and you start doing the math, like what does it cost to own your own autonomous car versus to rent a mile out of a fleet? At least in all the modeling that we've done, it doesn't look like it's very expensive to own your own car. So we think personal ownership will still be a major part of this for a very long time.

Then I think you get to spot where I think even in like really even in very tangible early steps of that game that I think are easier to place like higher conviction bets on today, things like long leg transport if logistics get relatively less expensive, our business model has a big trade it that is logistics for real estate. 98% of the market is on the real estate side of that bet, and we're on the logistics side of that bet. So that's like a relative win and like a very tangible, easier to extrapolate near-term way. We'll see how it all plays out, but I think that's at least a subset of our views.

And you have the capability to recondition an electric vehicle. You've put out a lot of work on how much higher your penetration is in selling EVs relative to the used car market. So I guess, how do you invest in recondition and machinery and tooling for those advanced vehicles?

So I think we already are making those investments, but I think A decent amount of the work doesn't vary across EVs and ice cars. Like there's most cosmetic things that happen, windshield replacements, tire replacements, et cetera. There's a lot of the work just get a car in great shape that doesn't even change across the two types of cars. So I think a lot of it, we don't have necessarily change, and then a lot -- we are making investments in making sure that we've got the ability to charge cars rapidly, and we're building out the capacity to monitor.

We have the ability to monitor charge across all these cars because that's something that comes up as well. We start selling more EVs is like EVs, the battery runs out if you leave it pared, whereas like a tank of gas stays full, if you leave it parked. So you have to build out different monitoring techniques, but nothing too deep that we have to invest in.

TAM expansion. So a lot of people do the 40 million used cars versus what share does Carvana get of that new car market. But as you've grown so rapidly and proved out your technology and logistics and vertical integration capabilities, are there natural adjacencies you might consider whether that's new cars? Acquire a few dealerships over the past year, reconditioning or servicing, any other areas that you would think about getting into?

I think I think the opportunities around us feel really, really big. And I think part of what's -- where we try to apply some discipline is just thinking through what is the most efficient thing for us to work on. And so I think we're in a place right now where we're 1.5% of the 40 million unit market. I think even that market it's not clear that 40 million is like the number that we should be thinking about in the long run. If we can make things more efficient and more fun, people can turn over cars faster. If like we enter a world that is benefited in all these ways by AI, people are relatively wealthier.

There's a chance if you want to turn their cars over more. I think -- and we've got enormous contribution margins at this point per unit that we produce. So I think trying to stay focused on that and just quickly is part of what we're trying to do.

And then there's clearly opportunities for TAM expansion for vertical integration, but we're trying to pick places there and not do too much at once, just because we've got I think such a simple and clear and scalable opportunity right in front of us.

Absolutely. Any final remarks or messages you have for investors, what are you most excited about for this year or for the business in general?

I think if we don't win in a major way, it's because we messed up. We're supposed to win. We're in a winning position and then we just got to go do it.

All right. Great. Cool. Thank you.

Awesome. Thank you, guys.

Good day, and welcome to the Carvana Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Meg Kehan with Investor Relations. Please go ahead.

Thank you, Nick. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Fourth Quarter and Full Year 2025 Earnings Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.carvana.com. The fourth quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q4, which can be found on the Events and Presentations page of our IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer.

Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meanings of federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that cause actual results to differ materially from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics, and all references to EBITDA will be to adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today.

And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thanks, Meg, and thanks, everyone, for joining the call. 2025 is another incredible year for Carvana. There are many useful ways to describe the progress that we've made, but one approach I returned to each year starting with the graph at the beginning of our shareholder letter. I find that useful because they provide a simple visual view of the big picture. And the big picture story is clear and meaningful.

The first observation from the graph is that both volume and financial performance are moving up and to the right rapidly. This is only possible if you offer customers something that is sufficiently different and desirable that it caused them to break habit and if the business model itself is sufficiently different and efficient that enables qualitatively different results.

When we went public, we wrote that our mission was to change the way people buy and sell cars. And the graphs show that we have built a customer value proposition and a business model with the power to do it. Having a great customer offering is the single most important thing. We have it, and we're making it better every year.

Looking at the year in our current position, there are 3 key takeaways in our minds. One, we are getting better and more differentiated as we get bigger. In the last 12 months, we increased customer selection by 20,000 cars, 20,000. We are delivering cars to our customers a full day faster. We have put more cars closer to our customers, leading to $60 average savings on shipping fees for our customers. We have reduced the interest rates our customers pay on their loans by about 1% relative to benchmark on average. We have made the transaction simple and straightforward enough that many of our customers can confidently make it all the way to the vehicle handoffs about ever speaking to a person at Carvana. And customers are telling us they love it with [ MBS ] at multiyear highs. That's a lot of progress we made in a year where we also improved our EBITDA margin by 100 basis points. Lots of good things have to be through all that possible and those things are hard to replicate.

Two, we are making rapid progress toward our goals. With every step, our path to our current goal of 3 million retail units a year and 13.5% adjusted EBITDA margin becomes clear, and this year was a big step. We estimate that fixed cost leverage alone will be worth about 2 points of adjusted EBITDA margin over time. We're making rapid progress in fundamental gains that is lowering variable costs and increasing the efficiency of variable monetization, which gives us more fuel to hit our financial goals and to keep providing additional value to our customers over time.

On units, we grew by 43% in 2025, meaning that the compounding annual growth rate is necessary to hit our 2030 to 2035 retail unit goal are now 38% and 18%, respectively. With the quality of our customer offering and the positive feedback in our business, we believe there is plenty of fuel to get us to our 3 million unit goal and beyond. But we have a lot of work to do and to keep scaling our operational machine to handle all that volume.

And that brings us to point number three. We have the infrastructure to scale and we just need to execute. The most operationally intensive part of our business is vehicle reconditioning. Continuing to scale reconditioning quickly, cost efficiently and at high quality has been currently is, and for the foreseeable future, will be a central focus. We have a better foundation to scale reconditioning effectively than we have ever had in the past. We already own the real estate for 3 million units per year. We have already made the investments in the facilities to produce 1.5 million cars per year. Our systems that manage the entire process flow through our reconditioning centers are more capable and robust than they have ever been. And we have more locations that are capable of reconditioning cars, 34 as of today than we have ever had meaning we can scale hiring and production faster because of access to more people and more geographies.

But it's still hard work and we still have significant room to continue to push more of the complexity of managing cars through these locations into systems with the goals of continually improving consistency across locations and of making scaling easier. The team is up to the challenge. The Carvana future is bright. The experience we deliver to our customers are exceptional and getting better all the time. The scale of our opportunity is enormous and the financial opportunity is clear to see. And we have a team that has proven that we can tackle the difficult technology and operational challenges that are in front of us and turn them into most that are behind us.

The march continues, Mark?

Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons will be on a year-over-year basis.

2025 was an exceptional year for Carvana. We entered the year focused on 3 key objectives: one, delivering significant growth in retail units sold and adjusted EBITDA; two, driving fundamental gains in unit economics and customer experience; and three, developing foundational capabilities. By these measures, 2025 was a resounding success.

In full year 2025, we grew retail units sold by 43% to a record 596,641. We integrated 10 additional ADESA locations. We expanded our digital auction capabilities nationwide. We reached multiyear highs on customer Net Promoter Score, and we increased adjusted EBITDA margin to a record 11%, again, making us the fastest-growing and most profitable company in our industry.

Moving to the fourth quarter. Retail units sold totaled 163,522 in Q4, an increase of 43% and a new company record. Revenue was $5.603 billion, an increase of 58%. Revenue growth exceeded retail units sold growth primarily due to traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner. Consistent with past quarters, our growth in the fourth quarter was driven by our 3 long-term drivers of growth, a continuously improving customer offering, increasing awareness, understanding and trust and increasing inventory selection and other benefits of scale.

The fourth quarter marked our eighth consecutive quarter of industry-leading retail unit growth and unit economics. Non-GAAP retail GPU decreased by $255 primarily driven by higher non-vehicle costs, lower shipping distances flowing through to customers in the form of lower shipping fees and higher retail depreciation rates. Non-GAAP wholesale GPU decreased by $148 primarily driven by faster growth in retail units sold than wholesale marketplace units. Non-GAAP other GPU increased by $49 primarily driven by improvements in cost of funds and higher finance and [ VSC ] attach rates, partially offset by our decision to give back to customers in the form of lower interest rates.

Since our last reporting, we again expanded our loan sale platform by entering into a fourth loan purchase agreement with a long-standing loan partner for up to $4 billion of loan purchases through December 2027. This brings the total of our new partner loan purchase agreements to [ $12 million ] over the next 2 years in addition to $6 billion with [ Ally ] through October 2026.

Q4 was another strong quarter for levering SG&A expenses. Our 43% growth in retail units sold led to a 340 reduction in non-GAAP SG&A expense for retail units sold, including a $57 reduction in operations expenses and a $344 reduction in overhead expenses. Advertising expense increased by $83 per retail unit sold as we continue to invest in building awareness, understanding and trust of our customer offering. With approximately 1.6% market share of the used vehicle retail market compared to approximately 20% e-commerce adoption in nonautomotive retail verticals. We believe we are in the early days of customer awareness and adoption of our model.

We continue to see opportunities for significant SG&A expense leverage over time and as we scale driven by both continued improvements in operational expenses as well as leverage in the fixed components of our cost structure.

Net income was $951 million, an increase of $792 million. Net income was positively impacted by a noncash benefit of $618 million, including a net noncash tax benefit of $685 million partially offset by a $67 million reduction in the fair value of warrants. Net income margin was 17.0%, an increase from 4.5%. Adjusted EBITDA was $511 million, an increase of $152 million and a new Q4 record. Adjusted EBITDA margin was 9.1%, a decrease from 10.1% primarily driven by increased retail revenue per unit resulting from the traditional gross revenue treatment mentioned previously.

GAAP operating income was $424 million or 83% of adjusted EBITDA, an increase of $164 million and a new Q4 record. 2025 was a strong year for our balance sheet. We ended 2025 with $2.3 billion of cash and equivalents, retired $709 million of corporate notes, and reduced our net debt to trailing 12-month adjusted EBITDA ratio to 1.3x, our strongest financial position ever. As discussed in prior quarters, we remain committed to driving toward investment-grade quality credit ratios over time.

In 2026, we plan to maintain our 3 key objectives from 2025, while placing additional weight on driving significant profitable growth at scale. Looking forward, assuming the environment remains stable, we expect significant growth in both retail units sold and adjusted EBITDA in full year 2026, including a sequential increase in both retail units sold and adjusted EBITDA in Q1 2026.

In conclusion, Q4 represented another strong quarter, closing out our best year in company history. We remain excited about progressing toward our goals of becoming the largest and most profitable auto retailer and buying and selling millions of cars.

Thanks for your attention. We'll now take questions.

[Operator Instructions] And the first question will come from Sharon Zackfia with William Blair.

I guess I wanted to kind of double clip on the reconditioning dynamics. So if you could maybe talk about kind of the challenges you're facing as you're growing at this rapid pace, which is certainly hard to keep up with. And I think in the shareholder letter, you mentioned something like if you got all of the locations or the top quartile, you'd get a $220 benefit per car. What is a reasonable time line to kind of move that bell curve to the right? And do you see the opportunity for GPU to be flatter up for the full year?

So first, I would say, I think that team has done an incredible job for a long time, and we've been obviously working hard to scale that part of the business. I think as we've said before, as a general matter, I think for any operational business, oftentimes the most difficult parts of the parts where you're moving the most people and things and for us, that's reconditioning centers. And so that tends to be the most difficult area to scale.

I think in addition to growing at 43%, supporting unit growth of 43% and also growing our inventory last year. That team also has been hard at work opening these additional integration sites which is great because it lays the foundation for additional growth in the future.

And then I think in Q4, I think there's no question that our expenses were a little higher than we would have liked there. And I think that is partially the result of these additional sites kind of having a single line, set of multiple lines and there being some extra costs that flow through there as a result. I think it's also partially a result of as we kind of spread out, we had some newer managers. And I think a trend that we've seen is locations that have matters that have been around for longer tend to perform a bit better. And so I think those are addressable issues. I think you've -- many of you have been to many tours inside of our inspection centers and seen all the work we've done in [ Carley ] to make that process as automated as possible. I think we've got some opportunities to also make the management of those processes more automated. And I think that those capabilities are kind of focused more on lifting the floor of performance instead of raising the ceiling.

I think a lot of what we've done so far has been about raising the ceiling. So I think we've got opportunities. I think we've got a very clear plan. I think this is one of those things where I think sometimes if you take a little step backwards, it kind of fires you up, and my strong guess is we'll be in a better spot in 3 to 6 months than we would have been otherwise. I think that team is fired up and ready to go and even no one's excited about taking a little backward step there. So we're focused on it. I do not think it will have long-term implications. I think I think we'll react to it very positively as we have to many other similar things in the past, and I think we'll get right back at it.

I guess as a follow-up, I know you have your AI brand, I think, as well in the shareholder letter, and it seems to me you would be maybe the most uniquely poised to benefit from what's happening in an AI. Can you talk about what the early kind of nascent uses are that you're implementing AI to do? And then if you're seeing anything in the competitive set or if it's just business as usual there?

Sure. Well, I think if we start with things that are visible to investors. I think we put some stats in there. We have 30% of our retail customers now go through the entire process [indiscernible] talking to a person until they get the car. We have 60% of our customers that are selling cars to us to go through the process out without talking to anyone until they drop off their car. That's only possible because of the systems that we've built and those systems being intuitive and automated and straightforward.

I think a major set of tools that contributes to that Sebastian and other tools that emerge from that AI brain. So I think that that's a very clear place where we're getting more scalable, where we're reducing costs. And I think very importantly, where we're improving customer experience. Those customers who go through the experience in that way have a higher NPS than customers they call us. And I think that, that also speaks to the power of those systems.

So I think that's an area where it's very apparent, I think, even from the outside looking in. And we've been focused on that for several years, and I think you'll continue to get better all the time. I think -- if you look at other parts of the business, including just the speed at which we're developing new products, that continues to get better all the time. I think there's been a couple of material step changes up in the quality of these different tools. And we're seeing internally those step changes start to flow through the business, and we're getting things done faster.

I think that is still relatively early. I think the last I mean the last year has been a massive step-up in the quality of these tools. I think the last 3 to 6 months has been another very large step-up in the quality of these tools.

But we do believe that we're fundamentally extremely well positioned to benefit from these things because we have a big deterministic system that's vertically integrated that has access to all the information and that brain has every system feeding it so we can give customers very simple answers to any questions they've got in really any software interface that we choose to put on top of it. So we think that's very powerful.

And then I think importantly, to try to discuss relative negative as something that I think is a long-term positive. I think even that -- a discussion today is what does AI mean for different companies in the long term? And I think we're sitting here talking about the realities of our business, including financing and logistics and reconditioning in these difficult operational things. I think that those are other areas of the business that are very important to deliver a great customer experience and those are areas that are not subject to AI disruption in the medium term.

So we think that we're positioned to benefit in a major way. We think that competitively, we're incredibly well positioned compared to the rest of our industry. And we think that our business itself is also positioned to be an AI winner and not something that is disrupted by AI. So our view is that some of all that is very positive, and we remain excited.

The next question will come from Jeff Lick with Stephens.

Congrats on a nice quarter and a great year. I was just wondering, Ernie and Mark, can you talk about the environment -- at least the depreciation environment is actually kind of reversed a little bit in Q1 so far. So I was wondering if you could just talk about -- you highlighted in the letter that you expect a sequential improvement, but maybe if you can just talk about the puts and takes and the path of travel for GPU, not only in Q1 but for 2026.

Sure. Yes. I could take that one. So Ernie hit pretty well on some of the cost dynamics of Q4. We do expect those cost dynamics to play out in Q1 as well and do expect our non vehicle cost to be up on a year-over-year basis in Q1. Despite that, we expect a sequential increase in retail GPU in Q1. So we expect to overcome those cost headwinds and demonstrate a sequential increase.

Beyond that, I don't have too much commentary to give. I think we'll see how the year progresses. Obviously, we've had a lot of success driving strong retail GPUs for a long period of time. And that's just one of the many places where we've demonstrated a lot of success over time, including obviously, the significant growth. But in addition to that, very significant growth throughout the income statement, including adjusted EBITDA operating income and net income.

So our goal in 2026 is to have another great year, to have another year we drive very significant top and bottom line growth, and that's what we're going to be focused on.

The next question will come from Daniela Haigian with Morgan Stanley.

First one, you might have addressed a bit with the retail GPU commentary. But overall, on EBITDA, the variable adjusted EBITDA margin decelerated down to 7% this quarter. Is this a one-off decline? How should investors be thinking about this metric longer term? And is the pace of growth needed to reach that longer-term target, the 18% to 38% CAGR like you mentioned, Ernie, is that supportive of incremental margin expansion?

Sure. So I think maybe the first thing I would say on the beginning point is I think revenue changes play a very big role in that calculation. I think if you look year-over-year, we moved away from marketplace units, and that meant we moved to more traditional kind of gross revenue accounting on a number of units.

If you look at EBITDA dollars per unit instead in Q4, I believe they were down by about $14 year-over-year, which is first order flat. So I think calcs kind of on EBITDA dollars, I think, would look significantly different. I think looking forward, we feel like we gave you a little bit of a walk, I think you can see where our margins are today. We clearly have significant fixed cost to leverage. We clearly have significant fundamental gains throughout the business. You can see those showing up in our expense line items, I think we remain very excited by the progress that we're seeing in operational expense despite the fact that we're passing value back to customers in faster delivery times and other ways that they do have some costs. So I think we still got a lot of room for that.

So we feel like the path to 13.5% is very straightforward. And not only is it straightforward, we think that there's clearly significant additional gains that can be made and handed back to customers along the way. I think our goal has been -- remains and always will be to try to make progress across all areas of the business. rapidly and simultaneously. So we're going to try to always push all those numbers up. Our EBITDA margin, our EBITDA dollars, our growth, our customer experience. And I think that that's where our priorities come in. We got to then try to figure out what are our priorities, and we had to pick projects that push us in the right direction. And so we try to communicate that clearly to investors as well in the same way that we communicate it internally.

But the opportunity is clearly there. I think in terms of the opportunity, the way we're thinking about the business, nothing has changed. I mean, really, since we started the business. It's just a function of how well we execute at any point in time, the opportunities there. And if we execute well, we'll go get it, and we'll get it all simultaneously.

That's helpful color. My follow-up is I guess the question on everyone's minds here. I just want to give you an opportunity to clarify some concerns around the related party transactions, does Carvana loans to related parties? Do the related parties originate loans for cars sold on Carvana? I think if you look at the 10-K you might have some answers there, but just any messages for investors on that topic here.

Sure. The answer there is very simple. All of our related party transactions are disclosed. In our financial statements, as a specific matter, we do not sell loans to related parties and have not done so for all of the years from 2017 through 2025. Recent short reports that suggest otherwise, are inaccurate. We have checked every single detail of those short reports to ensure that all of our reporting is entirely accurate and definitively say that those reports are 100% inaccurate.

So I think that we feel very strongly about that. We don't sell loans to related parties. We disclosed our related party transactions, and there's no ambiguity about that.

And then maybe friendly request to investors out there. If we have another shorter work during a quiet period at the end of the year, just maybe think back the last couple of years to recognize the pattern.

The next question will come from Brian Nagel with Oppenheimer.

So my first question, and I think this goes back to Sharon's question at the beginning of the Q&A session. But if you're looking at the reconditioning cost dynamic here in the fourth quarter, so I guess what I want to ask , that was more of a challenge for Carvana in the fourth quarter. What changed? Why did that become a more challenging year in Q4 than it had been in Q3 or prior quarters?

Sure. I mean, what I would say is I think that, that -- the most important answer, honestly, there's no unique dynamic that instantaneously changed. I think the execution of that team has been exceptional for a very long time, and we haven't spoken about this much, but I think we've been continually over time discussing the fact that if you look back over the last 10 years, the areas where we've run into more issues over time tend to be in reconditioning because it is fundamentally a very hard operational problem.

And so I think we try to set people up for that possibility because I think it -- wherever there's operational complexity, there's room for variation. And I think that will remain true forever. Like I said, I think that team is going to -- I really do believe that in 6 months, we're going to be in a better spot than we would have been if we didn't have a fourth quarter miss. I think the dynamics are straightforward. I think they're as described. We've opened a lot of facilities. We've grown quickly. We were growing inventory quickly in the fourth quarter. We're hiring new managers and kind of moving around some management layers to put us in a position to continue to grow quickly.

And so I think there are moving pieces and sometimes that leads to a little backsliding, but they're fired up. I mean just small anecdote, one of the corporate team members who runs that team, I was on a phone with this morning at 6:00 when he was driving out to [ Talison ] to go work on it. They're very aware that we had a little miss and they don't like it, and my strong guess is we're going to end up in a good spot quickly.

That's helpful. My second part, second is also on the retail GPU. You called out as you're positioning inventories better you're seeing as you indicated that your shipping fees now are declining. So I mean clearly, that's a positive for the business. It's very much a positive for the consumer dynamic. But as we're looking at the financials, how should we think about that? Because I guess that, to some extent, undermines the one driver of GPU, but there should be benefits either in sales or your SG&A, correct?

Sure. Yes. I think the simplest way to think about that is year-over-year by positioning cars closer to customers. Our logistics expenses were reduced by about $60 and our shipping fees were reduced by about $60, basically making it kind of a breakeven from our perspective, but making it $60 better for our customers.

I think we talk about fundamental gains, and I think that that's a fundamental gain that emerges from basically scaling, where there's just kind of cost savings in the system. And then I think the question is, if we want to keep the menu of options of equivalent economic quality as the previous year to our customers, then we would basically have the ability to raise shipping cost for any given distance. We would keep shipping costs flat year-over-year on average, and we would see lower cost and the same revenue.

If we choose to leave the shipping cost menu the same then we effectively pass through those cost savings straight to our customers, and that's the election that we made. We think over time, there's a lot of value to sharing that value with our customers and just continuing to separate the offering that we have. I think today, you can see in our financial performance and our growth in our NPS. We are dramatically separated from the outside industry offering, but we want to continue to separate. And we think that the more that we separate the louder customer support becomes and the more quickly we can take over more of the market, which is absolutely our aim.

So I think we try to be thoughtful about where that money goes. But that's an area where we got better as a business and customers benefited.

The next question will come from Rajat Gupta with JPMorgan.

Just one clarification. When you're seeing profitable growth for 2026, is it correct to assume that the EBITDA per unit should expand in '26 versus '25? I just want to clarify if that is the message. Then I have a follow-up.

Sure. I mean I think what we're trying to communicate there is subtle, and I think we're trying to communicate is kind of similar to the way that we're discussing internally. So in the letter, we talked about doing full build-outs of ADESA locations, for example. I think in market ops, we're making subtle choices to operate at slightly lower utilization, which happened in Q3 and Q4 of 2025, but results in faster delivery times because we think the math of that is good. And so those are some areas where we're making some subtle changes either in CapEx or in kind of transitioning away from fundamental gains and towards supporting growth at higher scale. Those are not big moves.

So I think what we're trying to communicate is we had those 3 priorities from last year. This year, we're leading a touch into growth. The other 2 priorities remain the same. Our goal is always going to be to make as much progress we simultaneously can across all parts of the transaction. We don't think there -- these are necessarily trade-offs. The trade-off is in our focus and where our priority is more than anything else. We think that there's room to get better at everything all the time, and we'll work hard to do it. And of course, it will be hard like everything the matters is.

Understood. Maybe a little more of a high-level question. I mean, you've tried to be as vertically integrated as possible on everything that occurs presell. Is it -- when is it the right time to start getting more vertically integrated on the post-sale side, maybe around loan servicing I mean I'm sure at some point, servicing cars with some of the franchise acquisitions you're doing comes on board. Just curious around your thoughts on that and the timing.

Sure. I think you can see from the sum of our choices over a long period of time that we're big believers in vertical integration, both because of the economic benefits and because of the customer experience simplification. So I think as a general matter, we are believers in that and I think that, that belief is deep. And so it will probably show up in lots of choice over a long period of time.

I think in the immediate moment, we're now at a place where our contribution margins are very, very high. And I think we've also put some data in the shareholder letter that talks about 70% of our customers referenced a recommendation from a friend or family member mattering when they buy a car from us and the majority of our customers 3 quarters are recommending us to multiple people after buying from us.

I think -- those are the sorts of things that tell us that there's a lot of value not just kind of in the math from scaling. The math is very clear because the contribution margins are very high, so that just shows up immediately, but also in just kind of laying the foundations for long-term secular growth in our market share because we're delivering great experiences to people that they're going to tell their friends and family about for a long time. I think those survey results are very consistent with individual conversations. If you talk to a customer, you obviously you get lots of stories, but the standard story that I feel like I hear is, yes, I kind of knew what Carvana was. I knew about your vending machines. I know you guys were innovative. I didn't really know what that meant. I went to your website, checked it out. Before I knew it, I bought a car and then I was almost nervous that I messed up and it got delivered and the advocates delivered, it was great. And then I felt so much better, and I was super excited and I told my friends about it.

And to me, that's like a very simple story, but that's just the way that actual growth happens. And so we're going to focus on trying to take the machine that we've got right now, growing it, delivering more experiences like that, that cause people to talk and we think that, that's going to pay us back, and we will always be looking at foundational capabilities would kind of be like the broad bucket that we use, that we discuss additional vertical integration.

I think the opportunities there are straightforward. I think you can see many of them you listed. I'm sure you can think of more if you sat here and thought about it for a second. We see them too, but we're trying to be focused on what's most important at any given point in time because we think prioritization matters a lot. And right now, it's the priorities we outlined for you.

The next question will come from Joe Spak with UBS.

I'm curious if you could comment on your feelings about what your customers are saying about affordability. I know you invested a little bit into rates and financing to sort of help this quarter. Curious to sort of see what the reaction to that was? And if maybe more is needed or is there anything as could do, whether it's longer terms or whatnot?

And somewhat related there's a lot of EVs coming back at some -- I think, going to some attractive rates at auction. And I'm curious whether you think that that's an opportunity to plug the hole, so to speak, at the lower end of the market?

Sure. I think that's a big question. I think -- there's no question affordability is always an issue, and we would always love for cars to be less expensive. And I think it's always helpful when we can find pockets where we can give customers an offering that's better. I think we're in a market that I think in aggregate is -- has relatively low elasticities. And what I mean by that is if you look at kind of aggregate used car sales across a long period of time, you tend to see used car sales that are relatively flat over a very long period of time across different economic environments and affordability environments and everything else.

So we think the thing that we can most impact is the quality of our offering relative to the rest of the market. And to do that, that's kind of that term fundamental gain that we throw around a lot. It's how do we lower our cost to give customers the same experience or get more efficient with our revenues. I think you brought up lowering rates by 1 point. That's -- I mean -- that's a big move. And I think if you look at other GPU year-over-year, you're going to see that approximately flat. That's pretty impressive, right? So how does that happen? How do we lower rates for our customers by about 1 point, have other GPU that's flat, we built better systems and processes that led to higher attach, and we lowered our underlying cost of funds by bringing on additional partners and getting more efficient in the way that we're structuring transactions and then that meant value for our customers.

So I think when we can get fundamentally better and when we're in the position that we're in, where we're already performing so well relative to the industry economically, we're in a position to share with customers. And then the benefit of that is that, that creates affordability for them and separates us further from the economic quality of the outside offering and drive long-term growth.

So I think that's what we're going to be really focused on is just trying to continually get better ourselves. And as it relates to EVs or any other segment that would allow us to try to plug some affordability gaps. We're always paying very close attention to all those things. But as a general matter, things that are easy, we'll get very quickly competed away. So if EV prices drop to a place where they're sufficiently desirable to many customers they're solving the affordability problem my at least expectation would be that many dealers will realize that and want to buy those EVs at the same time. I think we are probably a little bit better positioned because we've got a customer base that is more likely to desire an EV.

But the hard thing that we can do is make the business better and more efficient. And when the business is better and more efficient, we have money share with our customers that other people don't have to share, and that makes us different. And so that's generally what we're focused on.

Super helpful. Second question is really a housekeeping one [indiscernible] if I missed this in any of the prepared remarks, but can you just briefly touch on what happened with tax looks like there was some release and now there's a large deferred tax asset and a related tax receivable liability on the balance sheet.

Sure, I can hit that, and then there will be more details available on the IR website as well, that hopefully will be helpful. But the key facts there are -- we have an UP-C corporate structure, the UP-C corporate structure generates significant tax assets when LLC units are exchanged into common shares, and we've had those changes happening over a number of years. So we've generated very significant tax assets as a result of that. Up until the fourth quarter, we've had a full valuation allowance against those tax assets. But with the realization of sustained profitability. We've now released that valuation allowance leading to the significant deferred tax benefit in Q4.

The other thing I should note is the tax benefits from the UP-C structure are shared between pre-IPO LLC unitholders and Carvana common shareholders. And so the tax liability release is effectively reflects the portion of the tax benefit that are shared with LP unitholders. The remainder of that benefit then flows through to Carvana common shareholders, that was more than $600 million. So a nice win for shareholders in Q4 with those tax assets now being reflected in net income.

The next question will come from Chris Pierce with Needham.

Sorry. Just -- I hate to go back to this again because I know it just see it per unit is sort of what really matters. But can you just walk through a nonvehicle cost in an IRC? Because I'm thinking maybe you're less efficient car takes longer to get on the website, depreciates more, but then you might head, I think that's a vehicle cost. So like is there like an example you can give to sort of kind of talk about what might happen here and how kind of way you don't move past it?

Sure. Yes. Let me hit that. So by non vehicle costs, we mean not the acquisition cost of the vehicle, which is the largest portion of cost of sales. But then there's a number of other non vehicle costs like reconditioning and inbound transport being primary examples.

And so then just to go back, I think Ernie hit this earlier in the call, but recon costs in Q4 were elevated. We expect it to be elevated in Q1. I think a lot of that is driven by the success that we've had, adding new locations, Ernie touched on these points, but I think our reconditioning team had an exceptional year in 2025, growing locations more than 40%, growing total production more than 40%. I think our total production growth in 2025 is one of the biggest years, I think in the history of our industry in terms of increasing overall production.

So I think that, that team had an exceptional year this year. In Q4 with all the sites that we rolled out over the course of the year, costs were elevated, but we have a number of initiatives in place and are placing an increased focus on ensuring that as we continue to scale production capacity at very high rates that we're doing so efficiently and using software and technology as effectively as possible to make that process of scaling as efficient as we possibly can.

Okay. Perfect. And then I hate to call it topical because it's something haven't heard about for years but it came up this morning. Can you just walk through title issues, different titling registrations across 48 states, maybe touch on the restart program sort of -- I know that this affects a lot of deals, not just you guys, but maybe we hear about it more with you guys. I just kind of like to hear about just broadly what you can do there and sort of what you're at the restraints are because you've got 48 states with 48 different systems.

Sure. I'll tag on that briefly. And if you're listening out there yesterday, I passed the gentleman on the elevator that asked me to say Ratatouille. So this is, I think, my shot. But I think we've made tremendous progress in title registration. I think the reality is, as a bigger automotive retailer with more attention. I think that in the post-COVID period, we probably got more negative attention for that than was warranted by the performance. I think our performance at that time was very similar to the performance of many other automotive retailers.

But regardless, I think that was one of those moments where you kind of get slapped around with a concept a little bit, and I think it made us much better. And I think today, we're in a place where approximately 99% of our packets are completed by deadline, which means that we're in a spot to get customers there title registration work done quickly and on time.

And from all accounts, unfortunately, there's not like super simple to find benchmarking data out there, but from all accounts that makes us very likely best-in-class despite the fact that we have a fundamentally harder problem because we're moving cars across state lines from any locations to give customers the selection that they benefit from our website.

So I think this has turned from an area that I think was complex and was maybe a relative of weakness because we are taking on a more complex problem to an area that I think is now another area where we shine and outperform the market. So I think that's something that we're proud of. I think the teams that have worked on that, they just heard your project called out, I think you have a lot to be proud of, and we have a lot to be grateful for. So I think that's another kind of great bright spot in the Carvana story over the last couple of years.

The next question will come from Ron Josey with Citi.

2 parter here. Maybe Ernie we'll start bigger picture on conversion rates and we're seeing inventory grow, and you heard about passing on fundamental gains to customers with lower ATRs and faster shipping or delivery time down by a day. Talk to us about just how conversion rates are trending here progress as you're working as you -- I know you entered earlier on affordability, but just as you balance affordability with units sold and margins. So first is on conversion rates.

And then maybe, Mark, on guidance overall. Wondering when you think about 4Q, I think we talked about at least 150,000 units, we came in high single digits, maybe 9% better. Wondering what drove the upside in 4Q hear as we think about 1Q and the demand with tax rates falling and seasonality.

Sure. I'll hit briefly on conversion. I think conversion rates are something that we definitely kind of define what's the top and the bottom. But I think regardless of what we're talking about, I think that we've tended to see over a multiyear period, just continual improvement there. I think we're at a place now where we have a lot of website traffic if we use that at the very top of the funnel, if we want to go even higher than that if we say like aided awareness, I think we're in a place where there's quite a bit of aided awareness. I think our opportunity remains in kind of understanding and trust. And that's why I think we spoke about some of those anecdotes earlier.

I think as we pass value back to customers, I think we have very clear understandings because we run very clear test to make sure that we do understand those things. We know what speed means in terms of conversion. We know what price means or what rate means and the conversion and so that's math that we feel pretty good that we understand and that does flow through instantly. I think a lot of the bigger opportunity, though, I think, is more about creating an offering that is different by more that cause customers to tell one another about it more dramatically. And I think that, that's a payoff. It's much, much harder to calculate.

But I think part of the kind of math that sits underneath the idea that giving value back to customers make sense is that you have a long tail that pays you off over a very long period of time by just having an offering that is superior to the outside market offering. And so I think we do all the math and try to make very smart decisions as it relates to elasticities and conversion. But I think we also sort of from a principle and from a brand perspective, trying to make sure that we're giving customers an offering that's clearly different.

Sure. Yes. And then on the guidance front, our most important goal is significant growth in retail units sold and adjusted EBITDA in 2026, that's where we're going to be focused. We talked a little bit in the letter about, 2025 was a year where we had 3 key objectives. Significant growth in units and adjusted EBITDA, driving fundamental gains and also developing foundational capabilities. We plan to maintain those 3 key objectives in 2026 but to increase our waiting on really focusing on the things we need to do to continue to drive very strong growth in units I think we feel great about where the business is positioned today.

Our year end 2025 we think was exceptional. We think we're -- our growth in 2025 is in the top couple of percentage points of companies within the S&P 500, which is a stat we feel great about. I think we're starting to see now very strong returns on investments. For example, our operating ROA, operating income divided by operating assets for the year-end 2025 exceeded 20%, which we think puts us in line with very strong long-term compounders. A really big opportunity in front of us to build a very meaningful and significant company. And so we just want to make sure that we're doing the things to continue to grow retail units sold and top line significantly and then also continuing to grow on the bottom line as well. So that's where we're going to be focused in 2026.

The next question will come from Marvin Fong with BTIG.

Two, if I may. I think you referenced it slightly in the last answer, Ernie, but the passing along the lower APR about a percentage point you referenced. In retrospect, did that have the desired impact that you anticipated in terms of driving unit growth? And longer term, what sort of the end state there. Do you have a goal of actually being sort of best in class and offering the lowest APRs to supplying customers?

And then my second question, just on advertising, I noted on a per unit basis, it was down. And I was just wondering, you're obviously investing also in the business to drive great word of mouth, which is arguably your best [indiscernible] on advertising. So just are we at sort of a peak on a per unit basis with your formal advertising expense on a per unit basis? Or how would you kind of describe how we should think about that?

Sure. I mean, I think as it relates to kind of like the immediate elasticity as we are passing some of that rate back to customers over the last couple of quarters. I think I think, yes, generally, we believe that we saw the impacts that we would have expected. And I think that's generally been true, like I said, across time, and we've shared value with customers, and we feel like we understand those elasticities pretty well.

I think longer term, maybe I'll answer that slightly differently. I would say in the period between now and hitting our 3 million, 13.5% adjusted EBITDA margin goal, the goal is to make as much fundamental gain as we possibly can, of which we think there is lots of room. We think there's big opportunity in every GPU line item and every expense line item and all the teams are focused on those things and trying to prioritize and figure out where they can get the biggest yield the fastest, and we want to go get that. And then we want to give value back to customers. The more fundamental gains we get, the more value we can give back to customers. And we think the path to 13.5% is very straightforward, and it comes from scaling and kind of new markets acting more like old markets and just the benefits of levering fixed costs. So it's a straightforward path.

So I think that's kind of the 2030 to 2035 plan. And I think from there, we'll kind of reevaluate and I'm sure along the way, we'll be giving you updates as well. But I think that's what we're focused on. And so it's just about getting a little better all the time.

On [ AdX ], I think we brought up over the last couple of quarters that given the large contribution margins and given the desire to lean into growth and all of the obvious benefits that you get from growth because of the contribution margin and then because of the feedback in the system and because it creates more customers that can tell your story that [ AdX ] is a good place for us to invest. We continue to believe that, that is the case. And we've also made some other investments in other parts of the transaction as we discussed. I think we will try to be efficient with those investments and thoughtful about where those investments go there's obviously many different places where we can spend money with a similar goal there. So we try to be thoughtful and optimize as best we can, but I would say no major changes in any of our kind of general thoughts there.

The next question will come from Lee Horowitz with Deutsche Bank.

I guess as we look out to '26, the production growth algorithm looks quite strong as capacity comes online and throughput continues to improve. I guess how are you thinking about how that supply growth may be met via demand? And do you see any reason why the relationship you have seen in terms of selection growth and unit growth changing in any way relative to what you've seen historically?

I think we started the prepared remarks with something that we think is really useful is looking at the multiyear graphs and just trying to take away those big themes. I think we did have a similar kind of conversation here. I think if we look over the last 13 years of Carvana's life, I think as a general matter, the story has been that as long as we build the operational chain to support volume, there's demand for that volume. And I think generally speaking, that's been a pretty predictive, simple reduction of what's going on.

So I think we've got to keep building out that operational chain. It's a lot of work. Our foundation is good. We've got the real estate. We've got the people. We've got the team. We've got the systems. We're making the investments now as we speak, and we're building a system that scales better. but that's constant hard work. And I think that we would expect the future to look like the past on that because we still think we're a tiny portion of this market.

Yes, as discussed earlier, we're 1.6% of the used car market and 1% of the car market overall. So effectively, we still have first order of the entire market to grow into. So we think it remains very early in the game, and we think that making sure that we execute well and build out the supply chain is central to predicting where our growth is going to go.

Makes sense. And then I guess your competition has clearly talked about pushing on some price in the 4Q. The reaction to that in any way impact retail GPU? I know you give us the walk, but any color there? And maybe how are some of the actions taken by your competitors changing, if at all, the way you think about price competitiveness in 2026?

I think we gave you the walk. I think the story in retail GPU, I think, really is about a transfer to customers of shipping costs and then -- and then a little variation in depreciation that I think is going to happen quarter-to-quarter and is natural. And then I think most importantly and most controllably, it's about reconditioning costs. So I think that's the story there. I think we'll always pay attention to what's going on in the market, but as we've said before, I think one of the properties of this market that we think is very beneficial is that it's a market that is massively fragmented that has literally tens of thousands of players in it that share a cost structure and share a way of doing business.

And as a result, the way that, that market reacts in aggregate is pretty predictable because they're highly constrained by what their costs are, and it makes kind of the market very consistent and very predictable, and that's been true for our entire life and we'd expect to be true in the future. So with that being the case, we think that our focal point has to just be on us and delivering great customers and making our system more efficient. And if we do that, we think we'll keep getting better.

The final question today will come from [ John Babcock ] with Barclays.

I guess my question is really revolving around volumes. I mean you're guiding to sequential growth in 1Q, which seems to imply at least 22% growth, maybe a little above that. And generally, I think that's at least below where the Street was. Just kind of curious, I mean are you seeing anything in the market that's giving you caution at this point in time? And this also couples a little bit with your prior comment about shifting more to growth. So I just want a little more clarity there in terms of how you're thinking about that.

No, I guess would be the simplest answer. I think things look the same to us, and we're going to continue to run as fast as we can and just try to get a little better every day. I don't think there's any changes to what we're seeing or feeling.

Okay. That's clear. And then as far as -- I mean, you're expanding free at home delivery, free pickup should we think about that over time as potentially impacting GPUs, I mean we've clearly seen the impact this quarter at least of the shipping cost as more people are buying vehicles closer to where they're located. So just kind of curious if you might be able to go through that a little bit.

I think ideally, we're making fundamental gains at the same speed that we're passing them back. So that's -- or faster, frankly. So I think that's the general goal. I think in things like shipping fees, I think as we get cars closer to customers, what we're doing today is we're passing that benefit to customers. And I think as we scale that kind of naturally occurs. We have many of these inventory pools that are relatively new that have relatively small pools of cars in them. As those pools grow, that will bring our average car closer to our average customer, and we'll naturally cause a little bit more of that same impact, which we think is net positive.

I think that we've made some choices like we discussed earlier, in market ops, for example, to run at slightly lower utilization rates and the benefit of that is that means the delivery times are faster for customers, and we think the math of that is very good. That would mean all else constant, that would take a little pressure on Carvana ops expense. But we generally are making gains in other places that are offsetting that or more than offsetting that. And so that remains the goal. So I think we hope to continue passing value back to customers and to make gains that are of similar size, so -- or better. So we're not moving backwards.

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

Great. Well, thanks everyone for joining the call. Really appreciate it. Team Carvana, great job again. I think the year 2025 is a tremendous, tremendous year, and I think it's something that was very hard to foresee ahead of time and something that we should all be very proud of. I think Q4 is also an exceptional quarter. I think there were a couple of little line items where we all know that we could have done a little bit better. And I think in many ways, that's great. That's a good reminder for us. Let's use that and let's go do better tomorrow. But great job. We have a ton to be proud of, and we're going to keep rolling down this hill. So let's keep it up. Thanks, everyone.

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

Hi, everyone. Thanks for joining. My name is David Lantz, and I'm a part of the retail hardlines team here at Wells Fargo, and we're very pleased to be joined by the Co-Founder and CEO of Carvana, Ernie Garcia, as well as Mike McKeever and Austin Knutson from the Capital Markets and Investor Relations team. Thank you guys for joining.

With that, we'll jump right into Q&A. So units have grown significantly for the better part of 2 years. What have you and the team done to get the business back into a growth mode?

Yes. So I would say our version of the story would be that I think we were -- we launched the company in 2013, sold our first car in January 2013. And I think we were in growth mode from then until early '22. And then I think we massively made a huge strategy shift where we needed to no longer be reliant on capital markets to run business and that led to us doing all sorts of things that caused us to pull back quite a bit on growth and actually go the other way for 1.5 years, 2 years. .

And then I think we just kind of stopped doing the things that were designed to rapidly improve unit economics and led to business shrinking a bit and move back to the same equilibrium that I think we had for the many years prior to '22, and we're now growing again. And I think the fundamental driver, I think, is just that we deliver experience that is desirable to customers that's not completely understood. And so I think we have to keep delivering great experiences over time. And I think as we do that, our customers tell their friends and that drives more growth. And then the business itself has positive feedback through inventory growth and everything else. And I think we are leaning back into those levers.

Got it. That's helpful. And so you're aiming to sell 3 million retail vehicles a year in 5 to 10 years from now. So can you talk about the factors that could help you reach this in the earlier part of that or the later part?

Sure. So for perspective, for those of you that aren't that close to Carvana, we -- over the last couple of quarters, we've been run rating around 600,000 units per year, give or take. So I think getting to 3 million is around a 5x thing of the business. we've moved through several orders of magnitude since launching at 0 in 2013. And so -- and we're doing it into a market that has 40 million transactions per year. So that goal of 3 million units, while very large in absolute terms is only 7.5% of the market that we're in. So we think it's extremely achievable in terms of just the size of the market that we're moving into.

And our business is relative to most growth businesses. I think it's very operationally intensive. We buy cars, mostly from customers, but also from auction. We put about $1,000 of parts and labor into every car that we buy. We photograph the car. It goes up on a website, a customer goes through a process to get approved for financing. We do verifications. They select their delivery time. We deliver it to them. We use title and registration. So there's many components of the business that are complex. And so our view is just continuing to scale that system at the rate that we're continuing to benefit from constant growth demand for our offering is the hardest thing to do, and to hit that goal of 3 million units in 5 years equates to approximately 40% compounded growth to do it in 10 equates to approximately 20% compounded growth.

We think 40% is achievable, but obviously hard. And I think with relatively limited, if any, precedent for other businesses in history that have been disruptive concepts. So I think that suggests that it's hard but we've got a plan and we're marching as quickly as we can, and we'll see where we end up in that time frame.

How do you think about the balance of appropriately ramping production lines while also taking advantage of incremental near-term share gain opportunity? And I know in Q3, you had mentioned that the market is flattish and some peers have had some mixed reads since then. So I was just curious how you think about balancing the appropriate long-term stance with share gains today?

Well, I think our -- given our belief that ops is the likely driver of our time line to achieving any given level of scale. I think over time, we've been approximately operationally constrained. It's kind of how quickly we've -- what has driven our growth over time. I think we generally want to try to make decisions that smooth out ops as best we can, and make it easier for us to grow at high rates versus the same period. And so I think trying to continually open additional what we call lines. We have production lines inside of our facilities and then open additional facilities, which means that we have more places to open lines in the future, means that like the -- we reduced the actual hardest operational problem in our business. It is likely scaling inspection centers. And the work that happens to scale the business happens at the individual center level. .

And so by having access to more of these centers, which is more work today than just scaling in centers that we already have that have excess capacity. But by opening more of those centers, we basically make it. So in the future, we have an easier scaling problem because we have more locations to do that work. And so I think right now, we're focused on trying to lay out a multiyear plan to grow at high rates for a long time. And that means continually growing inspection centers. So we've been continually doing that.

Got it. And recognizing that it's a really fragmented category, where would you say that your share gains are primarily coming from today?

I think our view is that our share gains are very broad-based. I think I think an interesting -- I think an interesting result of the automotive retail market being so fragmented is that publicly reported companies are probably on the order of 10% of the market. In most retail verticals, the largest players, 20% to 30%, and the next largest player is 15% to 20%. And so if you have 4 or 5 public companies, you probably have the majority of that vertical that's reporting, and I think investors get a lot of visibility to that. I think in our market because it is so fragmented, a relatively small portion of the market is public.

And so I think oftentimes, the narrative that is dominant in our industry can be dominated by what a couple of companies are seeing or experiencing. I think as a general matter, given how fragmented it is, if we were taking share randomly from all other retailers, and we're currently 1.5% give or take the market. We'd be taking about 1.5% from everyone. That would obviously be very small and would not be noticeable to others. I think there probably is more concentration than like a true random draw across all the different retailers. But when we try to look at all the data that we have where we can look at all the cars that are listed online and where customers are buying from and we can look at cars that we value to then customers sell to a different dealer, and we can see where those show up online and what dealer ended up buying those cars.

And then we try to say who are we competing with? It tends to look like a mosaic of the entire industry more so than any concentrated number of players. So I think our general view is that we just got to stay focused on our customers, keep delivering great experiences and we know 1 player in this industry probably has a massive and direct impact on any other player in this industry. And we think that likely goes both directions.

And when we think about the go-forward growth potential and the 20% to 40% CAGRs that you mentioned over the next 5 to 10 years, how important is the used car auto backdrop in achieving that?

So I think as a general matter, used car retail has averaged for 20 years, about 40 million units, and it's probably been as high as 43% and it's probably been as low as 34%, maybe. I think the trough 34% was like 2009 or '10 post the great financial crisis. So I think generally speaking, like in our most recent quarters, we've been growing at about 40%. That's a very high rate of growth compared to the variation that we've seen over 20 years in the entire auto industry.

So I think -- our view is if the auto industry moves up or down by 2% or 3%, probably the best first guess is that we'll move up or down by the same amount. But that ends up just not being a huge part of our story in light of our growth. And so we're much more focused on laying foundations for sustained growth over a long period of time. And then I think we'll benefit when the market grows a little bit, and it will hurt us a little bit when the market shrinks, but on average about 40 million units.

And then I was in Orlando last week at the IRC tour, and there was some commentary around from the team that you're comfortable with the rate you're growing at the 44%. So can you dive into that a little bit more to especially as you get kind of tougher compares here over the coming quarters and into 2016?

Yes. Well, so I mean, I think -- again, I think growth happens at a location level. Like there's many different kinds of growth, but like some growth that is pure technology like functions that are pure technology, things like credit scoring for us. They scale incredibly well, right? Like you just turn on more servers, do more calc, the scale just kind of like shows up and it's very easy. The other side of that spectrum is reconditioning centers. And in between that, you have customer care and registration and verifications and you've got logistics I think when we look at all those different groups, we say, okay, let's look at the groups that have the worst scaling properties because you have the most labor and movement to physical things per unit of growth.

And let's look at what we've achieved in the past. When we look at how we grew in 2020 and 2021, and we look back at -- we averaged 10 to 12 inspection centers back then compared to where we are today, we're like, okay, we likely by adding the same capacity per center that we did in 2020, '21, we can likely hit the last year at 40% growth going from a little over $2 million to $3 million, right? If you compound out of that 40% the entire time. So we think that it's a problem of complexity that we have seen before and kind of executed against. But it's hard to sustain that over and over.

And I think when the team says that we're comfortable with our current level of growth, you are at an inspection center talking to the team on the ground that is adding lines on the ground, that's where work actually happens. And so, so far, I think the team on the ground, these locations and the corporate team that's overseeing a lot of this and the people ops team that's helping us hire in all these different locations. they've done a really good job, and I think our growth has felt comfortable. And I think there's reason to believe that we should be able to continue to grow at high rates. But of course, it's going to be hard. And so I think we'll work really hard to make that as smooth as we can.

Got it. And since we're at the TMT Summit, I'd obviously be remiss to not ask you about AI. So how is the company using it today? And how is it benefiting both internal processes as well as the customer?

So I find AI to be sort of hard question to answer because it's just -- it's everywhere. And then also I know how skeptically I look at the people and they start saying AI is everywhere, and they know it means higher multiples. And so I can only imagine everyone looking at us with the same skepticism. But I think it's in every part of the business. At this point, I think what's really beneficial about Carvana is we built our business in a way that led to everything being kind of designed in systems that are API accessible and all decisions being deterministic and all those things being able to be calculated very quickly. And all of the data being stored in places that we immediately have access to because it's all first party, we're vertically integrated throughout.

And so by virtue of just building the business that we've built over the last 12 or 13 years. We laid foundations incredibly well for an AI world where you can then take all of those services and you can take all that structured data and as long as it exists in a good place and it's immediately accessible, we can push it to these brains that can provide very high-quality answers very quickly. And so that shows up in obvious areas like our chatbot, it shows up in different tools we're building on the site today. It shows up in productivity throughout the entire organization. It's amazing many of our different groups are doing. I mean our modeling groups have built basically like collections of agents at different levels where you've got and agent that takes in a data set and goes through and cleans it. You've got another agent that converts that into variables that likely have intuitive meaning. And then you have an agent that goes through and generates models, then you have an agent that goes through and skeptically evaluates the result of those models to try to figure out where there might be hold.

And they're just now able to generate models that literally 100x the speed that they could even a couple of years ago. And then, of course, in like our development teams, development is like 1 of these areas where, I think if you ask 5 developers the best way to measure developer productivity, you're going to get 13 answers. And so I think trying to figure out what's the best metric to evaluate the speed at which we're increasing our output through our engineering teams isn't trivial, but I think we're materially up over the last 6 months to any of the metrics, and it seems like that's just continuing to happen. And so I think productivity, customer-facing capabilities is showing up everywhere.

Got it. And then shifting gears here to GPU. So you regularly talk about opportunities remaining across every line item within GPU. So can you talk about that in a bit more detail across retail, wholesale and other?

Sure. There's a lot in there. But I mean, so I think let's maybe -- let's move into retail a bit because we can maybe talk about it a little bit more deeply. But so I think in retail, there's a couple of things that are interesting that are going on. So I think that there's some like foundation laying that we think will lead to fundamental gains that will all else constant be a tailwind to retail GPU, which are things like rolling out [indiscernible] and having -- rolling out megasite and having both retail and wholesale capabilities at all these sites so that we can be a more efficient buyer of cars.

So basically, just between us and natural sellers of large pools of cars, we can cut cost out of the system and split the gains in them. So that's kind of like a structural improvement to the business that saves time and cost and energy and therefore, leads to gains. Then I think that we're constantly improving all of the ways that we buy cars and we price cars and we merchandise cars are informed by the quality of information we have about every car and the density of the information that allows us to understand how much any given feature is worth to a selling customer to a buying customer and where we're supposed to merchandise that.

And that data, the sum of all that data that we have is growing at approximately the rate that the retail business grows. And so your -- for any given model, you run into noise at a certain depth. And if you're growing at 40% every year, you can move down like a level of depth roughly every year in terms of what you truly understand that you're able to price intelligently without being overwhelmed by noise. And so just getting smarter with -- getting more data and then being able to utilize all that data to price on both sides of the market, merchandise in the middle and build search tools in the middle as well, also helps retail GPU.

So those are maybe like one is a structural advantage and one is kind of like a more of an analytical and data type projects. Both of those we expect to lead to increases in retail GPU, all else constant. And I say all else constant because we also definitely plan to pass back fundamental gains to customers as we think we're now at a spot where it's very easy to have line of sight to 13.5% EBITDA margins, which is a target that we set for ourselves for reasons we can explain if interested. And we think that there's enough fundamental gains to push us beyond that. And so we think it's going to be smart for us to utilize those incremental gains to pass back to customers to further differentiate our offering to enable us to play a really outsized role in this industry over a long period of time. So these are some examples.

Got it. And how do you think about the importance of passing fundamental GPU gains back to consumers as a function of achieving the 3 million retail unit target over the next 5 to 10 years?

So what I would say there is, I think -- I think a good approximation is that the quality of customer offering that we're giving to customers today versus the offering that we gave 10 or 12 years ago is about the same. And so we've driven for all about 1.5 years of that period, we've driven very outsized growth at constantly increasing scales from a base of 0 to a base of $150,000 a quarter with an economic offering that has been approximately constant.

And so I think there's -- and at that level, you can look at our older cohorts, and you can see that we have higher market shares in those markets. And you can look at our younger cohorts and see they're ramping at a similar faster pace than the older cohorts were, so you can extrapolate out to much larger scale we are today. And then you can look at those oldest cohorts you say they're still growing at very fast rates that approximate the rate at which the company is growing. And so you don't know exactly where that goes, but it suggests there's like a lot of headroom there.

And then I think we can look at passing economic benefit back to customers and we AB test all that through rates and do customer bids on buying cars from customers and through pricing. And we have an understanding what those elasticities are. But to me, those are all just tools in our arsenal. And I think in the best version of the story, and I think something that's consistent with historical data, it's not obvious that you need to be passing back a ton of those economic gains to drive continued high levels of growth because I think that we've got lots of visibility to continue high levels of growth with our offering exactly where it is today. I think that that's just kind of additional fuel that we think is going to be smart to use over time.

Got it. And on the EBITDA margin front, so you're in low double-digit territory today. Can you help us think through why 13.5% is the right target over the next 5 to 10 years? And I know you mentioned there's potential upside from that. But just as kind of a starting point?

Sure. So we can talk about for a long time, too. But what I would say is I think right now, like 1 way to articulate 13.5% is where we've been for the last couple of quarters, plus if you just look at our overhead expenses, and you assume that we lever that even partially with respect to growth on our way to these higher targets, it's very likely we would move through 13.5%. And then we're separately talking about all these fundamental gain opportunities that we think we have in every revenue line item and every expense line item that are going to be hard to unlock but that we plan to unlock over time.

And then that suggests to well, why don't you just go well beyond that? And especially if you believe that with a fixed economic offering quality to customers. We've driven all the growth that we've seen since inception to today. And I think that's a reasonable argument. But then I think the other argument is that there is elasticity, and even in our 3 million goal, we would be 7.5% market share. And I think while it's important to have a goal at any point in time, it's not hard to imagine that when we get to that spot, we will look further down the field and have bigger goals.

It's likely smart for us to pass some of those gains back because we can evaluate like what is elasticity and what is the value of incremental sale relative to the cost of getting that sale by having economics back to customers? And that math suggests that we should be handing some back to customers and that we could take a really meaningful share. And I think as we do that, we're also competing with -- we're about 1.5% market share.

For the most part, the other 98.5% market share of the market shares a cost structure and shares a revenue model that is very similar. If we put pressure on that, that business -- some of those businesses are not super well positioned to respond super easily because they just have a different lease structured business. And so it's probably smart for us to do it for that reason as well. And so I think 13.5% is not a perfect scientific exercise. It's like a bunch of science goes into it to approximate and then you try to pick a reasonable goal, and that's the goal we picked.

Got it. And on [indiscernible], you're completing about 10 integrations a year. So curious how you're measuring success there?

So I think the success is measured by opening the sites, doing the technology conversion so that we have the ability to run our play, getting leadership in place at those sites and then beginning to scale them produce cars and then have those cars -- we compare those cars when we do through what we call a global local process when we look at any given facility that's doing any given function, and we compare how that facility is performing compared to the other facilities that perform the same function. And so in recon, we want to look at cost speed and quality and just say, how well is this location doing in those 3 dimensions relative to our other locations? And how quickly can we climb that curve to be as efficient as other locations. And I think the steepness of those curves is a major way that we measure it. .

And as inventory pools ramp, can you walk through some of the benefits and risks associated with that?

I think -- let's start with the risks. The risks are it's inherently harder to open a new location and ramp up from 0 because you have the new technology rollout, you have new leadership. You have all new people you have to hire and train that don't get to learn from preexisting people that are already there doing the exact same thing. And so it's just kind of like inherently a harder problem. And I think that when you're taking on any operational problem. The harder it is, the higher the likelihood is that you stumble.

So I think that's the risk. And then I think the benefit is very mechanical. It's just in the most efficient version of the Carvana machine, you want to have many locations around the country that are distributed approximately similarly to the way the population is distributed so you can buy cars and minimize the transport to the location we're going to do the reconditioning and then merchandise it and then have ideally as much density in each one of those locations, so that customer as much dense as you can with the best distribution of inventory so that customers nearby are most likely select cars that are nearby.

So you also have less outbound transport. And so just the more locations that we add necessarily the shorter the distances for the average inbound transport and then either the short of the expected distances for the average outbound transport or the more selection you have this available faster depending on how you want to position the system from like a shipping fee perspective.

Got it. That's helpful. And so there are a lot of concerns out there today around the credit environment. So curious if you could talk about how you see the backdrop today?

So I think you always look smarter to be [indiscernible] and skeptical, and we have a really strong desire, especially in this beautiful stage to look smart. So I want to be cynical and skeptical, but I also think the data that we look at looks pretty good. And so I think it's been interesting to try to do some work on our side to tie out why do a bunch of smart investors feel like they're really anxious about credit. And why do most originators and investors in credit feel like things are kind of moving forward about as expected.

And I don't want to say that we have all the answers there, but I do think there's a good chance that a decent part of that puzzle is that every originator, I think, had tough '22 and '23 vintages and then virtually every originator tightened credit in late '23 or early '24. And I think if you're looking at portfolio level metrics, I think the '22 and '23 vintages are playing a bigger and bigger role in the overall portfolio and causing things to keep -- look like they're getting worse.

But if you're looking at actual vintages, I think it was easy to forecast where those were going to be 12 months ago, and most of the '24 and '25 vintages look pretty good. So it seems like consumer credit is better than the average narrative out there, but maybe we end up being wrong on that over time.

And then there's a big opportunity with brand awareness, obviously, with where your market share sits today. So can you talk about how you're going about capturing that and how you're using advertising as a lever?

Sure. And so I mean, to me, I would just say that like I think one of the interesting things for any like analytical mind to look at is to look at the cohort curves that we gave out every year up until I believe 2021, and you can kind of see that our oldest cohorts are ramping at a certain speed and then the newer cohorts were all ramping at a somewhat similar speed. And there's this question is like, okay, if you launched the market and then a bunch of time pass and you got to a certain market share, how come when you launched that next market? Why didn't it just start at the same market share that the other market was already at?

If you have inventory that can be shipped around the country and you have prices that are the same, you're bidding the same for customer cars and you've got financing is the same -- and you roughly are using mostly national advertising channels. Why don't you start at that same point and just kind of instantly jump there. What we actually saw was you started the origin and you built up over time. And to me, I think it's because in many customer conversations, it becomes clear that the actual question customers are asking themselves is they're saying, Carvana seems appealing? Like, first of all, I don't know what Carvana is. It's -- I've seen some ads and it's that vending machine company and how does it work? That's how most customers think about Carvana.

Then they learn more. And it's like, okay, not going to a dealership for 4 hours sounds appealing, A broad selection sounds appealing, a reasonable price sounds appealing, a 7-year-term policy that sounds appealing. But the other thing is I'm anxious about buying a car, right, like buying a car is an anxiety producing customer experience that has a reputation that has been earned over a very long period of time. And so part of what I'm trying to do is have it be better. Part of what I'm trying to do is make sure that I don't do anything done.

And a lot of times, the way to feel the least done is to do the traditional thing. And so I think many customers are like that's the debate that they have in their head. It's like, okay, Carvana seems appealing. But also if I just buy a car, the old way that everyone has always bought a car, I can't be that wrong. And I only buy a car 1, 3, 5 or 6 years. So what do I do? And I think what brand advertising is about and what delivering good customer experiences about is like if you have something that is actually fundamentally better, you just need that story to be in the minds of consumers to overpower the anxiety of I just want to make sure I don't look dumb.

And so I think that -- most importantly, that's about delivering good customer experience over and over again and having friends tell friends about it. But it's also about leaning into advertising a little bit and making sure that our brand is out there because even things like we all kind of know this. If you see an ad on Monday night football, you think that company is legit, right? You just do like that happens subconsciously, you believe that. And you don't necessarily believe it if you -- if it's -- or you'll believe it to a lesser degree, if it's a low budget ad during a local news broadcast, right? You're going to feel differently about those things. So just getting out there in the world and having people see you and make all those subconscious connections so that they don't run the risk of feeling like they made a mistake is I think a huge part of what we have to do over a long period of time to go from 1.5% market share to 7.5% to be on that.

Got it. And then on the same day and next day delivery, how are you measuring success of the pilot in Phoenix?

I think we feel like the benefit to faster delivery in conversion are very well understood. So I think it's about how well we're executing, how many customers we can get to have options where they have a same-day delivery option available to them. And then what is the customer uptake and then how well do we actually fulfill that promise, that's, I think, generally how we're measuring it. And I think the progress that we made there is very impressive, and it's more -- I think for a business to be able to grow really fast long period of time, you want it to be as simple as possible. But for a business to have moats that are defendable, you want to be as complex as possible. We happen to be the latter kind of business. It's complex.

Same-day delivery is not like a make a strategic decision, hire more people, deal with a little bit less labor efficiency and you've got it. It's -- there's a lot to do because like you have to manage different complexity of finance verifications for different credit types. You have to manage car picking, you have to manage presale inspections. You have to manage title and registration that varies by location. You have a lot of things that you have to manage that require that we kind of reoptimize our systems and design for them. And then you have to make sure that you also have staffing so that you can fulfill that very quickly.

And so it's like a real undertaking, and that's why we focused -- we rolled out the capability to many markets and sort of like our system as it was already kind of naturally designed without that specific intent and our staffing models as they were already designed about a specific intent. We let same-day delivery sort of happen in that way. And what's happening in Phoenix now is we're purposefully trying to increase the availability of that option to many more customers through system design and through SaaS models. And I think we've seen a lot of success so far and we hope to continue.

And to what degree is a broader rollout of same-day delivery embedded within your assumptions for 3 million retail units a year?

I mean I would go back to, I think a lot of what we're doing when we're estimating future retail units is we're looking at market shares of our earlier cohorts that are higher and then we're looking at the growth rates of those, we're looking at the various elasticities across the business. We have estimates for when you grow inventory. What does that do to conversion, what does that do to scale? And how does that kind of feedback loop play out when you -- we've made delivery times continually faster over that entire period of time. We have estimates of the feedback of that. And so we can kind of look at those things and extrapolate them out. And they definitely play into our models and into our confidence that, that kind of a number is achievable, but like we haven't broken that out precisely. .

And for those not familiar, can you talk about the differences between the full build-out of [indiscernible] locations that will begin in 2026 relative to the integrations that are already ongoing?

Sure. So -- the biggest difference is that auction locations forever, like as a seller of a car, when you go to an auction, you have an option to say, replace this windshield and clean up this headlight and bang out this debt over here. And I'm going to spend $500 to do that. And my hope is that I'm going to sell the car for $750 more. And so most auction businesses have some like reconditioning like mechanic capability that was already built into the auction business itself. So there's building and space for that.

So a lot of the initial rollout that we were doing was utilizing existing space that was underutilized maybe putting in some lift, putting in our software, putting in management teams and leadership in hiring and training and then pushing reconditioning through that pre-existing footprint. The full build-out means now we go to a site that's 50 or 60 acres, where maybe the initial build-out that already existed as part of the auction was enough to support 1 or 2 lines. And we want to have building capacity to support 6 to 8 lines.

We then need to maybe build another building, put down a photo booth, put in more lifts. And so that's more capital intensive. And so that's why I think we've been able to open some of these locations with very low capital intensity to sort of get a toehold for these different inventory pools and leadership and everything else. And then I think we will now go through and start to fully build out some of these facilities where we can do meaningful volume out of each one.

Got it. And then can you walk through some of the differences and to your point, the capital intensity of the fuller build-outs versus the integrations that are ongoing and kind of split that out?

Yes. Well, the integrations that we've done so far, for the most part, have been very low CapEx. And then when we bought [indiscernible], we sized the CapEx that would be required to do the sum of build-outs to get us to 3 million total reconditioning capacity to be around $1 billion. And I think that remains like a good ballpark estimate. There's been some inflation since then. I think it's probably ticked up a bit, but that's a good first order estimate. And so that's -- you take that divided by the number of sites that we'll do, and that's approximately the investment that we expect at these locations. .

Got it. And it looks like we only have a minute left. So 1 more here. Can you just talk about the significant -- the timing and the significance of the recent upsizing and new loan sales that were announced in Q3?

I think -- I mean I'm extremely biased here, but I think as a general matter, consumer credit is a deeply fundamental and highly valuable asset for people to invest in. And as a general matter, it's relatively hard for even pretty sophisticated investors to get access to many of these types of loans. And I think the way the markets have evolved there over a long period of time is that, generally speaking, you have companies that have kind of paired capital with sales teams that go out to many dealerships with verification capabilities and real-time credit scoring capabilities so that they can originate these loans and then investors have got access to the equity in those companies.

What our business does is we separate that. We basically have our own flow of customers that are coming to us. We've got our own credit scoring. We've got our own credit pricing. We connect it to verifications and to servicing. And then we create an asset that is easier for investors to invest in about having to build all those operational capabilities. And basically, we think that -- in many ways, that's the exact same trade that is happening in all of fintech. So I think that in automotive, we're sort of doing that same thing and that opens you up to an entirely new investor class.

And so I think we've got existing investors that we have long-term relationships with that we're still selling lots of loans to and have upsized, and then I think that we've been gradually getting deeper relationships with other new investors that are realizing even as they held loans, they went through '22 and '23 that were not great vintages -- the downside cases look pretty decent. And so they're more excited to invest more money in those assets. And our hope is that as we continue to get more scale, we'll be able to do that more. And if anything, drive down our cost of funds and therefore drive up our finance GPU, but we have to execute that to happen.

This has been super helpful. Thank you, Ernie.

Well, thank you. Thanks, everyone.

Good day, and welcome to Carvana's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Meg Kehan with Investor Relations. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Third Quarter 2025 Earnings Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.carvana.com. The third quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q3, which can be found on the Events and Presentations page of our IR website.

Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer.

Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of 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 Forms 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to non-GAAP metrics, and all references to EBITDA will be to adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website.

And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thanks, Meg, and thanks, everyone, for joining the call. The third quarter was another incredible quarter for Carvana. We remain the most profitable and fastest-growing automotive retailer. These data points are exciting in isolation. Achieving them simultaneously is rare and points to an exceptional future. Achieving them by the margins we have been recently, profit margins more than 2x the industry average and growth over 40% when other public retailers are approximately flat points to something that is structurally different, something that is capable of achieving our ambitious mission of changing the way people buy and sell cars. That is exactly what we believe we are capable of, exactly what we are focused on making happen and exactly what the data is telling us we are marching toward every quarter.

Q3 was another large step on the path to achieving our current goal of selling 3 million cars at a 13.5% adjusted EBITDA margin in the next 5 to 10 years. We're getting better as we get bigger, aided by the feedback inherent in our business, the benefits of scale and our continued pursuit of fundamental gains as well as the addition of foundational capabilities. The positive feedback flywheel is spinning. The data that powers our decision-making throughout the business is growing exponentially and allowing us to iteratively improve the models powering every decision across the business.

Our sales growth allows us to keep growing inventory economically, constantly broadening customer selection. Year-over-year, our inventory turn time is approximately flat, yet our customers have nearly 50% more cars to choose from. And the benefits of scale are also allowing us to make investments that magnify these advantages. Over the last 18 months, we've added reconditioning capacity to 15 ADESA locations, allowing us to position inventory closer to our customers, reducing customer delivery time by a day in the last 5 quarters. We've developed our digital auction capability, ADESA Clear, delivering a best-in-class digital auction experience to our wholesale customers, allowing us to add wholesale capabilities to 12 of our inspection centers and counting.

Having the strongest retail and wholesale channels to sell vehicles makes us a systematically better buyer of all cars from our customers and our partners. We've also been working on making dramatic improvements to delivery capability that will show up over time. We are currently using Phoenix as a test market to optimize our finance verifications, registration processes, vehicle staging, delivery scheduling systems and staffing models for speed. As a result, 40% of customers in Phoenix are now getting same or next-day delivery compared to 10% that get same or next-day delivery nationwide. On any given day, customers in Phoenix have about 2,500 cars available to be delivered that same day. That's worth pausing on and taking time to think through the implications.

Thousands of vehicles that can be purchased in minutes and delivered in hours is a highly desirable and extremely difficult to replicate capability. Like all good things, this will take some time to optimize the rollout across the country, but it is coming. Another set of statistics that demonstrate meaningful progress are that today, more than 30% of retail customers now complete the entire process without any interaction with the customer advocate until their delivery or pickup appointment. For customers selling their car to us, this number is more than 60%. To make this possible, our business must be vertically integrated, data must be well organized and immediately accessible. Decisions have to be deterministic and automated. Workflows have to be concretely defined inside of systems and all that has to be wrapped in intuitive interfaces that make customers feel confident.

It's hard. Our team is doing a great job, has detailed plans to keep making it better and is nowhere near satisfied. Looking forward, we continue to see opportunities for fundamental gains in every line item. Opportunities that will make our customer experiences simpler and more fun, will make our costs lower and will make our business more efficient. Our plan is to unlock these opportunities with the same discipline that has driven our success so far. Something that has always been true in the past remains true today and that we suspect will be true for a long time is that prioritizing our opportunities is the hardest part of making significant progress quickly.

With constantly evolving technology, constantly evolving customer preferences and expectations and an ambitious group of thoughtful people, new opportunities emerge faster than we are able to take advantage of the ones we previously saw. With AI, this is more true today than it has ever been. The future is bright. Selling 3 million cars per year with 13.5% adjusted EBITDA margin in 5 to 10 years is very achievable. There's a lot left to do, and there's an excited team ready to do it. We will continue to aggressively pursue rapid progress, and we aren't tired. The march continues. Mark?

Thank you, Ernie, and thank you all for joining us today. The third quarter was another very strong quarter for Carvana that was driven by our team's continued focus on identifying further fundamental gains and operating efficiencies and developing foundational capabilities while also pursuing growth. We set new records for retail units sold, revenue, adjusted EBITDA and GAAP operating income. And for the first time, our annual revenue run rate exceeded $20 million, a significant milestone pointing toward the long-term scale of our business.

Moving to our third quarter results. Unless otherwise noted, all comparisons will be on a year-over-year basis. Retail units sold totaled 155,941 in Q3, an increase of 44% and a new company record. Revenue was $5.647 billion, an increase of 55% and also a new company record. Revenue growth exceeded retail units sold growth, primarily due to higher average selling prices and traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner.

Consistent with past quarters, our growth in the third quarter was driven by our 3 long-term drivers of growth: a continuously improving customer offering, increasing understanding, awareness and trust and increasing inventory selection and other benefits of scale. Our strong profitability results in Q3 were again driven by our team's focus on driving fundamental gains and operating efficiencies as well as levering our overhead expenses.

Non-GAAP retail GPU decreased by $77, primarily driven by higher retail depreciation rates. Non-GAAP wholesale GPU decreased by $168, primarily driven by higher wholesale depreciation rates and retail units sold growth outpacing ADESA marketplace growth. Non-GAAP other GPU increased by $63. This change was primarily driven by improvements in cost of funds and higher finance and VSC attach rates, partially offset by higher-than-normalized loan sales relative to originations in Q3 2024. Looking ahead to Q4, we expect sequential changes in retail GPU, wholesale GPU and other GPU in a similar range to last year, with the latter primarily reflecting sharing fundamental gains with customers through lower interest rates.

In October, we expanded on several existing loan sale partnerships with agreements for the sale of up to $14 billion of future loan principal. First, we upsized and extended our Ally agreement for up to $6 billion of loan purchases through October 2027, an increase from $4 billion through April 2026. Second, we entered into a new loan purchase agreement with a loan sale partner for up to $4 billion of loan purchases through October 2027. Third, we entered into an additional loan purchase agreement with another loan sale partner for up to $4 billion of loan purchases through December 2027. The latter 2 agreements formalize existing relationships and establish defined expectations for sale volume and sales procedures throughout the agreement period, highlighting the significant fundamental strength of our vertically integrated finance platform.

Q3 was another strong quarter for demonstrating the power of our model to lever SG&A expenses. Our 44% growth in retail units sold led to a $319 reduction in non-GAAP SG&A expense per retail unit sold. Carvana operations portion of SG&A expense decreased by $96 per retail unit sold, primarily driven by our operational efficiency initiatives. We continue to expect Carvana operations expense per retail unit sold to decrease over time as we deliver fundamental gains and operating efficiency. The overhead portion of SG&A decreased by $314 per retail unit sold, driven by continued leverage of our overhead expenses with greater retail units sold. Advertising expense increased by $139 per retail unit sold as we continue to take advantage of opportunities to invest in building awareness, understanding and trust of our customer offering. We expect advertising expense in Q4 to be similar to or slightly higher than Q3.

We continue to see opportunities for significant SG&A expense leverage over time and as we scale, driven by both continued improvements in operational expenses as well as leverage in the fixed components of our cost structure. Net income was $263 million in Q3, an increase of $115 million. Net income margin was 4.7%, an increase from 4%. GAAP operating income was $552 million, an increase of $215 million and a new company record. GAAP operating margin was 9.8% and an increase from 9.2%. Adjusted EBITDA was $637 million, an increase of $208 million and a new company record. Adjusted EBITDA margin was 11.3%, a decrease from 11.7%.

As previously discussed, our adjusted EBITDA is very high quality compared to many rapidly growing companies due to our relatively low noncash expenses, which we'll continue to lever with scale. We converted approximately 80% -- 87% of adjusted EBITDA into GAAP operating income, an increase from 79% last year. As previously noted, we currently carry many expenses that support retail unit sales capacity of over 1 million units and expect our GAAP operating income to grow faster than adjusted EBITDA over time.

In the third quarter, we took additional steps to further strengthen our balance sheet with a continued goal to drive toward investment-grade credit ratios. In Q3, we retired the remaining $559 million of our 2028 senior secured notes, primarily through proceeds from $539 million of equity issuance through our ATM program. Following quarter end, we also retired $98 million of 2025 senior unsecured notes due October 2025, bringing our total quantum of corporate debt retired in 2024 and 2025 to $1.2 billion. With more than $2.1 billion of cash on the balance sheet, our net debt to trailing 12-month adjusted EBITDA ratio is now down to just 1.5x, our strongest financial position ever.

Our results through Q3 position us well for a strong finish to 2025. Looking toward the fourth quarter, we expect the following as long as the environment remains stable. Retail units sold above 150,000, and adjusted EBITDA at or above the high end of our previously communicated range of $2 billion to $2.2 billion for the full year 2025.

In conclusion, Q3 marked another outstanding quarter for Carvana. We remain very excited about progressing toward our long-term phase of driving profitable growth and pursuing our goals of becoming the largest and most profitable auto retailer and buying and selling millions of cars. Thanks for your attention. We'll now take questions.

[Operator Instructions] The first question comes from Sharon Zackfia with William Blair.

I guess the topic du jour is kind of subprime loans. And I know we can see a lot of your subprime loan performance and your prime loan performance through various different vehicles. But can you talk about kind of the health of the portfolio, whether you foresee needing to take incremental reserves there at all? And then separately, the timing of the formalization of these new third-party agreements, kind of what brought on that timing?

Sure. I can take that one. So the very simple answer on loan performance is our 2024 and 2025 loan originations are performing extremely well, both in an absolute sense and relative to industry comparables. I think some of the chatter out there about loan performance more broadly, we think has a lot to do with the 2022 and 2023 industry-wide cohorts, which did underperform initial expectations. I think most of the industry ourselves included tightened credit in late 2023. We certainly did, and we've maintained that tightness here through where we are today in 2025.

As a result, our loans are performing strongly. I think the best evidence of that is twofold. One, just the stability and strength in our other GPU. And then secondly, the outside validation of having Ally upsized from $4 billion to $6 billion based on the performance trends that they're seeing and additionally, the addition of these 2 new purchase agreements, I think, are great validation of the strength that we're seeing given all the fundamental gains that we've made in the program over time. So I'll start there.

In terms of the specific timing of these agreements, I think it's really just a continuation and a maturation. These 2 large agreements are with existing partners who we've been selling loans to over the preceding periods. Those previous loan sales have been more on a one-off basis. And so what these agreements do is effectively formalize the sales procedures and set volume expectations with those partners to essentially make more programmatic, the more one-off sales that we've already been doing. And so really, I think there -- the main point there is it's a maturation and a continuation of something we've already been doing, but now just in a more structured and formal way.

The next question comes from Marvin Fong with BTIG.

I hopped on just about 5 minutes ago, so I apologize if I missed this. But the OpEx, the operating expense per unit, I noticed ticked up sequentially, although it was down year-over-year. And I just wanted to understand, is that a better way to measure that metric? And can you just kind of talk about your future opportunities to continue to kind of like drive down your operations cost per unit, that would be great.

Sure. Yes. So I think it's useful to maybe break total operating expenses up into a few different categories. I think we -- let me break them into operations expense, overhead expense and advertising expense. I think we start with advertising expense. We are starting to invest in the multiple levers of our 3-part growth driving plan, which includes continued improvements in product offering, building understanding, awareness and trust and growing selection and driving other benefits of scale. Advertising hits the second of those. And so we have been investing in advertising as part of that longer-term 3-pillar growth plan.

I think looking at overhead expenses, I do think we saw nice leverage year-over-year and some leverage quarter-over-quarter there. Within overhead, I think that's grown much, much more slowly than retail units. I think in recent periods, there's been some lumpy expenses there that we think are more transitory in nature that's caused it to be a little bit higher than it otherwise would be. But overall, we're seeing very strong performance there with nice leverage on a year-over-year basis and then to an extent on a sequential basis.

Last, on operations expense. I think another place we've seen very strong gains on a year-over-year basis. That can bump around quarter-to-quarter, just depending on the presence of onetime items or other nonrecurring expenses. So it stepped up a little bit sequentially. But overall there, the trend is down, and we expect to drive that down further over time as we continue to drive fundamental gains in operating efficiency.

Great. And if I could maybe sneak in one more. Just skimming the real-time transcript here. So I believe you said retail GPU will be similar to last year. And I was just kind of wondering what's sort of underpinning those dynamics? So are your recon and logistics efficiencies sort of being offset by the macro environment and what's going on with depreciation rates? Or just kind of maybe double-click on what's kind of behind the year-over-year flattish retail GPU guidance?

Sure. So I think let me first just hit Q4 seasonality. I think most listeners have a good sense of industry seasonality in Q4, but typically, it involves higher depreciation rates, both in the retail and wholesale markets. And then it's typically industry-wide, the lower period for demand, whereas other quarters have more strong depreciation rates in both retail and wholesale and stronger seasonal demand. As it relates to retail GPU, I think what we called out is we are seeing for Q4 sort of sequential change off of Q3 that is in a similar range to what we saw last year, driven by seasonality. I think that looking at year-over-year trends, I would say that the number 1 thing I would say we feel like we've seen is I think Q2 was a bit of a strong depreciation quarter in the retail market.

We attribute that to some effects from the late March auto tariff announcements. I think on the contrary, Q3 was a bit of a softer depreciation quarter on a year-over-year basis. I think we would attribute that almost an offset to the Q2 strength. And so I think some of those depreciation dynamics would be the -- I guess, the one thing I would call out and also the thing that I mentioned in my prepared remarks about Q3 retail GPU.

The next question comes from Rajat Gupta with JPMorgan.

Just on the fourth quarter, like unit commentary, should we -- I mean, it looks like the guidance would imply a little more normal industry seasonality type numbers, at least the low end of the guidance. I'm curious, is that a change in terms of how we should think about the seasonal behavior of the business from here? I know in most years in your history, you've always grown units sequentially from 3Q to 4Q. So we're a little bit surprised by the guidance this time. So curious if that is a change in how we should be thinking about seasonality? Or is it just more being conservative around the macro backdrop, anything you're seeing out there from a consumer backdrop standpoint? And I have a follow-up.

I'll jump on this one. I think it's largely more of the same. I think when you look at the last several years, Q3 to Q4 for us or for other retailers, there's a decent amount of variability in the shape that you see Q3 to Q4. And so I think we're taking that into account and we're guiding. But I think we continue to see extremely strong growth. You saw it this quarter. We expect that heading into Q4 and into next year. I think we're on a great path and everything remains the same.

Understood. Okay. And then just on the other GPU within that, just the ancillary product penetration. It looks like you're starting to chip away at that. Can you maybe size for us what the penetration levels are today in that business? Or how much was it up year-over-year? And curious like how we should think about benchmarking that? I mean if you look at some of the franchise retailers out there, they make right roughly $1,500 a unit or higher at a 45% penetration. I'm curious, is that kind of a benchmark in terms of the long-term opportunity there? Are we thinking about this differently? Any thoughts there would be helpful.

Sure. I think there's a number of parts to that. I think as a general matter, I think other GPU is an area with a couple of line items underneath it. And like everyone else in the business, it's an area where we believe there are fundamental gains to be had. And I think we've been working on those for a while, and I think we've got plans to continue to work on those, and we think there's certainly opportunity there. Just to generalize a bit, I think that's true in every GPU line item and every expense line item. We continue to feel like we've got extremely exciting opportunities and the hardest part is just prioritizing those.

I think thinking about any part of our business, I think, relative to the kind of mature pre-existing automotive retail industry, I think, is a reasonable starting point. I think as a general matter, we've always sought to outperform the benchmarks that you would see if you compared us to the outside industry. But I think in ancillary products, I think something we want to make sure that we do is we deliver very simple, high-quality value-added products to our customers. And so I think that's a guiding principle that we'll make sure that we continue to adhere to. But there's definitely additional opportunity, and we definitely plan to go unlock it.

The next question comes from Brian Nagel with Oppenheimer.

So a couple of questions. My first question, look, we -- obviously, the results you put up there on the used car side are very, very strong. The question I want to ask, I mean, there's been other data points within the space that have suggested weaker, choppier used car demand. So is there anything you're seeing that's below the reported results that suggest a more difficult demand environment? And I guess maybe the ancillary to that is, is there something changing here to allow Carvana to capture even greater share in this most recent quarter?

I think as a general matter, I think things continue to look pretty similar at a high level is I think how we'd characterize things. I mean we're always paying attention. I think we get a good read on what things look like, obviously, looking at retail sales and also, as discussed earlier, looking at loan performance across the loan book. And I think as a general matter, things feel relatively stable. I think we're always paying close attention. And I think, as you alluded to, I think while we don't see signs of macro weakness today, that we're very well positioned if -- I guess, when that does come to pass. At some point, there will be cycles.

And I think where we are from a financial performance perspective relative to the industry and then where we are from a cash perspective and a balance sheet perspective and where we are from a consumer offering perspective and a business scalability perspective, I think the sum of all that is very good. And so I think as a general matter, like I said, things look good. The most important ways that we measure ourselves is how are we performing relative to the industry in customer experience, in growth and in economics. If we're always progressing in those areas, we're going to be on a really good path because this is obviously a very mature industry. We know what the scale of the industry are and we know what the economics of the industry are. So I think that's the single most important thing, but nothing notable to call out.

That's very helpful. And then my follow-up question, I guess, longer term in nature, but you mentioned in your script, just AI and to the extent to which AI is helping to enhance that consumer offering. And maybe if we could talk a little bit further about that. I mean as a consumer of Carvana now, where is AI helping my experience? And kind of how far along are you in this process now of integrating that technology?

I think we're pretty far along. Unfortunately, every company in the world knows they're supposed to talk about their AI strategy and every investor in the world knows that every company knows they're supposed to talk about their AI strategy. So I think what we try to do is we try to put in some anecdotes that are hopefully clear that demonstrate real capabilities. So I think there's 2 chats that we put in there that are super interesting and point to what we're capable of doing. One that we put in our shareholder letter, kind of -- it just shows a customer asking about a car and when it can be delivered and they ask for a specific color and they ask for a specific payment. And for that to be -- for this agent to be able to answer that question, it needs to be able to interact with our finance service, with our scheduling service, with our search service. It needs to be able to do a lot of things.

And then it also, interestingly, in line, we drop an image of the car that is clickable and pulls them into the VDP. It has to be able to have a designed dynamically rendered response to the customer that is sort of like a very early iteration of a dynamic UI, which I think is really interesting. So there's at least kind of 4 key capabilities there. And those capabilities exist not to serve our AI processes and capabilities, they exist to serve our entire business. The entire business is built to be automated and self-service and simple for the customer. It's just traditionally been in more of a standard UI structure that is click and scroll.

But I think as all these teams build these services and they embed all of the business logic into our systems, and then they make those systems and all that data readily accessible. It makes it very straightforward for us to build these very complex tools. I think we showed another one that's on the right of the page in the shareholder letter that is also very interesting and is interacting with very different data. And that shows a customer that is uploading their insurance document to kind of have that taken care of prior to taking delivery of their car. To do that, we have to know state-by-state rules. We have to be able to absorb the document. We have to be able to scrape down that document, convert that to data, apply that against business rules, figure out where we're in compliance and where we're not and then articulate to the customer what they need to do. And all that has to happen in an automated way.

There's a number of systems that are required to do that. So I think those 2 chats, chat is one possible interface, but they sort of reveal the brain behind the chat. And I think across the business, there's very interesting things happening everywhere. We're generally a very technology-forward company with a lot of ambitious, curious, excited people. And I think as a result, we tend to adopt technologies very quickly. I think another very different but extremely fun anecdote that is pretty recent from inside of Carvana is our team calls these ambient agents. I don't know if that language is an industry term or it's just what they call them, but I think it's descriptive.

We now have some agents that basically have triggers, so they don't require a human to pose a query. They just have triggers that can be data informed. A customer can run into a bug on a website, and it can automatically kick off an agent that then knows to go investigate that bug, try to figure out what's going on and then inform us what might be wrong. We recently had a version of that, that was triggered by one of the triggers that we set and no human kicked it off. It went and identified a bug. It suggested a solution. It wrote code. It sent it over to a person and then that person approved the code and the code was deployed. That's really like that's basically sci-fi from the perspective of 2 years ago. And I think that's also indicative of what's going on inside the company. So I think we are structured to benefit from this. And I think that we've got a lot of very high-quality people that are working very hard to make sure that we take full advantage of it. And I think that we're well on our way.

The next question comes from John Colantuoni with Jefferies.

I just wanted to start with the EV tax credits. Given your mix of EVs is greater than the industry average. Can you give us some perspective on how you see the elimination of the federal tax credits impacting demand for used cars in that space? And how you're making any necessary adjustments to minimize the impact on Carvana's growth trends? And I have a follow-up.

Sure. I think as a general matter, the expiration of those credits clearly mattered and clearly shift customer selection. I think the evidence so far is pretty clear that it's just a shift in preference of vehicles, not a change in aggregate demand, at least not one that is noticeable. So I think our system is well positioned to handle that. We've got -- our system is, for lack of a better description, sort of listening all the time to what our customers interacting with and what is that they want. And then we're making sure that we replace the cars that they want based on the actions that they're taking. And so we kind of have a system that pretty naturally adapts.

And I think that what you'd expect, we have seen, we've seen a reduction in EV purchases as a result of the expiration of that credit. And I think the system has adapted in a way that in the numbers is basically not something that you really see or need to be called out. And then I think as a general matter, I think we continue to be believers in EVs. I think all these new technologies go through their positive moments and their tougher moments. And I think it is true that EVs are a very high-quality fundamental technology that's early in their curve. And we expect over time that they will make a come back, and we'll be well positioned for it when they do.

Okay. Great. And you announced sort of a second franchise dealership acquisition last month. Can you talk about the results from your first foray into physical dealerships that made you acquire a second? I'd be curious if your findings suggest that this could be an area of investment for you in the coming years.

Yes. I appreciate the question. I think it remains early. It would be a bit premature to comment. So we're going to kind of stick to focusing on the core business and stay tuned for the future.

The next question comes from Christopher Bottiglieri with BNP Paribas.

First, I was hoping to delve into the same-day delivery test, which sounds pretty exciting. The logistics per unit went up for the first time, I think, in 10 quarters, which tells me people are using it significant. But can you just frame -- and obviously, it's going to pay for itself if there's a sales lift, but can you frame for us how performance in Phoenix is doing versus the control market that hasn't seen this type of increase or whatever you can tell us because it sounds like this might be an area you're going to invest in '26.

Sure. Well, I think, first of all, there clearly is a very clear relationship with speed and conversion, just like every other e-commerce business. I think that's something that we've seen across the business across time, and it's something that we continue to see in the business today. So I think that, that is a reason to focus on this and build this capability out. I think from a bigger picture perspective, we also just think it's tremendously differentiating and very exciting and kind of strategically important to be able to do something that other companies just simply can't do. And so we -- in my prepared remarks, I had my dramatic pause where I asked you to contemplate what it means to be able to buy thousands of cars in minutes and have them delivered in hours.

But I really do think it's useful to think about what that means and what that looks like as it feeds back over time, and we get more and more inventory pools closer to more and more customers and those inventory pools get larger and larger and customers have more selection and we automate more and more of our processes and the speed and ease gets simpler. We think that we're building a machine that is qualitatively different and structurally different than any other machine that's out there. And so there's certainly -- we would expect for there to be conversion tailwinds as we continue to work on this in Phoenix. And then once we feel like we're in a really good spot, start to roll it out to more locations. But more importantly, we think it just continues to separate us as a completely different business and a completely different offering to consumers that will enable us to have completely different kinds of results over a very long period of time.

Got you. That makes sense. And then wanted to parse the other GPU commentary out a little bit more. So it sounds like attach rate was up. You probably benefited from rate cuts because you don't perfectly hedge. There was another Fed rate cut in Q4. So that should be another tailwind that mitigates lapping that. But it sounds like you're going to reinvest that into the consumer proposition to offer lower rates to the consumer. I just wanted to, a, confirm that. And b, how do you think about beyond when there's some more rate cuts and you kind of lap this into '26? Do you feel like the rates go back up? Or how do you think about the value prop to the consumer on financing once the rates stop going down?

Sure. Yes. So I mean, I think we talked about some of the drivers of strength in other GPU. I think strong loan performance, strong performance on loan sale monetization and cost of funds. There's some positive trends we're seeing in finance attach. I do think those are driven by lower rates. We're also seeing some positive trends in ancillary product attachment rates as well. I think our viewpoint, and you'll notice we had a record in other GPU this quarter. It's our highest level ever. That's really driven by these fundamental gains that I was just pointing to. I think in Q4, our plan is to pass these fundamental gains back on to customers. So other GPU in we think we'll end up looking something much more like Q4 2024 rather than Q3 2025. And I think that's something we feel really great about. We really have driven meaningful fundamental gains in the finance and ancillary products platform, and that gives us an opportunity to pass some of those gains on to customers, for example, in the form of lower interest rates.

The next question comes from Daniela Haigian with Morgan Stanley.

So first, clearly, Carvana has built a strong digitally enabled mousetrap in the dealer business. But how do you think about competition from new entrants such as Amazon that also have warehouse and logistics capabilities? How does that feed into your, I guess, expected return on ad spend? And then also on that same line is what is the biggest gating factor in your near-term growth curve?

I think as a general matter, we try to think about making sure that we're delivering the best customer experience as we possibly can. We try to make sure that we're paying close attention to every line item in the business and doing all the hard work that's necessary at the detailed level to constantly make sure everything gets better. And we try to focus less on any given competitor. I think that served us very well over time and brought us to this place where depending on what profit metric you're looking at, we're 2 to 2.5x as profitable as the average automotive -- the other average automotive retailers. And I think that to me, that's, I think, probably like the most important single way to look at this.

I think there's a question about what new entrants can look like over time and how many there will be and what scale they will come at and what approach they will take. And those are all fair questions that we can all speculate on. But I think there are also facts that today, 98.5% of used cars and 99% of cars in some total are sold by traditional retailers that have the economics that we discussed earlier that are materially different than ours and aren't super well positioned to build a machine that looks like ours. And so I think to the extent that we just stay focused on ensuring that we've got a scalable business that's delivering great customer experiences with different economics, I think anything that is likely to come is unlikely to be powerful enough to change that 98.5% or 99% of the industry that looks the way it looks today.

And so that's where I think continually, at least from my perspective, my personal favorite metrics are how are we doing from a growth perspective relative to the industry, how are we doing in customer experience versus the industry and how are we doing in economics versus the industry? Because I just think that when you have a capital-intensive business, that requires lots of work and lots of scale to deliver good customer experiences, you're competing against the industry, and it's unlikely the entirety of the industry can move very fast in light of all that capital investment that's necessary.

You see all the things that we're having to do to move at the speed that we're moving. And I think what I would say is the simplest reduction of kind of what is the constraint. It's basically just the sum of effort across this large complex business where you're moving things and you're organizing people, and it's a lot to do. And I think that, that gates the speed at which you can run. And that's why we're doing all this work to make sure that we stay in front of ourselves. not certainly not what you asked about, but relevant, I think, in this conversation.

We talked a lot about what we're doing with ADESA and ADESA Clear and our inspection centers, and we kind of put this new concept in the shareholder letter about having retail capabilities, wholesale capabilities or retail and wholesale capabilities at all these different centers across the country. That's the kind of work that you can see in that graph, that's us doing work as fast as we can that is very complicated to be able to unlock those capabilities over time. And I think it's positioning us well for a broad future, and it's indicative of the kind of work that's necessary to scale a business like this.

Great. And I guess on that piece of your moat of what you've built out on this physical business, you also have a very low capital intensity in building this out. I think a lot of your fixed costs are already embedded. And so as you think about making progress towards that 3 million unit target in 5 to 10 years, what do plans look like to expand production capacity beyond that 3 million? And what are the capital requirements to get there?

I think our eyes are as big as anyone out there. And I think the opportunity in front of us is very, very large. And I think there's no doubt that the goal that we're chasing today that is time bound is our current goal, and we expect to have other goals beyond that. I think it's premature to talk too much about those other goals because I think that we've got several years here of hard work to make sure that we get to the $3 million and the 13.5 million. But I think there's no question that there's opportunity beyond that. And I think that you can probably look at our past when we've attacked problems in the past to get a sense of what that future could look like. But I think it's early for us to be giving specific guidance and expectations on that today.

The next question comes from Jeff Lick with Stephens.

Congrats on a great quarter, guys. In terms of the sourcing environment, I was just curious if you can comment on any evolutions of that. I know your relationships or how you're doing business with some of the commercial rental providers has changed a little bit. And then also just as you grow into sourcing 600,000, 700,000, 800,000, 900,000 units, buying from people's driveway, just any evolution there would be helpful and just the color on that.

Sure. Well, I think the most important fundamental there is what we alluded to a bit a moment ago, it's just making sure that the business is structured to be a structurally better buyer of cars so that we can be a better partner to partners out there, and we can give very exciting bids to our customers. And I think if we divide the types of cars in the world into wholesale and retail with retail being defined as a car that we're well positioned to retail, it's very obvious that we are deeply structurally advantaged in buying cars that we are well positioned to retail. I think as one of the many benefits of partnering up with ADESA is that it put us in a spot where we're also structurally advantaged to be able to buy cars that are wholesaled.

And then I think when we do the further work to unlock both wholesale and retail capabilities at the same locations, I think we become a better buyer again because not only are we well positioned to dispose of both types of cars, we're also well positioned to reduce the expenses that are traditionally inherent in the system that take the form of time and extra shipments and cost. And so I think we are doing the work today to go unlock those capabilities. In that graph, we've got 74 sites. We now have 41 that we label as wholesale only. That's the original 56 ADESA sites minus the 15 where we have added reconditioning capabilities. And so those 15 now represent both wholesale capable and retail capable sites.

We have 6 sites that are just retail. Those are the 18 inspection centers that we had prior, minus the 12 where we've added ADESA Clear, which is a digital auction capability. And then we've got 27 that are both, which is the sum of the 12 inspection centers that have ADESA Clear plus the 15 integration sites where we've added reconditioning capabilities to ADESA. So we now have 27 sites where we're well positioned to handle any type of car very efficiently, not just because we have a great wholesale distribution channel and a great retail distribution channel, but also because we can do both more efficiently.

So to me, that's the structural thing that we're doing. And I think the more progress we make there, the better position we're going to be. And then I think we continue to make progress with our partners. And I think there will probably be more to talk about there over time. But as long as we position the business for it very well, I think we continue to be in a great spot to take advantage of that.

And when you get to the retailing of 2 million to 3 million cars, do you think the proportion of where you source will change much? Or will it be pretty much the same?

I think we'll see over time. I think it's early to call a shot there. I mean I think at like the simplest, most fundamental level, most of the used car market is customers swapping cars with each other. And then they just do it through many different mechanisms. That's not strictly true because you do have off-rental cars and then you do have cars that flow out of fleets. I think you could call kind of off-lease cars, something sort of in between because it is a customer car that makes it to another customer.

But generally speaking, cars are just moving through some elaborate mechanism from one customer to another. So we think having the business of buying cars from customers is essentially important. I think there's many forms that can take over time. And then we think having a business of being able to buy cars very efficiently from business disposers of cars from fleets is also centrally important. And the machine is being constructed in a way where we feel like we're an advantaged buyer regardless of where cars are coming from. And then I think if you look at buying cars from customers, that is a slightly different offering than selling cars to customers.

But now for probably 5 or 6 years, those 2 brands have grown pretty much in lockstep, whether you're looking at the percentage of cars that we're retailing that were sourced from customers or if you're looking at our wholesale to retail ratio, they bounce around a little bit. But generally speaking, they've been pretty consistent. And I think that just speaks to, a, the fundamental that largely this market is customers swapping with each other. And so there's a similar sized market to buy cars as there is to sell cars; and b, the fact that those 2 businesses are growing at about the same rate as we continue to grow our brand in a way that benefits both sides of the business. So like I said, I think we're well positioned either way. I think it's early to call our shot. We'll hope to succeed in both areas.

The next question comes from Andrew Boone with Citizens.

Ernie, you talked about scale in the beginning of your prepared remarks. And then you mentioned automation multiple times as we've gone through this call. Can we just step back? And can you just talk about what are the biggest opportunities that you have to increase automation as you do gain scale? Like what are the key variable costs that you guys can really drive down that still remains in the model?

Sure. Well, I'll point again to the anecdote because I just think that they communicate very well. So what I would say is if we look back to that chat that we demonstrated in the -- or that we showed in the shareholder letter that shows like an insurance document and the customer interacting with that, I think that gives you a sense of the kind of thing that can be done. It's basically just expanding automation at greater depth so that the entirety of the process can happen in an instantaneous way where very clear instructions are given to the customer. They know exactly what to do, and they're able to complete a task with no latency.

I think that's been part of a progression over years as we've kind of built those capabilities. We first have to learn all the rules across different states. We have to make sure that those are written down and codified. We have to figure out what our particular rules are going to be for our business. We then have to go and find a way to get data to get uploaded into our site. And initially, that data is manually looked at and checked against business rules and the customers approve. And then you add the ability to scrape the data off of the document that's passed to us and then the tools are built to make that simpler.

And then you scrape the data and you automate the checking of that data against that business logic. And so to me, it's just that constantly deepening level of detail of automation that is very valuable. And I think that's certainly valuable to reducing costs. I think what we at least tend to think is the maybe even more exciting thing is just being able to differentiate the offering. Just making sure that customers can know exactly what to do and shop with extreme confidence and get offers that are amazing. Going back to being able to sit there in minutes, look at thousands of cars can be delivered in hours. That requires -- that's a very different kind of offering that we think is very strategically valuable, but requires a lot of things happening in the background.

So I think every part of the business, finance verifications, registration, customer care, every part of the business, continual gains in reconditioning and things that we're doing there, things in logistics across the business. I think there's opportunities to make every single workflow simpler and more automated, more repeatable and more scalable. And I think we've just been continually doing that work over and over. And hopefully, you feel like you see it showing up in the results.

If I could sneak in one more quick one. How do you think about the guardrails of expanding same-day delivery? How do you guys think about making sure that rollout is smooth? And what are the profitability metrics that you guys are involving to make sure you guys are containing what may the cost for that?

Sure. Well, I think like anything in the real world, I think the first thing you have to do is you have to kind of aim for something that's hard and then you start to see what are all the constraints in the system that are causing you to be limited in what you're able to achieve and then you have to go attack the biggest constraint and then move on to whatever the next constraint is that emerges. And I think that's why we're working really hard in Phoenix right now to attack those constraints one at a time. And I think we've seen a lot of progress there. Phoenix looks like other markets in the country just several months ago.

And now we've got 40% of customers getting same or next-day delivery compared to approximately 10% in the rest of the country. So we've obviously made rapid progress there. I think we will continue to try to progress in Phoenix. And then undoubtedly, the next step is going to be to roll that out to other inventory pools that are near large population centers, and we'll prioritize that intelligently. And then I think that's another place where you can kind of see the entire playbook. And then as we add more integration sites with ADESA, so we've got retail capabilities in more spots, then we can have inventory pools in more spots that are closer to more customers, and we can roll out that same-day delivery capability in more spots. So I think it's going to be a multifaceted, multistep approach over the next several years. But I think step 1 is proving out that we can do it at meaningful scale. I think that box is checked. Step 2 is making sure that we really nail it in Phoenix. And then step 3 will be continuing to roll it out from there.

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

There's a lot of talk out there about the K-shaped economy where you have lower income cohorts of consumers seeing relatively more pressure relative to higher income. Curious if there's anything that you've been able to see on that front, demand trends between the 2, especially since your unit guidance implies some deceleration. Is there any notable deceleration from lower income cohorts specifically?

I really don't think we have anything interesting to say there, and apologies. I think there's no question that -- there's a lot of story lines out there that point in that direction. And I think in our data, we can look at sales data or we can look at credit performance data, and we can kind of try to cut it in many different ways. I just don't think that there's interesting super validating data points that we can point to for that story. I think what we see tends to look a lot more consistent than that particular story, but we'll obviously continue to pay attention, and we'll follow the data where it goes.

Got it. And then in Phoenix specifically with same or next-day delivery, I'm curious, can you discuss kind of what you expect for GPU or EBITDA per unit or anything that you could give us kind of what that investment, if you will, looks like to deliver the cars more quickly? Or is it pretty seamless since you have that infrastructure there built out already?

Yes. I would say it's really more the latter. I think that the same-day delivery is really more about a technology investment at this stage and a process investment, making sure that it's a complex transaction. And in order to have same-day delivery, you need to nail every single aspect of a complex transaction accurately and in a short period of time. And so that's a technology focused investment. It's also -- it requires strong processes from the operators that are executing that. But that's really like the main investment. There's some incremental investment in staffing just to make sure that you have the capacity available to execute same-day delivery. And so you have a little more slack capacity there. But that's not a very large dollar amount in the grand scheme of things. The way that we're executing same-day delivery today, it's really more about a focus, a technology and process investment more so than a cost investment.

The next question comes from Michael Montani with Evercore ISI.

I joined a minute late, but I did want to ask if you discussed at all the advertising expense. It sounded like that might be expected to go up. And I just want to see is that quarter-over-quarter or on a per unit basis? Any color that you could provide on that one? And then I had a quick follow-up.

Sure. I can take that one. The outlook that we gave for advertising expenses on a dollar basis for it to be similar in Q4 to this Q3, maybe slightly higher, but similar to slightly higher. And again, where that comes from is really just continuing to invest in building our brand, building awareness, understanding and trust of our brand is one of the 3 key pillars of our long-term growth strategy.

Okay. And then just on the wholesale GPU, were you signaling that, that could step down quarter-over-quarter by about 25% to 30% the way it did last year? And if that's the case, I was just thinking there could be opportunities for improvements given some of the enhancements you've made in terms of processes. So I just wanted to make sure I had that right or if there's anything else to dig into from a depreciation perspective, et cetera, to know.

So I think we really think of sequential changes on a per unit basis, what we called out. And so I do think that there's seasonality in a multiple of the GPU line items. I think in wholesale, that takes the form of higher wholesale depreciation rates in Q4, lower auction volumes in Q4 than other times of the year. So we do typically see a seasonal pattern there. And we called out something seasonal, something similar to last year sequentially on a per unit basis.

Last question comes from Chris Pierce with Needham.

Can I just ask one big picture question. The 3 million unit goal, I guess, is that strictly around what determines when you could hit it earlier or later? Is that about adding recon scale personnel? Or is it about -- did you consider end markets or credit cycles or anything? I'd just love to know kind of big picture, how you came up with it, what drives it and what could pull it forward or push it back?

Sure. I would say at a high level, the time lines we provided there were 5 to 10 years, which correspond to 2030 to 2035. And I think the fast end of that is approximately 40% compounded growth and the slow end of that is approximately 20% compounded growth. I think as a general matter, we view that as largely driven by our ability to continue to execute is probably the biggest determinant of that. There's a lot of work that has to be done across the entire business to make sure that we're buying cars, reconditioning cars, delivering cars to customer long leg and last mile, handling customer questions and just scaling the entirety of the business. So I think there's a lot of work in there. And I think our execution is the primary driver that we think will dictate when we achieve that goal.

That's all the time we have for questions today. I would like to turn the conference back over to Ernie Garcia for any closing remarks. Please go ahead.

Great. Thanks. Well, thanks, everyone, for joining the call. Carvana team, another awesome quarter. Thank you guys so much. You really have a lot to be proud of. I hope you are proud. I hope the high fives fly, and then let's come back tomorrow and keep it going. We have a lot more work to do. So thanks to all of you.

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