Carvana Co. (CVNA) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Carvana Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead.

Thank you, Austin. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's third quarter 2018 earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. The third quarter shareholder letter is also posted on the IR website. I would like to remind everyone that we will be webcasting our first Analyst Day later this month on November 29, where we plan to discuss our long time outlook and technology foundation. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K and Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them whether as a result of new developments or otherwise. And now, with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thank you, Mike, and thanks everyone, for joining the call. The third quarter was great for us and valued for a number of important vendors. We performed well against our guidance in all respects. We executed well and released many of the operational pinch points in the business. We made significant progress on our preparation for the volume we expect heading into the seasonally stronger first half of 2019. We continue to invest in technology that we believe will further differentiate the quality experience we're able to provide to our customers. We made significant progress on our business of buying car from our customers. Most importantly from everything we saw in the quarter continued to increase our confidence in the size and economics of the long-term opportunities that stands in front of us. We are building a fundamentally better solution to car buying for our customers. These fundamentals are playing out in many specific ways and revealing many opportunities. At this point we strongly believe the biggest hurdle stands between us and achieving market that is never been seen in automotive retail before is our ability to exceed our plans. As a team we couldn't ask for more and we're motivated to make that dream reality. We had our nineteenth straight quarter of triple digit growth in units and revenue in the third quarter. To illustrate the power of that compounding growth, we delivered more cars to our customers in the third quarter alone than we did in all of 2015 and 2016 combined. During the third quarter we continued to meaningfully expand our population coverage and importantly we continued to see strong trends in market share penetration across our markets. The demand we're observing on our execution date has only resulted in even greater optimism about the future we see in front of us. And progress we've made in GPU results are very exciting and likes the path of profitability more clearly than ever before. In the third quarter our GPU surpassed the SG&A per unit of many traditional used automotive retailers. The implications there are significant and it deserves a moment of concentration. It's a powerful step and it's just one of the steps along the way. Our mid-term goal of $3,000 is clearly in sight and we're beginning to get more concrete visibility beyond 3,000. This will among the topics we will hit during our Analyst Day on the 29. We also continued our remarkable profitability on our expense line items even with our efforts to alleviate demand generated pinch points in the business and our investments in additional scalabilities to prepare for 2019. Top end of our guidance ranges in both units and revenue and also comfortably beat our GPU and EBITDA margin targets. This was driven by stronger-than-anticipated top and mid-funnel demand as well as strong execution across the business. SG&A per unit decreased by $702 year-over-year with about $230 coming from the leverage in customer acquisition cost and the remainder coming from non-advertising SG&A. This allowed us to achieve 8.3% EBITDA margin for the quarter reducing those walkers by over 750 basis points year-over-year. Given the quality of demand we're seeing from our customers, our focus on the further scalability of our business continues. We're talking many forms internally and is well underway. One visual kind of this is the acquisition of Propel AI, which we completed yesterday. Propel is an artificial intelligence powered communication platform that delivers automated conversations with customers via SMS, email and onsite chat. We expect this technology to improve our customer experiences further and make us more efficient overtime as it rolls out and is integrated into our platform. As part of this acquisition we gained a highly experienced product and technology team that we're excited about and they will be joining Carvana fulltime. One of these leaders is Tom Taira, Cofounder and Ex Chief Product Officer at TrueCar. Tom immediately earned my respect several years ago when we first met in TrueCar's office and I'm excited to finally get a chance to work with him every day. Initially he fill focus his efforts on integrating Propel and on our business of buying cars from our customers. As noted last quarter, we've been working hard to give our customers a better way to sell or trading their car. We continue to see exciting progress in the third quarter. The total number of cars we bought from our customers including both retail trading and cars bought from customers that aren't buying from us grew 273% year-over-year in the quarter. This now represents 37% of many cars we're selling to customers, up from 21% one year ago. Many of these cars are certified by inspection or reconditioning centers and are sold to our buying customers. In the third quarter 16% of the cars that we sold to customers were bought from other customers, up from11% in the second quarter and about 6% in the first quarter just few quarters ago. The remainder of these cars are sold at auction and those cars goes to our wholesale line item. This obviously very rapid car presence speaks to several underlying drivers, specifically our ability to give our customers an actionable value online in midst and then pick the car up from them on their time is resonating, our brand of attracting customers at scale that have an open mind to new offerings and trust us to deliver on those offerings. Our team is composed of high quality people who can rapidly execute when their energy is focused on a particular area and there is a lot of low hanging fruit and laid in opportunities in Carvana due to the fact that we're still less than a six year old company and have the time to focus our energy in all the important places. We believe the business of buying cars from our customers is still in the early stages with lots of growth and optimization in front of it. While our Q3 progress has raised our confidence and expectation in this area, we want to continue to manage our expectations carefully over the shorter term. We'll remain focused on optimizing our understanding of how to best run this part of the business and this maybe the variability in both growth rate and margins. But make no mistake, there's enormous opportunity and we are focused on its massive long-term potential. Looking forward we're optimistic, confident, ambitious and energized. We have a product people love. We have nearly endless ideas of how to make it better. The unit economics of the business continue to prove out. We've clear visibility in the GPU unit and SG&A gains. We'd executed for 19 straight quarters of triple digit growth and the team that delivered that growth over the last five years is motivated to keep delivering for the next five and beyond, really in light for our Q1 [ph] ambitions. We started this journey with big ambitions and again we're seeing the people we're surrounded by have only and bold enough. We will be working hard and having fun as we achieve our goals and we'll continue to keep you informed along the way. Mark?

Thank you, Ernie and thank you all for joining us today. Unless otherwise noted, all comparisons are on a year-over-year basis. We're pleased to announce another quarter of triple digit unit and revenue growth, increasing total GPU and improving EBITDA margin. Retail units sold totaled 25,324in Q3, an increase of 116%. Total revenue was 534.9 million, an increase of 137%. In September, in recognition of Carvana selling its 100,000 vehicle earlier in the year, Ernie committed to giving all employees shares of his personal stock. We provided a lot of detail on that in our shareholder letter and to ensure investors have visibility into our key metrics excluding Ernie's gift, we will refer to several non-GAAP measures prevented as ex-Gift with reconciliation and available on our materials. Unless otherwise noted, all gross profit, SG&A and EBITDA metrics mentioned by Ernie or I on this call are on an ex-Gift basis. Our guidance in past quarters is correspondent to ex-Gift results and we expect to provide guidance on ex-Gift results going forward. Because the gift is awarded after each recipients one year anniversary date, we expect it to impact our GAAP financials through the first half of 2020. Well, this means reuse of our future financial statement and shareholder letters will have to get used to some new terminology, we believe this Gift was a very positive event for our company and its shareholders and it very much reflects our commitment to one of our core values, we're all in this together. Returning to our Q3 results, total GPU including Gift was 2,263 and total GPU ex-Gift was 2,302, an increase of $560. This increase in GPU was driven by a significant reduction in average days to sale 63 days this quarter down from 97 days a year ago as well as gains in financing and ancillary product gross profit. EBITDA margin ex-Gift was negative 8.3% an improvement 760 basis points year-over-year. In addition to GPU gains, we're showing significant operating leverage, while simultaneously expanding our geographic footprint. We opened 30 new markets in Q3 and have opened four more so far this quarter, bringing our total to 82. We now expect to open 40 new markets in 2018 bringing our end of year total to 84. We also made significant progress toward increasing our inspection and reconditioning center capacity in Q3. This IRC in Indianapolis remains on track to begin producing cars around the New Year and we are currently evaluating sites for additional centers in 2019. As awareness our customer offering grows, we believe scaled nationwide reconditioning operations will be a key driver of our customer experience, while also bolstering our path to profitability. Additional IRC's allow us to improve selection for the customer, while also reducing delivery times and enhancing logistics network efficiency. On November 2, we upsized and extended our full agreement with Ally, increasing our future funding commitment to 1.6 billion. We believe this transaction gives a significant flexibility to provide customers with our seamless online financing experiencing, while also enhancing our ability monetize the finance receivables that we originate overtime. Deep knowledge and expertise of automotive financing is one of the core strengths of our company and we believe we're just scratching the surface of the financing and monetization opportunities in our business. So last call we've also completed several transactions to maximize our financial flexibility. In September, we completed an offering of senior unsecured notes generating net proceeds of 342.5 million. The notes have a two year no call period and mature in October 2023. In November we upsized our poor paying credit facility to 650 million from 350 million and extended the tem by two years. We believe these financings represent flexible and efficient sources of capital for us as we continue to execute our plan. In terms of outlook, for the fourth quarter we anticipate continued rapid growth in retail unit's revenue. We expect retail unit sold of 27,500 to 30,000, an increase of 103% to 122% and revenue of 570 million to 630 million, an increase of 115% to 138%. We're also raising the outlook for the full year to 93,858 units to 96,358 units and 1.94 billion to 2.0 billion in total revenue. We expect total GPU ex-Gift to be 2,000 to 2,250 in Q4. This reflects the normal season decline in the fourth quarter, including the anticipated impacts of our annual Cyber Monday promotion. We're also raising and narrowing our GPU ex-Gift outlook for the full year to 2,100 to 2,175 versus 1,539 in 2017. This reflects the strong performance we've seen across multiple parts of the transaction as we march toward our mid-term goal of 3,000 and beyond. We expect EBITDA margin ex-Gift to be between negative 8.5% and 10.5% in Q4, an improvement from negative 15.5% last year. This outlook reflects the impact of our recent acquisition; a higher share price on stock based compensation and increased investments in technology and logistics to prepare us for anticipated sales growth in the first half of 2019. You should use approximately 149 million weighted average shares on a fully exchange basis in Q4 and approximately 150 million in Q1 2019. As we look forward to the first half of 2019, we expect continued improvement in total GPU and EBITDA margin and we're excited about continued rapid growth and progress throughout our financial goals. Thank you for your attention. We'll now take questions.

[Operator Instructions] The first question will come from Sharon Zackfia with William Blair. Please go ahead

Hi, good afternoon. I guess just a few questions, on the acquisition of the AI business, could you kind of quantify what that meant for the fourth quarter versus your original outlook in terms of the incremental cost. And then secondarily, I'm not sure if you have another refinancing or perceivable, in the fourth quarter I thought that might be the case and I'm curious just given the other refinancing if you were able to get any kind of more advantageous terms with Ally.

Yeah, so first Sharon I'll take that, so on the Propel acquisition, we expect approximately $2 million to run through expenses in the fourth quarter related to the Propel acquisition and also speaking up to new kind of customer acquisition for a second. We're very excited about the acquisition, as we said; we've got a great team coming on board. Their technology is very, very interesting. They have the ability to parse any tax increases from customers and then translate that into enhance that - our computer can understand, I think vertical integrations makes our ability to integrate that much, much more significant. We can basically take those inquiries and put them into all the services we control around financing or trading, the process of sales, any of those different processes, we're going to be able to integrate with this technology in ways that would be very, very difficult for other companies that don't kind of own the entire stack of the customer experience to do. So we're excited, we'll to be able to integrate that not just through SMS and text, but also onsite and on our website too. We're very excited about that, as I said the team is great so we're super excited. We did a refinancing acquisition in Q3 on that, if you go through our financials, we expect to do another in Q4 which will also afford new financials. The terms with Ally, I would say to fold very similar, would be first order, how I characterize it and then I think there are some structural differences that make it a little easier for us to do more of these refinancing deals and deals that are similar to them. That should enable us to continue to improve our finance monetization over time. Although, as you said in the past we're in relatively early stages of that and that could be somewhat chunky, but we're very optimistic about where that's headed as well.

Okay, thank you.

Next question comes from Chris Bottiglieri with Wolfe Research. Please go ahead.

Hi, guys. Thanks for taking the question. Want to start on the retail GPU's, pretty strong there, you seem to attribute it a lot to the lower day sales. Just curious just given like the pretty significant increases you saw in the customer trading rate, why that didn't translate into like supporting higher retail GPU I guess is the first part of question.

Sure, so retail GPU improved by about $325 year-over-year. That corresponded to a reduction in average days to sale from 97 last year to 63 days this year, which was really far and away the biggest driver of that $325 incremental improvement. I think there were various puts and takes in retail's GPU as well, and you think we saw a benefit from buying more cars to customers. We so make probably more on cars that we source directly from consumers than cars that we source from auction in our retail business. We also though in the quarter stock - especially, higher retail cogs as we took over two inspection centers in their entirety early in Q3 and then also ramping up production looking toward the first half of 2019.

Yeah and I'm going to jump into that really quick because I think it's good opportunity to talk a little bit how we're thinking about the business of buying cars from our customer and how that's likely to focus our financing in the future. So as I said in my prepared remarks, that grows in two ways. One, cars we buy from our customers and then sell at auction. That's up in wholesale GPU and cars as you pointed out, cars we buy from our customers and sell to other customers, we've a few retail GPU innovated, but isn't really separately visible to you. But the reason - we're very optimistic about this business, but the reason we want to manage your expectations in the near term that how that's going to pull through our financials. If you look at our wholesale GPU per unit for example this quarter this quarter, it's up $355. If that number moves by $100, then you need to increase units by 30% just to offset it, right. So there's still kind of a fair amount of sensitivity there, given the size of those margins and so we don't want to get into a place where there's an expectation that every single quarter were its going to be kind of wraps into quarter-after-quarter. It may play out that way and it may not and we want the freedom to be able to price the appropriate ways and learn to from all those different pricing experiments et cetera. So I just want to make sure we're kind of carefully managing that, but the opportunity is big and the progress was significant.

Okay that makes sense. Then from a blue sky perspective, if you think about getting your DSI's down to 30 days over a certain definite period and getting your sourcing rate up another call it 30 points and hold your value discount, what does that retail GPU look like majorities where that contextualize that?

I would just continue to point to the framework we've given the past, which is every day, although we've reduced - say the sale is worth approximately $10 of GPU all of constant. That has some kind of seasonal fluctuation going up a roughly speaking across the year that's the right number. I think our 3000 in mid-term GPU goal has always kind of had a repeat and apply turns on both 30 to 60 days. We're making a lot of progress against that and feel really, really positive about it. I think as we continue to grow across the country and build up more inspection centers and we have shorter inbound transit distances to both inspection centers which goes into our days to sale, I think there's a lot of opportunity to improve there. I think the Ozzie and Harriet improvement just as we continue to grow sales again a fixed inventory, we can push down website days and then kind of the other bucket is basically days at the inspection center where there are probably some gains as well. So from a blue sky prospective, I think there's definitely upside potential, but I think we remain focused on kind of mid-term goal and we think 30 to 60 days is a good place for us to be in for now.

I got you. Very thorough, thank you

And the next question will come from Zach Fadem with Wells Fargo. Please go ahead.

Hi, guys. On the unit growth guidance, could you talk a little bit about some of the Q4 dynamics around seasonality in promo and specifically do you expect the unit trends to be consistent throughout the quarter or are you anticipating an uptick holiday in November and December.

Yeah, so I would say, our guidance reflects our expectations. We'd be kind of the highest order response to that question. I think if you're asking us to contextualize it versus last year. Last year was a strange year, we had hurricane replacement, we were moving trucks around the country to try alleviate that. We had some noise around our Cyber Monday promotion. We expect to do the Cyber Monday promotion again this year. So I don't want to get into kind of inter-quarter guidance, but you could see what our overall expectations are.

Got it, that makes sense. And with the INDY IRC coming on in the end of the year, what should we keep in mind for modeling purposes as those new costs are layered and how should we think about the impact to volumes in days to sale as the facilities up fully and running.

Yeah, sure, so in terms of our days to sale, I don't think you should think of it as making kind of a meaningful difference. I think you know we have a global inventory and I mean nationwide where all of our customers are drawing on all of our IRC's. So I think in terms of moving on average days to sale. I don't think there's much to - much to expect there. In terms of impact on sort of retail cogs, I think there could be a small impact there as we get things up and running and are a little bit less effect early on including we often start New IRC's with a little more outsourced kind of local services that we then in source over time and so that could be a small headwind as we're getting up and running, but I wouldn't think - think of that as being particularly large given that we've got five IRC's up and up and going now.

Yes and I would add, in kind of more medium term perspective, I think as that inspector center gets up and running that means we have more cars located closer to all of our customer in the country which just means that you were able to deliver cars faster to customers which has conversion rate impacts and you'd have to travel lower amounts of miles, which means that we have lower cost, so I think that's a - it's an exciting development for sure through the medium term and in the short term the ability to ramp up process with it.

Got it, that makes sense. I appreciate the time guys.

Thank you.

And our next question comes from Mark May with Citi. Please go ahead.

Hey, guys this is Nick on for Mark. Just two questions, the first on retail ASP, I know that's has kind of been creeping up year-on-year, can you give an update on where you are compared to Kelley Blue Book there. And then the second question is on population coverage, you've called out around 200 markets of 200,000 people or more. Kind of my quick math show that's about 78% population coverage is that kind of a long-term bogey and - but we expect you guys to kind of aggressively go after getting that coverage or - will you reassess at the end of this year at about 57% which is about three quarters of the way there.

Sure. Yeah, so our changes in ASP year-over-year are almost entirely mixed, we talked a little bit about this in Q2. We're going from Q1 to Q2, we saw a meaningful increase in ASP due to mix and we typically see an increase quarter-over-quarter going from Q1 to Q2 as newer cars and lower mileage cares sort of circuiting the used market. That is more or less maintained in Q3 and I think ASP was down 200 bucks quarter -to-quarter as we started to normalize our mix it, but - and we didn't expect further normalization in mix overtime. But I think the ASP - by far the largest driver of our ASP is mix and that in turn is driven in large part by what's happening in the market and also what our customers are demanding on the site.

Yeah, let me just comment on your population coverage question. I think your math is right, we take the 200 largest DMAs and add them up, 70% population coverage is approximately, right. I think it's important to also note that in general we have a delivery radiuses around each of our markets that are involved in the kind of the lines drawn around the DNA, so with that number of markets we will be able to cover more of the population in that, but I think that's a good framework to be starting with and that's probably a topic we'll touch on at the Analyst Day on 29 as well.

Okay, thanks for taking the questions.

Thank you, Nick.

And our next question comes from James Albertine with Consumer Edge. Please go ahead.

Great, thanks and good afternoon, thanks for taking the question. I wanted to ask with your new IRC up and running, can you give any or can you help us to alienate kind of what your aggregate capacity is in terms of processing vehicles in a - right now you're going to be building out over time and there's some - there's a slope to that curve, but if you were to sort of put everything in through your facilities today, how much could you handle with that new IRC up and running.

Sure. So that the NCIRC similarly sized to our previous four IRC's, which means it has about 50,000 units of annual production capacity at full utilization and so combining that with the four that we are already operating from that's 250,000 units of total annual capacity at full utilization.

Understood and I think related to that as we've seen you grow out across the top DMA's across the country, SG&A is still somewhat higher I think than we had modeled in terms of the linearity of the quarter. Nevertheless, you're showing good leverage. I'm just wondering how quickly can that start to step down and what is the right - I'm not sure we've ever shared this publicly, but what's the right long-term SG&A the units metric that we should be thinking about from a modeling perspective.

Yes, I would think we were pleased with our growth. We're definitely showing a lot of leverage. We expect to continue to show a lot of leverage and we're obviously investing in getting prepared for next year and kind of all the growth beyond that from a technology perspective, from an IRC, from a logistics perspective, so there is investment in that business we'll continue to make because we've got a much longer term game that we'll be able to plan here. So I think you'll continue to see investments. We haven't given a specific SG&A target as a percentage of revenue, but I think that's also something that we will likely discuss to some degree at Analyst Day. And then kind of on the other side of the economic summit on the gross profit side, I would just say that a lot of progress when $3,000 mid-term goal, we're very proud of that progress and our expectations have only gotten stronger there in terms of what we think we'll be able to ultimately achieve, so we're excited about that as well.

Understood, thanks again and congratulations on the progress.

Thank you.

And our next question comes from Sameet Sinha with B. Riley. Please go ahead.

Yes, thank you. A couple of questions, first, considering that demand for used cars seems to be unseasonably strong as per industry data, it seems like you're still planning to have that Cyber Monday sale. What's the value of having that considering that at one - on one hand you're stockpiling for a strong - seasonally strong period just two to three months away, seems kind of confident do a do or maybe the strategy is to kind of sell - this the way you get to sell some of those slow moving vehicles. And second question is Mark, probably this is for you CapEx given slightly below expectations, has there been some sort of a push out or some sort of increased efficiency there?

So I'll start Cyber Monday and Mark you can comment on CapEx. So I think your framework on Cyber Monday I think is right, if we're optimizing for now or the next six to 12 months. We're heading into - towards '19 expecting to see lots of growth there. We want to have cars spread over for our customers there. We want to make sure that we are smart about managing our GPU work, so I think [indiscernible] term that's right. I think the value that we find in Cyber Monday is that it's kind of the onetime per year where we can do a promotion that cements our brand. I think in general we like to be very careful about promotions because we think that promotions have been heavily associated over time in consumers' minds with less than transparent and simple transactions and so we stay away from that outside of this one event where we feel we're able to really kind of bang the drum that we're an online automotive retailer and we're able to tell our story through this promotion. And so I would think of it as a brand building effort and accordingly we're going to - we're going to continue to do it. That's something is playing out of a longer period of time in the next couple quarters.

On CapEx our expectations for CapEx have not changed. I think there can be some fluctuations quarter-to-quarter. For example, in Q2 we had a large outlay for the initial purchase of our INDY IRC and so - things like that can cause some fluctuations, but overall our expectations for CapEx has not changed.

If I can sneak in one question, so in the shareholder level, you're indicating you're staying close to existing markets as you open the new markets of staying close to the footprint, is that a strategy that you plan to adopt even if you continue to head towards that kind of 200 market target?

So I think as we continue to launch markets, I think it will be a mix of network expansion markets and network density markets. I think we have largely expanded coast-to-coast now and so there are still a few large network expansion markets left. But as we look forward after a couple of major network expansion markets there will be a lot of network density markets as we're marching toward continued market openings overtime.

Great, thank you.

And our next question comes from Collin Sebastian with Robert W. Baird. Please go ahead.

Hi, it's Ben on for Colin. First, I know you guys have provided average penetration rates across the markets before. Is there any update to provide there or would it be accurate to say that the markets that you have rolled out in 2018 are performing better at the same vintage - at the same stage of markets rolled out in 2017. And then I'll follow up after that.

Yeah, we just sourced by that data after the fourth quarter and we haven't filed in between, but what we said in prepared remarks that we've shareholder letters, we continue to see consistent uptick and consistent patterns in the way those curves are unfolding. One of those patterns we called out in the past that newer markets are generally ramping faster than older markets and nothing significantly different there.

Go it and then secondly on GPU, you guys have been commenting that the high end of that range over the couple of quarter and then on the last call you mentioned some potential GPU headwinds from the scaling of the Dallas and Philadelphia facilities. Should we expect that to be more a fourth quarter impact or is that kind of lumped in with the Indy scaling as well?

I think the way we talked about that in last call and are still thinking about it is that's going to be a back half impact to a degree as we move into those two facilities as we start getting it up and running as we discussed. There are some potential headwind there on retails GPU that are built into our guidance, but overall we're feeling very good about the way we're scaling these IRC's, we're looking toward the first half of '19 making sure we're prepared to ramp up production and increase selection and be where we need to be there.

Got it. Thanks guys.

[Operator Instructions] Our next question comes from that Nat Schindler with Bank of America Merrill Lynch. Please go ahead.

Yeah. Hi, guys. Thanks for taking my question. Can you help me out on what's the average Fico score of your buyers that are using financing on your site and how has that trended since you - as you've doubled since IPO or actually call it massively more than doubled. Also can you - it doesn't look like Ally is now taking all of your loans based on my calculations. Are you selling to others now as well and if so who and what type of loan - of longer you're selling to other people than Ally.

Yeah. So first of all Fico question out there. Our Fico continues to look a lot like the broader used car market. So if you look at other leading retailers or just kind of used car sales in general, we've got a very similar Fico distribution to any of those retailers and that's been very stable across time, nothing to call out there. Ally is buying is buying many of our loans and then they're also providing financing to other buyers that we've been able to refinance and refinancing transaction. I would say it is in concept somewhat similar to the registration markets kind of works and we'll probably continue to develop more of the financial buyers over time and those are some of the structural changes that we're talking about that we believe will be back with you over the next several quarters we continue to bring more people in, but Ally remains our biggest partner by a long way.

Great, thank you

Thank you.

And the next question comes from Gary Prestopino with Barrington Research. Please go ahead.

Hi, good evening. Hey, could you maybe just talk a little bit about the profile of the car that you're retailing from consumers. I mean, they tend to be older cars, something like that and mileage things like that.

In terms of cars that we're acquiring from customers that we then retail.

Right, yes.

Yeah, so on average they do tend to be a little bit over and a little bit higher mileage. Then cars that we source through our main auction channel. And I think that's fairly - our understanding at least is that's fairly typical in the industry.

Yeah and that's –what I would think just add to that I think one of the resource kind opportunity it's obviously an enormous GPU opportunity, it's another way for us to touch more of our customers and give them a great experience, but also it's a way for us to get access to fairly weak inventory on that car, so for example on average these cars are we buy from customers do sell faster on our sight in total than auction because they are more unique relative to the rest of our inventory and so we think that's another kind of hidden benefit of growth in this business.

Okay. Thank you.

And last question today comes from Ron Josey with JMP Securities. Please go ahead.

Great, thanks for taking the question. I just had to real quick and last quarter Ernie, we talked a lot about automating a lot of what are still very manual processes and that's understandable given the relatively early days of the business, but just wanted to understand if you could talk a little more about where you are in the automation? I'm sure it's still early days, but trying to understand through the progress here, maybe you can give us hitting or something and then and apologize if you talked about this already, but can you just give us some more content on the Propel internet campaign that you're doing I think that's really interesting. Thank you.

Sure. That's a hard question, very early I would say. I think as we about the past our kind of framework for prioritization has always been customer experience first and then our financial goals, one unit to GPU and then three kind of operating leverage which I think the unique part of operating leverage is basically operating expenses. So I think that has always been kind of our lowest priority area of investment and so it has not gotten as much attention as many other parts of business. We started to invest more there over the last several quarters and I think that the motivation there is partially financial. I think more than that it's more about just getting the business to be more scalable than it is as we look at kind of big growth in units and percentage terms in absolute terms looking forward. So I don't want to quantify what inning it is, but I would say very early and I would also say Propel is a very interesting technology solutions that is going to help us to organize a lot of our data and present it to customers in ways that are more self-service and also in ways that helps automate things that we're doing on our onsite, so I think that fits into that general theme. I would break the internet we're very excited about that collaboration obviously Disney's enormous company that we could be more excited to be associated with and the movie itself is great my kids are excited about it, so I can't wait to watching with them and have a roguish show up in there because that's really fun. We also think this is potentially a broader movement that need to be kind of fanatic not just for us but marketing in general where there's a more and more marketing built into content that people want to watch and so this is our first foray into that that we're doing in a pretty big way and we're very excited about it we have no idea whatsoever what to expect. We'll be watching it closely and hopefully something we do again in future.

Got it, thank you.

Thank you.

And we do actually have one final question today from Seth Basham - Wedbush Securities. Please go ahead.

Thanks a lot and good afternoon. My question is around the costs if you could elaborate for us your implied EB ITDA guidance for 2018 went from a negative $152 million to negative $89 million at the midpoint with GPU's not changing much. I presume that the biggest issue here is cost; you call the $2 million extra cost for your acquisition in the fourth quarter, what is the other - what are the other large cost buckets driving that decline in EBITDA guidance?

Sure, Seth. I think there's a number of things to call out there. So I think at the midpoint of our current EBITDA guidance versus our previous EBITDA a range was about $10 million difference that we're building in versus that previous range. That basically boils down to a handful of things and so Ernie mentioned $2 million for Propel, we also had about $2 million in increased stock based compensation expense from the run up and stock price, we had about $2 million versus kind of previous expectations on network expense and also engineering and technology hiring and then another $2 million that was a smattering of other things. And so I think those were the major things to call out since our last call. And I think obviously we feel like all those things are obviously intelligent things to be doing looking forward looking toward 2900. I think we're feeling really good overall about all the progress we've made this year obviously levering SG&A and I think at the midpoint of our EBITDA guidance for the year about 740 basis points of EBITDA improvement year-over-year from '17 to '18 that's actually higher than the amount of improvement we had going from 2016 to 2017 and we feel great about continued margin improvement. And I think as we're looking to 2019 we see EBITDA losses declining meaningfully looking to next year and so I think we're feeling really great about the progress we're making while doubling markets, investing in technology for the long-term and still showing substantial leverage while doing all of that.

I'll add to that, I think it's useful context if you look back to last three years. We've only levered from Q3 to Q4 in one year and that was last year, your previous two years we de-levered because all of these seasonal factors and higher depreciation rates in GPU, we have the Cyber Monday promotion. Generally speaking across the industry, it's a little bit of a softer period and we're generally investing in preparation for all the sales that we see coming in the first half of next year. We in our previous guidance had implied that we would lever again this year and we want to make sure that we did that while preparing for next year. I think as we headed through the quarter and we made this acquisition and then we saw some weird course happen with the stock based compensation that impacted that a little bit and then we have to make choices about how to scale and how to prepare for scale going into next year and we felt like a handful of millions of dollars was not a difficult decision there given we expect to next year so that's what drove that vision and the change in guide.

Got it, helpful context and then my follow up is on other GPU this quarter, extra $158 per unit that you earned from the $4 million refinancing fee other GPU was flat with the second quarter and also more limited gains year-over-year than the second quarter as well. What's going on there any change in the financing penetration rate or other factors impacting that other GPU this quarter?

Yeah, I think the other GPU you said was roughly flat sequentially after kind of adjusting for the finance modernization fee and there's some small puts and takes there, interest rates continue to rise which has a little bit of an impact on finance premium and then we've made some gains actually in attachment of vehicle service contracts or some of the initiatives that we've undertaken started to see some of those gains in the third quarter. And I believe that will be a positive force going forward.

And Seth, I'm going to jump on top again, I apologize. The last point that I do think is important to make here is, I said in my prepared remarks, but I want to make sure that it's heard. I think our GPU this quarter being above the SG&A of many scales used automotive retailers is a really interesting data point. I think that that carries a lot of implications and we still obviously believe there's lots of upside to our current GPU and we believe that our cost structure is going to be meaningfully lower over the long run than other traditional automotive retailers. So we think that's a great thing and we are on that path and we're going to staff we can to get volumes for different line items.

I appreciate, thank you very much.

And this will conclude our question-and-answer session. I would like to turn the conference back to management for any closing remarks.

Thank you very much. Thanks everyone at team Carvana, great quarter. We still have a lot of work in front of us. We a probably did a great job this last quarter and then team investors and analysts we look forward to speaking to you at Analyst Day. It should be a fun day. Thank you very much.

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