Carvana Co. (CVNA) Earnings Call Transcript & Summary

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.