Carvana Co

NYSE:CVNA

Earnings Call Transcript 2019-Q2

[Operator]

Good day and welcome to the Carvana’s Second Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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.

[Mike Levin, VP, IR]

Thank you, Sean. Good afternoon, ladies and gentlemen. And thank you for joining us on Carvana's second quarter 2019 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 second quarter shareholder letter is also posted on the IR website.

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

Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal Securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the risk factor 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.

Our commentary today will include non-GAAP financial measures, including but not limited to ex-Gift measures that exclude the impact of the 100,000 milestone gift to our employees. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, the copy of which can be found on our Investor Relations website.

Please note that all gross profit SG&A and EBITDA metrics mentioned by us on the call are on an ex-Gift basis.

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

[Ernie Garcia, CEO]

Thanks Mike, and thanks everyone for joining the call. Q2 was a pretty remarkable quarter for us. We continued making significant progress across the business and achieving our mission of changing the way people buy cars. Notably, the quarter included a very important and very visible milestone of crossing our midterm goal of $3,000 GPU.

Let's start by putting that in context. In 2016, our fourth year in business and only three years ago, we achieve total GPU of $1,023. On our first public conference call in June 2017, we outlined our path, with $3,000 of midterm target. We knew the business, we knew we had to do to generate those kinds of unit economics and we had a plan. But admittedly, that goal seemed a long way off too many.

We sit here just two years later, and couldn't be prouder to report $3,175 total GPU. So how did we get here, the first step was a simple one to plan and a hard one to execute. We build a customer centric company that has the technology, operations and culture to deliver incredible customer experiences. We have organized around this goal. Customer centricity getting the compelling storyline for us, is who we are and what we are built to be.

Secondly, we think long-term, we don't let expediency and ease push us into mediocrity. We are building the best solutions we can for our customers, and we aren't afraid to make the investments in those solutions require. The more we learn, the more we appreciate just how important and just how big of a differentiator this is.

Thirdly, we are thoughtfully designed the company to ensure great unit economics are possible. Through vertical integration of deleveraging technology, we're taking traditionally high variable costs and lowering and fixing them.

Next, we prioritize our goals carefully through our lens of customer centricity and long-term thinking. And finally, and very importantly, we've executed. That path has led us to where we sit today. So what's next, what's the next goal we’ll be focusing on. From here, our focus will be squarely aimed at achieving our goals and delivering 2 million plus cars per year and hitting our long-term financial model.

When we arrived with these goals through the same careful bottoms up analysis that led to our $3,000 midterm GPU goal. And we believe these goals are similarly achievable with similar risk, namely execution risk. If we continue to execute the way we have our future is extremely bright. I believe we will continue to execute. The primary reason for this that we have assembled a team that relentlessly strives to be a little bit better every day. We keep our eyes on tomorrow with the same scrappy tenacity we did at the very beginning, and have every intention of continuing to do so. Seeing the quality of people we have across functions and physical locations, what drives my confidence.

Mark way more on units revenue, GPU and EBITDA margin, all of which were exceptional this quarter. But I would like to quickly call out one highlight. For the first time in our history we had decreasing year-over-year EBITDA dollar losses. We did this while simultaneously posting 95% unit growth 108% revenue growth, a 134% growth in our total number of customers serve and 188% growth in buying cars from our customers. It isn't easy to do and it isn't something that seen very often.

We did all these while also accelerating our investments in our future through all the channels you'd expect. This powers the most exciting product pipeline we've ever had. All the product we've been building has been carefully considered and thoughtfully designed by passionate capable people. We don't yet what will become of all the improvements we are building today, but we are excited by the prospects. And we do know that many of the products we have built over the last several years are starting to pay significant visible dividends now.

One of the most recent examples of this is buying cars from our customers. In early 2018, we began discussing the investments we were making in this area. Since Q1 2018, we've made steady progress toward growing total units per smart customers from about 4,500 in that quarter to about 22,800 in Q2. During that time, we've moved from buying 24% as many cars from customers as we were selling to them to 52% in Q2. That is pretty significant progress happening over just five quarters. And it means that we are now buying as many cars from our customers, as we were selling just one year ago.

The contribution of these efforts to our total GPU has been significant as well and played a major part in hitting our midterm target this quarter.

Just like on the retail side of the business, the root of this growth lies in a clean, simple experience for our customers. And just like in the retail business, we believe this is a powerful and fundamental room. We continue to believe this scenario, we're just beginning to really tap into and understand, knowing exactly what we’ll end up here and exactly when we will get there as difficult at this stage. But there's no doubt we have a lot of momentum and there's a lot of unrealized potential.

I’ll close the same way, I open it. This is a pretty exceptional quarter across the business. Well, these results are extremely exciting what we believe is more exciting is zooming out and looking at all the progress that is happening on a larger time scale.

First of all, we are just a six year old company. It's worth pausing and thinking about all the implications of that much progress that quickly.

Over several year period used have grown exponentially and GPU and EBITDA margin have both improved linearly. What drives these results are incredible people delivering incredible experiences with a focus on the long-term. While the consistency of the results suggests is that is still very early days building into a very large opportunity. We are a team of builders and are excited by what we see in front of us, we’ll keep building, experimenting and learning and we'll keep you informed along the way. Mark?

[Mark Jenkins, CFO]

Thank you, Ernie and thank you all for joining us today. Unless otherwise noted, all comparisons on a year-over-year basis. We are pleased to report another quarter of exceptional growth in both retail units and revenue. Retail units totaled 44,000 in Q2, an increase of 95%. Total revenue was $986.2 million, an increase of 108%. This marks our 22nd consecutive quarter of triple digit revenue growth.

Total gross profit per unit exceeded our midterm goal at $31.75 [ph] in Q2, an increase of $1002. The second quarter continued our theme, of broad based GPU growth, with record GPU across all parts of the transaction.

Retail GPU increased by $302, reflecting gains and acquiring cars from customers, incremental shipping revenue and lower average days of sale. Wholesale GPU increased by $88, driven by 194% growth in wholesale units and a record gross profit for wholesale units of $660.

Finally, other GPU increased by $613, reflecting gains in finance monetization and increased attachment of ancillary products.

Our gains in GPU this quarter were bolstered by significant growth in buying cars from customers. To support this growth, we are making investments in advertising, technology and operations, relates to this offering. These investments are already paying dividends in the form of meaningful contributions to revenue and total GPU. Even more importantly, we believe buying cars from customers is a significant fundamental step toward achieving our long-term goals.

EBITDA margin was negative 3.3% in Q2, an improvement of approximately 5.5 percentage points, reflecting gains in total GPU and SG&A. Our 3000 GPU milestone and records EBITDA margin make this is a good time to look back at what we've accomplished over the past three years.

In 2016, the year before we went public, we had an EBITDA margin of negative 23.2%. This quarter, it was negative 3.3%. Over that time period, we improve EBITDA margin by nearly 20 percentage points, including nearly 9 percentage point improvement in gross margin and a more than 11 percentage point improvement in SG&A. We're proud of the progress that we've made and are excited about what this progress means for our goal of becoming the largest and most profitable auto retailer.

We ended the quarter with more than $750 million in committed liquidity resources and held an incremental $80 million in real estate and securities on our balance sheet, giving us substantial flexibility to execute our plan.

We opened 28 markets in Q2, bringing our current total to 137, up from 85 at year-end. We continue to expect to open 55 to 60 markets in 2019 bringing our year-end total to 140 to 145. After a record first half of market openings in the back half of the year, we plan to turn a focus to preparing for growth in the first half of 2020, and providing more cars from customers.

In Q2, we began production at our seventh inspection and reconditioning center in Nashville Tennessee, raising our production capacity to approximately 350,000 vehicles per year at full utilization. We continue to view inspection and reconditioning centers as a long-term competitive advantage as we further expand, are as soon as next day delivery infrastructure.

Q2 marked the most successful quarter to-date for our finance platform. On June 27, we closed our second auto loan securitization, further expanding and diversifying our investor base. Finance GPU was a record $1100 in Q2, an increase of $526. This benefited from a $100 to $150 impact from a decline in benchmark interest rate during the quarter, but was our highest ever by significant margins both with and without this effect. We're excited about what this means for our finance platform and expect to recognize additional gains over time.

In terms of outlook, we are raising our full year guidance to retail units sold to 167,500 to 172,500 and total revenue to $3.6 billion to $3.7 billion. We are also raising our guidance for total GPU and reiterating our guidance for EBITDA margin based on our strong results in the first half and our view of the many exciting opportunities ahead.

We expect approximately 155 million weighted average shares on a fully exchange basis in Q3. As we look forward to the remainder of 2019 we are excited about our progress toward our long-term financial goals.

Thanks for your attention and we’ll now take questions.

[Operator]

Thank you [Operator Instructions]. Our first question today will come from Sharon Zackfia, with William Blair. Please go ahead.

[Sharon Zackfia, William Blair]

Hi, good afternoon, and congratulations. That was a really big ramp-up and profitability really quickly.

[Ernie Garcia, CEO]

Thank you.

[Sharon Zackfia, William Blair]

I guess, question sequentially, though. So if I'm doing the math, right, I think the all-in GPU will decelerated by maybe $300 or $350 in the back half at the higher end of your EBITDA, or by your GPU guidance. In addition to the finance, I guess you were indicating, like a $100 to $150 may not be sustainable. Where's that other kind of a couple hundred bucks coming from sequentially in the back half, meaning decelerated [ph].

[Mark Jenkins, CFO]

Yeah, sure. So I think there's a couple of things that we’re take into consideration in our GPU guidance. And obviously, we're very excited about where we came out in the quarter and very excited about where we expect to come out for the year.

The two things that we're taking into consideration, are one, seasonally, the used car market is typically weaker in the back half than the front half of the year. And that relates to typically depreciation rates in the used vehicle market tend to be higher in the back half than in the first half. And so we're taking that into consideration.

Moreover, we typically in Q4 have historically done a Cyber Monday promotion, which has an impact on retail GPU other things equal. And so I think that's the first point. The second point you alluded to which is we think we benefitted this quarter to the tune of approximately $100, $150 in finance GPU due to a quick decline in benchmark interest rates within the quarter. So those would be two things I point to, of course, we're obviously very excited with our GPU progress. Breaking through the 3,000 midterm goal, was a very exciting milestone this quarter, I think increasing our guidance by $200 on both ends for the year relative to where we expect it to be at the beginning of the year. I think it's very excited.

I think we're looking at our third consecutive year of more than $500 year-over-year GPU growth, as a public company. And so I think all of those trends are leaving us feeling very good right now.

[Ernie Garcia, CEO]

Yes, sure. This is Ernie. I would add, as I think we improved by over $1,000 year-over-year, this quarter, that's pretty incredible growth and it was driven by as Mark said, significant progress across all the different elements of GPU. I do think when you look in our comp through the rest of the year, last year in Q3 and Q4, we made some pretty significant positive moves as well. And so it's important to get into account, but the moves we see from here are normal seasonal with the exception of that $100 to $150 delta because of interest rates.

[Sharon Zackfia, William Blair]

I think and secondarily, just to follow-up. Ernie, last year, you had talked quite a bit about roadblocks that you had to overcome in growth, I think a lot on the logistic side to fulfill customer demand. I mean, where are you on kind of roadblocks at this point? I mean if you had to pinpoint where there are obstacles to growth, I'd just be curious on what those are?

[Ernie Garcia, CEO]

Sure. So I think the way the term we last used was pinch points, I think what we mean by that is basically throughout the business, there's a bunch of different operational areas that we need to make sure that we're tied-on and executing well, in order to deliver the best possible customer experience. And so the best customer experience is they go to our website, and they find the car they're looking for. If we're selling a lot more cars than we expected, sometimes our inventory can get lighter, and that can reduce sales versus what they otherwise might have been.

We need to have logistics network that's functioning well, I mean it's able to deliver cars quickly to customers everywhere. If there are parts of logistics network that are a little bit tight, we may have delivery times that are a little longer than they otherwise would be. And so that can reduce conversion. If we're getting a lot of calls into abdicates, was questions about how the process works, or wanting to sell a car to us. And we're not able to handle all that volume back and lean to reductions in volume.

So there's a lot of places where that can show up, that really exists on a continuum, it's not really a binary that exists anywhere. And I think today we're in a pretty good spot. I do think that the 188% growth in buying cars from our customers has been faster than we anticipated. And so there are a couple of areas in the business where we're probably not running quite as tightly as we wish, but I think that's coming from a really great place and I think in general we're in a good spot.

[Sharon Zackfia, William Blair]

Thank you.

[Operator]

Our next question will come from Zack Fadem with Wells Fargo. Please go ahead.

[Zack Fadem, Wells Fargo]

Hey, guys, congrats on the progress. First question on the guidance, you took unit sales and GPU all up for the full year. Curious if you could differentiate which areas of the increases are driven by flowing through the outperformance in the quarter. And what part of the new outlook is driven by changes on your view on the back half of the year?

[Ernie Garcia, CEO]

Sure. So I think across the board, we saw a lot of progress in the first half in general and then specifically in Q2, that we’re very excited about, so, we’ve raised units in Q1, and we're raising it again now, you're passing to a big raise in GPU, and then we're holding EBITDA margin. Everything across the board, that's really good to us. But I think it's important to walk through kind of the differentiators there.

In units, we're seeing great volume across the board, across cohorts, across markets, it looks really strong. And so we're very excited about that we're able to pass that through.

In GPU, I think there's several contributors, one that is definitely worth calling out is buying cars from our customers. We posted a large number of wholesale GPU contribution there, it was about $160, give or take.

And then the other place that buying cars from customers flows through to GPU is when we buy cars from customers and then sell those cars retail, that can't be separately broken out in our financials, but it's also a big contributor of somewhat similar size. And so a big part of the beat in the quarter and a beat that we anticipate for the remainder of the year is coming from that business of buying cars from customers. That business is growing at a 188%. And it also involves some investment that we're accelerating now, given the strength that we're seeing there.

So, on the order of our fit give or take of our marketing budget, is now going toward the business of buying cars from customers. There are also technology investments, and then operational investment and costs to running that business. And so it's clearly contributing a lot of GPU. It also has expenses associated with it. And that's why you're seeing the big GPU raise without an equivalent push through on EBITDA, and overall we view that as extremely positive.

[Zack Fadem, Wells Fargo]

Got it, that's really helpful. And then bigger picture question, you plan to end the year at 67% population coverage, basically where we are today. Curious if you could talk through, what's holding you back from accelerating to that 80%, 90% level and maybe talk about game plan for bridging the gap and the regions like the Pacific Northwest where you maybe under index?

[Ernie Garcia, CEO]

Yeah, so I think everything that we continue to see there's really strong both in terms of the way that those markets are responding that we're opening up and the ease with which and speed with which we're able to open those markets. So we opened over 50 markets in the first half. And those markets are fastest ramping markets that we've ever had in the company's life. So we're very excited by that.

As we look forward through the first half of next year, we do expect to see significant volume increases in 2020. And with all the progress that we're seeing in our business of buying cars from customers, we want to make sure that we're thoughtful and we don't put ourselves in a spot where we are really constrained on the operation side. And so we're putting more of our focus today on preparing for that growth, and preparing for all the growth and buying cars from customers.

And then we anticipate rapidly opening markets again thereafter. I think, given what we've seen over the last year is anything that gotten bigger for the percentage of population we can ultimately serve and maybe even the speed of which we can serve it. But for now we're going to slow down a bit and make sure we stay focused on ops, so we don't get over steep too far.

[Zack Fadem, Wells Fargo]

Got it, makes sense to me. Appreciate the time. 6

[Ernie Garcia, CEO]

Thank you.

[Operator]

Our next question will come from Chris Bottiglieri, with Wolfe Research. Please go ahead.

[Chris Bottiglieri, Wolfe Research]

Hey, guys, thanks for taking the question. Two part question, one on financing. So, really impressive growth. Curious, though, why you want to -- why you expect to give back $100 to $150, when I look at the interest rate curves, all I see is like a pretty steep, slope and down curve. If rates stay where they are today, we can either rate cut even, would you expect to still give back that $100 to $150? Or is the message is, that you're passing it back to the customer APRs getting lower? Like how do you balance that?

[Mark Jenkins, CFO]

That's exactly right. I think you hit the answer during your question at the end. So where we to hold rates flat, move down and benchmark rates would cause that $100 to $150 to be processed. But the reason we have called it out as being transitory as we've passed a lot of that rate decline along to customers.

[Chris Bottiglieri, Wolfe Research]

Got you. Okay. And then big picture question, last year for the debt holders, you gave them this pretty impressive chart showing market contribution profitability. It showed Atlanta with just under $1300 of EBITDA and a fully loaded even a little under 500. Given your total GPUs at $1000 higher today than it was when you gave that disclosure, I'd be curious to hear, if you can give us an update on Atlanta profitability at the contribution level?

[Ernie Garcia, CEO]

Sure. So I think, at this point it would 3.3% EBITDA margin loss for the entire business, obviously showing a lot of leverage. And I think we're going to keep our EBITDA level disclosures at that level instead of diving into the market level. But you can go look at that chart. And, the way it works is not all that complicated. Generally speaking the GPU is roughly shared across markets, so if we have gains, in any given market, that's on average going to flow through to all the markets. And then as we get bigger and lever corporate costs more that generally benefits to markets and the -- as we continue to level marketing that tends to benefit the market.

So, I think, when we look at it across the market, there's really, really good stories there. And we think the path to profitability is clear than it's ever been. I think, even kind of stepping back and saying, why did we set this $3,000 goal to begin with when we first came public, in early 2017?

I mean there are two reasons why we set that goal. One is, we thought through a carefully we kind of felt, we understood all the levers of the business where we could go and get money. And we felt it $3,000 with a level that made sense, and it was achievable given the business that we had built.

But two and really importantly, we thought the $3,000 was a very significant level in terms of being a number where you could build a sustainable and very profitable business. And we continue to believe that today. So I think there's a lot of ways to look at our financials today.

I'll call up three, one, just to look at the momentum in progress that we've got. Mark talked about levering nearly 20 points over the last three years and being a 3.3% EBITDA margin loss today. That suggested that there's a lot of room that we're very, very excited about.

Another approach is just like we approached $3,000 GPU target, we can do a bottoms up analysis, and that basically is our long-term financial model. We went through that very carefully, look at all the expense items of all the areas we thought that we could add additional GPU. And we put that together, and I hope at least it from an objective perspective, you could go through and do a similar bottoms up analysis and arrive at similar places as we have in our long-term model.

And I think third and interestingly, is do a relative comparison to dealerships out there. If you go look at any given dealership, any public with some of them, this comparison will be very easy with some, it's hard because you need to get there SG&A for retail unit and kind of massage out service offs. But if you go look at that, most dealerships are spending around $2300 in SG&A, per car they sell. In the quarter, we spent $4100 on SG&A per car we sell. So, per car we sold, excuse me. That gap is paying for 95% unit growth, and 108% revenue growth, and we're still significantly subscale.

But even at that level, our losses, if you take our EBITDA loss in the quarter and divide by sales, they are about $750 per car. If you basically assume the long run, we can get to a cost structure looks similar to dealerships, there's an $1800 benefit there. And, now you're suddenly $1,000 positive, which is about 5% EBITDA margin. And obviously, we believe in the long run our cost structure looks a lot different than dealerships. And it is much better than most dealerships.

In addition, we still think there's a lot of room in GPU. So we're looking at that and feeling very, very good. And we think just given the clarity of the story now, we're going to stick with speaking about it at a company level.

[Chris Bottiglieri, Wolfe Research]

Got you. That make sense. Thank you for the color.

[Ernie Garcia, CEO]

Thank you.

[Operator]

Our next question will come from Nick Jones with Citi. Please go ahead.

[Nick Jones]

Hi, thank you. On the letter to shareholders. The comment on 760,000 customers in the quarter and then doing 44,000 retail units, I guess that's attributed that you maybe acquired more than 17% from customers and as maybe there's some friction or efficiencies or data cells little bit longer on source vehicles and then maybe ways to kind of ratchet up that 17% without necessarily sourcing significantly more vehicles. Can you help me unpack kind of that tenants?

[Ernie Garcia, CEO]

Sure, there's a lot going on there. So let's start with what the 60,000 number is. So that's basically the sum of customers that we transacted with that includes all the customers that we sold cars to that's 44,000. And then also all the customers that we bought cars from that we didn't also sell a car to. So those are kind of unique additional customers that are just selling as their car without, also simultaneously buying one from us. And we have that up to 60,000. That number of total customers transacted with is the number that grew by 134% in the quarter.

So that's kind of what that number is. The number of cars that we bought from customers and then sold to customers was 17% in the quarter up from 14% last quarter. On average about this is a heuristic, this is exactly right. But on average about half the cars that we're buying from customers, meet our retail standards and can be sold to customers. And in the quarter we bought 52%, as many cars from customers in total, including cars that we bought without an associated sale and cars that were traded into us. We bought 52% as many cars as we sold the customers.

And so you'd expect kind of the percentage of cars that we're selling retail to be a little bit higher that 17%. But there's kind of a natural lag there, because there is a lag time when we buy those cars until they make it to the reconditioning center and get up on the website or ultimately purchased by customers. And so there's some nice positive momentum there as well.

[Chris Bottiglieri, Wolfe Research]

Got it. Thank you for taking my questions.

[Ernie Garcia, CEO]

Thank you.

[Operator]

Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.

[Seth Basham, Wedbush]

Thanks a lot and good afternoon.

[Mark Jenkins, CFO]

Hey. How are you doing?

[Seth Basham, Wedbush]

Good. My first question is around the strength in the quarter. Your units probably talk to your internal plan. Can you give us a sense of how much they beat your internal plan? And then secondly, what you think drove that upside that would be helpful?

[Ernie Garcia, CEO]

So I think, we're going to stick with the guidance that we provide in the past. I think the fact that we're raising does suggest that we outpace what we were anticipating in our guidance. And so I think that's great news. And we think that what's driving it really, in any given quarter, I think you can zoom into all kinds of little drivers.

But what we think is most important, we're delivering differentiated very high quality experiences to customers, we're giving them a bigger selection they see anywhere else, we're giving them more value they see anywhere else, and the teams executing very well. And that's showing up in broad base demand across the market. I don't know that there was anything macro that felt unique that would raise the level of being called out separately in the quarter.

[Seth Basham, Wedbush]

Okay, fair enough. And then secondly, in terms of your financing GPU, should we think about a $1,000 as your normalized run rate here? And then is there any change in penetration rate that you experienced in the quarter anything else that affect that run rate, other than the interest rate?

[Ernie Garcia, CEO]

So, we printed 1100 in the quarter. And then as we said, there was about $100 to $150 impacts due to interest rates that we would not expect to persist. So that would get you down to about the range that you are talking about. We think that there are also additional gains to be had from here of the same flavor of the gains that we realized this quarter. And so I think we would point to our long-term financial model there, we think there's probably a couple hundred dollars of additional gains from Q2 levels. But we would expect to step back of $100 to $150 and then to overtime continue our positive walk forward.

That there's a number of drivers there. In general, we've seen a very slow drift overtime, positively in asking rate of financing. But the far more powerful drivers have been just getting better execution overtime, as we've outlined before.

[Seth Basham, Wedbush]

Thanks a lot.

[Ernie Garcia, CEO]

Thank you.

[Operator]

Our next question will come from Ron Josey with JMP Securities. Please go ahead.

[Unidentified Analyst]

Hi. This is [indiscernible] on for Ron. Two questions, please. Trading is just going really well. Can you talk about kind of the drivers there, whether that's better conversion, the marketing campaign, just whatever is behind that? And then secondarily, advertising came in a little ahead of us understood the trading campaign. But is there a cap for national advertising, are you guys spending more on performance, or is there anything that were to call out? Thank you.

[Ernie Garcia, CEO]

Great. So let's start with buying cars from customers. I mean, I think what's driving that, at a high level is just that experience is incredibly simple and that experience is also pretty easy to understand. I think buying a car online is not a super easy thing to communicate to customers. I think if you say what is buying car online means, 200 customers, you might get 100 different definitions. But if you say, do you want to go to a website, get a value for your car, and then we'll pick it up and drop, we will just send you money right away. People kind of understand how that works. And so that's a fairly straightforward thing to explain to customers.

And then the offering, I think it's about as good as you can hope for from a customer perspective. And so we think that's the root of what's driving. It's a very simple experience and it's simple to understand and we think that's great. If we zoom in a little bit more, we're definitely making investments in telling that story and marketing. And so that gets your second question, we'll circle back to that.

We're definitely making investments in technology, throughout the funnel and the website experience, it still very early days. We're still learning meaningful things, every time we run the test on a website, that are changing the way that we're approaching this problem. We're still learning a lot about pricing. We're not even leveraging all the depths of our data that we've got today to make sure that we're pricing as intelligently as we can. And we still have a lot to learn, because our historical volumes are pretty small compared to the volumes that we're seeing today.

So we think there's tons of gains we had there. We're still learning a lot on the operation side, we're making changes to our scheduler to make delivery and pick up simpler and faster for customers. So I think there's just broad base gains all over the place.

And then I think, just to circle back to the advertising question, we definitely are leaning into this and advertisements more, because it is a simple story and because we are seeing incredible growth, and when we look at kind of the unit economics of incremental advertising gains in the business of buying cars from our customers, and then we compare that to the GPU gains that we're seeing, we think it's a really good trade, especially when you take into account all the growth that we're seeing. And so that's definitely baked into our guidance for the remainder of the year is the expectation that we will continue to invest aggressively this offering that we’ve got.

[Unidentified Analyst]

Thank you.

[Ernie Garcia, CEO]

Thanks.

[Operator]

Our next question will come from Rick Nelson with Stephens. Please go ahead.

[Rick Nelson, Stephens]

Thanks. Good afternoon. You source more cars, from the customers directly that with half of those feeding retail, are you migrating to older higher mileage cars on your website, and if that's the case, are you seeing any change in the number of vehicles returned or the proportion of vehicles returned?

[Ernie Garcia, CEO]

Great question. So, I think the answer to the first part of your question, is largely, yes, We are seeing a different distribution of cars that are available to us as a result of buying cars from customers, I think that particular channel does weekly push you toward having more access to lower cost inventory, which is great.

We also generally see a broadening of the distribution of cars that we’re selling to the other side, we're selling more expensive cars, as well. And so, I do think that there's overall kind of a broadening of the cars that we're selling, which – it’s happening slowly, but it's been part of a continual migration over a longer period of time. And it's certainly been accelerated by buying more cars from customers.

In terms of return rates, and then customer reviews, which are both things that we monitor pretty closely at the car level, to make sure that your understanding how different classes of inventory are causing different customers to get different experiences, we don't see anything material there. The directions tend to be what you'd expect we see very slightly higher return rates on older cars. Oftentimes, we see lower views on older cars, but that's not even a very strong relationship at all, I'm not even sure I would confidently call out the direction there.

So, in general, through the broadening distribution of cars that we're selling, we're just getting more confident that we can sell a very broad distribution of cars to customers overtime.

[Rick Nelson, Stephens]

Okay. And if I can ask as a follow-up as, as you grow this internal, sort of saying it's going to push more cars to wholesale, is there a certain size, I think that you need to get to operate your own auctions, or is that part of the long-term game plan?

[Ernie Garcia, CEO]

So, that's interesting question. I mean, first, there's clearly to give you an economics associated with selling a car wholesale, even obviously you don't own, there's a buy fee to sell fee which can add up to 300 to 400 bucks, there's transportation on both sides, that can be pretty significant. So that's undoubtedly, an area of opportunity.

We also have great partnerships with the options with which we do business today. And I think, in general, our instinct will always be to seek to work with our partners first and find arrangements that work out well for both of us. So we can stay focused on the many other exciting opportunities that we have in front of us. And so I think that would be our starting point and that's not an enormous strategic focus today, but the point is a good one.

[Rick Nelson, Stephens]

Thanks. Good luck.

[Ernie Garcia, CEO]

Thank you.

[Operator]

Our next question will come from Colin Sebastian, with Robert Baird. Please go ahead.

[Colin Sebastian, Robert W. Baird]

Thanks. Good afternoon. As you shift growth from new market openings to market penetration, wondering how you will alter the approach in terms of engaging with potential customers? And how much of the investment in the website and app are generating improved metrics such as conversion rates? And I have one follow-up. Thanks.

[Ernie Garcia, CEO]

Sure. There's I guess there's a lot going on there. I think, as we start to -- as we open up more markets, which just not what we think there's still quite a few more markets out there. There's still a significant swath of population that we can service. But once we make it through that population we transition to just growing existing markets.

I'm not sure if it's fundamentally our engagement strategy changes materially, we still remain at very, very small levels of awareness and understanding even our most mature markets. So we think there's a lot of gains to be had there. There's a lot of advertising to be done and awareness to be accumulated overtime. There's a lot of learning on our part to figure how to communicate to a broader swath of customers more efficiently.

So, I don't think that there is a ton that will change there, I think it will be part of a continual migration and continual learning on the marketing side, because we clearly just have a lot of head room there. We're making all kinds of changes all the time across the website. And I think, I said in my prepared remarket, but I really do think at this point is often times at least lost a little bit. We are a [indiscernible] company and that means that nothing we do is perfectly refined in any way shape or form.

So, we’re still very much at a stage where we’ll go lot changes and we see big significant moves that matter move the needle and that happened at a pretty regular cadence and I don’t even think we’ve seen that cadence slowdown because our offering is broad, there is a lot of technology and customer experience associated with buying cars, reconditioning cars, offering a logistics network we can deliver on next day, giving them a good experience on the website, offering a simple finance experience, there is a lot there.

And so there's so many areas for us to keep exploring and we got great team that are exploring in all those areas and we're continually finding significant improvements. If you define conversion strictly as websites to sale, that’s a complicated measure for sure because the quality of traffic is constantly changing depending on what marketing channels were using, and then depending on if we're making progress in areas like SEO where often times you driving a lot of value, but you may be driving well lower converting traffic.

So, I think when we think about conversion and all the comments we made about conversion before, those comments are kind of holding website traffic static and then over time, our website traffic is likely to move in both directions. I think as we get better things like SEO we’ll probably drive more volume of traffic but it maybe a little bit lower quality and therefore you may see lower conversion rates, when you're measuring it that way.

As we have other innovations that are more direct and hit in market of buyers, you may see conversion go up and so I think are those two separable effect and I would just make sure that you are thinking about them separately, so I think they are pretty independent.

[Colin Sebastian, Robert W. Baird]

Okay that’s helpful and the clarification or the follow-up is on the GPU contribution from the finance platform. Just wanted to clarify outside of the impact from lower benchmark rates should we expect the improvements in finance GUP to sustain itself on a sequential basis or were there benefits from the timing of securitizations rather factors that may not might be a little bit lumpy? Thanks.

[Mark Jenkins, CFO]

Sure, so I mean we called out the benchmark interest rates impact in our remarks and I think also in our questions. I wouldn’t go into more specific in terms of breaking down our guidance for the rest of the year, but I would say that over time, we certainly see more opportunity to improve execution, were still relatively early in our life as a securitization market participant and we think that leads to a lot of opportunities as we look forward over time.

[Colin Sebastian, Robert W. Baird]

Okay, thanks Mark.

[Operator]

Our next question will come from Tom Champion with Cowen. Please go ahead.

[Thomas Champion, Cowen and Company]

Hi, good afternoon. Thanks for taking the questions and apologies if you've already addressed this. But I'm curious on the other side of the capital raise in May, where you're really leaning in terms of investment it seems like this could be on the new market side or IRCs or logistics, just curious any comments on that.

And then second, maybe dovetailing with the last question. You completed your second ADS transaction and can you talk about the implications of that and your reliance on that channel as a part of your portfolio of financing sources? Thank you.

[Ernie Garcia, CEO]

Sure, so as it relates to the capital we raised and then what that's unlocking. It clearly does unlock additional aggression if we so choose. I think so far we have not elected to be more aggressive in any material areas that the one area where I think we're being little bit more aggressive today is buying cars from our customers, but that is largely self-funding and paying for itself. So I don’t think that’s an incremental area of investment.

I think we thought about bringing that capital as just buying us a lot of financial flexibility, there were two forms for capital that we brought in there, there’s high yield debt and then there was a slope of equity. The high yield that for us is very, very efficient capital, because it basically replaces sale leaseback financing that we would do to finance our CapEx otherwise and it has a similar cost in a shorter duration it is just generally more flexible. So, we largely raised that for that purpose, it's just kind of a dominant form of capital that we like having on the balance sheet.

And then the equity we took on the order of 2 point of dilution give or take. And I think we thought that was a smart thing to do just from a cushion perspective to make sure we're prepared for bumps in the road. So we really haven't changed our tack there in any material way.

On the ADS transactions, I think we're very excited about that, in general, the way that we like to think about our finance platform, because we want to optimize both the monetization of finance, and the stability of our finance platform, our finance partners, and I think in the quarter, we ended with a mix of ally and the securitization market, on the order of 99% of the loans that we sold in the quarter once those two purchasers.

And we think that that was a good mix, because we've got a lot of stability, and we're also able to show a lot of progress and monetization. So we think that that looks good. And I think looking forward, we’ll continue with our strategy of optimizing monetization and stability. But we don't want to commit specifically to any given channel today, but we feel great about the flexibility we built into the program over the last several quarters.

[Thomas Champion, Cowen and Company]

Make sense. Thank you.

[Ernie Garcia, CEO]

Thank you.

[Operator]

Our next question comes from Armintas Sinkevicius with Morgan Stanley. Please go ahead.

[Armintas Sinkevicius, Morgan Stanley]

Great, appreciate for taking the question. When I look at $1500 of other GPU, and I think this question has been asked in many different forms, but the $1500 versus the roughly $1000 in the first quarter, so a $500, sequential step up, you mentioned the $100 to $150 from the benchmark. What's the other $350 to $400 related to for other gross profit per unit?

[Mark Jenkins, CFO]

Sure, yes. So, I mean, it's primarily just better execution on our loans. So, I think we're -- we introduced ourselves with the securitization market in the first quarter with our inaugural deal. We went back securitization market for the second time, this quarter, brought in more investors, diversified our investor base, and saw a higher gain on loan sale. That was on the previous quarter.

I think the better execution is a big driver, there's some other smaller drivers, for example, fees per unit were lower, as expected this quarter, because we had fewer first time deal expenses, and we did a larger deal. But just better execution on our loans was the biggest driver of the sequential increase in finance GPU.

[Armintas Sinkevicius, Morgan Stanley]

Got it. Okay, so call it the $350 to $400, then sequential improvement x the benchmark rates. At the investor day, you talked about a $500 to $700 improvement from lower cost of financing. So is this $350 to $400, part of that $500 to $700 or is this, apples and oranges, you mentioned a couple hundred dollars, which was sort of line up with the commentary from the investor day of $500 to $700?

[Mark Jenkins, CFO]

Yes, I think you're thinking about that the right way. I think we've made a nice step here, both including and excluding the inter quarter benchmark move, but certainly feel like we've got some potential increases in the future as we mature in the securitization market, continue to demonstrate strong performance, increase liquidity of our program, et cetera.

[Armintas Sinkevicius, Morgan Stanley]

Got it. And then one more with the finance receivables last quarter, that was about a $50 million burn for the quarter, this quarter, it was a $90 million source of cash, maybe you could talk about some other puts and takes there on finance receivables, and how to think about that as a source or use cash going forward?

[Mark Jenkins, CFO]

Sure. So, we use – we view finance receivables very similar to inventory. There -- that's working capital, that auto dealers or other auto industry participants have as part of their standard kind of operations of the business. Now, both inventory and finance receivables are heavily financeable with standard working capital facilities and so much like we've done with inventory overtime, we expect to the extent that finance receivables are moving up and down, finance the vast majority of them with working capital liquidity from short-term working capital facilities.

[Armintas Sinkevicius, Morgan Stanley]

Got it. Much appreciated.

[Mark Jenkins, CFO]

Thanks.

[Operator]

Our next question will come from Lee Krowl with B. Riley FBR. Please go ahead.

[Lee Krowl, B. Riley]

Great, thanks for taking my questions and congrats on a very solid quarter. Two questions. First, just on the buying versus selling ratio, obviously, doubling year-over-year and up from 40%, last quarter to 52%. You guys kind of highlighted that the opportunity out in the market from competitors is one-to-one, kind of thoughts on if you believe that's achievable with Carvana and if so maybe perhaps a timeline and the GPU implications of that?

[Ernie Garcia, CEO]

Sure. So, I think, the market leaders, buy from customers about as many cars they sell to customers. And so that's clearly achievable in the sense that it's been done before. There's not really a logical ceiling on what that number can be. Trade-ins are mechanically related to the number of cars you're selling. And so, that kind of necessarily limited to less than one there. But then buying cars from customers that are not associated with a sale kind of leaves you in an unbounded place.

And so I don't think we know exactly where it can go, what we know is that we're delivering great experiences to customers, it's growing very quickly, we're learning very fast, there's clearly a lot of momentum. So when we look at, what the market leaders are doing and say, given we've seen so far, do we think that overtime, there's the opportunity to buy as many cars for customers we’re selling. And do we think that over time, there's the opportunity to make about $1,000, give or take, per unit that we purchase from customers. We think that that looks very achieve with where we sit today.

But we also think that there's a lot of work left to do. And so we've we made a lot of progress recently, we're going to keep working at it. But I don't think we want to give any more concrete guidance, than we provided at Analyst day with our long-term financial model, which made those same assumptions that I just outlined.

[Lee Krowl, B. Riley]

Got it. And then just on the locations increase, obviously, heavily weighted to the first half. Kind of just your thoughts on the investments as it relates to fewer location openings in the second half, and whether the dollar value of investments remains the same and it's just allocated elsewhere internally, via technology or marketing, or if the dollar investments to scale a business step down?

[Ernie Garcia, CEO]

So, what I would say that, I think we think about those as somewhat independent choices. The choice to open markets more slowly in the back half is largely driven by operations and by preparing ourselves for the first half of 2020, and wanting to make sure that we stay in front of ops there and continue to deliver very high quality experience to customers. So that's what's driving that.

The investments that we make internally, in process improvements, or operations or technology, we tend to make those pretty independently, and we don't manage with like a quarter-to-quarter total investment budget in mind. We're trying to do the right thing for the business at all points in time, and then trying to recognize it, that we do have limited resources at our disposal. And so we need to allocate them as intelligently as we can.

And so I think we think about those things separately, but in the back half of this year, we've elected to put more of our operational focus on preparing for growth in early 2020. That probably in a vacuum will not impact the way that we're thinking about investments in technology.

[Lee Krowl, B. Riley]

That makes sense. Thank you for taking my questions.

[Ernie Garcia, CEO]

Thank you,

[Operator]

Our final question will come from Dan Salmon, with BMO Capital Markets. Please go ahead.

[Dan Salmon, BMO Capital Markets]

Good afternoon, everyone. Just curious, Ernie as you really expand the footprint out and cover a bigger part of the country. Obviously, we're not going to talk about 2020 just yet, but expecting that your launch rate picks back up again, after the preparation that you're doing for the first half next year. It's not very long, I think, before you do complete your goal of covering the entire U.S. footprint, or at least the sort of top 200 markets that you've talked about targeting traditionally. With that goal becoming increasingly insight, do you have any different thoughts on expansion beyond the U.S., even if it's just in North America or the Americas more broadly?

And then second, just maybe Mark, you could remind us the long-term financial goals in that target model, if I remember correctly, was just simply for the domestic footprint in mind that we not consider any sort of international expansion in it?

[Ernie Garcia, CEO]

So, let me start with this. I think, we clearly are getting very close to that financial model that we provided earlier about -- there being about 200 markets in the U.S. to have over 200,000 people in those markets serving about 80% of U.S. population. We're approaching that pretty rapidly. I would say that the experience that we're having in terms of our ability to open markets, and the way those markets are responding to us and the way that we're seeing smaller markets respond, is if anything kind of broadening our ambitions about what we think is possible, we’ll take the remainder of this year to think through carefully what we think the right plan is, but directionally if anything, our ambitions are being broaden there.

As it relates to things about outside the U.S., I think we've got a long way to go here. This quarter we're on the order of 0.5% less than 0.5% of the used car market and we think there's just so many much room to grow, in our most mature market, we're still a relatively small part of car sales happening there. We still have relatively low awareness. And so we think we've got a lot of room to grow.

So I think we’ve got a machine that works really, really well. And we think there's a lot of room to just continue to market that machine and tighten that machine up, since we're only a six year old company and to see a lot of growth. We also think that, the business of buying cars from customers that has been effectively launched after this infrastructure that we built.

It's good evidence of the types of things that we can do here domestically as well, to further monetize the transaction and service all the needs that customer has, when they're buying or selling a car, and give them a better experience. And so I think our focus is going to definitely be there, before it moves outside of the boundaries of the U.S.

And that is what our long-term model presumed as well.

[Dan Salmon, BMO Capital Markets]

Great, thank you.

[Operator]

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

[Ernie Garcia, CEO]

Thanks everyone for joining the call. We really appreciated and to everyone out there on team Carvana, thank you so much for everything you're doing. This was an absolutely incredible quarter. Please take a moment and take pride in what we’ve built. It's pretty incredible, but we still got a lot of billing left to do. So go get a good night's sleep and let's come back tomorrow and keep on, keep in on. Thank you, guys.

[Operator]

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