Carvana Co. (CVNA) Q3 2026 Earnings Call Transcript

Operator: Good day, and welcome to Carvana's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Austin Knutson with Investor Relations. Please go ahead.

Austin Knutson: Thank you very much. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Third Quarter 2026 Earnings Conference Call. Please note that this call is being webcast and can be accessed along with our Q3 shareholder letter and supplemental financial tables, on the Investor Relations section of the company's corporate website at investors.carvana.com. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that this discussion contains forward-looking statements within the meaning of the relevant federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of these risk factors can be found in the Risk Factors section of Carvana's most recently filed Forms 10-K and 10-Q. These forward-looking statements are based on current expectations as of today, and Carvana assumes no obligation to update or revise them. Our commentary today also will include non-GAAP financial metrics. GAAP reconciliations can be found in the shareholder letter posted on our IR site. And with that, I'd like to turn the time -- call over to Ernie Garcia. Ernie?

Ernest Garcia: Thanks, Austin, and thanks, everyone, for joining the call. Also a shout out to Meg, who's at home with her second and should be on a walk, but is almost certainly listening to this call. So Meg, go for a walk, it's nice out. We got this. The third quarter was another exciting quarter for Carvana. Our focus remains on building the machine to deliver 3 million units per year and 13.5% adjusted EBITDA margin, and the steady drumbeat of results heading in that direction is evidence of both the team's execution and the achievability of those goals. First, let's look at the progress we are making scaling the machine. This is our first quarter with over 200,000 sales. Our run rate is now 870,000, double what it was just 2 years ago. This was also our first quarter with $8 billion of revenue. Our run rate is now $32 billion, more than double what it was 2 years ago. Next, let's look at the financial results our machine continues to post despite the pressures of growth and an imperfect backdrop of increasing interest rates and gas prices. Our adjusted EBITDA in the third quarter was $800 million, a run rate over $3 billion, almost double what it was 2 years ago. And our net income was $480 million, a run rate of almost $2 billion, more than double what it was 2 years ago. We are the fastest-growing automotive retailer with 8 consecutive quarters of approximately 40% growth in an industry that's flat. And we are the most profitable automotive retailer with the margins that are approximately twice the industry average for the 10th quarter in a row. The experience we deliver our customers has always been the foundation for the success and the team's hard work, as well as the positive feedback in the model, continues to separate us further from the pack here as well. Over the last 2 years, our NPS has improved by 9 points as we are delivering cars to our customers 2 days faster, we've lowered the interest rate our customers pay by over 100 basis points, and we've made the entire Carvana experience simpler and more intuitive. The machine is getting better. Despite the market share gains from doubling in 2 years in a flat industry, and despite our scale of 870,000 unit run rate, we still have just over 2% of used market share and 1.5% share overall. We are still extremely early in the game. In the letter, we briefly touched on another benefit of our vertically integrated model. In building it to serve our core business, we have created a very capable, scaled platform. Our early success with Stellantis new cars is a clear demonstration of the platform value of Carvana's operations, technology, brand and infrastructure. In addition, our model is structurally different in a way that it not only met the moment of the last 14 years, but also meets the moment of today. A question that we constantly ask ourselves in every part of the business is this. If we were building this today from scratch, what would we build? With a rapid increase in the capabilities of AI and with the first early looks at the opportunities agentic commerce will provide, it's a relevant question with an exciting answer. If we were starting from scratch today, we would build Carvana. AI is the -- most powerful when decisions are automated and deterministic, when technology is architected to rapidly surface those answers, when there's a steady stream of differentiated data to feed it and in the presence of vertical integration where experiences get simpler and frictions between layers disappear. Carvana has all of this. Agentic commerce is much earlier in its maturity, but it seems likely to accelerate digital adoption to reward companies who have put their effort into building fundamentally better solutions and to put pressure on supply chains to be as low cost and fast as possible. Carvana also has all of this. It's an exciting time. If we keep building the machine, good things are going to keep happening. The march continues. Mark?

Mark Jenkins: Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons will be on a year-over-year basis. Q3 was another strong quarter for Carvana. We set new company records for retail units sold, revenue, gross profit, GAAP operating income and adjusted EBITDA. These results were driven by our company-wide focus on driving profitable growth and efficient operational execution. Retail units sold totaled 217,385 in Q3, an increase of 39% and a new company record. Revenue was $8.04 billion, an increase of 42% and a new company record. Consistent with past quarters, our growth in the third quarter was driven by our 3 long-term drivers of growth: a continuously improving customer offering; increasing awareness, understanding, and trust; and increasing inventory selection and other benefits of scale. The third quarter marked our 11th consecutive quarter of industry-leading retail unit growth and [ industry-leading ] adjusted EBITDA margin. Non-GAAP retail GPU increased by $85, primarily driven by wider spreads between retail and wholesale market prices, partially offset by higher non-vehicle costs. Non-GAAP wholesale GPU decreased by $196, primarily driven by our 39% retail units sold growth outpacing our wholesale gross profit growth. Non-GAAP other GPU decreased by $299, primarily driven by our decision to give back to customers in the form of lower interest rates relative to benchmark rates as well as by rising benchmark rates in the third quarter, partially offset by higher average amount financed and hedging gains. Non-GAAP SG&A expense per retail unit sold was approximately flat. Operations expense increased $109 per retail unit sold, primarily due to higher fuel and logistics costs. This increase was more than offset by a $159 per retail unit sold reduction in overhead expense, driven by our 39% growth rate. Advertising expense increased by $45 per retail unit sold as we continue to invest in building awareness, understanding and trust in our customer offering. We continue to see opportunities for significant SG&A leverage over time as we scale, driven by both continued improvements in operational expenses, as well as leverage in the fixed components of our cost structure. Net income was $483 million, an increase of $220 million. Net income was negatively impacted by a one-time $53 million pretax expense related to the early redemption of senior secured notes. Net income margin was 6%, an increase from 4.7%. Adjusted EBITDA was a record $800 million, an increase of $163 million. Adjusted EBITDA margin was 10%, a decrease from 11.3%, primarily driven by selling a mix of higher-priced vehicles and giving back to customers in other GPU. GAAP operating income was $714 million, or 89% of adjusted EBITDA, an increase of $162 million and a new company record. Before turning to the balance sheet, I want to spend a moment on what sits underneath these results, the machine we are building to deliver on our long-term goals. With the scale of our ambition, building the machine is a continuous exercise, and our execution is the pacesetter for our growth. That machine has 3 components: selection, speed, and experience. Each of these maps to one or more major operational groups. Our inspection and reconditioning centers drive selection. Our logistics and delivery network drives speed. And these, plus our customer care centers, drive customer experience. Within those groups, the work is carried out by our people, including technicians and cosmetic associates, vehicle transporters, last-mile delivery and customer care advocates, and many more. As we grow at 39%, our ability to hire and train these teams and to give them better tools and processes directly determines how we scale. We are actively working on each of these areas, and we are encouraged by the progress we are making. Turning to the balance sheet. We continue to drive toward investment-grade quality credit ratios. Early in the third quarter, we further strengthened our balance sheet by refinancing the remaining $1.7 billion of senior secured notes due 2030 with a senior secured Term Loan B, resulting in approximately $45 million of annual interest expense savings. This transaction, along with the successful execution of our operational plan in Q3, resulted in a net debt to trailing 12-month adjusted EBITDA ratio of 0.8x and a trailing 12-month adjusted EBITDA to interest expense ratio of 6.9x, both new company records and again placing us in our strongest financial position ever. Our results through Q3 position us well for a strong finish to 2026. Looking forward, we expect the following as long as the environment remains stable: a sequential increase in retail units sold and adjusted EBITDA in the higher end of our previously communicated range of $2.7 billion to $3.0 billion for the full year 2026. In closing, we are excited by what our team accomplished in Q3. We remain focused on executing at a high level, delivering profitable growth, and making consistent progress toward our goals of becoming the largest and most profitable auto retailer and buying and selling millions of cars. Thanks for your attention. We'll now take questions.

Operator: [Operator Instructions] The first question comes from Marvin Fong with BTIG.

Marvin Fong: Congratulations on managing all this growth. A question on other GPU and the interest rate environment, a lot of conversations among investors heading into this. Just, how are you managing that kind of -- into the fourth quarter? Are you a -- continuing to talk about the 100 basis points of improvement to consumers? Are you passing along the full increase in the benchmarks? Or how should we kind of think about how you're approaching that?

Mark Jenkins: Sure. Yes, I can take that one. So I think I would break that question into a couple of different concepts. The one is the idea of giving back to customers. And there, I think an important moment was in late 2025, we elected to pass back some of the fundamental gains that we had driven in other GPU over the preceding time periods to customers in the form of lower customer interest rates relative to benchmark rates. And so that's a component of the question and a place where we've long talked about, hey, as we drive fundamental gains, over time, we'd love to pass back some of those fundamental gains to customers to improve our customer offering, increase our competitive differentiation and continue to just build the best offering for customers as we strive toward our long-term goals. So that's the -- this idea of passing back gains to customers in the form of lower interest rates. Now the second part of your question relates to the interest rate environment over the last couple of quarters. And it has been now over the last couple of quarters, really actually this full year, a rising rate environment. And so when we're in a rising rate environment, generally speaking, our mindset is to pass back past gain movements in the rising rate environment, that means increases in the benchmark rate to customers. Now we won't always do that in full necessarily, and there can often be delays or lag times between when benchmark rates rise and when we pass back gains to customers. But as we've seen these rising rates in the past couple of quarters, we have been passing back some of those benchmark rate moves to customers. And I think we -- that was definitely delayed in the second quarter. We saw that in our other GPU results in Q3, benchmark rates continued to rise meaningfully over the course of the quarter. But we didn't see a meaningful change in other GPU quarter-over-quarter, in part because we had sort of started the motion on passing some of those benchmark rates through. So that's a pretty fulsome description of dynamics. I think of those 2 things separately. One is, what was sort of the strategic path back to fundamental gains last year and then how are we responding to these recent rate moves.

Marvin Fong: That was great. And a follow-up, if I may. Just on retail GPU pretty flat quarter-over-quarter. That was actually a very good performance relative to some of the other publics. How -- you're still talking about some inefficiencies in the business. The ones that emerged sort of in the fourth quarter of last year, where are we in catching up to that? And just kind of comment in general how you kind of feel about retail GPU.

Mark Jenkins: Sure. Yes. No. So I think it was a strong quarter for retail GPU. I think if we look on a year-over-year basis, I think we break it down as we see retail to wholesale spreads up year-over-year, partially offset by higher non-vehicle costs; some of those higher non-vehicle costs were driven by inbound fuel costs. So that was a place where rising fuel prices impacted the business in the quarter. But overall, I think we're pleased with certainly the gains that we made in reconditioning efficiency since early Q4/early Q1 area where we were talking more about some of the cost inefficiencies that have crept into the system. So I think overall, good trends there. I think a dual part of reconditioning, there's cost and then there is production capacity. And so Q3 was a quarter where we did make gains in production capacity. We set a record for units produced in the quarter. It was our first quarter producing more than 200,000 units in a single quarter. That's a nice milestone. Our year-over-year growth in production also accelerated slightly relative to Q2, which I think is the direction that we want to head, and we slightly outgrew retail units sold from a -- or we slightly outproduced retail units sold in Q3, which is also definitely a direction that we want to head. So I think we made some nice gains in production. Having said that, there's still more work to do, and continuing to increase production capacity is going to be a key area of focus as we look forward. As one example of that, growth in the number of cars that are on the website immediately available to customers is still up year-over-year at a rate that is much below what our sales growth is year-over-year. And so that's something we want to change, and we're going to continue to invest in getting the right people, process, and systems in place in the reconditioning centers to efficiently scale production.

Operator: The next question comes from Daniela Haigian with Morgan Stanley.

Daniela Haigian: Great. Mark, first one for you. Where do you think the biggest area of opportunity is in SG&A for leverage? Can you kind of talk through the puts and takes? Ad spend is higher, as you mentioned, on a per unit basis, assuming that remains similar into the fourth quarter and '27 and fuel costs remain elevated, how should we think about other line items leveraging?

Mark Jenkins: Sure. Yes. So I mean, I think if we take a step back and think about the opportunities through the entire SG&A stack, I think there's opportunities in every area. So let me start with overhead. We do have a high fixed cost business where we make significant technology investments. We have large investment in infrastructure that we think levers well over time. And so we see significant opportunities to further lever overhead expenses over time. I think that's an area where we have shown really significant leverage over the past several years as well, but I do believe that's an area that affords significant further leverage as we look out over time on a per retail unit sold basis. Next, I'll talk about advertising expense. We made the point before that advertising expense is a place where not necessarily in the near term, but certainly in the longer term, see opportunities for meaningful advertising leverage as we continue to raise awareness, understanding and trust, build out our selection, improve speeds, et cetera, enhancing the customer offering. A good data point on that is just the fact that our most mature markets that have -- the most nearby inventory at the fastest delivery times have historically had a much lower advertising expense per unit than the company as a whole. And so advertising, not necessarily in the near term, but certainly in the long term, is a significant SG&A leverage opportunity. Last, I'll talk about operations expenses. So operations expenses did tick up in Q3. I think fuel and logistics cost was definitely a component of that, and certainly the largest component of that. And so that bucks sort of a longer-term secular trend on operations expense per unit declining. I think if we look in the longer term, there's significant opportunities there, driven by AI and by scale and logistics network density that can cause operations expense per unit to come down on a per retail unit sold basis in the fullness of time as well. So that's a lot of different components. But really, as we do look across those major SG&A categories, we see opportunity for leverage as we look out into the future.

Daniela Haigian: Great. Second one is for you, Ernie. You mentioned in opening remarks, opportunities in agentic AI. What's the opportunity for Carvana there? How are you positioning the business to capitalize on that shift in consumer behavior?

Ernest Garcia: Sure. Well, first, I would say that we were excited by the fact that we think that we've been positioning the business for that kind of a shift for 14 years. And I think what agentic AI is basically just putting general AI capabilities that can also take actions into the pockets of consumers. And we think it has a lot of things that are very good for us. We think just through habit formation, in general, it pushes people more in the direction of digital transactions. And then we think that it also, as a general matter, has kind of the capacity to effectively reduce digital friction to 0 while leaving physical friction largely unchanged. What I mean by that is, if a customer comes to Carvana through their agent and we're able to verify that the agent has a customer behind it, and that agent has access to everything that is necessary for that customer to get a trade-in value and knows which cars to shop for, and is able to apply for credit and has access to their documents to provide information we need for verifications, the customer's experience there is going to basically be: we found the car, here's the picture, here's the trade-in value. Here's how it compares to benchmarks. We applied for financing. Here's your down payment and your monthly payment with the trade-in applied. If you'd like this one, it can be here today. If you want this one, it can be here tomorrow. And if you want one of these 2, it can be here in 2 days. And it's kind of, say, yes or no. It's kind of like the logical extreme of where that can go. I think when you compare that to what we compete with, which is what's important: whenever there's technological change, what matters is what we can do, but also what the competition can do. The experience the customer is going to get is likely to be very different. First of all, the odds that the agent can even find a car that is similar in the entirety of the city is not certain. I think in many large metropolitan areas today with the inventory that we have, we already have more cars than the sum of dealers in many, many areas, and that's a strength that continues to get stronger. So there's -- the agent will figure out what's the best match that it's got. Then it will probably say here's the process to get a trade-in value. If you go in, this dealer has this doc fee associated with it, and they may have additional add-ons that are either part of the car that you'll run into as you go through that process, make sure you keep me in your pocket so I can keep you informed along the way. We can't yet see what your interest rate is going to be. But given benchmarks and tools that we can find online, here is roughly what we think the range is likely to be. If you'd like to apply for a loan before you go, here's a series of steps that you can go through. And so you can kind of see where not only is it reducing the digital friction, it is also fully revealing and articulating the physical friction. And so we think that's a huge advantage for us. We think, like we said in the prepared remarks, if we were building from scratch today, we would build Carvana. And so we think it's a huge opportunity for us. We're excited by it. I think it's very early days. I think it's one of many tools that will be in the pockets of consumers over time. And we think that sum of those tools is just going to put pressure on businesses to build fundamentally better solutions. And we're 14 years into building a completely different supply chain and a completely different approach to this business that is more efficient and more vertically integrated and benefits from all these changes. So we're extremely excited by it.

Operator: The next question comes from Brad Erickson with RBC Capital Markets.

Bradley Erickson: Just 2 on the other GPU. I guess just when you think about gain on sale levels going forward and kind of across your 3 major selling channels there, just -- what should we expect in terms of these levels going forward kind of in the 7% range? And then how will each of those channels kind of perform within that? And then second, you upsized the ABS deal, I think you did during the quarter for the first time. And I guess the question is like, should we expect future deals to look like that? And if so, kind of what would you recommend investors read into a deal that gets upsized versus the one that does not?

Ernest Garcia: Sure. So let me start with -- you framed the question in kind of premium space instead of dollar space. And I think that it's useful to look at it both ways. I think over the last year or so as we've given rate back to customers, and that rate has been disproportionately in the primary, we've seen more prime customers, and we've seen more expensive transactions, all else constant, that has also kind of served our inventory goals over that period. So it is natural that we move in that direction, often premiums go down, but they're applied against a bigger balance. And so if you look at it in dollar space, that line item is a line item that I think it's an exercise that I suggest everyone is, go look at the last 12 quarters, graph that out over time and just look at the stability in the absolute dollars, it bounces around inside of a very, very tight range. And I think if you look at it over a longer period than that, as a general matter, it's been upward sloping as we've continued to find fundamental gains and get more efficient as a business and add various loan buyer partners that lower our effective cost of funds. So I think we will continue to utilize these different channels that we've got. We'll continue to seek out fundamental gains in every part of the finance flows. But I think something that we're very excited about is I think this line item that obviously gets a lot of attention, and there's a lot of numbers that bounce around quarter-to-quarter that people can watch and kind of push through the math. Despite all of that, we think the most important thing is we found a lot of stability there. And it's because the platform that we've built generates a lot of real fundamental value, and then we're able to capture that value, while also passing value back to our customers.

Operator: The next question comes from Michael Baker with D.A. Davidson.

Michael Baker: I just wanted to follow up on the agentic question and understanding the advantage you guys have. But where are you with that now? Is there anything that you need to invest in, to take advantage of that because if you just sort of -- I know it's very early in this whole process, but if I just did a random sample of going on to some of these bots and say, find me used car, you guys come up sometimes, but your competitors still come up quite a bit as well. So I'm wondering what you need to do to invest to take advantage of your benefits?

Ernest Garcia: Sure. Well, I think there's a series of things that probably sit underneath that question. And I think the one that you specified there was the search question. We think we've got to make our cars readily available. We've got to make sure we're pushing out data and all the ways that these different bots can see it. We've got to make sure that we continue to scale and get our information out there. And I think there's lots of things that go into that. But I think the great news is that the bigger we get, the more often we're going to show up in all those different places. And then I think in terms of changes in the underlying business, there's really not a lot of fundamental things that we need to change. A lot of these tools are tools that we use ourselves, a lot of these tools are tools that are now in the hands of consumers. But because our entire consumer-facing system is deterministic and we can present all of the information for every part of the transaction through an API to any part of our website, any UX that we create on our website or any UX that is available to consumers through whatever bots they have, it's very straightforward. And then because the underlying processes for even how we do a lot of the operational things that touch customers are also pushed through a wire. There's customer care work, verifications work, title and registration work that is done in a way where we have articulated all the rules, we have made clear exactly what documentation we need, we have business rules and flows where data is pulled off of paper and pushed those flows to get us to answers. That also means that we're very well positioned to utilize these tools in our business itself because the underlying systems are already there and the underlying rules are already articulated inside of the system that's able to execute against them. So we think in customer-facing ways and in our own managing of the business, we just think there's opportunities to get better everywhere. And I think like everything else we're working on in the business, it's just a matter of prioritization and how well we execute, but the opportunity is all over the place.

Operator: The next question comes from John Healy with Northcoast Research.

John Healy: Congrats on the progress. Ernie, I wanted to ask your thoughts on the FTC dynamics in the quarter. Would love to get your thoughts on how you see the industry kind of evolving from here? Do you think the industry is kind of caught up now in terms of practice? Do you feel like your position is strengthened by this? And do you view this as a benefit more to units or maybe even your ability to push ASP and maybe GPU higher? I'd love to get your thoughts on that topic.

Ernest Garcia: Sure. So I think as a general matter, we think this makes it clear for consumers to compare offers more easily for different cars that they can purchase. And we think that directionally, that benefits us, whether it's the kind of doc fee direction or if it's a direction that has also been issued by the FTC around disclosing any additional products that are required to be purchased with the car in the price of the car. So if a car, for example, has like tint pre-installed or has fabric protection pre-installed or VIN etching or whatever it is pre-installed, that also is supposed to be disclosed as part of the price. So we think that, that's helpful because it kind of -- it brings all the information forward in a way that is easier for the customer to see. In many ways, that's not materially different than a customer that has ChatGPT in their pocket or is using an agent to complete these purchases because they also will kind of bring information forward in similar ways. We think for us, that's great because we think it makes it simpler. It's upfront and easy for customers to see what they're getting into and to understand what the steps are likely to be down the path. And so we think that, that's a benefit to us broadly. I think whether it shows up in units or margin, I think, is largely a choice. I think to the extent that we -- the value that we offer is easier to discover for consumers, that will generate value. And we -- given where we are and given how clear the path is to 13.5%, I think that we would prefer for that value to show up in unit growth, but that requires that we continue to scale the supply chain as quickly as possible. To the extent that we're unable to scale the supply chain as quickly as we'd like, which we would like to be scaling it even faster, then it's likely to show up in margins or somewhere else. But we think as a general matter, it's good for us. And what I'd also say is we feel like the way those economics flow through. If you were to look at the last 25 or 30 years of automotive retail, generally speaking, what has happened is EBITDA margins or net income margins have been relatively flat over a very long period of time. And basically, vehicle profits have decreased, and F&I profits have increased and the underlying cost structure of dealerships have been in a similar spot relative to the value of the car that's being purchased. And so I think the simplification of that story is just that dealers have a pretty clear cost structures. This is a long-standing, extremely mature industry that has profits that are associated with it that are profit levels that are pretty well established. And the particular place where that shows up, it just doesn't matter all that much to the bottom line. So we think to the extent there's more clarity and these other line items are simplified, what that will likely lead to is just increases in the prices that other dealers list their cars for. And it probably won't change the underlying economics very much. So it just aids in price discovery and value understanding for our customers, and we think that's great.

John Healy: Very helpful. And I'll take a swing at this. A couple of quarters ago, you told me to have a different question, but I wanted to ask about the franchise dealer model a little bit. Clearly, a lot of things have been written about the success you're having in that vertical. Is that opening doors for other manufacturers and more movement there? Would love to get your thoughts about that expansion opportunity ahead for the company?

Ernest Garcia: Yes, sure. Thank you. Well, I think -- I apologize to be so [ cutesy ] on this, but unfortunately, we don't have a ton more detail to add. I would say we spoke a bit in our opening remarks about our work there with Stellantis dealerships as kind of being an early indication of the platform value that we're building. We think that we have built a platform that has real value to it. We -- the customer offering that we provide to customers is very clear and it's very high quality and it's very clear that customers like it. The economics work. So I think there's a lot of good things there, but it's also very early in the game, and we still got a lot to learn.

Operator: The next question comes from Sharon Zackfia with William Blair.

Sharon Zackfia: As you kind of embark upon the full ADESA conversions or build out, are there any inefficiencies that we should expect to kind of see hit the P&L? And are there any learnings from the kind of mini conversions that you did that will inform kind of how these larger conversions come up to speed?

Mark Jenkins: Sure. I can hit that. So I do think when we are launching a new facility, I do think that there -- those facilities tend to have higher costs, other things being equal, than facilities that are at a greater level of maturity and scale. Some of that is just basically levering as production facilities are ramping up, levering some of the more fixed components of the cost structure. Part of it can also be related to just getting all the systems and processes up to be operating at the highest level of efficiency. So I do think there can be some effects there. Now I would note that we've been -- we have been integrating facilities and now we'll start integrating fully constructed facilities here over time. And so I think we -- that's been part of our business for a long time. We did talk a little bit in late 2025 about how, hey, actually adding facilities did have some outsized impacts on costs. That's led to a lot of focus over the course of this year on making sure that we have the right management infrastructure and leadership development infrastructure, making sure we have the right systems, making sure that we have the right day-to-day operational focus on managing costs as the network gets bigger and bigger. There's always more to do there, but I think we've made gains that leave us feeling good about our ability to bring on new sites at a reasonable level of efficiency.

Sharon Zackfia: And Mark, I guess I was thinking more about the people side because that seems like it's a tougher part to scale. So if you kind of increase the number of managers in training or mechanics in training or so on as we think about this acceleration in '27?

Mark Jenkins: Yes, sure. Yes. So on the people side, I think there's a couple of different components. So one is we've talked about the idea of just making the job of managing an inspection and reconditioning center simpler. So that can involve things like better manager reporting that provides more real-time data faster and deeper into the operations of the inspection and reconditioning center. That's something that we've been using AI over the course of this year to rapidly scale systems that give managers better real-time day-to-day operating visibility. In addition, I do think part of it is making sure that we are bringing on the right number of leaders in the inspection and reconditioning centers, giving them grounds for training and getting up to speed before moving on to new facilities. And so that's a place where we have ongoing development and further opportunity. So I think through systems and through making sure we have the right people in place, I think those are some of the key things that will allow us to scale into more facilities at the level of efficiency that we hope to do so.

Operator: The next question comes from Rajat Gupta with JPMorgan.

Rajat Gupta: I wanted to ask about just EBIT margin expansion or just EBIT per unit going forward. I mean, last few quarters, there have been a lot of different type of margin headwinds, fuel costs, benchmark rates, reconditioning issues. Do you think starting fourth quarter, you should be back to margin expansion or EBIT per unit expansion for the company, assuming all else equal, just curious to get your thoughts there. Maybe the last time you're going to guide, so I might as well ask, and I have a quick follow-up.

Ernest Garcia: Sure. I would say earlier in the call, Mark gave examples of areas where we think that there's additional opportunities for leverage. I would put that question back in kind of the context of our goal of 13.5% EBITDA margin leverage, which kind of maps to 12.5% operating income margins. And I think that those different line items that he provided are enough to get us to 12.5% operating income margins. And that leaves all the revenue line items where we still think that there's fundamental gains to be had and all the variable cost line items where we think that there's significant fundamental gains to be had, many of which will be aided and hopefully accelerated by the various AI tools that we've been discussing on the call. So we think the path there is extremely clear. And then, of course, there's always going to be little things that we face. This quarter, it was pretty significant moves in gas prices and in interest rates, which impacted us to the tune of about $200 per unit. But in the grand scheme of things, those things tend to zero out and we're just kind of steadily on this march. So we think the path is very clear. We're going to continue to move forward. We can see our way very clearly to 13.5%. And we plan to get there slowly but surely continually over time.

Rajat Gupta: Got it. And then just on third quarter advertising, a pretty sharp sequential pickup. I know you've given us like some color on like leverage going forward, but are you able to unpack a couple of areas where you invested more this quarter within advertising? Any examples that you could highlight, that would be helpful.

Ernest Garcia: Sure. I think we continue to test things all over or through many different advertising channels. I don't think there's anything too notable to call out there. As we discussed last quarter, inventory was growing a little slower than we kind of ideally would have liked. We are putting a little bit more into advertising to keep pressure up on the rest of the business. I think we're still 2% market shareholders. So it remains very early in the game and there are areas of opportunity all over the place in marketing, both for more dollars to be spent and then also for us to save significantly in dollars per unit. So I think we'll continue to manage that equation over time, but you can kind of see what we've done over the last several quarters.

Operator: The next question comes from Jeff Lick with Stephens.

Jeffrey Lick: Congrats on an awesome quarter. Either Mark or Ernie, your units were up 39.4%, which is actually an acceleration, whether it's a 1-, 2-, 3-year basis. And that's in an environment where whether it's NADA or Cox, the used car business was actually down and SAAR was down in the quarter as well. I was wondering if you could maybe just force rank the factors as to why you think the acceleration might have happened. In the past, you've talked about better production inventory availability, maybe the FTC has helped financing rate elasticity and then you also mentioned before about broadening the mix on the price bandwidth selling more expensive cars. I'm just curious, if you can maybe force rank why you think your business accelerated in an environment where the market decelerated?

Ernest Garcia: Sure. I mean I think that there's many micro factors that we could probably point to, but our general premise and kind of belief over a multiyear period is that our rate of growth is constrained by our ability to scale the supply chain. And so we think that is by far and away the biggest driver. Mark talked about us increasing our production growth sequentially quarter-over-quarter pretty significantly, but also even our year-over-year growth increased a little bit sequentially from Q2 to Q3. So we think that, that's probably the most important thing. We think that there's clearly additional demand available to us if we can produce the cars in many, many different areas, many different car segments, customer segments, income segments, credit segments, all over the board. And that's why we think that when we focus in on a particular type of car, we tend to see outsized growth in that particular area. The most notable area where that's occurring, right now, is in prime where we've seen our prime mix really shift up as we've focused on producing more expensive later-model cars as we try to catch up. I think the team is doing a great job, and we're making a lot of progress in recon. But you heard in the detail of Mark's answer, this is definitely an area that we are going to continue to put a lot of effort for the foreseeable future, for a very long time. Operations and complicated physical operations are never easy and scaling them at the speed that we're growing is very, very difficult. And so it requires a ton of focus and attention, and we're continually working hard to come up with new ways to get more efficient there, so we can keep growing that supply chain. Mark is putting a ton of effort in right now, personally spending a ton of time there. So I think that will continue to be an area of focus, but we think that is the biggest driver of our growth. And so we just got to stay dialed in there and keep turning the wheel.

Jeffrey Lick: Just a quick follow-up. You mentioned to Rajat's question, advertising more put pressure on the business. And you guys have mentioned the notion of actually trying to generate better production by actually putting pressure on the business. I'm just curious, how do you know when it's too much? And how do you measure like how much more you can go by trying that tactic?

Ernest Garcia: I think that's obviously a feel, and that's hard to precisely know. And I think you're probably never exactly right. But as a general matter, I think we've got a lot of people at Carvana that are competitive and want to win and want to find ways to make a difference, and they want that pressure on themselves, and we think that, that's the best way for us to grow as quickly and effectively as we can and keep making the machine better. So I think, yes, we generally try to make decisions that keep pressure on the business because a lot of times, the areas where you need to focus your attention are revealed by pressure because they are the areas that struggle first. And if you aren't applying that pressure, you don't find those areas that you need to improve to get better. And then once you improve those areas, you move on to the next area that you need to improve. And as you continually do that, you just get a more and more efficient machine. So we do try to make sure that we are keeping pressure up. We would like to think we do a pretty good job of it. I think that's definitely an art, not a science.

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

Michael McGovern: On agentic risk, on the financing side of the business, could agents hypothetically drive higher competition proactively searching for lower rates, either at competitors or third-party financing options? And how much does your moat in financing help with that risk going forward?

Ernest Garcia: Sure. That's a -- there's a lot to that question. So let me try to swing at that maybe a couple of different ways. I think first, the frame is a very reasonable frame. As people have more information in their pocket and the ability to take action in their pocket, it makes everything kind of easier and therefore, price discovery is easier along the lines of all the things that we discussed before. And so I think in kind of like a comparative static, what changes given the introduction of this technology, it's reasonable to assume there will be things like higher prepayments. And then what exactly did that mean? So I think that is -- that's not a crazy thought direction. Approaching the problem from a different side, financing -- and this is kind of bigger than Carvana. We'll talk about like financing in general and then we can zoom into Carvana what that means. Financing in general is very clearly a value-added function in the economy. It's something that is important and necessary. And I think if you look at finance companies that provide consumer financing to consumers, maybe banks is a good example, and there are others as well. These aren't companies that are earning excessively high profits. They are generally companies that are earning kind of pretty reasonable profits relative to the work that they do. And the reason I say that is because I think that when some of these things are taken to their extreme, like if you think of financing as like an insurance business where you originate a pool of customers and some get better and some get worse, if all the customers get better instantly refinance and you're left only with the customers that got worse, they basically have like a premium that was the average of the expectation. The finance business basically just doesn't work. It just kind of like wouldn't function. So there will be market evolutions to resolve those sorts of things. In other markets, those have taken the form of upfront fees or prepayment fees or whatever it could be. So what I would say is, I think if you look at what happens in vacuum, I think you can arrive at one conclusion. If you take into account the fact that these things exist in a system and they exist in a market and there's value being provided, I think that it is unclear what the sum of all of the market evolutions will be, but it is unlikely to be as dramatic as the comparative static kind of approach might cause you to think. And then as we zoom into Carvana in particular, I think Carvana has a number of advantages versus 2 horizontally stacked businesses that make our system more efficient. They allow us to build better models and to price more effectively and to avoid certain types of risks that emerge through imperfect alignment of incentives between 2 stacked horizontal businesses. And we would expect that to remain the same. So I think we'll see how all this evolves over time. That will be complicated, and it's obviously a thing that's going to get a ton of attention. But I do think it's useful to take a step back sometimes and remember that these things exist in the market, and there are generally many moves that occur.

Michael McGovern: Got it. That's super helpful. And then maybe just one more quick one for Mark. I was curious the note on 2027 reporting, could you speak to kind of why now is the right time for that change, just focusing more on GAAP earnings than non-GAAP earnings, maybe focusing more on GAAP operating income than EBITDA, for example?

Mark Jenkins: Sure. Yes. So I think it's a natural step in our evolution as a company. I think adjusted EBITDA has been an important metric for tracking our progress over the past many years. I think the -- as we become more profitable on a GAAP basis, I think the value of adjusted EBITDA goes down. And that's why I think when we look out at the world, some of the biggest and most successful technology companies out there, they're not reporting adjusted EBITDA. They're focused on operating income, they're focused on net income. And we think that's just a natural evolution for us as we seek to really grow this business into a very large, very profitable one.

Operator: The next question comes from Brian Nagel with Oppenheimer.

Brian Nagel: Congrats, great quarter. So my question is -- look, it may not be a fair one. But clearly, as we all know, you operate in a very fragmented space, and you've been performing remarkably well. But you do have what I view as a significant or a larger competitor out there now that's starting to show much better growth, still nowhere as near to what Carvana is putting up. The question I want to ask is as you're seeing this dynamic change, are you -- is there more -- are you seeing anything in your business that you have a stronger competitor now reemerging?

Ernest Garcia: I mean, I would say, and we'll say this, from our perspective, we're approximately a 2% market shareholder. I think for a long time, we've been the second largest seller of used cars in the country. I think we're knocking on the door of becoming the largest. And so I think when we evaluate others in the market, they are going to be similar in size to us or smaller. And what we've historically seen is it's very hard for us to tease out the impacts of any of those individual players in our results. So we are focused on delivering the best experience we possibly can, making our business more efficient, making everything in the business just function better. And we think that, that's been our focus since day one 14 years ago, and that will continue to be our focus. And then we think that a lot of the things that are emerging in the world around us, generally technology rewards scale, and there's been a lot of technological evolution recently. We're excited by that. And we think it, in many ways, provides a tailwind for us over time. So I think we have not seen anything in particular from any given competitors that we believe has had any notable impact on our results.

Brian Nagel: That's very helpful. Then I have a follow-up question. I think someone else asked about the FTC -- changes in the FTC have made in these companies level the playing field changes. So the question I want to ask is, look, the Carvana has been on the right side of this for a while with these fees. Do you believe though now with these FTC changes, that has been an incremental driver of your business? And if so, how should we think about the duration of that? Is it a 1-year type phenomenon? Or is this something that goes on for a while?

Ernest Garcia: So I think it's very hard to message out in the results. We clearly think it's directionally better for us. We'll see what the overall impacts are over time. But I would take that opportunity to make a slightly bigger point. I think you graciously use the terminology, we've been on the right side of this for a while, so I appreciate that characterization. But what I would say is I think doc fees are a great example of the type of innovation that can occur in markets that is not fundamental. It's not to make the pie bigger innovation. It's a presentation innovation. And that is the type of innovation that we think is less likely to be successful in a world where people have a lot of intelligence in their pockets. And so something that I had my personal agent do is go through Carvana conference calls and all the Q&A where Mark talks too fast and look and see how many times we said fundamental gains over the last several years. And we said fundamental gains 350 times over the last several years in our various communications. And to me, what excites me about that is that very, very clearly shows you where our head is. That's why we've made choices like not having doc fees and trying to make things as simple as we possibly can because we put our effort into trying to build solutions that are fundamentally better and that generate more pie. They don't just kind of shift pie around on the plate. So this is an example where not all innovation in the market was pointed in that same direction, but we think that the tools that are emerging and in this case, this FTC directive, they all point in the direction of rewarding fundamental progress, and we're excited about that.

Operator: The next question comes from Ron Josey with Citi.

Ronald Josey: Ernie, we'll see if you can use fundamental gains again here. I wanted to ask about inventory overall. I think it was up around 30% in the quarter. Last quarter, we just talked about the importance to drive and grow more inventory and what that can do to overall conversion rate. So talk to us more about where we are in inventory. Are we at a good mix in terms of what you believe is needed to attract, call it the higher earners or whatever it is? And then how that's driving conversion rates? That's question one on inventory. And then, Mark, I want to get back to the advertising comment. With Net Promoter Scores up 9 points overall, just how does that change Carvana's view on growth? Meaning, does that mean we move significantly forward on advertising spend to raise awareness, drive greater conversion rates, et cetera?

Ernest Garcia: Sure. I'll give a quick high-level answer on inventory. I think, again, to reiterate, we think the team has done a great job. We've made progress in building more cars. We would certainly like to make faster progress, and we're working hard to do that. If we could press the button and have many, many, many thousands of additional cars on Carvana, we would instantaneously very happily convert cash to more reconditioned cars. But that's a process that requires a ton of time and energy. And so we're doing the work to try to as quickly as we can. In the quarter, we did out -- produce sales by a little bit. So that's definitely progress we're excited about, but there's a lot more wood to chop there.

Mark Jenkins: Great. Yes. And then on the advertising question, I actually think it's useful to just take a step back and talk about our 3-part growth algorithm. So we've been talking about this, I think, over the past couple of years, but there's really 3 drivers of our long-term growth. One is continuously improving the customer offering. That just means making simpler, faster, more informative, seamless experiences for our customers. And that's something that we have focused on and plan to continue to focus on, but just making the customer offering better is a big part of our long-term growth story. I think second is increasing awareness, understanding and trust. That's really the pillar where advertising comes in. We think we're relatively early still in our long-term journey of telling our story to customers and having them really understand all the things that Carvana brings to the table. I think we think we've got a long growth way -- runway in front of us. And so investing in advertising and telling our story is definitely a place we expect to continue to invest. Last, increasing selection and other benefits of scale, that links back to your first question, where certainly, we want to continue to grow selection, add more inventory pools, drive faster delivery times and get those benefits as part of the long-term growth algorithm. So those are the 3 big areas. Advertising plays a key role in area #2, and we do expect to continue investing in telling our story.

Operator: This concludes our question-and-answer session. I'd like to turn the conference back over to Ernie Garcia for any closing remarks. Please go ahead.

Ernest Garcia: Thanks. Thanks, everyone, for joining the call, and thanks again to the Carvana team. Another awesome quarter. Please walk around and give each other high fives. This is another great one, and then let's come back tomorrow and do it again. Thanks, everyone.

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