VRM - NASDAQ

Ladies and gentlemen, thank you for standing by, and welcome to the Vroom Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. I’ll now turn the conference over to Allen Miller. You may begin.

Thank you, Senedra. Good afternoon and thank you for joining us on Vroom’s fourth quarter and full year 2020 earnings conference call. Joining me on the call today are Paul Hennessy, Chief Executive Officer; and Dave Jones, Chief Financial Officer. Please note that this call will be simultaneously webcast on the Investor Relations section of the company’s corporate website at ir.vroom.com. The fourth quarter earnings release is also posted on the IR website. Before we begin, please note that the discussion today includes forward-looking statements within the meaning of the federal securities laws, including but not limited to statements about Vroom’s operations and future financial performance. These and other forward looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from those in such statements. We direct you to the company’s most recent SEC filings, including the risk factors section of Vroom’s most recent Form 10-K for additional discussion of factors that could cause actual results to differ materially from those in the forward-looking statements. Please note further that today’s discussion including the forward-looking statements speak only as of the date of this call and Vroom assumes no obligation to update such statements based upon future developments or otherwise. The company may also discuss certain non-GAAP financial measures during today’s call. You can find a presentation of the most directly comparable GAAP measures and a reconciliation of those measures in today’s press release. With that, I’ll now turn the call over to Paul Hennessy, our CEO. Paul?

Thanks, Allen. And thanks to everyone for joining Vroom’s fourth quarter and full year 2020 earnings call. I’d like to start by thanking all of our employees, investors, and board members for all of their hard work and support in building a great customer-centric public company. I could not be prouder of our team and all that we accomplished in 2020. First and foremost, we had a very successful initial public offering and follow-on raise, adding capital to our balance sheet so that we can continue to build an outstanding company. We doubled and extended our floor plan financing with Ally Financial, enabling us to scale our supply and meet our increasing demand. We also launched a series of preferred lending agreements with JPMorgan Chase, Ally Financial, and Santander Bank, providing attractive lending alternatives to our customers across the credit spectrum. Operationally, we added a new reconditioning partner to expand and diversify our resources, and also added a total of 14 strategic reconditioning facilities in the year, providing Vroom with quality reconditioning capacity for 2021 and beyond. We also started investing in and scaling our last mile delivery services to enhance our customer experience. And we laid the groundwork to develop our own long-haul operation in 2021 to drive quality, speed and efficiency to our national logistics network. We brought technology and data science to our customer experience, improving our e-commerce platform by removing friction and enhancing the end-to-end experience for our customers. We grew our workforce in all areas of the company and expanded our third-party providers to add critical resources to scale our business. We ended 2020 with the acquisition of CarStory to enhance our ability to buy better, price better and optimize better while also enhancing our overall digital retailing capabilities. And as we’re all painfully aware, we realized all of those achievements while operating in the middle of a global pandemic. As I said, I could not be prouder of what the team accomplished. I point out our accomplishments because many are foundational in nature, financing for the company, for vehicles and for customers, reconditioning and logistics capacity and improvements to deliver quality and scale. Technology and data science enhancements to drive e-commerce conversion and improve customer experience. 2020 was a year in which we built our business into a very stable platform that scales. And that’s exactly what we’re doing. We’re scaling. E-commerce units were up 82% year-over-year for full year 2020, and e-commerce gross profit was up 89% year-over-year for full year 2020. Looking back on the fourth quarter specifically, I’m also very pleased with our performance. Vroom delivered a record number of e-commerce units and achieved record gross profit. In the fourth quarter, e-commerce units were up 74% year-over-year. E-commerce gross profit was up 95% year-over-year. As we move ahead after the unprecedented year that we experienced in 2020, here’s how I think about where we are currently and where we’re headed in 2021. There are four key areas of our business, demand and marketing, supply and reconditioning, logistics, sales and sales operations. These four areas are highly integrated and have direct impact on the performance of our business in terms of both revenue and gross profit, as well as cost structure of our business and the experience that we deliver to our customers. I’ll provide transparent commentary on each of these key areas. Demand for the Vroom model is strong, as evidenced by our continued record-breaking e-commerce unit sales and the demand is broad-based across our single nationwide market. Brand awareness is growing for the Vroom brand. And as you know, we took a large step towards making much of the country aware of the Vroom brand by our participation in this year’s Super Bowl. Now one 30-second advertisement does not make a brand, but we’re very pleased with the early read and results from that decision, which has longer term brand building benefits. We are very confident in our ability to engage customers, bring them into the Vroom business and convert them into buyers and sellers. As I said, demand is strong. Supply has been strong in buying cars, both at auction and from consumers. As we built out our technological capabilities with integrated buying algorithms, we are now able to evaluate significantly more cars in real-time, buy and price them appropriately and grow our inventory. By combining our existing data-driven technology platform with the artificial intelligence powered analytics provided by Carstory, we expect Vroom to be well-positioned to acquire inventory, to meet our 2021 plans and beyond. Reconditioning is scaling very nicely. I am enthusiastic about our asset-light model for reconditioning, which leverages our own facility with those of our third-party partners. We are delivering high quality reconditioning at costs that are in line with our expected near-term and long-term cost structure. As we add nodes to the network, we get closer and closer to our customers, which is constructive for both speed of delivery to customers and lower inbound and outbound shipping costs. Our asset-light models enables us to respond quickly to increases in demand and to avoid gridlock in our inventory supply. We are very confident that our reconditioning model will continue to deliver high quality, attractive costs and needed capacity to continue to scale our business. Logistics is an area of increased investment for Vroom and our logistics operations have been expanding rapidly. Our initial focus has been on last mile to ensure that our driveway delivery experience is outstanding. As mentioned on our last call, we will continue to add more owned vehicles, not only for last mile, but also for longer-haul routes. These investments significantly enhance our overall Vroom customer experience and are efficient at scale in relation to our cost structure. We’ve added talented logistics leaders with specific experience in both the direct-to-consumer and automotive retail delivery verticals to build out and scale our nationwide network. We are confident that we are building a national logistics and transportation network that will deliver speed, efficiency and an outstanding experience. Sales and sales support operations are in a significantly better place than they were at the end of Q3 2020. We’ve nearly tripled the amount of staffing in both our sales organizations and our sales support organizations, and they continue to be an area of investment in the first quarter. It is important to note that as we experienced exceptional growth in the second half of 2020, backlogs in our business formed as there was more volume to process than our capacity could deliver. The result meant that our customers had to wait. When customers have to wait for us to complete a transaction or deliver a car, pick up a car, complete financial arrangements, or register their vehicle, their experiences degraded. As I mentioned, we’ve been invested in and will continue to invest in our sales and sales support organization so that we remove any bottlenecks in our business as the business is scaling. We believe we are tracking against this objective and are confident in our ability to eliminate the backlogs and deliver an exceptional customer experience. I also want to make the point that our backlogs also contributed to a negative outcome on our retail and wholesale unit economics. As you saw in our fourth quarter results and in our first quarter guidance, we had lower gross profit per unit levels than we anticipated. In addition to greater depreciation than we expected, the lower gross profit per unit is also because we were buying inventory in anticipation of and aligned with our demand. The demand arrived as expected, but due to the constraints in sales personnel and sales support personnel, we were unable to convert and process the sales associated with that demand. The result is that our inventory aged. That aged inventory needed to be discounted to move through our retail channels or liquidated in our wholesale channels. Said another way, we bought more inventory than we could actually process and that excess inventory needed to be moved in Q4 and will continue to be moved in Q1. We are confident that is our throughput increases as a result of our investments, and as we turn our inventory faster, both our unit economics and our customer experience improve. We are intentionally adding and deploying human capital in the coming quarters to remove friction from our process and ensure that our customers have an outstanding experience. But it’s important to note that as an e-commerce company, we are committed to the goal of building a world-class end-to-end touchless transaction. With each software deployed, we move closer towards that goal. And the need for incremental human capital decreases significantly while our consumer experience increases significantly. So here are the key takeaways. Demand and sales are strong sequentially and year-over-year, and we believe we will deliver triple digit e-commerce growth this year. Gross profit per unit was under pressure in Q4 and will be in Q1, but we’re expecting over 200% growth in aggregate gross profit for full year, implying material improvements in each remaining quarter of 2021, as we right-size and turn inventory well. Supply is readily available and our access to an acquisition of consumer inventory is increasing. Reconditioning quality costs and capacity is in an excellent place and is well positioned to handle our anticipated sales growth. Our logistics network is scaling rapidly and improving the customer experience. Sales and sales support have been creating bottlenecks, but we’ve invested heavily in those areas and we’ll continue to do so to remove friction throughout the entire sales funnel. And finally, our platform is stable and scalable and well positioned to deliver another record number of units sold, record revenue with attractive gross profit and many, many satisfied customers. And with that, I’ll hand over to Dave for further remarks in our financials and our guidance. Dave?

Thanks, Paul, and good afternoon, everyone. E-commerce units sold in the fourth quarter, increased 25% sequentially from Q3 and increased 74% year-over-year, to a new quarterly record for Vroom at just over 11,000 units. This was driven by increased consumer demand, higher inventory levels and increased marketing spends. Total listed vehicles which includes coming soon inventory and sales pending inventory, increased to about 16,000 units at the end of Q4 from about 12,000 at the end of Q3, and we’re currently at about 14,500 with approximately 46% of those vehicles available for sale. We are estimating 14,000 to 14,500 e-commerce unit sales in the first quarter of 2021. The mid range of that guidance would imply an accelerating 29% sequential growth quarter-to-quarter and 80% year-over-year growth. Again, as Paul mentioned, we’re expecting triple digit growth in e-commerce units for the full year of 2021. At the end of the quarter, we had 19 Vroom reconditioning centers around the country, including our proprietary Vroom VRC. These 19 facilities provide us with capacity to recondition more than 2,000 vehicles per week. We’re confident that we currently have the capacity to meet our full year 2021 targets. And we’re continuing to work with our reconditioning partners on expanding the number of VRCs, which gives us the benefits of a widely distributed reconditioning network. We anticipate expanding to 25 to 30 VRCs in 2021. As a reminder, we added 14 in 2020, despite the difficult COVID environment. At 30 VRCs, more than 50% of all U.S. households would be within 100 miles of one of our VRCs. We measure the quality of the reconditioning production at each of our VRCs at the VIN level. We utilize voice of the customer feedback to measure daily delighted scores from our customers, quality scores from our employees on the ground at each reconditioning facility and net promoter scores by location. We are pleased with the current quality of production at each of the 19 VRCs. Our e-commerce revenue grew 43% year-over-year and 28% sequentially in the fourth quarter to approximately $285 million. For the full year, revenue grew almost 56% to $915 million. As planned, unit growth outpaces revenue growth due to lower average selling prices per vehicle year-over-year. Average selling price per vehicle in the fourth quarter was approximately $24,900 versus $30,800 in the prior year. As we’ve discussed in the past, our inventory selection is driven by demand signals that we see in our market data and by acquisition opportunities. In addition, the continued expansion of Vroom reconditioning centers allows us to participate in a broader market at the $25,000 to $26,000 average selling price due to decreased inbound logistics costs time and decreasing reconditioning costs. These moves are consistent with our long-term strategy. For the first quarter of 2021, based on current inventory, we’re forecasting an average selling price of $25,000 to $26,000 per unit. Our fourth quarter e-commerce gross profit per unit set a new company record at $20.1 million, up almost 95% year-over-year. E-commerce gross profit per unit was $1,821 in the fourth quarter, which was up 12% year-over-year from $1,626. We were selling inventory in Q4 that was purchased in Q3 during a 25 year high pricing environment. That fact combined with higher than expected seasonal depreciation in Q4 and the inability of our sales and support functions to serve as the accelerating demand caused a shortfall in our vehicle gross profit per unit in Q4 versus our expectations. It’s important to note though, within vehicle gross margin, we saw a year-over-year improvements in inbound shipping costs and reconditioning costs, and we expect those trends to continue. Turning to the other component of our total gross profit per unit. Products gross profits per unit of $943 in Q4 was up 53% year-over-year and 6.5% sequentially. The year-over-year improvements in e-commerce gross profits per unit were primarily driven by improved attachment rates and increased profit per product sold. Finally, we believe that total gross profit per e-commerce unit will be in the range of $1,750 to $1,850 in the first quarter. Wholesale units increased approximately 69% year-over-year in Q4 and were somewhat flat for the full year. Wholesale units in Q4 were driven by increases in trading vehicles from the increased e-commerce units sold and were also driven by increased direct purchases from consumers in the quarter and increased vehicle liquidations. Full year wholesale units were increased as a result of paring down our inventory in the initial stages of COVID, but then offset in part by reduced trade-ins and direct-to-consumer purchases during the height of the pandemic. Coming out of Q3, we discussed challenges we were facing in sales and sales support. Those challenges continued in Q4 as ramp up time for new hires exceeded our expectations. In addition, as Paul discussed as a result of the significant scaling of the business in the second half of 2020, there was more volume to process than our capacity to deliver, which created backlogs. As a result, our inventory simply did not turn fast enough in Q4 and we had inventory that have aged and needed to be liquidated. This was evidenced by our 77 days to sale in Q4, which was up from 66 in Q2 earlier in the year. As a result wholesale gross profit for the quarter was negative as we moved aged inventory through the wholesale channel. The fourth quarter results also turn the full year wholesale gross profit line slightly negative. For Q1, we expect those wholesale units to be in a range of 7,000 to 8,000 units and we expect wholesale gross profit per unit to continue to be negative in the range of $450 to $600 per unit. But as Paul discussed, we’re taking significant steps to address these bottlenecks. We believe we’re now ahead of the curve in terms of sales support. Our primary third-party sales support function is now operating effectively with about 300 representatives, servicing our customers, which is up from about 100 at the end of the third quarter. In addition, we’ve engaged with one of the top business process outsourcers in the nation to help us turn up another sales support function in the second half, as we intend to stay ahead of our accelerating growth curves. Similarly in customer support, we’re making significant investments. Our team dedicated to contract, funding and titling and registration is rapidly expanding. The team had approximately 125 members at the end of Q3 and now has almost 300. Consistent with our hybrid approach to all aspects of our business, we’ve also partnered with business process outsourcers to help us scale and manage our ever increasing volumes. We believe that we will be substantially ahead of the customer service curve by the beginning of the second half. It’s important to note though, that manpower is not the ultimate solution to scale, it’s technology. We continue to invest in our product and engineering teams as they work on technology to improve all aspects of our business and our customer experience. Projects that take human time out of the process, allow us to scale without incremental operating expenditures and ensure a delightful experience for our customers. We believe that the initiatives that are in place to scale the administrative parts of our business will bring the wholesale gross profit per unit back to breakeven by the end of the year. Any lingering effects of liquidations are included in our Q1 guidance. And again, we are expecting more than 200% year-over-year growth in aggregate gross profit in 2021. Turning to TDA. Units were up 22% sequentially from the third quarter, as foot traffic increased and improvements in inventory on hand remained. The TDA still experienced a 50% decline in units year-over-year in the fourth quarter and ended the full year down 43%. While we believe that the effects of COVID on foot traffic have subsided somewhat, we still have constrained inventory in the Houston area as the e-commerce business is scaling and pulls heavily from each VRC location. Our goal is to get TDA back to reasonable level of monthly unit sales. We believe as we increase the number of VRCs in our network, we have the opportunity to allow TDA to have a dedicated inventory to service the local demand. However, it’s important to note that with the scaling of the e-commerce business, TDA will continue to decrease as a percentage of the total. Operating expenses. Our total operating expenses for the first quarter increased as a percentage of revenue from approximately 15% in 2019 to about 19% in 2020. As Paul and I have discussed today, we are continuing to invest much more significantly across all areas of our business in particular, in our people around technology, logistics and support functions that are needed to scale with the business. Total compensation and benefits was up approximately 39% for the quarter and 27% for the year. Marketing expenses for the year were up approximately 25% driving our 82% increase in e-commerce units sold and building the Vroom brand. Outbound logistics was up 121% or $5.7 million year-over-year for the quarter, approximately $3.5 million of that increase was from the 74% growth in e-commerce units sold in the quarter. Increases in market rates from carriers make up the remaining $2.2 million of the increase. Full year results for outbound logistics were similar to the quarter. Outbound logistics costs per unit were $952 in the quarter compared to $749 in the prior year. The build-out of our proprietary logistics network continues as we begin 2021. We’re in the beginning stages of building a 250 person logistics organization by the end of the year. Our first line haul trucks will be arriving in the second quarter. Our proprietary last mile delivery operations are also well underway. At the end of the fourth quarter, we had eight hubs up and running. I should mention that this function also includes third-party last mile partners in line with our hybrid approach. By the end of the year, we expect to have approximately 30 hubs covering half of the U.S. population and delivering 50% of our e-commerce vehicle sales. We expect logistics capital expenditures to be approximately $1 million in Q1 and up to approximately $10 million for the full year. In Q1, we expect total operating expenses to be between 20% and 23% of total revenue as we step up our investments in the business to support the massive demand we’re experiencing. One final note, regarding our balance sheet and liquidity, at the end of Q4, we had over $1 billion of cash on our balance sheet and almost $100 million available under our Floorplan Facility. We’ve provided comprehensive Q1 guidance in today’s earnings announcement. And we would now like to open up the call for questions.

[Operator Instructions] And your first question comes from

Hey, guys. First question for me, on the triple digit unit outlook for the year, which would imply about 70,000 e-comm units and the pretty meaningful step up in gross profit per unit. So considering where you’re expecting to start in Q1 for both units and GPU. Could you walk us through the cadence for how these metrics are expected to build particularly at the gross profit per unit line?

Yes.

Got it. Thanks, Dave and – sorry, did you finish? Sorry.

Yes. Yes. Go ahead.

Okay. And then operationally, when you’re sourcing cars from customers, could you talk about how you decide whether a car will be sold through the retail channel or the wholesale channel and how that informs the prices that you’re willing to pay for a trade in? And then to what extent is this process improved with CarStory in order to maximize your gross profit per unit on both the retail and wholesale side?

Yes. I guess, there’s two answers to that. And part of it is very simple and part of it is more complicated. We have retail criteria, right? And so we sell as an example, we typically retail vehicles that have less than 70,000 miles and are six years older, younger. So that’s kind of the first gates to get through in terms of how we decide whether a vehicle is retail or wholesale. And so we have a much more expansive criteria list than that, but those are kind of the main gating items. And then from there, it gets more complicated because a substantial majority of the vehicles that we are appraising and acquiring are done really through technology, right, through AI and so that one allows us to scale the business. We obviously, we couldn’t have enough buyers to buy ever to appraise the number of vehicles that we appraise every year. So the technology really comes into play. And that’s exactly, the point of the CarStory acquisition. They’re really experts in the industry. They’ve got the best industry data. And so as you can imagine, we can use that data to help us buy much better than we have in the past. We also think that we’ve more than doubled the number of data science and engineers – data scientists and engineers that we have available to us now. So we think there’s an acceleration of a lot of the projects that we had on the list around improving the buying process, managing inventory, everything we’ve always been addicted to data, as you know. And so this was – we think CarStory pluses that for us.

Got it. Really appreciate the color.

And your next question comes from Daniel Powell with Goldman Sachs.

Great. Thank you. Just wanted to dig into a little bit of the puts and takes around GPU in the fourth quarter. And then coming into the first quarter, I understand there’s some seasonal depreciation dynamics that may have been a bit more severe than you were expecting, but in terms of the bottlenecks, just thinking about the unit guidance that you gave in the e-commerce channel for 4Q and sort of coming in at the midpoint of that versus coming in a good bit softer on the GPU guidance would imagine not all of that with sort of seasonal depreciation surprise. So just curious to hear sort of what the solutions are, and sort of what you’re putting in place so that those sales functions, bottlenecks? Don’t sneak up on you again.

Yes, Daniel, thanks. Yes, if you think about – if you separated into sales and sales support functions, right. So coming in and in the middle of the range on our top line as we were exiting Q3, we talked a decent amount about some challenges we had just in the sheer staffing around sales support. And so as we got our arms around that in Q4 that improved pretty drastically. And so I think it allowed us to hit our unit guidance for the quarter. But there was more demands there still during the quarter that I think we could have processed if we were further ahead of that. Like Paul and I mentioned, we have literally tripled the number of people that we have in that organization. We’re turning up a completely separate organization in the second half of the year. So we don’t have those issues again. But so that’s how we think about it from a top line perspective. I think, we’re really confident that we’ve got the solution there at the top of the funnel. We talked about seasonal depreciation in gross profits per unit. And I think, when you look at the data, there was call it 3.5% seasonal depreciation in Q4 of 19. And we were probably almost double that in Q4 of 20. But having said that, we expected some of it, I think the more significant impact on our gross profit per unit in Q4 was really from the bottlenecks, which caused our inventory to age a bit. And then, it causes us to have to lower prices on that inventory to get it to move or to take it to wholesale auction. So that’s really where we found the downward pressure on gross profit per unit in the quarter.

Got you. Got you. And then as we sort of look at the earning season that’s passed, and some of the comments coming from the listing sites, just curious, as you all have seen your branding efforts start to get out there and participating in the superbowl what have you? Have you started to notice any conversion improvements coming through those third-party listing sites where maybe historically your early stage brand was not converting as well as maybe peers?

Yes. I’ll take that one, Daniel. And I think your thinking is academically spot on, right, as you’re – as people are on third-party listing sites and making selections of brands, not surprisingly consumers tend to choose brands that they’ve heard of. And as we build our brand we start to see improvements not only in third-party websites, but also direct traffic to our website, which as you know, convert significantly better. So what I’d say is, that’s an ongoing trend from since we – from the time that we started turning on our brand advertising on a nationwide basis and not related specifically to a Super Bowl event. but we expect that decision around the Super Bowl was to do exactly what you’re talking about. As people understand one that we exist; two, exactly what we offer; and three, that what we offer is actually very appealing to them direct traffic and indirect traffic converts better. And yes, we’re starting to see that, that’s what puts us in the position to predict triple-digit growth in our e-commerce business.

Great. Thank you, both. Appreciate the color.

Yes.

And your next question comes from Sharon

Hi, good afternoon. I was hoping you could talk about kind of the embedded agility in the model. And I guess what I’m thinking is that with the sales support function in particular, it seems as if you would have a good read on how that was ramping. And so I guess, I’m wondering how quickly you can turn off new vehicle acquisition. So, as to mitigate some of that gross profit hit that we’ve seen in this quarter, if there’s some learnings there. And then secondarily, just the thoughts on liquidation, I understand sending it to wholesale. But have you analyzed the potential benefit of just offering a consumer a really good deal?

Yes. I’ll start off.

Yes, go ahead.

I was just going to say in terms of the agile model, and now laser like focus and prediction of here is the output of individuals and getting ahead of that. As we mentioned, we think, we’re in very good shape about truly understanding, the human requirements to convert on the sales side, the human requirements to convert through the sales operation side and/or have been in our adjusting our business to make sure that we get that right too and which again – which informs our confidence of being able to grow aggregate gross profit dollars, more than more than 200% on the year. So, you live through that kind of experience of the disappointment of having, gosh, having all the demand we need, having the inventory we need, and not being able to get the output that we’d like. And I think the – the answer is we are laser like focused on fixing that problem on a permanent basis hence the perpetual investment in both human capital and then quick, fast follow technical expansion, so that we can ultimately lower the need for incremental humans. So, we feel very good about that. And as far as giving retail customers a great deal, yes, I think that’s something that we think intensely about, and we’ll – that’s a lever in our business that we will have been and we’ll utilize as appropriate. So, we’re just not liquidating at wholesale.

Yes, Sharon. I would just add to that. And you mentioned turning off vehicle acquisitions. The cycle time, as you know, is fairly long, right? So just, if you use random numbers, we – it takes a, call it, a week to get a vehicle into our reconditioning facility, six days to recondition it. And then it gets – then it’s listed and it’s listed for a period of time. So, our normal days to sell, which takes into account the entire cycle time is, call it, 60 days to 70 days. And you saw in the quarter, we were at about 77 days. So, because of the cycle time, I think, it’s difficult to turn off acquisitions to manage it that quickly. Now, having said that too, I think, cycle times in the industry in terms of vehicle pricing are usually not very dramatic and much longer – a much longer curve than what we saw during 2020. So, as I mentioned, we bought inventory in Q3 that we would recondition and sell in Q4, and there was pretty dramatic changes in the pricing environment. And so it was the unfortunate equation of buying high and then selling into a softer pricing environment in Q4. Again, that what I’ve seen those cycles are usually not as dramatic in the industry. But obviously, it was a pretty dramatic year. So anyway, again, I think, car story probably pluses us here as well with enhanced abilities to analyze the data and just make improvements in our inventory management strategy as well.

Thanks.

And your next question comes from Ron Josey with JMP Securities.

Great. Thanks for taking the call to the question. Two questions, please. So Paul, I just want to ask about the investments that we’re hearing around sales and support, and I definitely hearing, you’re still building this out to get ahead of the curve, but just wondering as you bring the logistics O&O long hauls like in-house, thoughts about maybe, bringing that in house as well, that meaning the sales and support side. And then on the long-haul decision, can you just talk about the benefits you see there? I think we saw higher NPS scores with last mile. and so just talk to us about the decision to bring long-haul in-house as well. Thank you.

Sure. We have been very satisfied with our existing third-party sales team. and so scaling that was a natural, they convert well. They treat our customers like they are their own. And so with that level – and by the way, and our customers love that experience. So, we don’t have any burning desire to blow that up and say that we would do that better. In terms of the sales support role, processing transactions itself, we do the vast majority of that ourselves. We will continue to do the vast majority of ourselves and as Dave articulated, and we get help to scale. And so I think our hybrid model provide the agility that we need for something that ultimately, right with an e-commerce platform will need a lot less of both on the sales side and the sales support side. So, we like our – again, our hybrid approach with Vroom tight management over and delivery of great service. For the long-haul question, here’s how we think about it. It delivers better experience, because we take on more predictability in the network. When they are our trucks, they come and go at our back-end call, and we get to control, the entire journey from hub to hub, and then with the last mile from hub to customer. And so predictability is great for customer and great for company. and in that predictability and more cars on our own long-haul trucks, it starts to drive efficiency. So instead of every single vehicle being one off, we get the efficiencies and economies of scale by putting five, six, seven, eight cars on a truck that are all headed to a particular region. So, again, we love anything that drives better customer experience and better efficiency and unit economics for the business. And so long-haul was a natural follow on to last mile. And the combinations of that again, efficiencies at scale outstanding customer experience.

Thank you, Paul. Appreciate it.

Yes. My pleasure.

And your next question comes from Nat Schindler with Bank of America.

Yes. Hi, guys. Just a couple of questions. One, I think this is just to clear this up for everybody, because it’s not sales, because as you said, you’re very comfortable with the sales function that you’re doing through third parties. And it’s not delivery that is going everything down, it’s customer support. And I’ve gotten multiple questions from investors, actually what that would actually be. So, if you could walk through what are the exact processes that you are doing too slowly in order to get the sales that you think you could have gotten? And then secondly, I would – I want to go and compare to your closest comp out there and look at this quarter inside the e-commerce looks roughly the same as Carvana 3Q 2017, about the same number of units about the same GPU. At that point, they were growing with about 133% in units. What were they – what is different about then and them and now, and you. And I know there’s a lot of things have changed over those years and the competition has changed and we are in the midst of COVID still. But can you just walk through, what do you think the differences are and what were they doing differently then? Finally, one look a little bit at your triple-digit growth projection for next year. How much of that is – well, how much benefit will you likely see it from a stimulus check that is going through the market and how that affects growth? And I know this is a really hard one, because it’s actually telling you to then start projecting something on kind of 2022, how much of a difficult comp if we don’t see that in the following year, which seems likely would in effect.

Okay. I’ll – let me take those one at a time. And I’m going to give you a sense rather than walk through a very detailed, what’s end-to-end process for sales support. But here’s what I think, you will understand. As we – as customers move from a – I’m interested in that vehicle, I put a deposit on a vehicle, I’m qualified for lending of that vehicle. Then you’ve got to actually complete the transaction. So, in some instances, consumers need a proof of documentation. There are signatures involved, there are wet signatures involved in some cases in our process. There are verification of payoffs of loans. There are verification of lease arrangements from if someone’s trading in a lease car. There is a lot of human and intensive manual steps and procedures that are required to complete the transaction. And because that’s a manual process rather than a press button get deal in this space, as well as any kind of connectivity into DMVs and things like that, anything that is manual and requires, high touch human interaction that’s where the amount of deals slows the business. And let me add more contexts as well. As we’ve increased our purchases from consumer cars, I would say significantly in doing so, that requires the same amount of work and manual work, paperwork, wet signatures, et cetera, calling of banks, paying off of loans, et cetera, as a sale. So whether we’re buying or selling when both of those go north, and both of those have gone significantly north in terms of total transactions in our business, you need a lot of sales support folks doing that until such time as full automation, which as I mentioned, we’re working on. So that’s like – that’s where the bottleneck is. That’s where you’ve heard, we’ve tripled the amount of people that are doing that and we think that we’re in very good shape as we continue to invest in that area. On the second, what was different with Carvana, approaching four years ago, that’s a tough one to take on. We are – as you said, we are in an entirely different place. They were – they were growing, I think you’ve said at 130% of that time, what I’ll remind you is pre-COVID, we were growing at 150%. So, I think that as our world normalizes, as our inventory normalizes, our ability to scale faster will happen. And I think that that’s why we’re projecting triple-digit growth this year and we’re very pleased with that growth. As far as stimulus checks, whether it’s tax season, whether they’re stimulus checks, when consumers have more money, they often have turned to use cars as a way to either secure, important transportation, take advantage of an opportunity of a used car or just treat themselves. So, stimulus checks are positive to our business. And what I would say is, what’s much more important is broadly folks having jobs stability in the market, a more normalized world as it relates to COVID, that’s really environment that we believe will do very well. And because of our growth rate, we should be growing through tax seasons and growing through one time or now maybe, two time macro events like stimulus checks, building a slow and steady and again, triple-digit growth business. So that’s how we think about your broad and deep question.

Okay. And just finally, just a little bit on that stimulus check thing, if you obviously, tax rebates come in the kind of Q1, early Q2 period that creates seasonality, stimulus check coming in at a similar time. Should we look for a kind of a mega seasonality?

Well, again, I don’t know the timing of all of those events. We tried to guide to the best of our ability on what we think is going to happen both in the immediate quarter, but also on an annual basis. And so that that’s contemplated whether those show up in the end of Q1 or whether those show up in early Q2 that’s contemplated both in our guidance for Q1 and our annual guidance.

Great. Thank you.

Sure.

And your next question comes from Rajat Gupta with JPMorgan.

Hi, good afternoon. Good evening and thanks for taking my questions. Just going back to the fourth quarter GPU versus your original guidance, could you help us bridge how much of that disconnect roughly $300 versus guidance was due to just a higher than expected seasonal depreciation environment versus how much was it due to liquidation? And the same for 1Q like how much impact is embedded in that guide due to just liquidating inventory? And I have a couple of follow-ups. Thanks.

Yes, sure. So, I guess, here’s what I thought about Q3 expectations versus actual Q4 performance. So, we expected Q3 vehicle gross profits to go from about $1,300 to about $1,240 in Q4. So, our expectation for seasonal depreciation Q3 to Q4 was let’s call it $65 per unit. And I think that’s consistent, we may have – I think we were on the lighter end in terms of expectation, it’s somewhat difficult as you can imagine to actually quantify, how much seasonal depreciation was in there. What I would say is, you had significant appreciation in Q3, which therefore affects the Q4 depreciation as well. So anyway, we expected $1,300 of vehicle gross profit per unit, we wound up with $878 of vehicle gross profit per unit. So it was about a $424 difference. So if we say $65 of that was what we expected, the normal depreciation you’re left with was about $360 per unit. And then some piece of that is – accelerated, but more than expected depreciation and the balances as a result of moving aged inventory. And so, that breakout is kind of tough to get, but that’s how we quantify it anyways. So we think call it $350 is somewhat related to the extra depreciation. I would tell you the majority of it though is really from the liquidations, because I don’t think that the extra depreciation in Q4 was like terribly significant. And then I think, as we look at Q1, it’s – again it’s a little bit difficult to tell, how much are we going to be de-price aged units versus units that are fresh. I think it’s much easier to see, we’re expecting a similar loss in the wholesale gross profit per unit that we saw in Q4 as we get through that. So I think the retail would probably be similar as well, so hopefully, that’s helpful, and you said you had another question.

Yes. Just related to that. Thanks for that clarification, but I’m just surprised that you’re having to liquidate so much inventory even on the retail side, just because I mean, I understand that some of it is aging. I mean, at the same time demand is just really strong here. And it seems like you’ve also raised your shipping fee by roughly $100. So curious as to like, why the need to cut pricing so much in order to just get the inventory out, because you clearly have the capacity to ship the 11,000 cars or the 14,500 cars in 1Q. So if demand is so strong, why is – why are we – what is the need to cut pricing so significantly that is impacting the first quarter GPU?

Yes. So I think the – the way to think about it is, it’s obviously – it’s a depreciating asset, right. So – and there is – we have competition in the market. So if we’ve got inventory that has aged and we’re selling against fresher inventory that was purchased at different times, it just becomes difficult for those economics to work. I think it’s easier on unique vehicles to the demand higher sell price. But when you’re retailing 15,000, – 14,000, 15,000 units a quarter, they’re not all unique, a lot of them are run of the mill inventory. And so you’re competing against dealers and other online players. And so, I think when that inventory ages you have to decrease the price of it we purchased it in a different environment and you have to adjust that price to the current environment. But a great demand, demand is strong, and so, we’ve got that dumped into the Q1 guidance. In terms of the shipping fee, we changed that to $699 in mid-February. We’re a nationwide business, and so we’re shipping nationally. And as we’ve talked about for couple of quarters now the shipping charges from the carriers in the industry has just gotten more expensive, and so, that’s the rationale. We haven’t seen any impact to conversion from raising that shipping price. And then the way we think about that going forward is at a greater scale, we start to now think about variable pricing on shipping, where consumers can look at a vehicle if it happens to be closer to them, we can offer a smaller shipping charge, if it’s vehicle that’s far away and they just have to have it, then we’ll charge them a little bit more for shipping. So, that’s how we think about it going forward.

Got it. Just one last one for me. I mean, so, I mean today as where the inventory stands today, I mean, what percentage of that would you say is aged more than what you would like. And by what time of the year are you expecting this backlog issue to resolve? I mean the reason I ask that is because, I mean, there are a lot of underlying positives in terms of – you’ve increased your sourcing from consumers, your reconditioning costs that are lower than before, your inbound logistics costs are lower than before. So, I mean, it looks like once these backlog issues are clear, I mean, you should see a significant tailwind just on your underlined GPU level. So – and even with the 200% guidance for the year, it doesn’t look like you are going to get to what you should be entitled to. So, like how long does this – are these backlog issue is going to take to care out? That’ll be all. Thanks.

Yes. And then, I think we’ll have to wrap up with this question. I think that the backlog issues are well at hand as I shared. And in terms of the inventory situation, look, we’ve got import in Q1 within in my prepared remarks, material improvement in gross profit in sequential quarters after Q1. So I think you’re connecting all the right dots. This is a Q4, Q1 issue for both the inventory situation, but also for the backlog, which is what’s going to allow us to accelerate both unit economics and top line e-commerce unit sales.

Got it. Thanks for all the color and good luck.

Yes. Thanks.

And that is all the time we have for questions today. I’ll now turn the conference back over to Paul Hennessy for closing remarks.

Great. Thank you; and thanks everyone for joining the call and special thanks to all the room employees that, yes, that continue to keep the trains running on time. Thanks, and we’ll talk soon.