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Good day, and welcome to Carvana's First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's first quarter 2025 earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the Company's corporate website at investors.carvana.com. The first quarter shareholder letter is also posted on the IR website. Additionally, we posted a set of supplemental financial tables for Q1, which can be found in the Events & Presentations page of our IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K and Forms 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today and Carvana assumes no obligation to update or revise them whether as a result of new developments or otherwise. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website. And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?

Thanks, Meg, and thanks, everyone, for joining the call. In 2018, we held an Analyst Day where we walked through the long-term economics, we believe our business model could deliver. That analysis resulted in us projecting a long-term EBITDA margin range of 8% to 13.5% at a time when our actual adjusted EBITDA margin was negative 9%. For the last four consecutive quarters, we have been in that range. And in Q1, in a seasonally weaker quarter, we were reporting 11.5%. This achievement is worth reflecting on, and it begs an important question. Why were we able to accurately forecast how our model would perform as a five-year-old newly public company that was significantly subscale and 20% of revenue away from our margin target. The answer is that the automotive industry is simpler when you zoom-out than it looks when you zoom-in. It is a mature industry with mature unit economics. It is highly fragmented with many industry players using similar processes with similar goals and similar underlying economics. This reality provides a lot of stability and makes the key to understanding any given player about understanding where they are different from the rest of the industry. This is the method we use to determine our own long-term financial model in 2018. We went line by line using automotive retail history, simple mental models for the way our industry works and a bottom-up analysis of the differences in cost and revenues of our business given our novel approach.

Thank you, Ernie, and thank you all for joining us today. Our first quarter results were outstanding and driven by our team's ability to achieve further fundamental gains and operating efficiencies while also delivering significant year-over-year growth. For the fifth consecutive quarter, we earned positive net income, and we set new records for retail units sold revenue, adjusted EBITDA, GAAP operating income and GAAP operating margin. Unless otherwise noted, all further comparisons will be on a year-over-year basis. Retail units sold totaled 133,898 in Q1, an increase of 46% and a new company record. Revenue was $4.232 billion, an increase of 38% and also a new company record. Consistent with past quarters, our growth in the first quarter was driven by our three long-term drivers of growth: a continuously improving customer offering; increasing awareness, understanding and trust; and increasing inventory selection and other benefits of scale. We believe as we continue on our path of profitable growth, each driver will improve, creating more positive feedback in our model. Our strong profitability results in Q1 were again driven by sustained and fundamental improvements in GPU and operations expenses as well as levering our overhead expenses. Non-GAAP retail GPU was $3,308, an increase of $97. Year-over-year changes were primarily driven by reductions in reconditioning and inbound transport costs and lower retail depreciation rates, partially offset by lower spreads between wholesale and retail market prices. Non-GAAP wholesale GPU was $964, a decrease of $189. Year-over-year changes were primarily driven by faster growth in retail units than wholesale vehicle and wholesale marketplace units and higher wholesale vehicle depreciation rates. Non-GAAP Other GPU was $2,868, an increase of $430. Year-over-year changes in Other GPU were primarily driven by higher spreads between origination interest rates and funding costs, as well as a higher attachment rate on vehicle service contracts. Non-GAAP SG&A expense was $468 million, an increase of 20%. Q1 was another strong quarter for demonstrating the power of our model to lever SG&A expenses. Our 46% growth in retail units sold led to a $750 reduction in non-GAAP SG&A expense per retail unit sold. The Carvana operations portion of SG&A expense totaled $1,658 for retail units sold, a decrease of $192, driven by our operational efficiency initiatives. The overhead portion of SG&A expense totaled $160 million, an increase of $9 million and a decrease of $449 on a per retail unit basis. We continue to see opportunities for significant improvement in per unit SG&A expenses over time and as we scale, driven by both continued efficiency and operational expenses as well as leverage in the fixed components of our cost structure. Adjusted EBITDA was $488 million in Q1, an increase of $253 million and a new company record. Adjusted EBITDA margin was 11.5% in Q1, a 3.8 percentage point increase. Our adjusted EBITDA margin of 11.5% was industry-leading and is well within our long-term financial model EBITDA margin range of 8% -- to 13.5%. Our adjusted EBITDA is very high quality compared to many rapidly growing companies due to our relatively low noncash expenses. We converted approximately 80% of adjusted EBITDA into $394 million of GAAP operating income and a 9.3% GAAP operating margin in Q1, leading the public auto retail industry. As previously noted, we currently carry many expenses that support retail unit sales capacity of over 1 million units and expect our GAAP operating income to grow faster than adjusted EBITDA over time. Q1 was a record quarter that again demonstrated the significant power of our business model. Assuming the environment remains stable, looking toward Q2, we expect a sequential increase in both retail units sold and adjusted EBITDA, leading to all-time company records on both metrics. We remain on track to deliver significant growth in both retail units sold and adjusted EBITDA in FY 2025. In conclusion, our results in Q1 were exceptional, and we remain highly motivated by our opportunity to continue driving significant profitable growth. Thank you for your attention. We will now take questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ron Josey with Citi. Please go ahead.

I have two. Ernie, I wanted to -- in the letter, we talked about a lot of things in the letter, but specifically, you talked about very clear visibility to continued financial performance and I wanted to -- the first part of this question is talk to us a little bit about macro about how tariffs fit in very short term, I know, and I know you just gave long-term guidance, but I wanted to hear your thoughts on the here now and how things are going, how we should -- how you're thinking about the impact? And then the second question is more on pricing and on GPUs. And just wondering, when you're managing the business, and do you manage the business chain retail GPUs and total GPUs, meaning that as you can benefit from improving retail GPUs, does that go into lower pricing, maybe impacting the retail GPU, but yet financing GPUs are better. So, I'm trying to understand how we're taking these efficiencies, pushing it to greater growth and now how that rolls up to overall profitability of the Company. Hopefully, that makes sense.

Okay. I'll try to be quick on the first one because I don't know that we have as much interesting stuff to say as others might. But I think -- as it relates to tariffs, I think we've heard reasonable arguments that I think are directionally correct that if tariffs drive up car prices, all else constant, that's bad. And I think we've heard reasonable arguments that it would be more likely they would drive up new car prices by more than used car prices. And so it may be a directional benefit to used cars. And it may be a benefit to business models that are able to offer value to consumers, which is a business model that we think we fit in that box. So, we'll see how that works. I think the general approach that we try to take to this, and I think it's been true since the beginning is we believe what matters in this industry is what are your expenses compared to everyone else what are your revenues compared to everyone else and what is the experience you deliver compared to everyone else. And if you're better in those three things, then you're going to win and the question is degree and the question is time, because it is a competitive industry. It's a mature industry. It's an industry that's very large. And it's an industry where many of the other players have shared economics. And so, we try really hard to put all of our energy into those three things because you can kind of chase a macro environment in circles. That said, we pay attention. I think the good news is we have an adaptive system. Our system inherently adapts to what it sees. So, if customers start to prefer less expensive cars, we'll automatically start buying less expensive cars. If the reverse is true, then we'll react in the opposite way. I think we've seen little gyrations over the last month or so. I think when tariffs were first announced, we saw a small pull forward of demand, and we reacted accordingly. We like to try to keep sales approximately on our plans as it keeps operations very smooth. So, we pulled some levers to try to keep sales on our plan and despite that little increase in demand. And then we saw probably a little bit of a trough thereafter, and it feels like it's stabilized sense, and I think overall, our expectations remain the same. So, I don't think we have too much that's interesting there, but that's how we've been reacting. I think as it relates to pricing in general, I think we've continually used this term fundamental gains. And I think the last couple of years have been pretty exceptional in this regard. I think we've demonstrated a lot of improvement in every expense line item in every revenue line item, and we've done that well, giving customers improving experiences with improving NPS and similar value. And I think that, that's very exciting. And we think we tend to have kind of our annual planning around this time, and we're setting our targets now for Q4 this year and for Q2 of next year. And I think looking at the opportunities in every group, they're, again, very large and very exciting. And I think the hardest thing that we have to do is decide which things we're going to do and which things we're not going to do to try to stay focused and ensure that we get the most out of our effort along the way. But we still think there are very significant fundamental gains. And we think that in aggregate across the various line items, we're likely to take those fundamental gains and seek to share the significant majority of them with our customers to further separate our offering, over time, And, we think that we're in a position to do that because we think the economics are very strong. So just to give a quick walk, which is, to some degree, in the shareholder letter, we were 11.5% this quarter in a traditionally seasonally weak quarter. And so we think that that's very strong to begin with. We think there's a couple of points of fixed cost leverage from there, even in marketing, which is not a huge line item at this point. our older, more mature markets with larger market shares are a couple of hundred dollars better than our average. And we still think that there's very significant fundamental gains to be had. And I think when you start doing the mental math on that, it gets you well beyond our 13.5% target. But we view that as exciting because we think that, that's fuel for future growth that we can share with customers. And we think we'll share it in many ways, it could be economic. It could be additional investments in experience. You've seen some of the stats we put in the shareholder letter. We're delivering cars materially faster. We're answering phones more quickly. We're getting fewer calls from customers because we've invested in digital tools that answer questions for them. So, we're just becoming more efficient as a business overall. And I think that we will seek to continue to do that and to take these gains that we expect you'll get, but that we're going to have to work hard to go get share them with our customers and see where that takes us. But we think the road in front of us is very clear, and it's up to us to execute, but we think we've got a huge opportunity.

Next question comes from Brian Nagel with Oppenheimer. Please go ahead.

First off, congratulations. I mean another very, very nice quarter. So, congrats.

Thank you. We really do appreciate that. And we do keep track over here. Just remember coming up next.

Two questions. I'll put them together. I mean first off, as part of their superior performance, you've been managing your retail GPU very well. But I guess the question I have is if you look at it from here, how should we think about, from your standpoint, the trajectory there kind of the puts and takes both near and maybe longer term on the retail GPU? And then my second question, the longer-term nature, you introduced today the kind of new longer-term financial goals for the Company. So, as we think of -- been recognizing the numbers you put out there over a long period of time, but what type of incremental investment are you starting to think about just sort of -- in the business to support those type of volumes? And when will we start to see that newer capacity so that come online?

Sure. So, I think as it relates to the various GPU line items, I mean the way that we think about it first order is we try to break it down, we say, what are the various inputs. So, retail GPU, you've got inbound transport, you've got your acquisition cost, you've got reconditioning. You've got the price that we put in front of customers, which is driven by how well we're merchandising and how effectively we're driving demand to those cars. And so, those are various areas where we have goals and we have projects that we're trying to tackle in every one of those areas, and we try to get better. And so, I think first and foremost, we try to get fundamentally better. And if we get fundamentally better, then we've got good options. One option you show that in the bottom line. One option you pass it back to customers either in price itself or in some other form of investment and drive incremental demand. And so generally speaking, I think that we feel like we're in a pretty good spot from an overall GPU perspective. And it's driving us to this place where the EBITDA economic walk that we did a moment ago, gets you to very, very exciting places. So, I think we're going to be managing kind of across the economics of the business to try to make sure that we're in a great overall margin spot. And we're going to try to get better in every subline of every revenue line item and every expense line item. And we think we have visibility to do that, and we'll seek to continue doing that. I think as it relates to investments to keep going from here, I think we are in a pretty unique and exciting position. We acquired ADESA several years back now. And through that acquisition, we got access to a lot of real estate. We've been methodically opening up our mega sites, which support both auction capabilities and reconditioning capabilities. And then we also have underutilized inspection centers ourselves. So, I think we're positioned very well to kind of grow into that infrastructure. I think, of course, along the way, there will be investments. Mark has given some CapEx guidance for this year, I'm sure, over time, we'll continue to provide that. But I think relative to most companies with this kind of opportunity, I think there's a lot of kind of infrastructure that we get the benefit of growing into. So, I think we're in a great spot there, and we're excited about it, and we'll work hard to unlock it.

The next question comes from Rajat Gupta with JPMorgan. Please go ahead.

Great. I have one question just on the macro and you have several questions being asked over the last few months around how is Carvana positioned to tackle another recession, maybe a severe recession. Could you help us understand like what's different now in the business versus '21, '22? How should we think about the challenges you might face in the lending market, gain on sale margins, et cetera. If you could just walk us through like some of maybe two or three top aspects that are very different from 2022, which puts in a better position to navigate a downtrend. And I have a quick follow-up.

Sure. Okay. Well, you started that question with a great and then you didn't follow it up. So, was that great that it was your turn or was that great quarter just so we can keep our staff on this side.

Both, both.

Okay. Thank you. So, mark that one down. Here's what I would answer. I think it's a good and fair question. I think the way that we would try to answer that one would be to point to the automotive industry in general. I think that we were a very, very different company in many respects heading into '22, right? We were not a moneymaking company. We are an extremely high-growth company that was sprinting full speed as an opportunity. And we felt at the time that we were supported by investors in that mission. And then I think we ran into our own issues. We saw interest rates shoot up in a way that was very unique. We saw car prices shot up over a full year in a way that was unique. And we were in a position where we had to dramatically change our strategy. And so, I think there's just a lot of threads that came together at a single time there that can give the impression of a pattern that we don't really think is predictive of where the future is likely to be. I think where we are today, is we're the most profitable automotive retailer by a pretty long way. I think as measured by adjusted EBITDA margin, we're approximately twice as profitable as the average public automotive retailer. And that puts us in a very different position. We've got a significant margin to work with. We've got significant cash balances. We're simultaneously growing very quickly. And I think that, that suggests that our ability to absorb variation in the macro environment is very, very different. And I think it's likely to look more like other automotive retailers that were profitable heading into downturns in the past. And in general, when you go back and look at that history, the changes were not very severe. I think you can also -- in any of these line items, you can look at the history that we've generated overall relatively short life of the Company. We've been through some real storms in finance GPU, for example, which I think is one of the areas that people tend to look at first when they ask these sorts of questions. We went through COVID, and we saw a finance GPU go down a little bit but recover a quarter later. We went through '22 and '23 when you couldn't read a nice thing about us online if you search over and over again. And I think that we saw GPU go down a little bit, but not all that much. Generally speaking, we are in a competitive market. everyone else sees the same things that we see. If consumer credit gets worse, that gets priced in. If interest rates go up, that gets priced in. If car prices go up or down, that generally gets priced in. And so, I think our expectation would be that it would be much more like other highly profitable automotive retailers have dealt with difficult environments in the past than it would be like '22 or '23. And we'll do our best to make sure that that's the case.

Got it. Got it. And just a follow-up on just like the lending backdrop. You added like a new partner last year. Curious where you are in discussions, potentially adding more partners? Do you see yourself having more partners or additional partners this year? Where are we in those discussions today.

Yes, sure. I think we're stronger than we've ever been by a long way. I think our securitization program is stronger than it's ever been. I think we have more support in the residual sale portion of that, which is kind of more of the -- almost whole loan risk-taking portion of these securitizations, we've got more buyers that are kind of recurring buyers than we've ever had. We've got, obviously, our Ally arrangement, which has been great for us over a long period of time and hopefully, great for them as well. And we've also had large like pooled loan sales that we've done. We added another large pool of buyer this quarter. And I think, in general, we feel like we're in a really strong position there. We generate very high-quality assets that have predictable cash flows and high yields relative to a lot of other assets that are available in the market. And so, in general, I would say that feels as good as it's ever felt, and I think that, that's reflected in the results that you see this quarter. We had exceptional finance GPU this quarter. And in general, it's been an improving trend over the last 1.5 years plus. So, I think that, that's reflective of those trends.

The next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead.

First one, I'm not sure I heard you correctly, but it sounded like you recast the TAM to the $40 million used plus new, and now you're 1% of that TAM. So just in context of acquiring that small dealership that you bought in the franchise space, just currently thinking, wanted to hear how you're thinking about the new vehicle opportunity.

Sure. So, we bought that dealership. I think that begs a series of intriguing questions, but it's also very early. I think we're just in the process now of experimenting and learning. And so, I think it's a bit early to share much more than that, but stay tuned.

Okay. That's fair. And then I was hoping to dig in on the ramp, like you provided some interesting context in the shareholder letter, like you can get to 3 million, 5 years versus 10, and what that implies for like the weekly production capacity. I mean you do it in five, you'd have to almost probably start this year or this coming year to do that. But I guess, what are the steps you do differently to hit it in 5 years versus 10? Like how does that change your capacity needs it's the same facilities, but I guess what do you do differently to do it in 5 versus 10? Is it more demand based? Or is it more like how you approach investment and scale it up more quickly?

Sure. Well, I think you referenced some data that we put in the letter that hopefully was helpful. But I think over the last 12 months, we've been simultaneously growing sales quite a bit and growing inventory. That means that we've been growing production pretty quickly. And so, if you break that down to what have we been doing weekly, it means that over the last 12 months, we've averaged increasing our production by about 80 units per week. And we've done that very consistently over that period of time. It's been a tremendous undertaking by the team. I think they've done an unbelievable job. But I think it also bodes very well for our future because if you -- that is kind of like the real fundamental operating unit that underlies growing at least production, which is our most complex and difficult to scale operational component of our business. And so, if you look at that pace, we really don't have to increase it by very much. We estimate that we'd have to increase it to about 90 units per week over a 10-year period to hit 3 million sales. And so that feels very achievable, and we need to be at about 180 units per week to hit 3 million sales in five years, which sounds a bit further away. But I think it's also important to note that over the last year, we had, on average, about 23 locations that we are producing cars out of, and we expect over time to have about 60 locations that we're producing cars out of, and production growth happens at a facility level and requires organization and leadership and hiring all those levels. But it's something that is made easier certainly by adding more facilities. So, we think that operationally, it's very achievable. It's going to be a lot of work, and there are other parts of the kind of operational change that we've got to make sure we expand as well. But it's the kind of work that we think that we can do, and it's a scale of that work that we believe we've achieved in the past or at least have been close to in the past. And so, I think that's pretty exciting. And so, I think our goal is going to be to go unlock that as quickly as we can, subject to delivering great customer experiences with highly efficient operations to go get fundamental gains and share those with our customers and have that drive demand. I think generally speaking, if you look at the sum total of our life, we had an offering that has been pretty consistent over time and that very consistent offering has driven a lot of demand growth over an extended period of time. And we think looking forward, we're going to benefit from that same offering, and we plan to make it better as we unlock additional fundamental gains. And so, we think that, that should provide an ample amount of demand to get us to that level. Because again, 3 million units is a big number. But it's relative to the used market of 40 million units at 7.5% in kind of other retail verticals, it is not abnormal in the lease to have a player have at least that market share and generally significantly larger. And we think with the business model that's twice as profitable as the average of the other public automotive retailers and growing at 46%, we absolutely have that ability, and so we're going to go chase it down.

The next question comes from Sharon

I feel a lot of pressure to say congratulations. So, I will do so, because I know you're keeping...

You’re keeping You have forced. we're still going to count it.

Feel that felt a little forced. It's a long day. It's long out here. So, I guess I wanted to kind of back into the idea of reinvesting the gains with your customers in the future. I want to level set that, that means future gains, and we're not expecting kind of a retrenchment in GPU anytime soon because I'm getting pinged on that. So just if you could clarify that. And then secondarily, as you think about reinvesting kind of further gains with the consumer, how are you prioritizing where to reinvest that? I mean is it -- are there certain areas where there's just a really quick ROI that you know will catalyze conversion or catalyze traffic? Are there areas where you have like certain return thresholds that you're thinking about when you're thinking about this reinvestment. I think it's just a whole construct, and I'd love to know what -- I think you said reasonable margin ranges. I need you to define reasonable for me, Ernie?

You know we're not going to do that. But okay, so let's start with the first question. So, I think, we put in the letter and said earlier in the call that we'll prioritize growth over margin within reasonable ranges. And so, I think that, that does then beg this very reasonable question of like, okay, our margin is going backwards. Is that the plan? And so just to be crystal clear, we think 5 to 10 years is a long time, and it's important when you're a company it's 1% of the market to have flexibility. But we are on a very good path right now, and we're not creating this long-term plan with kind of reasonable flexibility built into it to set ourselves up for an imminent reduction in margin. That is not our plan. We feel like we're on a very good path and are extremely excited about that. I think our plan going forward is to continue to unlock fundamental gains, and we think those fundamental gains are still significant. Year-over-year, if you just look at the change in our EBITDA margin, that was about another $1,000 give or take, per unit of value that we unlocked. That -- if you can unlock that much that fast, there is likely more left. And we anticipate and we'll seek to go get more of that. And then we think that we will share that with customers. And I think when we share with customers, there's a number of ways you can do it. Our goal is a simpler, faster more fun way to buy a car where we offer more value. And I think when you talk about margins going backwards, I think everyone's head goes first to the value side, they imagine lowering prices, lowering rates, increasing bids on cars we buy from customers. All of that is certainly possible and on the table. And I think we will look to share value with our customers in the most intelligent ways we can over time. But I think that simple faster and fun are also areas that are worthy of investment. And so that's the kind of areas that I think that we've invested in over the last year or two that are driving NPS to near three-year highs and leading to the statistics that we put in the letter and we discussed earlier. Generally speaking, I think if you make investments in customer offering, it is usually more work and it is harder. And you're not only kind of -- you're generally investing focus, I would say, more so than dollars. And I think in the best-case scenario, we'll seek to invest as much focus as we can to keep making the experience even better because we think that really matters. And all times, that's more efficient than dollars. But we're clearly in a spot where if you look at reasonable expectations of additional opportunities we can unlock. It is relatively large dollars, and we think that, that's exciting, and we'll try to invest it intelligently going forward.

Can I follow up on that? Is that as you're starting to kind of embark on these kinds of investments, are those things you're going to outline to us on the Street, so that we're aware of kind of where you're prioritizing that investment?

I think -- I don't want to sit here and talk about the exact forms that we'll discuss that in the future, but I mean, I think we likely will. I think we just -- I think the areas that we discussed earlier, where all the service levels across the entire business are getting better. Those are, I think, areas where we put effort over the last 12 months. And I think it's showing up in the numbers, and we're discussing them today.

Next question comes from Michael Montani with Evercore ISI. Please go ahead.

Just wanted to ask if I could about some of the work that you all have been doing with respect to third-party marketplace selling, if you could give us an update on that and how it's going? And then also, if there's anything that we should be keeping in mind as we build out models and so forth with respect to the potential for ancillary revenue streams, whether it's third-party logistics or reconditioning. So that was the question I had.

Sure, I can hit both of those. So, I think the offerings that we've been developing related to either wholesale or retail marketplace, I think are going well. I think we've talked a bit before about some of the fundamental opportunities we see to create a better offering for commercial sellers that gives them options to send a car to Carvana and either wholesale it through a physical auction in ADESA, wholesale it through our new digital auction offering that has been expanding this year, ADESA Clear or to sell it via our retail marketplace offering. And so that's something where we see real fundamental gains in the time it takes to get a car from a commercial seller into the hands of the ultimate customer and also an opportunity to cut out costs out of the system in doing that same thing. I'd say we're incredibly early in that story and thinking about what that can ultimately be. But I do think that it's a place in the industry where we see real fundamental opportunity for a faster and lower-cost offering that makes everybody better. And so, I do think it's something that we're excited about, but it's very, very early days, and really thinking about what that could ultimately be. In terms of your question about what should I put into the model on ancillary revenue streams? And you mentioned a couple around third-party reconditioning or logistics services. I think certainly, we see opportunities in those areas. Those areas are not a near-term focus. I think our near-term focus is starting from where we are today is roughly 1% player in this industry, and really continuing to grow the key offering of selling cars to more and more customers. And I think that's really where our focus is going to be. And I think there are ancillary opportunities like the ones that you pointed to, but they're not a near-term focus.

The next question comes from Jeff Lick with Stephens Inc. Please go ahead.

I'll add my congratulations and through really a tremendous in for the quarter.

So, it's our first tremendous. Thank you.

No problem. I'm always trying to be a trend setter. A question for Mark. And then, Mark, I was wondering if you could just -- something in the data this quarter that surprised you? And then for Ernie, we're really only call it, four years into past-COVID where you mentioned recurring customers. We see all these tremendous volumes that you're putting up. But the reality is people really don't know you that well yet. I mean, we're still all operating under this pretense over the last 40 to 50 years that you buy cars at a dealership. And so, it still feels like you're very early in the adoption. And I could -- I'd be curious to know how you think about that and things that you're looking at in the data that says, hey, well, maybe we're whether -- where we are in the adoption curve.

Sure. Yes, on the thing this quarter that surprised me the most, I have to say the aftermarket reaction initially to our earnings release today was probably the biggest surprise. I mean we think we had an unbelievable quarter set records across almost every key metric. I think the numbers that we're putting up here with 46% retail unit sales growth in our roughly flat industry. I think the leading the industry on adjusted EBITDA margin by nearly 2x while growing at that 46% year-over-year growth rate, having very strong conversion of adjusted EBITDA to GAAP operating income, I think making us look very favorable on that metric compared to other many high-growth technology companies. I think we're just really excited about all these metrics. We think Q1 was an incredible quarter. We're expecting sequential growth in retail units sold and adjusted EBITDA in Q2 as well. And so, we're excited about that. And so I just think the way we feel like we're positioned right now, the numbers that we're putting up, the way we're executing, I think we're very, very excited about. So, we're certainly surprised to see that first few minutes reaction to our earnings print.

Yes, if you ask me that question, I have another answer, I have -- let me just start. But that's your second question. I think and I hope that you're right, and I think that there's a lot of evidence that you're right. I think one of the many ways that we try to get customer feedback is every couple of weeks, we have customer calls, we'll just call two customers, give or take, three customers for half an hour and just talk through their entire experience. And we try to parent where it's different kind of customers, maybe one week gets customers that bought an EV and one week get customers that are repeat purchasers or customers that didn't have a perfect experience or whatever it is. And something that I would say is you learn a lot in those conversations because you're talking live with a person who made a choice to buy a $20,000 thing on a website. And you definitely hear the stories of, "Oh, my friend or neighbor told me that it was great, and so I went and did it." And you also definitely hear stories that are more like -- and I would say we hear more of these stories that are more like, well, I was searching online. I had kind of senior logo before and knew that it was a thing. The car looks good. The price looks good. And I kind of searched around, and I saw a picture of a vending machine, and that seems like it was real. So, I figured you guys were a real company, and I decided to go for it. And to me, that's a bit of a bummer from like a brand-building perspective, but I think it's incredibly exciting from an opportunity perspective because I do think that if we want to become the way that people like cars, the way that you do that, is it no longer is a friend of a friend that you heard that Carvana is a pretty great way to buy a car. It's three or four friends and a neighbor and a family member who say, "Just go to Carvana. It's easy." Like why would you do anything else? And I think because this market is so big and people buy cars once every five or six years, I think it takes time to build the kind of brand that we want to build. But the most important input is delivered great experiences to customers one at a time and give them an offering that's truly differentiated, and we think that we're doing that. So, I think that it is still early, and we're excited. And I think that one of the frameworks that we try to use to evaluate that question is there's always kind of like the awareness question, which is you can always hit people up on surveys and try to get a sense of what is awareness. I think in awareness, we're generally pretty good. And to put it into this customer discussion language, I think that oftentimes means I saw your logo before, right? I have some sense that you're a thing in the world. And so I kind of know that you exist. And then there's understanding, do they really know that we've got a broad selection. They really know that the purchase experience is very simple. They really know that they can get financing in minutes. They can get a value for their car and attach the trade and have it delivered to their door. Do they really know they have a 7-day return policy. And I think that understanding is where I think we tend to have lower levels of understanding. I think that's a real opportunity for us. And then I think the last thing is, when you click buy, it comes down to trust. Do you believe that you're going to get a high-quality car. And if there's something wrong with it, you'll really be able to return it. And to me, that's friends and family and neighbors. And all that points in the same direction, it says, we just got to keep delivering great experiences. And I think all of the data is pretty exciting around that as well because we do see that adding up. We see that our older markets have higher market shares than our newer markets. And we don't see that our growth story today is newer markets catching up to older markets. We see that all markets continue to grow at rates that are pretty exciting. I think versus our previous best Q1. At the Company level, our sales are up about 25%. If you look at our -- two of our larger markets where we've historically had very large market shares Atlanta and Phoenix, in both those markets, they're up about 25% versus their previous first quarter high. And so, I think that suggests that even later in life, we are continuing to build awareness, understanding and trust in these markets, and we're excited about that and I think we have a long runway in front of us.

Well, just as a quick follow-up. In your advertising, you never really lead into just how much better the experience is over the status quo. And then to your point about quality you really haven't ever shown people just how these cars are reconditioned relative to what they might be buying. So, I'm curious why you haven't done that.

So, I think we -- I think we have an incredible marketing team that puts together incredible creative assets, and we've got a very thoughtful quantitative marketing team that does a great job trying to get those assets in front of people. And I think that we've tried a lot. What I'll say is if you go back and like the way back machine and look at the first version of our website, it was basically five bullet points about why we thought it was the right way for consumers to buy cars. And it turns out it was a surprise to me, but it turns out that five bullet points about the economics of car buying, don’t have it being that persuasive to consumers. I think marketing is one of these very, very difficult, very important problems where it's hard to get someone's attention and get them to open their mind to hear a message that is a little bit different. But we've got great teams that work hard to do that. And then I think very importantly, we've got the sum of the Carvana team that works incredibly hard to make sure that when a customer does decide to buy it from us, they've got a story to tell and that story is compelling. And that we're very confident works over time. So, I think we'll continue to try to tell our story. We'll try to tell the vehicle quality story. I think you're right. If someone wants to give us 10 or 15 minutes or maybe even two or three minutes of attention, I think we can tell a very compelling story about vehicle quality. And many of you have seen that out at our inspection centers. But that's not super easy with millions of consumers. It's hard to get their attention to tell that story. And I think trying to explain experiences, we'll continue to work on. I think that we've got some great swings out in the past. We've got some great ideas. We've got fund adds that are coming out all the time, and I would encourage you to take a look at those. But yes, that's a recurring problem that I think will take a long time, and I think it bodes well.

Awesome. Well, congrats on the stock is still up. So, we'll talk to you soon.

The next question comes from Daniela Haigian with Morgan Stanley. Please go ahead.

On the financing side, I appreciate your comments on the additional whole loan buyers added to the platform. In that vein, can you comment on gain on sale. It looks like it increased sequentially to over 11% of receivables sold this quarter, impressive considering the market backdrop, can you speak to your various loan monetization channels, profitability across each, what's driving the higher gain?

Sure. So, I can talk about that. I mean other GPU is one of the places, and this would include finance GPU, where we're really focused on continuing to make fundamental gains. And I think those fundamental gains take a couple of different forms. One is just improving the platform itself. So, that's continuing to make improvements to our credit scoring and pricing and underwriting and using more and more data and continuing to optimize and just get smarter and smarter on the lending side of the platform. In addition, fundamental gains means doing things to lower our cost of funds. And I think that can be things like bringing new buyers to the platform, for example. And so, I think that can have a positive impact. I think we still -- we've made lots of gains in both of those areas and still see meaningful opportunities for further fundamental gains in both of those areas. And so that's certainly a place where we will be looking to continue to make further fundamental gains. In terms of some of the more specifics on the quarter, if you look year-over-year, for example, I do think benchmark rates or benchmark rates have moved around a bit and our spread of origination rates, the benchmark rates was a little wider this quarter than it was in some previous quarters. So that's a driver as well. But I think most importantly, the most important driver is our teams are just working to make continued fundamental gains, both on the lending side of the platform as well as on the monetization side.

The next question comes from Marvin Fong with BTIG. Please go ahead.

Great. Congratulations on the strong quarter. I would like to -- obviously, you guys are producing like crazy here. How should we think about your ability to continue to source, I think it's 80%, 85% of your retail units from consumers. Are you going to be able to sustain that? Do you feel like you're access to the wholesale marketplace can help you satisfy the demand there? And the second question, just to go to maybe an old school metric, but it looks like your conversion rates are doing quite well on roughly the same traffic, your unit sales are up. And I was just wondering if you could double-click on that. Is it being driven by the improved delivery availability and things you're doing on that front that you've talked about in the past, or was there something about this quarter with tariffs and the urgency there that on the consumer part. I know you mentioned there wasn't much there, but potentially had some no notable impact on the numbers. Is anything you could provide on conversion rates would be great.

Great. Yes. So let me -- I think you asked the question specifically with respect to sourcing inventory, which I think is a good question. And I think I can imagine similar questions being asked about the price we pay for inventory and what does that mean for retail GPU? Or what about our ability to sell loans at ever-increasing scale. And would that put pressure on GPU. And I think that when we sit here and try to imagine being 6x bigger, I think those are all reasonable questions to ask. I think one way to evaluate that is to look back to when we were 1/6 of our current size, which is around six years ago, give or take, 6.5 years ago, maybe we were approximately 1/6 of our current size. And I think since then, generally speaking, our offering has been very similar. I think we have added some capabilities, so our economics have gotten better. But for the most part, I think the simplest explanation would be the kind of mental model that this industry has very stable economics across the sum of the transaction when you add up retail and finance and wholesale and everything that's available. I think that mental model has held up tremendously well and has been very predictive and is why we were able to put together a long-term financial model and then hit it seven years later. So, I think when we look forward, we expect the same to be true. I mean, 40 million transactions is just consumers that own 270 million cars trading with each other every six or seven years, that's what 40 million transactions is and the machine that we're trying to build, the sum of buying cars from customers, plus selling cars to customers plus having access through our ADESA platform and additional capabilities we're building out ADESA Clear is about playing a big role in that system. And our growth has generally come from taking market share and displacing others in that systems, but the economics that the system offers have remained remarkably stable over a long period of time, and we expect them to continue to remain stable. So, I think we'll continue to grow in the same ways that we have. I think, generally speaking, things have been very stable, and that's our expectation going forward as well for, I think, deep fundamental reasons.

The next question comes from Alex Potter with Piper Sandler. Please go ahead.

Perfect. Great quarter. Wow. It actually was a very good quarter. I don't want to be facetious. Appreciate it.

I appreciate it. I appreciate the wow, too. And the pause, a little drama in that.

Yes. So, I'll just keep it to one question here. Obviously, it's exciting to see this new framework. Once you get into the millions of units, presumably, you're going to be reaching down market in terms of pricing. Obviously, if it's a 15- or a 20-year-old car that's selling for a couple of thousand dollars on Craigslist or something that counts as a transaction, but presumably the economics aren't as attractive or might be less sort of ancillary finance BSC type stuff and more pure retail GPU. So, if you can comment on, how you expect your own economics to evolve over time as you reach down into those lower price points, that would be very interesting?

Yes, sure. What I would say is I think we don't necessarily expect to need to evolve all that much in terms of the distribution of cars that we're selling, I think that that's an opportunity for us, but it's not obviously that it's a need. I think if you look at used cars sold in the U.S., the significant majority are less than 10 years old, which is a subset of cars that we're selling today. I think it's something on the order of 85%, give or take, but that number might not be exactly right, the cars sold are less than 10 years. And so today, if you go to our website, we're selling cars across that spectrum. I think you can break those sales in other ways as well. Franchise dealers generally have about 1/3 of the 40 million transactions, call that kind of 14 independent dealers generally have around 1/3, give or take, and then private party has around 1/3. And I think those numbers from different sources can vary a little bit. But you're talking about millions and millions of transactions and in all of those buckets. So, I think we're currently reasonably broad, but I think there is room for us to go both upmarket where I think we have a demount of opportunity and I think a little bit down market. And I think this market is just very, very big and the opportunity is significant. So, I think as we head from here to 3 million, it's not obvious that our average sale needs to move all that much. We think that what we're selling today is likely to be pretty reflective of what we'll be selling at that point.

Next question comes from Michael McGovern with Bank of America. Please go ahead.

I have two. First, do you expect any impact from the auto part tariffs on your reconditioning costs or on retail GPU? And then second, I guess, more broadly, do you still expect similar seasonality this year in retail GPU to what we've seen in the past where you might have Q4 and then Q1 be a little bit lower and then have some normal seasonal uplift in Q2.

Let me start with the second one of those questions. So, I think the seasonal pattern in retail GPU typically -- we think of Q4 and Q1 being the lower quarters of the year, and Q2 and Q3 being the higher quarters of the year. And I think that's a reasonable expectation for this year based on what we're seeing as well. So that is -- that's sort of the normal seasonal pattern. And no reason to think that this year would be any different on that front at this time. I think on your question about tariffs and parts impacting recon costs, I think we'll see. I think we'll see exactly how these tariffs end up playing out. But I think beyond taking a wait-and-see approach, I think we're not making any particular prediction about that at this point.

And the one thing that I would add there, I think the mental model that has been reasonably predictive is that we're in a competitive market with others that share similar cost to us. And so, to the extent there's some input cost that changes, generally speaking, the way that, that has played out is it that input cost is passed through. I think the simplest way to see that, that is the case is just to look at like the retail GPUs of all of the various automotive retailers over a long period of time where over the last five or six years, we've seen enormous swings in car prices. We've generally seen pretty stable retail GPUs. And I think any other shared cost is more likely than not to have that same kind of relationship in the future.

The next question comes from John Colantuoni with Jefferies. Please go ahead.

Great. I wanted to ask a high-level question. So, if I look at the 3 million target, it implies 250,000 to 500,000 incremental units each year, which is at the high end, about 3x more incremental units than you've ever added historically. I'm curious how you plan to unlock that much incremental consumer demand. for your offering? And also, how you can expand units that much without inefficiencies popping back up into the business?

Sure. Well, so I think we gave kind of our long explanation of the way the operation has been working over the last year, which I think is one helpful way to think about what we've been able to unlock over the last year. I think I'm going to have one more operation and I'll swing back to demand. I think another thing to keep in mind is, operationally, I think that we produced on a per facility basis, at significantly higher rates, and we've grown significantly faster per facility than we did over last year in the past. In 2018 through '21, we had significantly fewer facilities, and we were ramping sales at a very fast rate. And if you kind of do the math on a per facility basis, then we were growing pretty quickly. So, I think that there is plenty of data in our history to suggest that we can execute at that level. And then I think on the demand side, I think, generally speaking, we've had an offering that's been very stable and we've moved through several orders of magnitude as we've grown the business. And I think, generally speaking, our economics have been very stable across several orders of magnitude and our consumer offering has been very stable across several orders of magnitude. And we think that, that's because we have an offering that customers love. That is very simple and gives them a broad selection and great value. And as we grow, there is positive feedback just directly in the system even as it relates to just conversion of existing customers as you have more cars, the odds that a customer find the car they're looking for go up. As you have more cars at more inventory pools, you can deliver cars faster. And so there's some benefits there to conversion. So, I think historically, demand has not been the governor on our growth. Generally speaking, it has been more our ability to operationally handle it. And I think looking forward to the market of this size, I think we'll work hard to make sure that we're delivering great experiences that in turn, turn into demand and then we'll work hard to make sure that we're operationally fulfilling that demand as best we can. But we certainly think that the 3 million is a very achievable number over time.

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

Thank you. Well, thanks everyone for joining the call. Really appreciate it. Carvana team, another awesome quarter. Thank you, guys so much. I really do think these results have just been kind of a hit parade over the last several quarters, and I hope you're incredibly proud of what you're building, and I hope you take a moment to be proud, but you don't let it go to your head and we keep fighting because we got a lot of building left to do. We got new goals, and I think we have every opportunity to go chase and down. So, thank you all so much, and let's go do it. Thanks, everyone.