Carvana's Q3 2025 Earnings Call: Contradictions Emerge on Loan Reserves, Interest Rate Strategy, and Cost Efficiency

Date of Call: October 29, 2025

Financials Results

• Revenue: $5.647B, up 55% YOY
• Operating Margin: GAAP operating margin 9.8%, up from 9.2%

Guidance:

• Retail units sold expected above 150,000 in Q4 2025.
• Adjusted EBITDA expected at or above the high end of the previously communicated $2.0B–$2.2B range for full-year 2025.
• Advertising spend in Q4 expected to be similar to or slightly higher than Q3.
• Sequential GPU changes (retail/wholesale/other) expected to be in a similar range to last year (seasonal patterns).
• Plan to pass some fundamental finance/ancillary gains back to customers (e.g., lower interest rates).

Business Commentary:

* Revenue and Retail Unit Growth: - Carvana reported revenue of $5.647 billion for Q3, up 55% year-on-year, and 155,941 retail units sold, marking 44% growth year-on-year. - The growth was attributed to improving customer offerings, increased understanding and trust, and inventory selection benefits.

• Profitability and SG&A Expense Leverage:
• The company achieved adjusted EBITDA of $637 million, an increase of $208 million year-on-year, and 11.3% adjusted EBITDA margin.

• Profitability improvements were driven by fundamental gains, operational efficiency, and leveraging overhead expenses.

• Loan Portfolio Health and Fundamentals:

• Carvana's loan portfolio performance was strong, with no need for incremental reserves, supported by outside validation from Ally upsizing loan purchases.

• The strong performance was due to tightened credit standards in late 2023, maintaining tight credit conditions, and effective fundamental gains.

• Digital Capabilities and Customer Experience:

• The company is advancing its digital capabilities, aiming to reduce customer delivery time by a day through optimizations in Phoenix.
• This move is part of a broader strategy to enhance customer experience and drive conversion through speed and simplicity.

Sentiment Analysis:

Overall Tone: Positive

• CEO: "The third quarter was another incredible quarter...profit margins more than 2x the industry average and growth over 40%." CFO: "Revenue was $5.647 billion, an increase of 55%...set new records for retail units sold, revenue, adjusted EBITDA and GAAP operating income." Guidance: retail units >150k and adjusted EBITDA at/above high end of $2.0B–$2.2B.

Q&A:

• Question from Sharon Zackfia (William Blair & Company L.L.C.): Can you talk about the health of the subprime portfolio, whether you foresee needing incremental reserves, and the timing/driver of formalizing new third‑party loan sale agreements?
  Response: 2024–2025 originations are performing extremely well versus industry comps after tightening credit in late‑2023; Ally upsized and two new agreements formalize and scale prior one‑off loan sales, validating program strength.

• Question from Marvin Fong (BTIG, LLC): OpEx per unit ticked up sequentially though down YOY — is that the best metric and how will you continue to drive down operations cost per unit?
  Response: OpEx rise driven by higher advertising and some lumpy overhead/one‑time items; operations expense is down YoY and management expects continued fundamental gains to reduce ops cost per unit over time.

• Question from Marvin Fong (BTIG, LLC): You said retail GPU will be similar to last year — what's underpinning that dynamic (recon/logistics efficiencies offset by depreciation/macroecon)?
  Response: Q4 GPU moves are seasonal (higher depreciation and weaker seasonal demand in Q4); Q2/ Q3 depreciation swings (e.g., tariff effects) explain year‑over‑year variation; expect sequential Q4 change similar to last year.

• Question from Rajat Gupta (JPMorgan Chase & Co): Q4 unit guidance implies more normal seasonality — is this a change in seasonal behavior or conservatism around macro?
  Response: No structural seasonality change — guidance reflects historical quarter‑to‑quarter variability and conservative assumptions; management still expects continued strong growth.

• Question from Rajat Gupta (JPMorgan Chase & Co): Other GPU/ancillary penetration — current levels, YoY change, and long‑term benchmark (e.g., franchise retailers ~$1,500/unit at 45% penetration)?
  Response: Other GPU contains multiple line items with meaningful upside; management views mature retailers as a reasonable benchmark and plans to improve attach rates while focusing on simple, high‑quality value‑adds.

• Question from Brian Nagel (Oppenheimer & Co.): Some industry data suggest weaker used‑car demand — are you seeing any hidden weakness, and did anything change to allow Carvana to capture greater share this quarter?
  Response: No hidden weakness observed — demand looks stable and Carvana is capturing share via superior customer offering, strong loan performance and balance sheet strength.

• Question from Brian Nagel (Oppenheimer & Co.): Where is AI already improving the consumer experience and how far along is integration?
  Response: AI is live across use cases: integrated chat linking finance/scheduling/search with dynamic UI, automated document ingestion/scraping for compliance, and ambient agents that detect/fix issues — materially automating workflows and improving speed.

• Question from John Colantuoni (Jefferies LLC): With EV tax credit expirations and Carvana's above‑average EV mix, how will this impact used EV demand and what adjustments are you making?
  Response: Expiration shifted mix (fewer EV purchases) but not aggregate demand materially; systems adapt sourcing to customer preferences and management remains constructive on long‑term EV adoption.

• Question from John Colantuoni (Jefferies LLC): You announced a second franchise dealership acquisition — what did you learn from the first that justified a second and is this an investment area?
  Response: Too early to comment on results or scale strategy; management is focused on the core business and will provide updates when appropriate.

• Question from Christopher Bottiglieri (BNP Paribas Exane): Same‑day delivery test in Phoenix — how is performance versus control and will you invest in 2026?
  Response: Phoenix shows clear conversion benefits from speed (40% same/next‑day vs ~10% nationwide); management views it as strategically differentiating and will optimize in Phoenix before scaling to other pools.

• Question from Christopher Bottiglieri (BNP Paribas Exane): Other GPU strength — are you passing rate/cost gains to consumers and how do you think about the value prop once rates stop falling?
  Response: Other GPU gains driven by loan performance, loan‑sale monetization and lower cost of funds; plan for Q4 is to pass some gains back (e.g., lower interest rates), moderating other GPU versus Q3.

• Question from Daniela Haigian (Morgan Stanley): Competition from entrants like Amazon — impact on return on ad spend and biggest gating factor to near‑term growth?
  Response: Management focuses on customer experience and unit economics; new entrants unlikely to shift the large incumbent market quickly; the primary gating factor is execution — scaling complex operations across the business.

• Question from Daniela Haigian (Morgan Stanley): Plans/capital requirements to expand capacity beyond the 3M‑unit target in 5–10 years?
  Response: Opportunity beyond 3M exists but it's premature to provide capital plans; near‑term priority is executing to reach the current 3M/13.5% adjusted‑EBITDA goal.

• Question from Jeffrey Lick (Stephens Inc.): Sourcing evolution — changes in relationships with rental providers and sourcing as you scale to 600k–900k+ units?
  Response: Vertical integration and ADESA partnerships (reconditioning, ADESA Clear) make Carvana a structurally better buyer across retail and wholesale channels, improving sourcing efficiency as scale increases.

• Question from Jeffrey Lick (Stephens Inc.): At 2–3M retail units, will the sourcing mix change materially?
  Response: Too early to predict a major shift; management expects both customer‑to‑customer and fleet/off‑rental sources to remain important and feels well‑positioned for either mix.

• Question from Andrew Boone (Citizens JMP): Biggest opportunities to increase automation as you scale — which variable costs can be driven down?
  Response: Automation across finance verifications, registration, customer care, reconditioning and logistics — codifying rules, automating data capture and workflows to reduce variable costs and speed conversions.

• Question from Andrew Boone (Citizens JMP): Guardrails for expanding same‑day delivery and profitability metrics to contain rollout costs?
  Response: Iterative, constraint‑focused rollout: prove at scale (Phoenix), resolve biggest constraints, prioritize inventory pools near population centers and integrated ADESA sites; control costs via tech/process improvements and targeted staffing.

• Question from Michael McGovern (BofA Securities): Any evidence of a K‑shaped demand split where lower‑income cohorts are decelerating more sharply?
  Response: No clear validating evidence in sales or credit data showing disproportionate weakness among lower‑income cohorts; management will monitor but sees consistent patterns.

• Question from Michael McGovern (BofA Securities): Phoenix same/next‑day delivery — what is the GPU or EBITDA per‑unit impact and incremental cost?
  Response: Primarily technology and process investments with modest incremental staffing; per‑unit cost impact is not large — focus is on driving conversion and operational accuracy.

• Question from Michael Montani (Evercore ISI): Advertising outlook — will spend rise Q4 and on a per‑unit or dollar basis?
  Response: Advertising dollars expected to be similar to or slightly higher in Q4 versus Q3 to support brand awareness; commentary was on absolute dollars.

• Question from Michael Montani (Evercore ISI): Wholesale GPU seasonal step‑down in Q4 — should we expect similar magnitude to last year?
  Response: Yes — wholesale typically sees higher depreciation and lower auction volumes in Q4; management expects sequential seasonal patterns similar to last year on a per‑unit basis.

• Question from Christopher Pierce (Needham & Company): The 3M unit goal — drivers, how you derived the 5–10 year timing, and what could accelerate or delay it?
  Response: Timeline (5–10 years) maps to ~40% (fast) to ~20% (slow) CAGR; primary determinant is execution across buying, reconditioning, delivery and operations — faster execution accelerates timing; execution risk can delay it.

Contradiction Point 1

Loan Portfolio Health and Reserve Requirements

It involves the assessment of the health of Carvana's subprime loan portfolio and the need for additional reserves, impacting financial stability and risk management.

Can you assess the health of the subprime loan portfolio and any need for additional reserves? - Sharon Zackfia

2025Q3: Loan performance in 2024 and 2025 is strong, and our 2024 and 2025 loans perform well compared to industry norms. There is no need for incremental reserves. - Mark Jenkins(CFO)

How is Carvana prioritizing reinvestment of gains? - Sharon Zackfia

2025Q1: We continue to add incremental reserves in our lending portfolio, we've added about $25 million in incremental reserves to this portfolio since we've started the year. - Ernie Garcia(CEO)

Contradiction Point 2

Interest Rate Strategy and Consumer Benefits

It involves the company's strategy to pass on interest rate reductions to consumers, impacting pricing strategy and customer satisfaction.

Are you reinvesting rate cuts into consumer rates in Q4? - Christopher Bottiglieri

2025Q3: Yes, we're passing on fundamental gains to customers in the form of lower interest rates in Q4. This is due to improvements in finance and ancillary products, with plans to continue offering lower interest rates. - Mark Jenkins(CFO)

How to assess retail GPU's trajectory and the long-term impact of new investments on capacity? - Brian Nagel

2025Q1: We do not anticipate significant changes in our interest rates. While our cost of funds is lower than it was at the end of the year, we're maintaining our rates for the foreseeable future. - Ernie Garcia(CEO)

Contradiction Point 3

Operational Cost Efficiency

It involves the company's approach to operational cost efficiency, which is critical for maintaining profitability and competitive advantage.

Operating expenses per unit rose sequentially but decreased year-over-year. Can you discuss the reasons and future opportunities to reduce operational costs? - Marvin Fong (BTIG, LLC)

2025Q3: Operating expenses can step up quarterly, but the trend is down year-over-year. We are leveraging our overhead expenses and seeing strong performance in reducing per unit costs. - Mark Jenkins(CFO)

What are the main components of other GPUs and what drives operational efficiencies? - Michael Peter McGovern (BofA Securities)

2025Q2: We've achieved SG&A cost leverage of 220 basis points year-over-year despite the increase in unit sales and we expect to continue driving leverage on a year-over-year basis. - Mark Jenkins(CFO)

Contradiction Point 4

Customer Experience and Brand Awareness

It involves the company's strategy and focus on enhancing customer experience and increasing brand awareness, which are crucial for market growth and customer retention.

Is the used car demand environment becoming more challenging? Is Carvana gaining market share? - Brian Nagel (Oppenheimer & Co. Inc.)

2025Q3: We're seeing a stable environment with no notable macro weakness. We're well-positioned if cycles change, with strong growth and economics relative to the industry. Carvana continues to focus on customer experience and capturing share is not our primary focus. - Ernest Garcia(CEO)

What is the current brand awareness level and what message is Carvana conveying? - Sharon Zackfia (William Blair & Company L.L.C.)

2025Q2: We're focusing on increasing brand awareness. The goal is to lay foundations for outsized growth. We see significant opportunity in awareness and understanding. We're testing various channels and are excited about the future. - Ernest Garcia(CEO)