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spk14: Thank you for standing by, and welcome to Shift Technology's third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. Should you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Vice President of Strategy and Finance, Henry Bird.
spk03: Good afternoon and welcome to the Shift Technologies third quarter 2021 earnings call. Joining me on the call today are co-CEOs Toby Russell and George Harrison and CFO Oded Shine. During our remarks, we will make some forward-looking statements. which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks, and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statement. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise after this conference call. During the course of the call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. With that said, I will now turn the call over to Toby.
spk06: Thanks, Henry. I thank you all for joining the call today. Over the years at SHIFT, we've had many team members, who have served in the armed forces before choosing a civilian career at SHIFT, and I'd like to first take a moment on this Veterans Day to thank all members of our armed services, past and present, for your sacrifice, courage, and the example of service you set for us all. Thank you. Turning to our quarterly results, the third quarter was another great quarter for SHIFT. Once again, our team performed exceptionally well across all components of our business. We continue to aggressively take market share, all while continuing to improve operating leverage toward our long-term financial goals. A quick summary of our Q3 results. Revenue of $180 million, representing three times year-over-year growth. 6,487 e-commerce units sold, representing 10% sequential growth over Q2, and reporting our fifth consecutive quarter of exceeding unit sales expectations. Adjusted GPU of $2,021, more than 50% year-over-year growth. With this, we exceeded the guidance we provided on our second quarter earnings call in August for all of our metrics. We are happy to once again be raising our full year 2021 revenue expectation now to over $620 million, which represents more than three times year-over-year growth and nearly 50% more revenue than we had signaled at the beginning of the year. Our top-line unit and revenue growth is driven by our rapidly scalable business model, coupled with the accelerating shift in the used car market from offline to online. Our focus on operational excellence has enabled our team to navigate the current and unique and challenging market conditions very effectively. Throughout Q3, we continued to observe complex dynamics in the consumer automotive industry, the first being a volatile pricing environment. Early in Q3, prices started to drop from Q2 peaks, only to quickly rebound and remain elevated throughout the rest of the period. This was significantly different from the normal seasonality patterns the industry usually experiences. Secondly, competition for used inventory has been at all-time highs. Throughout this, our team has continued to work with extraordinary dedication, exceeding targets, and delivering on SHIFT's industry-leading customer experience. I want to extend a huge thank you to every member of the SHIFT team for delivering yet another exceptional quarter. Our continued success can be largely attributed to our unwavering focus on providing a world-class e-commerce experience for our customers and our firm commitment to our long-term strategic business objectives of, first, deepening penetration within our existing markets where we continue to see significant opportunity. We've just entered into an agreement for a new Bay Area facility over two and a half times the size of our current hub in San Francisco that will expand service capacity for our Northern California market. Second, growing our geographic footprint. We are excited to announce that we have begun to expand into Houston, Texas, and expect to have that offering fully operational as a two-sided market in the near term. We shift buying cars from Houston customers in addition to selling them to them. Third, building lasting brand awareness, which has been a successful strategy in its first several quarters and will continue to be a major area of investment for us. And finally, driving efficiencies in our full-stack operations while improving unit economics, as demonstrated by our Q3 F&I dollars per unit, reaching the highest point in SHIFT's history. Looking forward, we expect to continue delivering on our growth objectives and, as such, are focused on investing in and building our teams. Hiring across all industries has been challenging over the last 18 months, especially so in retail, and we've had to manage our way through that. While our hiring throughout 2021 has kept pace with our goals and delivered outperformance on key metrics, we see opportunity in Q4 to set ourselves up for success in 2022 and continue building on our momentum. Accordingly, we have launched a major hiring program across the board, from our customer-facing concierge teams to our inside sales and support teams to our reconditioning technicians. Finally, on the topic of investing in our team, I would like to take a moment to welcome Jeff Clements to Shift. Jeff has been serving as Shift's president since the beginning of October. He brings over 20 years of experience leading e-commerce and marketplace businesses, including in senior leadership roles at Walmart and PayPal. He has an exceptional track record of leadership in operating efficiently, delivering customer value, and doing it with heart. We are excited to welcome Jeff to the team and believe he will lead sustainable growth at SHIP for years to come. And I wanted to take a moment to acknowledge that for me personally, this will be my last earnings call as co-CEO at SHIP. As you know from our announcement last week, as of February 1, I will transition to a role as a board member and advisor. I would like to take this time to extend my heartfelt and deep appreciation to everyone on the shift team today, everyone who has worked at shift over the years, to our investors who have put their trust in us, and to our board members for their unwavering support during our journey from an idea to a public company and industry leader. I would also like to reiterate my confidence in what this incredible group can and will accomplish in continuing to transform the industry over the quarters and years to come. At this point, I'll turn the call over to Oded, our CFO, to run through the quarter's financial results. Oded?
spk02: Thank you, Toby. Our momentum continued into Q3 as our top line and profitability metrics came in ahead of our expectations. I will first review our third quarter results and then share guidance for the fourth quarter and the fiscal year. Total revenue for the third quarter grew to $179.8 million, an increase of 200% to last year's third quarter and 16% compared to the second quarter of this year. Total units sold were 8,111, an increase of 100% year-over-year, with the e-commerce channel growing to 6,487 units, up 120%. e-commerce average selling price was $24,086, 9% higher than last quarter as a strong price appreciation environment continued, especially later in the quarter. Adjusted gross profit was $13.1 million versus $3.9 million last year and $16.5 million in Q2. I'll focus my remaining commentary on sequential changes. Adjusted gross profit per unit reached $2,021 in the quarter, down $788 from Q2. The Q3 GPU results were well above our expectations as market pricing remained elevated throughout the quarter. However, the impact of the market dynamic on GPU was less compared to Q2 where we saw unprecedented appreciation in car prices. I'd like to spend a moment on our acquisition and inventory strategy throughout the quarter as we are able to successfully manage our acquisitions while preserving profitability. On our Q2 call, we talked about our plans to slow acquisitions in anticipation of the typically negative seasonality effects we see in late Q3. We executed on this strategy, and while we didn't see typical seasonal depreciation, it allowed us to take advantage of the elevated prices resulting in stronger-than-expected front-end margins. Despite the unusual market dynamics, we exited the quarter with a healthy inventory mix and we feel good about our position as we build our inventory heading into 2022. Given our consumer-focused sourcing strategy, 95% of cars purchased in the quarter came from consumers and partners. Other revenue, mostly F&I, was 6.2 million in Q3 compared to 5.1 million in Q2. We remained encouraged by the fundamental performance of our F&I business. Other adjusted GPU per unit in Q3 was 982, our highest quarterly result to date. Total marketing expense for the quarter was 10.8 million. Customer acquisition cost was 1,659, 12% lower than Q2, as the new strategy emphasizing brand marketing took hold and yielded impressive results. This will continue to be an area of focus and investment for us. Adjusted EBITDA loss for the quarter was $33.3 million, or 18.5% of revenue, compared to a loss of 16.9% of revenue in Q2. But once again, ahead of the guidance range we provided on our Q2 call. Turning to the balance sheet and cash flows, we ended Q3 with cash and cash equivalent of $247.5 million. This represents a $9.3 million increase compared to the Q2 cash balance. This increase in cash was primarily driven by a decrease in our inventory position, as we ended the quarter with $88.9 million, a $33.6 million decrease from our Q2 inventory. A quick update on our floor plan facility. On October 13, our floor plan agreement with U.S. Bank expired. We're actively pursuing a new floor plan facility since we view it as an important part of our capital structure and expect to put one in place by the end of this year. Turning to guidance, for the fourth quarter, we expect revenue to be in the range of $180 to $188 million, or 145% to 156% higher than Q4 of 2020. Adjusted GPU is expected to be in the range of $1,600 to $1,700 for the fourth quarter, more than tripling our adjusted GPU in Q4 of 2020. Our adjusted EBITDA loss for the quarter is expected to be in the range of $40 to $44 million. As we discussed earlier, we will be making significant investment in Q4 across the business to prepare us for a successful 2022, which will impact our EBITDA for the quarter. This leads us to 2021 estimated revenue, which we are again raising due to the momentum we are seeing across our business. We expect total revenue to be in the range of $621 to $629 million, an increase of approximately $40 million to our previous guidance. We expect to sell 23,000 to 24,000 e-commerce calls. Adjusted GPU for the full year is expected to be greater than 2,000, a raise over our previous guidance of adjusted GPU greater than 1,800. We now expect adjusted EBITDA loss margin for the year to be around negative 22%, versus our previous guidance of better than negative 23%. I will now turn the call over to George for closing remarks.
spk08: Thank you, Toby and Odette, and thank you all for joining our call today. In short, our third quarter results exceeded our expectations as we continue to capture market share, evidence of the fact that SHIFT's mission and business model is resonating with consumers. We're also excited about finishing the year in a very strong way by investing in key areas that will benefit Shift throughout 2022 and in the years that follow. Last week, we announced plans for Toby's transition out of his current role as co-CEO. I've had the great fortune to spend so many years working with my best friend on building a company we both love. One thing I admire most about Toby is his determination to succeed and his inability to fail, superpowers that have been instrumental in Shift's growth and success over the years. Toby's brilliance, leadership, strategic insight, sacrifice, and grit have made Shift what it is today. On behalf of all current and former employees, shareholders, and supporters, thank you, Toby. As Toby discussed, we're fortunate to be welcoming Jeff to Shift as our new president. Jeff's unique combination of technology and retail experience on a global scale will be instrumental in sustaining profitable growth at Shift in the years to come, and I'm just so excited to have him on board. With that, operator, please now open up the line for questions.
spk14: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 on your touchtone telephone to ask a question. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Zach Fathom of Wells Fargo. Your line is open.
spk07: Hey, good afternoon, and Toby, best wishes to you in the new role and going forward. So with that, can you talk about where you are on capacity and utilization today and to what extent you're seeing, you know, throughput and labor constraints? And then as you think about the elevated demand you're seeing, Can you walk us through the glide path for capacity expansion through 2022 and where you think capacity goes from where we are today?
spk08: Hi, Zach. Good to talk to you. So I'll start and then I'll let Odette take it from here. So we've had, obviously, to deal with the same labor issues that everybody else in the world and the country has. But so far this year, we've been very happy with how things have been. And we're very happy with the team's performance and our ability to hire folks as we need to. Obviously, it would be better if the labor market was not as tight, but we've handled it really well. As we think about the future, as we mentioned in our prepared remarks, we are working really hard to ensure that we have the team in place for a really successful 2022. Part of that entails changing our approach to how we hire. Normally, we hire just in time. meaning we aim to bring people in a few weeks before we need a specific role filled, especially when it comes to field operations or reconditioning, logistics, et cetera. Obviously, partly that's to manage for cost. But the decision we've made for entering 2022 is to actually hire folks ahead of the curve. So we're going to do a lot of hiring in Q4 in preparation for Q1 and 2022. That's like a one-time big push to bring a lot of folks on board a few months earlier than we normally would. Once we do that once and kind of have this larger team, we'll be in a really good place for the rest of the year. We thought that that was a prudent decision in light of the very tight labor market that we're dealing with. So it's kind of high level where we are now. I'll hand over to Odette to talk to some of the more details.
spk02: Thank you. So an important facet of capacity and where we made great progress has to do with reconditioning. We have, again, as I mentioned, made great progress to a point that reconditioning is no longer a constraint on our ability to buy, process, and sell cars. We have increased capacity steadily throughout the year, and we continue to do this. working on opening a new facility in Texas and then as we launch further new markets, we'll be able to open facilities there as well. As we said in our remarks, we are also in the process of putting a new facility in Northern California to replace the San Francisco facility and that would increase our capacity even further. So at this point, as I said, not a constraint.
spk07: Gotcha. And then for the full year GPU outlook of about 2,000 per unit, I presume the breakout is about 1,100 retail, about 900 in F&I. And the question is whether you think these levels are a fair jumping off point for 2022, or if you think some of these, you know, unique 2021 dynamics result in any departure from these levels one way or the other.
spk02: Well, we clearly exceeded our expectations for GPU for this year. Yes, there was price appreciation and favorable market conditions, but the key secret sauce for our success has to be our operational efficiency improvement. I talked about reconditioning before, how much we reduced the cost there, but also F&I. So F&I is a difficult area to grow, but we have done really well in growing it steadily and gradually by small steps every quarter. We had a good success in Q3, and we expect to see further improvement in Q4. So as we end the year at around 2,000 GPU, it's an important stepping stone to get to our midterm goals of 2,500 GPUs. In order to get there, as we shared in the past, you need about 1,200 to 1,400 in F&I, so we still have some ways to go. And you need reconditioning to be 1,200 or below. We are, you know, approaching that as well. So we are in a good position to be able to hit the midterm goal in the coming several quarters.
spk07: Got it. Very helpful. Appreciate the time.
spk14: Thank you. Our next question comes from Marvin Fong of BTIG. Your line is open.
spk09: Great. Thank you for taking my questions. So first question, just wondering on specific to the fourth quarter GPU guidance, I believe it's 16 to 1700, just wondering if you could just break that down a little further and And my thought is what you just did, over $2,000 this quarter, and the environment looks pretty favorable. Why the step down? And specifically, as a secondary question, are you forecasting any drag from wholesale as occurred in the third quarter in your fourth quarter guidance? And then I have one other follow-up.
spk02: So $1,600 to $1,700 in Q4 is still, what, more than triple of last year's results. So we are obviously very happy about that. In the fourth quarter, you see the impact of seasonality. People focus their discretionary spending on holiday spend rather than on purchasing used cars. So there is some pressure from that point of view on GPU to some extent. And the last thing I would say is that there is a level of conservatism here just because of the experience we had in previous Q4s. We wanted to make sure that, you know, we gave you our best estimate at this point. So that's where we are. The wholesale, I don't think we're going to see a lot of impact of or negative impact of wholesale on our numbers in the fourth quarter.
spk09: Okay, great. Thanks, Oded. And then Um, just looking at the, uh, the inventory for sale, um, you know, I realize you have cars, you know, you're working on that aren't yet on the site. Just curious if you could comment on, um, your outlook for the, how, if you'll be in good shape for inventory for the seasonally strong first quarter. Uh, thanks.
spk08: Um, go ahead. Okay. Uh, so look, um, On the inventory side, we entered the quarter in a really strong position. We spoke in August about the fact that we had a strategy for how we would approach inventory going into Q3 and Q4, which was to sell through inventory that we had bought over the summer at what we thought was very high prices and slow down acquisitions in late August and in September when normally you see a decrease in pricing. We executed on that strategy, and that, you know, benefited us dramatically with GPU in Q3, and we're really happy about that. And then we also were able to enter Q4 in a very strong position with inventory and are really happy with that at this point. Obviously, going into, you know, next year, we will need a significantly more – a larger amount of inventory than we have, you know, going into Q4 because we're going to be aiming for a strong growth here in 2022. And we're doing what we need to do in order to – grow our inventory. All year, we've actually never had a problem with inventory. I think folks in the industry are generally very used to people having a challenge, but we've not really had a challenge. Our inventory position has been very strong and we've been very happy with that. And it's really exciting to see the reconditioning team being able to keep up with inventory as needed and be able to get it ready to be sold in a quick way. So I think one other thing to kind of say, I think it ties to the point that you made regarding wholesales. which is that we sell a much broader set of cars retail, cars all the way from zero years to 11, 12 years in age. So that really kind of helps us with inventory position as well, but the result is that we sell a lot less cars on wholesale because a lot of cars that come our way we sell retail. So, you know, I think that hopefully answers the question. I also am excited hopefully to a day when we can do this from one room rather than many different rooms and we don't have speaking over each other.
spk09: Yeah, I'm looking forward to that day too. Thanks so much, George and Odette.
spk14: Thank you. Our next question comes from Alex Potter of Piper Sandler. Your line is open.
spk05: Perfect. Thanks, guys. First, congratulations, Toby. Good luck. I had a couple questions following up on F&I, encouraging, obviously, to see the trends there. I guess this can be a relatively high-friction sales process, at least in the context of the traditional automotive retailing industry. So I'm wondering kind of the strategies you're using there to get those higher F&I attach rates.
spk08: Hi, Alex. So yeah, F&I is definitely not an easy thing to sell. I mean, there's an actual sale involved versus people just kind of choosing to do it. I think that's true across virtually every service type of component, like a vehicle service contract or anything else outside of the automotive industry. We are, I think, making really good progress in increasing our attach rates, but we need to continue to do that, including providing the right type of training for our teams. This is something that the team needs to learn how to do. And obviously, in an environment where you're trying to grow the team, you know, we're kind of keeping up with both growth and training, and there's a little bit of a drag on that. So we're working through that, and we think that we'll be in a good position for that in 2022. Additionally, we've spoken before about the fact that there are opportunities in the kinds of contracts we have with our partners, and that's another area where we're working through. And, you know, overall, we think we're on a good path to increasing our effort numbers. to where we want them to be, you know, by midpoint, which is about $1,200 to $1,400. It's not the kind of thing where, like, one thing you do results in an additional $200 or $300 more. It's a lot of small things that add $25, $50 at a time that ultimately adds up to the number that you want to get to.
spk05: Okay, great. And then maybe one follow-up here also on F&I. Is it is it possible that obviously we're seeing high transaction prices now? Some of that is market driven. I don't know the extent to which maybe some of that is also favorable mix. Generally speaking, you have higher F&I attach rates on higher priced vehicles. So if you subscribe to this idea that that vehicle prices are going to come back down or normalize, do F&I attach rates go down with them or is that not a risk?
spk08: I think it's certainly true that for really inexpensive cars, F&I tax rates are slightly lower, especially when it comes to vehicle service contracts. So if you have a $7,000 car or what maybe now is selling for $9,000 in light of inflation, the likelihood of a vehicle service contract being attached to that vehicle because it's a 10-year-old or 11- or 12-year-old car is lower. There's also possibly that the loan tax rate is lower on that as well because people have that kind of money to kind of spend. So that's certainly true on the kind of what we would call value or near-value inventory. Attached rates are generally lower, and we've spoken about that in the past. But for everything else, price I don't think is the driver of attached rates. The way people buy automotive vehicles is by thinking about their monthly payment, meaning what can they afford to pay on a monthly basis. And obviously, they look at the whole picture. What are they paying for the vehicle? What are they paying for any add-ons that they might add? So while I don't have proof of this, you could actually conceivably argue that prices increase much more quickly than people's salaries do. Actually, folks are more concerned about being able to do a monthly payment that's larger and might not do attachments as much because they need to have a certain monthly payment. And then in that scenario, you actually could see that if prices kind of normalize and there's some, you know, depreciation in prices as a result of this kind of tension in the market ending, you could see higher tax rates because people's monthly payments would then be able to absorb those vehicle service costs more. I don't have kind of data to back that up, but I think that's a hypothesis that we've certainly thought about internally and how this works. But overall, you know, I think the goal for us is to increase our tax rates. And as we do that, we think that F&I numbers will go up as well. Great.
spk05: Okay. That's super helpful. Thanks a lot, George. Good quarter.
spk14: Thank you. Our next question comes from Raja Gupta of J.P. Morgan. Your line is open.
spk11: Great. Thanks for taking my questions, and congratulations to Toby. I would echo other respondents in the call as well. Just a question, maybe a couple of questions. Firstly, just to follow up on the 2500 medium-term GPU, on what kind of volume level is that based? Any thoughts on that?
spk02: So the 2500 is not volume specific. It has to do with the progression of our ability to be efficient on the operational side. Now, obviously, scale helps to that end, but we need to be able to staff and train and learn and improve on all facets of operations in order to be able to increase F&I and reduce reconditioning costs. And we've done a really good job there over many quarters, and we should continue to do that.
spk11: Understood. Got it. That's helpful. And then just on the hiring and the staffing, you're ramping up investment significantly here in the fourth quarter. In the shareholder letter, you mentioned adding sales support. Yes. How do you manage all the other functions too? You're investing out of growth, you're adding salespeople, but also hiring reconditioning staff and logistics, trucks, drivers. How do you manage all those other pieces of the puzzle just so you're not caught in a situation where you have one end of the funnel fully equipped, but you're having throughput issues on the other side? So how should we think about that in the context of, you know, just a fourth quarter SG&A pickup?
spk08: Totally. Our hiring is focused across all the needs that we have as a company. You know, that includes drivers, that includes mechanics, that includes concierge, salespeople, customer service, et cetera, across kind of all areas where we need people to execute on the business. And, you know, I think the really important thing here is that Almost everything we do is in-house. Our reconditioning is done in-house. Our logistics is done in-house, et cetera. So we have a pretty good sense of what we need, and fortunately we don't have dependencies on other people. I also want to mention this because I think it's really important as a differentiator for how we operate. Our concierge or our driver gets into the car and drives that car out to the customer. So we don't put the car on a truck and then drive it that way. So the type of labor force you're hiring there is different. And then just how we operate in the field logistically is different as well. So we are investing across all those pieces and ensuring that we have the right amount of people that we need for 2022 going into Q1. And obviously, as you can imagine, it's a really big focus to manage it very carefully and deliberately. And I think we're doing, I think, very well in that regard. Like I said, the market is not an easy market to hire in. One of the things that we wanted to do by diversifying our locations and going into Texas, for example, et cetera, was to be able to not have a dependency in hiring just in one location, including the fact that California obviously is a lot more expensive than a lot of places. And so we're definitely going to benefit from that as well because now we're not hiring just in California, but are also hiring in the newer locations that we launched. So that's kind of my overall, I hope I answered the question.
spk11: That's helpful. Sorry to interrupt.
spk02: Just a shout out to our people ops team. About seven or eight months ago, we hired the new CPO and she brought in a whole team of seasoned professionals who really attack the issue of hiring. Hiring across the economy is difficult right now and they've done a fantastic job in addressing each part of our organization and really helping us. So we feel very confident with them in place leading us forward.
spk11: Great. I appreciate that. And then, you know, just on the recon center, you know, the large one that you're opening, in that case, too, it's going to be the concierge doing the delivery. And just, I mean, is that an approach that you – plan to replicate across other regions as well in terms of like the size and scale of the recon center? Thanks.
spk08: Yeah, so our approach to reconditioning facilities is, you know, I think quite unique among our peers. We rent space and then we put in lifts into that facility and then we operate that facility. These lifts can be moved from one facility to the other. Our leases are generally on the shorter side so that we can move from one location to another location based on our need as we grow. And the capital investment that you can make to get into a facility is fairly limited as well. So I think we said in our shareholder letter that about 80% of the equipment can be reused from one facility to the next. And that's kind of the approach we've had for a long time. This is not to criticize an approach of building kind of a factory floor massive reconditioning facility. There's definitely value to that as well. And in the long term, there are cost savings that you see from that, but the upfront investment that you make for that is much larger. And at this scale that we are at today, we don't think that's necessary. In California, Bay Area obviously is a very large market for us. And we had a facility in, or we have a facility in South San Francisco. We needed to go to a much larger facility to be able to continue to grow you know, almost all the growth that we've seen this year actually came from existing markets. And we think there's a ton of opportunity to continue growth in these new markets. And so our approach has been we need a bigger facility to achieve that. And that's why we are moving to a facility that is, you know, 2.5x bigger than what we have now. But the capital investment to do that is pretty limited. And it'll serve as primarily, you know, Bay Area locations, plus potentially a little bit of Sacramento, so kind of Northern California more broadly. Now, Obviously, consumers can buy a car from Shift anywhere, and then we'll ship that car to them. That is a kind of way to buy from us. It's not a majority by any means, but people choose to do that. And so in that case, we'll put a car on the truck and ship it to the consumer wherever the customer is across the country. But for the overwhelming majority of customers who buy within our geographic footprint regions, we will drive the car to them with a concierge like we have always done.
spk11: Got it. Okay, great. Thanks for all the cover, and good luck.
spk14: Thank you. Our next question comes from Seth Basham of Wedbush Securities. Your line is open.
spk04: Thanks a lot. Good afternoon, and congrats to Toby as well. I just want to dig deeper into a couple of the prior questions. The first is on retail. e-commerce, GPU, and the guidance for the fourth quarter. I'm trying to understand why there's such a step down, understand the seasonality effects, but the pricing environment continues to strengthen from... the level at which you bought vehicles over the last couple months. So I think that your margin should be stronger than you're forecasting. Is this just conservatism or is there something else that's going on from an additional reconditioning or transportation cost perspective or something else?
spk02: So thanks for the question, Seth. As I mentioned before, we are very pleased to be able to guide to $1,600 to $1,700 just because It's more than three times our number from last year, so that's a starter. And then what happens in the fourth quarter is that there is a seasonality impact. Just people spend their money in different ways, and spending it on cars is sometimes not their first priority. And if they decide to do so, it becomes more competitive, and it has an impact on the final price you get for the car. And then finally, is there an element of conservatism here? Yes, just because, you know, we had some more challenging experience in previous years in fourth quarter. And we wanted to make sure that we guide you to the best of our ability and, you know, and give you our best take as of now.
spk04: Okay, that's helpful perspectives. And then as it relates to F&I improvement in this quarter, the third quarter, how much of that was simply from higher ASPs relative to improvements in attachment rates?
spk02: Well, obviously, it's a little bit hard to tell exactly, but the improvement was in many different ways, and you can see it in many different products as we were able to increase attachment both on the financing side and the other products that we sell. So I would say it was across the board. It's not necessarily focused on one thing, and I don't think ASP is the main culprit there.
spk04: Got it. Thank you.
spk14: Thank you. Our next question comes from Nived Khan of Truist Securities. Your line is open.
spk10: Hi. Thanks a lot. We're hearing about more and more car buyers just getting priced out and not ending up buying. Do you think the marketing efficiency can be higher in sort of a more normalized card buying environment? And maybe just talk about the advertising channels. Which ones are you seeing that are more effective?
spk08: Great. Thanks for the question. Look, we certainly realize that as prices on cards have gone up, it's creating a complicated environment for a lot of people, and frankly, That's one of the reasons why we hope that eventually things kind of go back to where they were before and normalize. We are fortunate that our inventory is very broad, meaning you can buy a brand-new car from Shift that's six months old all the way to a 10- or a 12-year-old car with 100-plus thousand miles. And so the price diversity that people can find at Shift is very broad, and so hopefully that's an opportunity for people who might not be able to afford it a two or three year old car given a price increase to buy a really good shift certified four or five year old vehicle. And so we hope to serve them that way. With regards to marketing, as you know, and we've spoken to in detail, last Q1, we fundamentally changed how we approach marketing. Historically, shifts have been very focused on marketing through digital channels. Whereas with this transition, we have refocused ourselves much more on brand and building a long-term sustainable brand that will pay off both today and over the long term. The primary way in which you do that is through video advertising. Obviously, television is one area, and I don't mean just television in a normal sense where you're watching CNN cable, but also over-the-top television where people consume on demand, as well as other channels that people use to build brands. That's where a lot of our focus is. We obviously haven't stopped doing digital. We just do a lot less of it than we used to as a total percentage of our spend. And, you know, the digital channels that we've always deployed continue to work really well for us, and we'll continue to utilize those as needed.
spk10: Thank you, George.
spk14: Thank you. Our next question comes from Brian Nagel of Oppenheimer. Your line is open.
spk13: Hi, good afternoon. Congrats on the moves, and congratulations on a nice quarter. So one question just to begin. It's relatively basic. I mean, we're all talking about, just here today, the significant elevation in used car pricing. If you look at your business, I mean, assuming that used car pricing will eventually normalize, but you look at your business now, is the increase in the elevated used car pricing, is that more of a positive or a negative for you?
spk08: I'll start and then I voted or told me when to chime in. I'll let them speak as well. So certainly in Q2, and we saw a really strong tailwind from that because we bought cars before price elevation started. And then we had appreciation in car prices virtually every week throughout the quarter. And so that really helped us. And we talked a lot about that during our call with you guys in August. In Q3, then we saw some pressure on car prices for a little while, but then this kind of came back in September and that tailwind helped us a little bit in Q3 as well. That said, you know, so from that point, those are kind of positive. On the flip side, though, you're operating in an extremely unusual environment, an environment that we've never been in before. And a lot of the patterns and kind of history that we've noticed about how pricing works throughout the year are no longer applicable. or they've been telling this to us for months, just throughout the history book and assume that you don't know what's going to happen based on history. And that makes things much more complicated. And so from that perspective, I'm actually even more proud of what the team's been able to do because in this very complicated environment, they've executed extremely well. And so from that point of view, would we prefer to, for things to return back to normal? In many ways, of course, because we could then use our historical patterns and things that we've learned over the years to predict better what is going to happen with pricing, and that would make everyone's lives a little bit easier, and frankly, consumers would be in a better place as well because they wouldn't be paying this high of a price for cars.
spk02: I would just add that, look, I'm fairly new to the car industry specifically, but what occurred to me is that when you have change in the trajectory of prices, then you're going to get price headwind that we saw in Q2 or it could turn into a tailwind at some point in the future as long as prices continue in their trajectory for a long period of time so you have to pay more to buy cars and you get more when you sell cars so maybe it's a small appreciation in between that you can gain on but you get to normalize pricing so right now we are in more normalized pricing versus what we saw in Q2 for example
spk13: That's all really helpful. I appreciate it. Then the second question I have, just with respect to the new markets, I think in your script you talked about Houston, but I guess maybe a two-part question. Just to discuss the performance of these new markets, I know you've said in the past that most of the growth still comes from your legacy markets. Is that still the case, and is there any change in timing of when the new markets could become bigger contributors to your overall growth?
spk08: Certainly this year, the vast majority of the growth has come from our existing markets, you know, markets that we had prior to, say, November of last year, which, you know, makes sense because the other ones were starting on such a small end. That said, we've seen really strong momentum in some of the markets that we launched. You know, Seattle went two-sided in, I think, November of 2020 and then, you know, some of the Texas markets in Q2. They're doing really well and we would expect them to be bigger contributors to the business next year, not to in any way suggest that the market that we had prior to that in California or Oregon won't grow. We expect those markets to continue to grow very well. There's still a ton of market share to be captured in these markets, but given just the fact that they're growing and the end from which they'll be growing will be bigger, we would expect markets that we launched in late 2020 and first half of 2021 to be big contributors to the business in 2022.
spk13: I appreciate it. Congrats again. Thank you.
spk14: Thank you. Our next question comes from Ben Sherland of Cancer Fitzgerald. Your line is open.
spk12: Hey, guys. Thanks for the question. I was wondering if the increase in PPU is entirely related to price appreciation or if you guys are also increasing the mix of higher relative price point vehicles.
spk08: Um, so I think, are you implying in that that cheaper cars might have lower GPU? Is that kind of how you're thinking?
spk12: No, it's not related, not related to GPU. I'm just trying to think about, um, you know, PPU going forward. So if we were to say, you know, used vehicle pricing would remain at the current level, should we assume, you know, your PPU would kind of remain at that $24,000 range going forward?
spk08: Um, yeah, so we've, um, You know, there are two things that happened this year that resulted in ISP being higher than it was previously. One was a choice that we strategically made. So in 2020, kind of as COVID started, we saw a really significant spike in demand for lower cost cars, which makes sense. People felt like they needed a vehicle because they didn't want to be in public transportation, but they also didn't want to spend a lot of money for a car because they had no idea where the economy would be. And so we lean into that. We have a unique ability to sell vehicles. cheaper cars. And so we made that be a really big percentage of our cars sold. Going into 2021, we wanted to reduce that cheaper vehicle percentage of our cars sold. And we did that partly because of reconditioning and partly because we thought it was a better mix to have as a business. And so we have chosen throughout the year to reduce the mix of cheaper cars as a percentage of total, which obviously drove our ASD out. Now, concurrently with that, we saw this massive appreciation in car prices, which then led to what we've seen this year, which is that everybody's ASTs jumped pretty significantly. So those are the two things that kind of drove price appreciation in our AST over the course of the year. That said, we still sell a very broad spectrum of inventory. We have a ton of cars that are below $10,000 in price, for example, even in an environment where prices have gone up as much as they have. And so, you know, we can predict what's going to happen in the future from the choices that we can internally make. We don't expect to make any changes. We think that the mix that we have on inventory today is generally good, and we'll continue to have that same mix in the foreseeable future. Obviously, if demand from consumers changes like it did in 2020, then we'll respond to that demand and get a different set of inventory based on that. Does that answer the question?
spk12: Great, great. Yeah, that's helpful. Thank you. Maybe a follow-up if I could. As you continue to scale and expand in the new markets, is there a point where you need to acquire more inventory from wholesale channels or are you fairly unconstrained on the number of cards you can source from consumers?
spk08: So going into this year, if you kind of look back at the modeling that we were doing in Q4 of last year, we were planning on having roughly 15% of our cars come from auctions. which we thought was reasonable. Now, if you look at what actually has happened this year, we have not bought 15% of our cars at auction because we saw prices go up dramatically at auction, and we just did not think it made sense to pay retail prices for auction cars, which is what a lot of people had to do. We made up for the cars that we didn't buy at auction from consumers, and we actually ultimately will end up selling more cars than we thought was possible this year. So we were able to meet the demand for cars that we had from consumer cars. That's a unique competitive advantage that Chips had for a long time, and we are able to do very well. And we don't see any reason why we can't continue to scale that in a very strong way in the quarters to come. Now, obviously, prices normalized and wholesale prices are not as high as they are today versus retail prices, which we would expect eventually to happen once new car production increases again. then we would probably buy more cars at wholesale. Historically, Shift had chosen not to buy a lot of cars wholesale because those cars have less front-end margin, and you have to have much better F&I to be able to get to the GPU that you want when you sell cars that you bought at an auction. So when we didn't have very good F&I, we were not able to lean into that as much. Now that our F&I numbers are a lot better and will continue to improve, we think there's an opportunity actually to grow our auction purchases and then turning them into retail sales. But we need the prices at auction to normalize before we're able to do that.
spk12: Great. Great. Thanks, guys.
spk14: Thank you. Our next question comes from Mike Grondahl of Northland Securities. Your line is open.
spk05: Hi, guys. This is Owen on for Mike. I just have one quick one. I know the lockup for shares is getting closer, but do you guys have an exact date yet?
spk08: Sure. So lockup expires on November 15th, which is on Monday. And, you know, that's been public for a long time, ever since the transaction.
spk05: Great. Thank you. Congrats on the quarter.
spk14: Thank you. Thank you. And our next question comes from Tania Anderson of William Blair. Please go ahead.
spk01: Hi. Good afternoon. Good afternoon. Could you talk a little bit more specifically about your reconditioning capacity? I think it was at 600 a week last quarter, and you mentioned increasing capacity. So I was wondering where it stands now. And then when you put in the new, you move to the bigger facility in California, where you expect it to be. And then can you remind me, maybe I missed this, what's the timing on switching over to that bigger facility?
spk02: Okay, so... Let me start by saying we did not update the capacity numbers. As I'm saying, it continues to grow. It's not a constraint on our capacity to produce and recondition cars. So we're doing really well and going to grow into next year. So this is one of our, in my opinion, strengths as a business is our ability to do this efficiently and scale up as we expand. As for the new facility, you know, it takes a little bit to just retrofit it and put all the equipment that we need in the place and hire the staff, even though we're going to move some from the current facility. There will be some overlap between the two. So at some point in the first half of next year, we'll be fully operational.
spk01: Okay. And then can I follow up on that F&I question? You made some improvement this quarter, and your midterm goal is $1,200, $1,400. Can you remind me of maybe the timing of that? And I guess since you mentioned a higher initiative that includes F&I, better training, new partners, is it reasonable to – I know you talk about, oh, it's incremental improvement. Is it fair to – think about it being maybe a little bit, that incremental improvement being a little bit better each quarter with all these things you're doing and towards that goal. And then the other thing is I think you're going to probably cross a billion dollars in revenue maybe next year. So can you update us on your thoughts on the timing of capital funding?
spk08: Sure. So I'll start with the last point first. We always said that, you know, To be able to build capital, you need to be able to set a billion in revenue just from a security point of view. We don't really have a concrete update on that, but certainly you're correct. I think next year is when we will actually start to actually think about when to go after this and how, and hopefully we'll be able to provide an update to you guys in a few quarters on that. As far as F&I, you know, generally if you look at our F&I results, We've improved quarter after quarter. I mean, the improvement is pretty significant from last Q3 to this Q3. Obviously, you know, it's not exactly linear. Some quarters there might be a slight decrease as well. But overall, you know, we think that to get to that 1,200 to 1,400 number, our goal is to do that in 2023. And we think we're well on our way to kind of make that happen.
spk01: Okay, thanks.
spk14: Thank you. At this time, I'd like to turn the call back over to George Harrison for closing remarks. Please.
spk08: Great. Well, thank you, everybody, for joining us. I really appreciate your questions and look forward to speaking to you again in Q1.
spk14: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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