Shift Technologies Inc (SFT) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Shift Technologies Second Quarter of 2021 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Henry Bird Vice President of Strategy and Finance. Sir, you may begin.

Good afternoon, and welcome to the Shift Technologies second quarter 2021 earnings call. Joining me on the call today are Co-CEOs, Toby Russell and George Arison; and CFO, Oded Shein.

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 statements. 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.

Thanks, Andrew, and good afternoon, everyone. In the second quarter, our business exceeded all expectations. Through hard work of our team, we delivered incredible performance across key metrics. $155 million in revenue, representing year-over-year growth of 377%, 5,871 e-commerce units sold, adjusted GPU of $2,809 and significant improvement in our operating leverage.

With these results, which greatly exceeded the guidance that we gave on our first quarter call and strong momentum into Q3, we are now raising our full year revenue guidance to between $575 million and $595 million. At the midpoint, this represents a 3x increase over last year or nearly 50% more revenue than we had originally anticipated for 2021. We achieved these strong results while continuing to provide exceptional service to our customers in a very unusual environment brought about by Covid and continuing to drive toward achieving our mid- and long-term strategic goals. These goals will be the core focus over the rest of my prepared remarks today. And afterwards, Oded will discuss the financial results and guidance in greater detail.

As we've discussed before, we have several key strategic focus areas: investment into which will set Shift up for long-term success. These include: deepening market penetration within our existing markets, expanding our geographic footprint, building lasting, brand awareness and driving efficiencies in our full stack operations, while improving unit economics.

Once again, our growth this quarter was primarily driven by the strength of our most mature regions along the West Coast and San Diego up through Portland. These 5 legacy markets in which we had operated prior to 2020, accounted for nearly all of the 377% year-over-year growth in the quarter. At the same time, we are encouraged by what we're seeing in newer markets, such as Seattle and our Texas markets and Las Vegas, where at this time we are buying but not yet selling cars. The newest markets will be valuable contributors to our sustained growth in 2022 and beyond.

One of the key drivers of growth across all of our geographies has been our new marketing strategy that we have talked about at length in prior calls. This campaign has proven to be highly effective, supporting immediate and midterm sales efforts while also building durable, nonperishable brand impressions for the long term. In our May call, we set the expectation to reduce CAC by roughly half in Q2. We achieved this with a 46% CAC decrease quarter-over-quarter, with total market expense also decreasing sequentially despite accelerating unit sales growth. Given the momentum we are seeing in our business and the effectiveness of our branding effort campaign, we will continue to prioritize and, in some cases, accelerate investment in building our brand.

As of late Q2, we are now in a position to utilize powerful third-party data tools to measure the impact of our branding efforts on Shift's aided awareness among customers. We believe that with the right investments over the next 6 to 8 quarters, we can drive faster awareness growth than our peer set has when they embarked on branded growth and do so at a lower total spend level despite a more expensive Covid-driven marketing environment. That, in turn, will drive deeper market penetration, support growth in front-end GPU and help new markets grow with faster ramp in their earliest cores.

Turning to Operations. We continue to see strength across business functions. While many in the industry struggled to find supply, Shift was able to grow our sellable inventory nearly 40% throughout the quarter, with 93% of cars sourced in Q2 coming direct from consumers and partners. Our in-house reconditioning facilities did an excellent job keeping pace with the growing spot and currently can process over 600 cars per week without additional staffing, which is more than sufficient to meet our 2021 inventory needs.

Q2 saw some of the most unusual used car market behavior that the industry has seen in decades. And certainly, in the 7.5 years since Shift has been in operation. A confluence of factors caused multi-week steep pricing appreciation rather than the depreciation of the industry normally sees across all used car cohorts. Market tailwinds benefited the industry and helped us achieve the $2,809 GPU over performance. Oded will provide additional color on the drivers of that and overall unit economics.

That said, our nearly 5x revenue growth year-over-year significantly outpaced that of the broader market. Given this momentum, based on the branding and operational investments we are making, we are positioned to continue significant market share growth in existing and new markets for the rest of the year and beyond regardless of market pricing dynamics. Regardless of how the market moves in the short term, our strategy, technology and operational excellence is well positioned to respond appropriately to drive growth while delivering on our mission of making car purchase and ownership simple and trustworthy for the long term.

I would like to thank all of our employees at Shift for their hard work and dedication to make these great results possible. Our people stepped up and delivered exceptional results. We had a great quarter, and we are excited for the growth ahead in 2021. I will now turn the call over to Oded to go over our second quarter financial results as well as provide guidance.

Thank you, Toby, and good afternoon. The second quarter was a very strong financial quarter for Shift, providing record metrics across the board and demonstrating meaningful progress towards our long-term goals.

I will first review our second quarter results and then share guidance for the third quarter and the fiscal year. Total revenue for the second quarter grew to $154.9 million, an increase of 377% to the prior year period and 46% to the prior quarter. Total units sold were 7,815, an increase of 240% year-over-year, with the e-commerce channel growing to 5,871 units, up 222%. The e-commerce average selling price was $2,219, 11% higher than last quarter, in part due to pricing appreciation we saw throughout the quarter.

Adjusted gross profit increased to $16.5 million versus $3.7 million in the prior year period and $7.5 million in Q1. I'll focus my remaining commentary on sequential changes. Our adjusted gross profit per unit reached $2,809 in the quarter, up 66% from Q1. As Toby mentioned, in the second quarter, we saw unique market dynamics with significant appreciation in car prices. A large portion of the cars that we sold in Q2 were purchased before price appreciation really took hold and were sold at much elevated profits. We estimate that this unusual appreciation dynamic contributed approximately $600 to $700 of incremental GPU in Q2.

Looking at Q3, most of the cars we are selling in the first half of the quarter were purchased in Q2 at the very peak of price appreciation in order to ensure adequate supply to meet our growing demand. As a result, we expect GPU margins for the second half of the year to be lower than they would be in a more normal environment. Given these unusual swings in market pricing conditions between Q2 and Q3, looking at average GPU over the combined 2 quarters helped to balance this short-term volatility. Market appreciation helped Q2 but is expected to hurt Q3. I'll discuss this fully in the guidance section.

Other revenue, mostly F&I was $5.1 million in Q2 compared to $4 million in Q1. We remain encouraged by the fundamental performance of our F&I business. F&I per unit in Q2 after adjusting for changes in accounting reserves, was $938, same as in Q1. After consistently delivering around $900 per unit of F&I revenue in the first half of the year, we continue to see meaningful opportunities in this space.

Total marketing expense for the quarter was $10.9 million, down from $15.4 million in Q1 as the new strategy emphasizing brand marketing took hold and yielded impressive results. As Toby mentioned, Q2 customer acquisition cost was $1,897, down 46% from Q1. Total SG&A in the quarter was $48.1 million or 31.1% of revenue compared to $50.2 million or 47.4% in the previous quarter, demonstrating significant operating leverage. EBITDA loss for the quarter was $26.1 million or 16.9% of revenue compared to a loss of $34.4 million or 32.5% of revenue in Q1.

Turning to the balance sheet and cash flow. We ended Q2 with cash and cash equivalents of $238.2 million. This represents a $61 million increase compared to Q1 cash balance. Our Q2 cash balance includes $115.3 million from the May 2021 issuance of convertible notes, net of origination fees and cap call purchase. Primary uses of cash for both the second quarter and year-to-date were funding inventory purchases and marketing investments supporting our accelerated growth. Partially offsetting these cash outflows in the quarter were full utilization of our $50 million floor plan facility and normalization of our accounts receivable balance when compared to Q1.

Turning the spotlight on inventory. We ended the quarter with $122.5 million, a $48 million increase to our Q1 inventory. Our strong sales and GPU performance in the second quarter speak to our continued ability to procure desirable cars, the vast majority of which are bought directly from customers. Looking forward to the second half of the year, we expect to achieve the accelerated growth embedded in our guidance with only modest inventory investment. As we have demonstrated this year, we are able to quickly size our inventory to changing demand and market conditions. We're utilizing the inventory increase in Q2 to fuel our current quarter growth and plan to replenish when prices become more favorable in full.

Turning to guidance. For the third quarter, we expect revenue to be in the range of $155 million to $170 million or 159% to 184% higher than Q3 of 2020. Adjusted GPU is expected to be in the range of $1,500 to $1,600 for the third quarter. This will create an average of approximately $2,100 for the Q2 and Q3 period. Our adjusted EBITDA loss for the quarter is expected to be in the range of $34 million to $36 million.

Based on positive results year-to-date and momentum we are seeing across our business, we are again raising our annual revenue guidance for 2021. We expect total revenue to be in the range of $575 million to $595 million, approximately 3x our revenue for 2020. We expect to sell 22,000 to 24,000 e-commerce cars. As we've demonstrated in prior quarters, our growth strategy allows us to grow well in excess of the market. While the volatile market dynamics did not slow down our growth, they do impact GPU. Due to limited price visibility later in the year and with an abundance of caution, our full-year expectation for GPU remains at greater than $1,800, well on track to reach our sustainable GPU target of $2,500.

We now expect our EBITDA loss margin to be better than negative 23% versus our previous guidance of better than 24%.

I will now turn the call over to George for closing remarks.

Thank you, Toby and Oded. Over the years in the past, before we were a public company, I was often asked, what is the governing constraint on Shift's growth. I would regularly say that we were capital constrained, that we could not invest in the areas we needed to drive growth, but that if we have the capital we needed, we'd be in a position to drive exponential growth and bring this company to scale much faster.

Now after removing the capital constraint once we went public last year, it has been very exciting for us to see our team deliver on accelerating growth for 3 subsequent quarters with 168%, 254% and 377% year-over-year growth for Q4 2020 and Q1 2021 and Q2 2021, respectively, while driving significant operating leverage this year. It is also exciting that almost all of this growth is coming in existing markets, providing a further proof point that our model is positioned to aggressively gain market share in each of its operating markets by providing consumers with the broadest possible inventory and test drive delivery.

Given these strong results in Q1 and Q2 and our newly increased guidance for the full year, we are now expecting to hit $1 billion in run rate revenue a few quarters ahead of our original expectations. We are looking forward to continued efforts to invest in the areas that have supported this industry-leading brokerage entry, while driving significantly sustained improvements in our gross profit, as well as in improving our operating leverage on a drive towards scale and profitability.

Thank you to our shareholders, customers and team members, especially those working on the frontlines in the -- so the pandemic who are all helping Shift deliver on our mission.

We look forward to answering your questions. Operator, please open up the line for Q&A. Thank you.

(Operator Instructions) Our first question comes from the line of Alex Potter with Piper Sandler.

Great quarter. I guess, first of all, obviously, the focus on marketing is clear. Is it possible that the CAC looks as good as it does right now because there's just this unprecedented demand for used vehicles, so customers are just falling all over themselves trying to find used vehicles and that, that could normalize a couple of years down the line or a couple of quarters down the line once the market settles down?

So as we had said in our previous call, our plan was to reduce our CAC by about 50% or roughly half, and we got to about 46% reduction. So it's very much in line with what we had expected. And we think that the way to think about CAC in our approach is twofold. One is you could just target it for acquiring customers today. And then secondly, targeting towards building aided brand awareness among consumers for the long term.

So a lot of what we're doing today in our marketing strategy is not focused on immediate results; we focus that results over the long term. We've seen with our peers that as they build brand awareness, they are, I believe, (inaudible) higher price to market increases, which then results in a better front-end gross profit. So a lot of our investments have to do with this kind of long-term strategy and long-term plan. I think if we were just targeting customer acquisition for today and not for the long term, we probably could drive to a much lower CAC, if we wanted to, but we don't think it will be the right approach, given that we are trying to invest for growth over the long term.

So I think the reality that CAC reduction is part of the kind of operational and strategic focus that we've had to drive for results in our marketing campaign and our efforts and really not connected to the market conditions overall. As we talked in our prepared remarks, we think market conditions definitely impacted gross profit. But what we are seeing with our unit and revenue growth is primarily and vast majority, driven by our own results and very much in line with what we wanted to accomplish as a business.

I guess then, I mean, clearly, you've got a business model that seems to be working. Is there urgency then on your part to try to expand and out maybe expedite this business model to other regions? Or are you going to stick with your historical plan in terms of kind of a deliberate market by market, region-by-region rollout.

I'll let Toby take that.

Thanks for that question, Alex. We had previously, as you referenced, said that we wanted to grow about 2 markets per year. And as I mentioned in our prepared remarks, the vast majority of our year-over-year growth came from in footprint. We continue to see just tremendous potential from our existing in footprint base for delivering large volume for Shift.

But we are growing our market expansion faster than that too that I had mentioned or we had talked about in the past. I think we're going to continue gauging that and continue moving ahead of that target for 2021. We're excited about that, and we're seeing really great reception of both the brand marketing campaign and the footprint expansion, both immediately within the footprints and in surrounding areas when we see cars being shipped to nearby area sort of a penumbra footprint alongside our existing markets.

And maybe one last 1 and I'll turn it over. You mentioned kind of the in footprint, the existing footprint that you've got on the West Coast there. And you also mentioned that you have the ability of 600 vehicles a week, I think, is what you said to meet your 2021 targets. Is there a point on the somewhat near horizon where you foresee bumping up against capacity constraints in your existing markets, where you would need to deploy additional CapEx or start adding square footage, adding parking spaces, anything like that, that could potentially constrain your growth?

Thanks, Jeff. I think it's a good question, and I know that with our peers, that's more of an issue. So I think what we said in our remarks on this point is specifically related to kind of what we can process today with the labor that we have. Our real estate can process a lot more than 600. But obviously, you need to hire and train labor force for more. So we don't -- in the past, this has been an issue for us. It's not an issue for us right now.

As we said, we are in a very good place with reconditioning capabilities that we need for this year. Obviously, given that our model does not assume building massive reconditioning facilities, we are able to turn on additional facilities as we launch each market. And then the second kind of variable there is the labor force. And that's kind of how we've approached kind of thinking about whatever condition needs are. So I think we want to be able to grow production organically, and we're able to do that with kind of the model we have today, being really close to the customer.

Our next question comes from the line of Sharon Zackfia with William Blair.

Congratulations on the quarter. I guess I wanted to unpack what you were talking about when you mentioned growing your brand awareness faster at lower spend than some of your peers did previously. Could you kind of help us understand tactically what that really means and how you do that? And then separately, if I look at your units sold relative to your average monthly unique visitors, it looks like your conversion went up in the quarter. Can you talk about what's going on there? Are you getting better leads? Is it something that ties into the brand strategy? I'm just curious on that metric.

Sure. So I'll start with the first question. We can't really share too many details right now on that. What we can say is that over the last quarter or so, we have gotten access to a lot more data that allows us to measure what impact our brand campaign is having. And this is probably a result of the fact that as you spend more money out of it, you're kind of get access to information that previously might not have been available to you through agencies and other partners. And so that is allowing us to track the effectiveness of our branding efforts really well and to also set midterm goals for our team in terms of what we want to accomplish as far as our branded awareness. And so we believe that with the right investments over the next 6 to 8 quarters, we can achieve really strong results and drive faster growth in our awareness versus what other folks have been able to do with what would hopefully be in aggregate less total spend.

Hopefully, in the coming months and quarter, we can talk more about that. But at this point, kind of directionally, I thought it'd be useful folks to know how we're thinking about that. I know in the past, we've gotten questions about, hey, what are the goals of it, that's separate. And so we wonder -- indicate where we are leaning. We can't really kind of go into more details on that right now, but hopefully, in the future we will be able to. And then I'll turn it over to Toby for the second part of your question, which has to deal with conversion.

Excellent. It's a great question on conversion. Multiple factors help drive up our conversion, better targeting and marketing, of course. Additionally, as Oded mentioned, we grew our inventory, which means having more inventory and more cars for people. It's easier to do the thing that we do, which is match people with cars when you got a larger pool of inventory to match folks with. And finally, we've been making some great strides in our technology experience. We're continuing to actively invest in our web and mobile technology experiences, investing in improving the -- removing friction for customers and improving features that make it easier to find cars and easier to connect with those cars. So we're seeing multiple levels of activity combined to really improve that conversion, and that remains an ongoing focus for us.

And then one last question on the F&I GPU. Was there any benefit there from the pricing environment?

I believe Toby will speak on that.

In terms of the -- our F&I, at a high level, we have found that, that is just a great business area and business line. It's incredible value add. As you allude, most people don't walk around with like $20,000 in their pocket. And so one of the top questions we get from buyers are, in the early days of Shift for buyers to say, "Hey, I love the car. I love the experience. Do you have financing for that?" So we said, yes, we can do that.

Note the combination of being able to offer financing and warranty is critical. We're continuing to build technology and build out that entire product offering, both from a intangibles, both the financial offering and the technology offering to keep improving what we offer to customers. There are variations with things like ASP and vehicle segment. We've talked in the past about the variations in F&I between what we describe as core cars or our certified cars versus value cars, et cetera. But I wouldn't say that in this particular period, we saw wild variation based on ASP.

Our next question comes from the line of Zack Fadem with Wells Fargo.

So on your 1,000 unit increase in the full year unit outlook, to what extent would you describe this as flowing through the outperformance in Q2 as opposed to raising your unit assumption in the second half? And then as we think about total top line, could you talk a little bit about your expectations for price and where you expect the retail ASPs to land at the end of the year versus the 22,000 level today?

Thanks for the question. As you know, we just raised total revenue guidance by $85 million for the year. We also raised our unit volume guidance by 1,000 cars. So it's a combination of each one of the quarters and our trajectory being faster than we originally anticipated. But specifically, towards the end of the year, we don't have very good ASP visibility right now. So if you really do the math, there may be -- if ASP remains at the 22,000 plus 1,000 range, there may be some upside for total revenue by the end of the year.

So I guess, another question on cars sourced from customers up to 93% in the quarter and then your wholesale units up over 300%. Can you just talk about what you attribute to the external environment here? And how should we think about modeling out these line items over the couple -- over the coming quarters.

Oded do you want to take that? So I'll take that. The way we kind of think about it, we're not really good at buying cars at auction, other than very opportunistically, given the pricing environment at auction, right? So I think the vast majority of the inventory that we are getting is coming from consumers. It has historically, and we're very much going to lean into that as far as kind of driving our inventory needs. And so I think folks should assume that, that's what we'll continue to do. Obviously, we actually would prefer to be able to get more cars at auction if we can. But in this environment where prices are just way too high we really are kind of having felt like it made sense to do that. But again, like I think Zack you and I've talked about this in the past, in other conversations.

But historically speaking, we did not really get into auctions because our F&I numbers were not as good as they needed to be for us to be able to get into auctions. But given where the F&I numbers are now, we actually are capable to do a much larger amount of cars from auctions if auction prices were in a better place. And so longer term, I would expect that as auction prices come down, we would lean into that a little bit more. So that's kind of how we think about our inventory kind of purchasing. And I'll let Toby talk about kind of the inventory disposition in terms of wholesale.

Yes. On the wholesale side, this is not like a massive focus for us at this point. There are other players out there that have built out a big wholesale business. In a lot of ways, our wholesale disposition really is an offshoot of what is the core of what we're focused on, which is acquiring consumer cars to sell to consumers. We're really putting our primary focus on that. And the wholesale business, while it is valuable and it supports that consumer mission. We have not yet built out or captured the real opportunity of that thing as a large stand-alone unit, hosting our own auctions at large scale, et cetera. But we do think there's future opportunity in that.

But in terms of your question [narrowing] back about how to model that. There may have been a little bit of a difference in terms of what was going on wholesale this past quarter in terms of this shortage of cars at wholesale. Increasingly, we're seeing that normalize. And for the later part of the year and into the next year, indications are that the market is returning to a normal supply date, and we wouldn't expect anything extraordinary or unusual, either in terms of wholesale pricing or supply, particularly as new car supply comes back online following chip shortages through the earlier year. So from a modeling point of view, can't be super specific on the tactics, but I think we're about to return to more of a normalized environment in the latter part of this year and into early next.

And then lastly, just a follow-up on the F&I question. Is it fair to say the 900-ish level is the right way to think about this item in the near term? Or are there reasons to believe that there could be some upside here in the back half of the year?

So as you know, our mid-term goal for F&I is to be somewhere in the one to $1,200 to $1,400 range, right? So if we're in the $900 now, we're making good progress, but we still have ways to go. And another way we're thinking about it is that we continue to improve hiring and training of our staff. They do a better job and become more productive, but they still have, again, ways to go. We're thinking about the product and so on. So it's always been our strategy to talk about growth in that area from this level to a higher level. How fast can we ramp up to that higher level? Time will tell. We're doing every effort to do that. It may take us several quarters to get to that promised range.

Our next question comes from the line of Marvin Fong with BTIG.

Congratulations on the quarter. I thought I would just start with a question on GPU. Thank you for putting a number on what you thought the pricing environment contributed to the expansion, but that still leaves about something like $500 plus or minus of GPU improvement quarter-over-quarter. Just curious if you could help us unpack that, how much was reconditioning, how much maybe a structural price gains or pricing power? Anything else you can expand on that? And then second question, just again on sourcing. Are you seeing -- are you able to isolate what's going on in terms of the elevated pricing is between just the overall pricing environment and any impact that might be -- you might be seeing from more companies getting into consumer sourcing?

So thanks for the question. I'll start with the GPU compared to Q1. So there are a couple of things going on. Q1, as we said last time was we had a little bit of hangover from Q4, especially on the reconditioning side, right? So the cost there was a little bit elevated, and we had some improvement in this quarter as well. So I would say that those -- and plus, of course, what we talked about market condition is, the combination of those 2 factors contributed to the big rise. Obviously, as we said in the comments, the market dynamics was the bigger part of that, and it's going to be equalized in Q3. So that's why we suggest to look at the average of the 2 quarters, Q2 and Q3 to get a more normalized balance number.

And Marvin, on the second part of your question around sourcing. I think it is a very valuable and important one. What we saw was a true anomaly in the market, and that was rapid appreciation, like something on the order of 25% appreciation between January and April of used vehicles. With that and that shortage environment, you saw a lot of folks saying, wow, if you're an auction buyer, if you source primarily through auction, you were having to pay very high prices to be able to source at auction.

Fortunately, for Shift, we were able to not rely on the auction channel to do our sourcing. As we mentioned, this past quarter, 93% of our sourcing came from consumer. There's a real advantage there. We've spent years building out that capability. And while we see others moving in that direction, we tend to say that, that's validation of a great strategy, and we have no concern about that competitive environment. Instead, we see real competitive advantage on our part, making that a key area. And in the past, Shift has been able to diversify and source elsewhere. But that core consumer sourcing is always going to be a great and best way to get cars. Those are the cars that we say people want. You're looking for that one owner, no accidents, strong options package, relatively lower price because it's a slightly older car, and that's always been the bread and butter in the core of what Shift has done really, really well. That proved out very nicely this past quarter, and we think that, that will continue to be true.

Additionally, because we've been so focused on consumer sourcing, we have a wider spectrum of what we sell. So the Shift value offering, for example, is a key differentiator. It is a unique capability to be able to source, recondition and then merchandise that vehicle set. And that is an outgrowth of our years of experience and focus on the consumer vehicles. You just would never find those vehicles really at an auction to buy them. We think that, that is another key advantage and puts us in a strong position. We're excited about that, and we've seen the advantage of that strategy play out here in this past quarter.

If I could ask a follow-up question just forward-looking on your new markets. I think you've only recently begun selling operations in a couple of those expansion cities. But anything you're seeing with the buying operations or anything that you could comment on, on how these new markets compare to the core West Coast markets that you've been operating in a while? Just any insight there would be great.

Yes. Another great question. As I mentioned, we're just seeing -- most of our growth and tremendous growth in the core footprint. The -- that's San Diego up to Seattle, and kind of Canada and Mexico, West Coast region has just been coming. We're really excited about that. Seattle being one of the newer markets as well. But Texas has landed very nicely. While we don't see any need to rely on it for our 2021 numbers, and we see it really as a foundation of our growth in 2022 and 2023. The rapid move to selling cars out of Dallas and our being able to have both the Dallas-Fort Worth and Austin, San Antonio markets up and running and selling cars is just a real indication that we're bullish on the market, and it's going really well.

Furthermore, we're super excited about the idea of Texas being a great anchor for the Central and the Eastern United States. We built out our entire footprint on the West Coast with interlocking mutually supporting regions that you can shop in L.A. or San Francisco anywhere up and down the West Coast and now from Texas. And we see that as a great beachhead that is just build out through the Central and in the Eastern United States. So we're feeling really bullish on that, and there's been great reception of the Shift offering there in Texas.

(Operator Instructions) Your next question comes from the line of Seth Basham with Wedbush Securities.

My question is how you're thinking about managing growth versus profitability here. It seems like demand remains really strong. Your inventory sourcing capabilities are really strong. And while GPU might be coming in a bit, it does seem like you're taking off as you put out the gas a little bit as it relates to growth. First of all, is that accurate? And if so, why, why wouldn't you try to drive more units if you have the ability to and strong demand environment?

So I'm not sure I understand your question because the growth pattern that we have exhibited, growing 5x more than last year and just raising our guidance by $85 million, I think, indicates of pretty fast growth. We have to think about the way we grow the company in our existing markets and the infrastructure that we have to support all of that. We are continuing to increase our capacity in things like reconditioning. Capacity has been growing, just in the few months I have been here, by more than 25%. Our sales force is growing, serving our customers better. So we are doing everything we can to grow the top line in a very fast way. Our guidance, again, indicates that we're going to grow revenue this year by 3x compared to last year. So I don't think we're not trying hard enough to grow.

I was just noticing that your guidance implies in terms of quarter-over-quarter unit growth, a slowdown relative to what you just did in the past quarter. So it seems like you have the ability to scale, but you're slowing down that scaling a little bit.

Seth, I think it's important...

(inaudible) consider the market dynamics we are here right now. We have a great inventory position. We want to maintain that. But we also have to be cognizant that the market is expensive, right, for purchasing cars and in order to grow our GPU and maintain profitability we have to think about how fast we grow the inventory at the same time. So there are many considerations there.

Seth, I think it's also important to remember that Q4 historically has very strong seasonality in this market. I've kind of -- I learned this a tough lesson back in 2014 and 2015. And so in general, we tend to be quite conservative in our assumptions about Q4. Oded spoke about that in the prepared remarks. And so across the board, we are pretty conservative in our assumptions about Q4. Obviously, if -- and so part of our assumption here is that ASP will come back to normal levels in Q4 and potentially even will have a steeper seasonality curve than normal because of how Q2 and Q3 have done, right? So as a result of that we are being conservative about Q4. And obviously, if ASP does not come down, there will be upside to what we've already said as far as 3x growth for the full year.

Our next question comes from the line of Ben Sherlund with Cantor Fitzgerald.

So your customer sourced vehicles, just going back to this, came in at 93%, which is pretty significantly above some of your competitors. Does this suggest that you might have some pricing power on the vehicle acquisition side, down the road? And maybe if you could kind of talk about how the pricing or the sourcing of vehicles varies from newer markets versus older markets? And then I have a follow-up on CAC, if I could.

It's a great question. And I'm going to answer it both in terms of sourcing as well as selling. We do believe and core to our strategy is that building out the Shift brand as a destination for selling or buying your car does create long-term pricing advantage allowing us to trade at reasonable market prices on both sides of that thing. In the short term, we do think we do have an advantage, as I mentioned in this past quarter, of being able to move our pricing quickly along with the consumer market so as to not necessarily be dependent or subject to the auction inflation that we saw, and we were able to move to a 93% mark with that consumer sourcing.

But again, the long-term sourcing pricing does relate back to great customer experience and our brand journey, and we're coupling both of those. We believe we have the best customer experience in the industry on both sides for buying or selling your car. And we want to brand that. Shift's #1 challenge is that we're great, people don't know about it. And so we do think that, that brings with it both through the funnel conversion advantage as well as pricing power, if that makes sense.

And then on the CAC side, maybe if you could just talk a little bit about how CAC varies between some of your more established markets like San Francisco versus some of the newer markets? And also -- sorry, go ahead.

No, go ahead. Just go ahead and finish the question.

And I was going to say, in 2Q, it looks like your marketing expense per unique visitor was up about 76%, which compares to a lot of pricing in the performance marketing space in Q2, up triple digits. What are you guys seeing in 3Q? Are you seeing any easing in kind of the impression costs on the performance marketing side?

Those are awesome questions, and I wish I could speak in more detail, but we haven't through these kind of any data on how our older versus newer markets do as far as marketing. And so what I can say is the following. We have found, and I've spoken about this in the past, but I think it's kind of important to reemphasize. We have found that given our presence in the various locations we're already in, especially San Francisco and Los Angeles that marketing nationally for brand is really beneficial. We don't spend all our brand dollars nationally, but a significant amount we do. And so what we see there, the costs are kind of more similar across the board. And we think there's a positive impact from that. And then second point that I think is really important to consider that we have very strategically, pushed our spend more to brand and away from digital spend. We found over the years of building this company that building a strong brand is really, really critical. And so we can't -- we couldn't do that if we're just digital.

I and others at Shift came into this business, thinking that you could literally kind of build a whole company with just digital spend and it turns out that, that's kind of not possible to do, a brand is really crucial. And so from that standpoint, we kind of don't just think about kind of customer position costs from just the digital side. We're kind of thinking of them more holistically, including the brand side of (inaudible).

Our next question comes from the line of Mike Ward with Benchmark.

I just wonder if you could provide a bit more clarity on the walk in the gross per unit coming from Q2 to Q3. We're about halfway through Q3. And so have you seen a significant drop off already in the gross per unit? Or what are the -- is it just the acquisition costs went up and some of those units kind of matured in from Q1 from late Q4 into Q1 and now into Q2? Is that what we're seeing?

So what we have seen -- just let's go back a sec. The majority of the units that we sold in Q2 were acquired in Q1 before prices really went up, right? So Q2, it was such a windfall of selling high after buying low. What you see in Q2 to Q3 is a much flatter line and maybe even starting to show some signs of declining prices, we bought at the peak of the market, and now we're selling it still at good price, but clearly, not as high a spread as we've seen in Q2. So that's why 2 things: a, that's why we guided lower. And also, that's why we think that it makes sense to look at the 2 quarters together and do an average because that's more like our seasonal normal average would indicate.

So it's not this big collapse. And so basically, what we're seeing as we've gone through July and August, we're seeing the transaction price is still remaining on the e-commerce side remaining elevated, north of $20,000, $21,000, $22,000, but the cost of those has come up. So you're not seeing a collapse in the market, so to speak, but you're just going with the expectation that basically the maturing process of the purchasing and the selling price differential. Is that the right way to look at it?

Yes, absolutely. You can see market dynamics and prices as well as us, and you can see that there hasn't been any collapse.

Right, I know.

Maybe a little depreciation in the wholesale market, less depreciation in the retail market, but it's not the same windfall as buying it at those prices, we bought stuff in January, February and then sold it in June.

And part of that is just you being conservative as you're looking at the numbers going out because it seems to be changing pretty quickly.

That's exactly right and also just to consider that September is also usually a unique month in this space because that's usually a time when you start to see seasonality, and so you kind of have this very strong progress, right? And then a much weaker September from the seasonality perspective. And so what we try to do, historically speaking, is sell as much inventory as possible in August, go into September with less inventory and then acquire inventory in September when prices have come down a little bit. And so that, obviously, but you still -- you can't sell all your cars because they wouldn't make any sense. And so you go into September, with some inventories that's going to have some GPU pressure. We know that that's normally the case. And so we're kind of managing for that in what we're guiding to for the quarter.

And I do want to say one other thing, which is not something you can track to kind of publicly available numbers, but I think it's something that is definitely happening in the space, which is that while the list prices for dealers are still remaining very, very strong we are noticing anecdotal evidence from consumers that the discounts to with the offering are beginning to be stronger than they were 30 or 60 or 90 days ago. And so that will -- there's an indication to us that you will see some kind of reduction in prices coming into the future months. And that's another reason why we're being conservative in our assumptions for the second half of the year as far as those profits.

And on the -- within SG&A, I think in the first quarter, you had the big marketing spend where you were kind of doubling up, did it come back down in Q2? Do you have a 2Q marketing expense portion of SG&A?

Yes. Marketing went down from more than $15 million to -- in Q1 to less than $11 million in Q2. So clearly, a total dollar decline.

So it's getting back to a more normalized rate?

Yes. But if you look at the whole SG&A, you've seen a really nice leverage effect of the increase in revenue and obviously, not as much increase in cost.

Our next question comes from the line of Mike Grondahl with Northland Securities.

This is Owen on for Mike. I just have one quick one. In terms of marketing, are there any major updates here or areas you can call out that are resonating with both buyers and sellers?

Well, I think it's kind of hard to say more than what we've said, I think the question so far, which is that we've reduced our cash by 46%, and which is in [limit] in line with what we had said would be the case. And we are seeing really positive momentum in the marketing that we're doing from the consumers, obviously, on both sides. We're really excited about the data that we now have access to and kind of what that's allowing us to see in terms of what the reaction is. We can't really kind of go into more details on that, but we think that the marketing campaign is having a really positive impact.

But I do want to underline one more time that this is not a kind of 1 or 2 quarters outcome. This is a multi-quarter investment that we've been making for a long time because that's how you build brand. And we think that doing that will have any positive mid and -- medium-term and long-term benefits to the business from customer position perspective and from gross profit perspective.

Our next question comes from the line of Brian Nagel with Oppenheimer.

Congratulations on a great quarter. So a couple of questions, like to be follow-ups. But first off, just with respect to the market growth, we talked a lot about it. At what point do the new markets become more of a needle mover from a volume perspective for Shift? I mean what you say now, you continue to have such strength in your existing markets, particularly those in the Western or the West Coast United States. But as you push in these new markets more East, if you will, at what point do they really become -- soft of to say, really become -- matter more in the total volume growth of the company.

It's a great question, Brian. Thank you for that. What we're seeing is the -- we see the newest markets, the Texas market, the Seattle market is likely to make a bigger difference next year, showing the 2022 time frame. And the reason is we have pursued a strategy that is goes deeper in our existing markets over time, which means they're pretty substantial market presence in each of those existing markets. And so for a new market to catch up to that and make a significant difference, it takes a little while. It doesn't happen like in 3 months, it's more like it takes it about a year or so to start hitting its stride in terms of total volume. That's a different strategy than if we said hey, we're going to launch like 50 markets and then each new one adds a little bit a little bit a little bit.

And we've articulated not that strategy, but we wanted to go deeper, get a lot more marketing and brand present leverage locally as well as create an ecosystem in our regional strategy, our sort of super regional strategy. And so that's why you might see the -- we see those markets both incubating for a little longer and becoming part of an interlocking system. We talked a lot about the interlocking regions that kind of support each other from a brand presence and total inventory point of view.

And then second one, just with respect to marketing and the focus now on brand building. So you talked a lot about the shift that happened over the last few quarters. I think in some prior question you discussed now the lowered marketing dollars Q1 to Q2. So as we watch the market continue to unfold here, what should we expect? Is it more of the same? Or will there be -- over the balance of, say, '21, will you see new efforts come in that help this branding campaign?

I think for right now, the best we can say is that we're going to continue doing what we're doing. I think Toby spoke in the prepared remarks that we believe that over a kind of 6 to 8 quarter investments, if we do the right investment, we can have some really positive impact on our brand and how much aided awareness we have. And then that obviously has really tangible implications for our GPU and customer acquisition costs over the long term. I don't think we can kind of say more than that at this point, but we think that at minimum, continue what we're doing will be very much the case for the next few quarters. Obviously, as our volume grows, the total dollar amount might increase, but we think that the tack where it is now is in a good place.

I'm not showing any further questions in the queue. I would now like to turn the call back over to George for closing remarks.

Great. Well, thank you everybody, for joining us, and really appreciate your questions, and we look forward to speaking to you one-on-one in the coming days.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.