Carvana Co. — Q2 2019 Form 10-Q
Business context and reporting period. Carvana operates an online used-car buying and selling platform, including vehicle financing and ancillary products. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. The company reported one operating segment. Amounts below are in U.S. dollars; financial statement figures are generally shown in millions.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $986.2 | $475.3 | $1,741.5 | $835.7 |
| Gross profit | $137.8 | $49.0 | $226.3 | $83.3 |
| Gross margin | 14.0% | 10.3% | 13.0% | 10.0% |
| Net loss | $(64.1) | $(51.3) | $(146.7) | $(103.9) |
| Net loss attributable to Carvana Co. Class A common stockholders | $(26.6) | $(11.3) | $(55.2) | $(21.1) |
| GAAP loss per Class A share | $(0.58) | $(0.41) | $(1.26) | $(0.92) |
| SG&A expense | $181.8 | $95.7 | $337.1 | $178.8 |
| Interest expense | $19.3 | $4.2 | $35.0 | $7.7 |
Q2 adjusted operating measure EBITDA ex-Gift was a loss of $32.5 million, or negative 3.3% of revenue, versus a loss of $41.8 million, or negative 8.8%, in Q2 2018. For the first six months, EBITDA ex-Gift was a loss of $88.6 million, or negative 5.1%, versus a loss of $86.4 million, or negative 10.3%. This company-defined non-GAAP measure excludes interest, taxes, depreciation and amortization, and compensation expense for the 100k Milestone Gift.
- Retail units sold increased 94.9% in Q2 to 44,000 and 96.8% in the first half to 80,766. The company had 137 markets at June 30, versus 65 a year earlier.
- Q2 total gross profit per retail unit was $3,132, up from $2,173; excluding Gift compensation expense, it was $3,175. Average days to sale improved to 61 from 66.
- Six-month operating cash use was $294.8 million, compared with $179.5 million in 2018. Investing cash use was $87.0 million; financing provided $335.6 million. Cash, cash equivalents and restricted cash declined to $42.4 million from $88.7 million at year-end 2018; unrestricted cash was $40.2 million.
- At June 30, current assets were $957.5 million and current liabilities were $249.8 million. Vehicle inventory was $606.5 million, and finance receivables held for sale were $177.7 million.
- Reported short-term revolving facilities were $39.7 million; current long-term debt was $20.7 million and long-term debt was $743.1 million. The company reported $638.0 million of availability under short-term revolving facilities and $75.2 million of sale-leaseback availability. Including cash, it reported $753.5 million of committed liquidity resources, subject to facility terms and collateral availability.
Material changes versus the prior comparable period
- Revenue more than doubled in Q2, led by higher retail volume and a wider market footprint. Used-vehicle revenue rose 95.4%; wholesale revenue rose 279.1%; other revenue rose 225.1%.
- Gross profit increased faster than revenue, and reported gross margin improved. Management attributed per-unit used-vehicle gross-profit improvement to more customer-sourced vehicles, incremental shipping revenue and shorter days to sale.
- Losses widened in dollars as SG&A and interest expense rose substantially. Advertising, compensation, market expansion and infrastructure growth increased SG&A; new senior notes and other borrowings increased interest expense.
- Operating cash use increased, notably alongside a $192.0 million increase in vehicle inventory during the first half, versus $74.8 million in the prior-year period.
- Carvana issued $250 million of additional senior notes in May and raised approximately $297.6 million net from a May–June Class A equity offering. The notes bear 8.875% interest and mature in 2023.
Outlook, risks and unusual items
- Management expects retail unit sales to continue growing through deeper penetration of existing markets and new market launches. It also expects to keep investing in technology, logistics, advertising, vending machines and inspection and reconditioning centers; operating expenses are expected to increase as the business grows. No specific financial guidance was provided.
- The company has incurred losses since inception and expects further losses. Management stated that existing working capital and expected inventory, capital-expenditure and receivables financing should fund operations for at least one year from issuance of the financial statements; additional capital may be required and may not be available on favorable terms.
- Finance-receivable sale gains are an important source of gross profit. The company expanded securitization activity in 2019, retained at least 5% of securitization credit risk, and reported $45.2 million of beneficial interests at quarter-end. These interests carry credit and prepayment risk; some fair-value estimates use unobservable inputs.
- The senior-note indenture contains restrictive covenants; the company reported compliance at June 30. The notes are guaranteed by specified domestic subsidiaries. The floor-plan facility, secured by substantially all assets other than real property, matures in October 2020.
- Carvana adopted the new lease standard on January 1, 2019, initially recognizing approximately $80.3 million of right-of-use assets and $86.8 million of operating lease liabilities. Adoption did not materially affect results or cash flows.
- The 100k Milestone Gift generated compensation expense; management’s non-GAAP “ex-Gift” measures exclude this cost. It expects the program to affect gross profit through the first half of 2020. The reported consolidated loss includes non-controlling interests; Carvana Co. owned approximately 31.8% of Carvana Group at quarter-end.
- Related-party relationships with DriveTime include leases, vehicle service contract administration, servicing and other arrangements. The company reported ordinary-course legal matters but did not expect their resolution to materially adversely affect it. It stated there were no material changes to previously disclosed risk factors beyond those in its May 2019 quarterly filing.
Important facts for investors to verify
- Whether rapid unit and revenue growth can translate into sustained GAAP profitability, considering SG&A, interest costs and continuing expansion investment.
- The drivers and durability of gross profit per unit, including finance-receivable sale gains, ancillary-product revenue, customer-sourced inventory and the Gift adjustment.
- Cash burn and inventory growth, and whether financing capacity remains available on acceptable terms as receivables and vehicle volumes grow.
- Total debt and lease obligations, senior-note covenants, floor-plan maturity and collateral requirements; distinguish committed availability from unrestricted cash.
- Exposure from retained securitization interests, related-party transactions, and the company’s non-controlling ownership structure.