Carvana Co. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results compare with the corresponding 2017 periods. Carvana operates an e-commerce platform for used-car sales, financing and related products.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $534.9 million | $225.4 million | $1,370.6 million | $593.8 million |
| Gross profit | $57.3 million | $20.4 million | $140.6 million | $46.2 million |
| Gross margin | 10.7% | 9.1% | 10.3% | 7.8% |
| SG&A | $115.8 million | $58.7 million | $294.6 million | $156.6 million |
| Interest expense | $5.6 million | $0.8 million | $13.4 million | $5.4 million |
| Consolidated net loss | $64.4 million | $39.8 million | $168.3 million | $117.1 million |
| Net loss attributable to Carvana Co. | $16.0 million | $4.4 million | $33.1 million | $57.4 million |
| GAAP loss per Class A share | $0.50 | $0.29 | $1.43 | $0.86 |
- Revenue increased 137% in Q3 and 131% for the nine-month period. Retail units sold rose 116% in Q3 to 25,324 and 116% year to date to 66,358. Markets doubled year over year to 78.
- Q3 used-vehicle gross profit per retail unit was $1,127, versus $841 a year earlier; total gross profit per unit was $2,263 versus $1,742. Average days to sale improved to 63 from 97. Nine-month figures were $1,083 versus $737 for used-vehicle gross profit per unit, and 66 versus 99 average days to sale.
- Growth did not translate to lower losses: SG&A nearly doubled in Q3, reflecting expansion, staffing, advertising and logistics costs. Management reported Q3 EBITDA excluding the Milestone Gift expense of negative $44.6 million, compared with negative $35.8 million; this is a non-GAAP measure.
- Cash used in operating activities was $263.9 million for the first nine months, versus $116.0 million in 2017. Investing activities used $113.9 million, principally for property and equipment. Financing activities provided $648.9 million.
- At September 30, cash and cash equivalents were $439.8 million and restricted cash was $18.5 million. Current assets were $935.4 million and current liabilities $457.6 million. Vehicle inventory was $339.0 million.
- Debt included a $349.4 million floor-plan balance, $350.0 million principal of senior notes issued in September (reported at $342.5 million net of issuance costs), $34.8 million of notes payable and $65.9 million of sale-leaseback financing liabilities. Floor-plan availability was only about $0.6 million at quarter end.
Material changes and unusual items
- Carvana issued $350 million of 8.875% senior unsecured notes due October 2023. The notes have restrictive covenants; the company reported compliance at September 30, 2018.
- In April, Carvana raised $172.3 million net from a follow-on offering. Separately, 75,000 shares of convertible preferred stock converted into about 3.8 million Class A shares during the first nine months.
- The CEO’s 100k Milestone Gift generated $7.8 million of Q3 compensation expense, including $6.8 million in SG&A and approximately $1.0 million in cost of sales. The company excludes this item in certain non-GAAP measures; it expects gift-related expense to continue through the first half of 2020.
- Other revenue included a $4.0 million fee for arranging and participating in a finance-receivables transaction. Related-party VSC commissions were $6.7 million in Q3 and $16.4 million for the nine months.
- Carvana acquired Car360 in April for approximately $16.7 million, including cash and LLC units; the acquisition added $9.4 million of goodwill. Its historical results were not material.
Outlook, liquidity and risks
- Management expects continued investment in market launches, advertising, technology, logistics, vending machines and inspection/reconditioning infrastructure; operating expenses are expected to increase. It expects retail-unit growth but gave no specific financial guidance.
- Management said existing liquidity and expected inventory and capital-expenditure financing should fund operations for at least 12 months. The company also stated it expects continued losses and may need additional financing if cash and operating sources are insufficient.
- After quarter end, the floor-plan facility was increased to $650 million, extended to October 2020 and repriced to one-month LIBOR plus 3.40%. Finance-receivable purchase arrangements were also amended and extended, increasing access to purchaser commitments. These facilities remain important to inventory funding and liquidity.
- Key risks include sustained losses and cash consumption, rapid expansion and execution, dependence on third parties to buy originated finance receivables and generate gains, substantial debt and covenant restrictions, variable interest rates, inventory valuation and resale timing, seasonality, and reliance on related-party arrangements with DriveTime.
- The company recorded a full valuation allowance against deferred tax assets because of cumulative losses. It disclosed approximately $69 million of unrecorded potential Tax Receivable Agreement liability; actual tax benefits and payments depend on future taxable income and other assumptions.
- Management reported no known pending legal proceedings expected to have a material effect, no off-balance-sheet arrangements at September 30, and effective disclosure controls. It noted adoption of lease accounting in 2019 is expected to materially increase reported assets and liabilities.
Investor verification checklist
- Track retail-unit growth alongside gross profit per unit, average days to sale and inventory levels to assess whether growth is improving underlying economics.
- Reconcile cash burn and capital spending with the company’s 12-month liquidity assessment, including restricted cash and available facility capacity.
- Review the terms, availability and renewal risk of floor-plan financing and finance-receivable sale arrangements, including the post-quarter amendments.
- Assess total debt, interest costs, note covenants and future debt-service needs; distinguish principal amounts from balance-sheet amounts net of issuance costs.
- Separate recurring operating performance from the Milestone Gift expense and the one-time $4 million receivables-transaction fee; review related-party revenue and costs.
- Monitor the realization of deferred tax assets and potential Tax Receivable Agreement obligations, as well as the effect of lease-accounting adoption.