Carvana Co. (NYSE: CVNA) — 2018 Form 10-K
Business and period. Carvana operates an online used-car retail platform with vehicle sourcing, reconditioning, financing, ancillary products and delivery. This filing covers the fiscal year ended December 31, 2018; fourth-quarter figures below are unaudited. The company ended the year in 85 markets, with 94,108 retail units sold and 14,657 vehicles listed online.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1.955 billion | $858.9 million |
| Gross profit | $196.7 million | $68.1 million |
| Gross margin | 10.1% | 7.9% |
| Net loss | $254.7 million | $164.3 million |
| Net loss attributable to Class A common stockholders per share | $2.24 | $1.31 |
| Cash used in operating activities | $414.3 million | $199.9 million |
| Cash used in investing activities | $150.3 million | $78.5 million |
| Cash provided by financing activities | $466.3 million | $416.1 million |
Revenue grew 127.7%, while retail units sold increased 112.7%. Total gross profit per retail unit rose to $2,090 from $1,539; average days to sale fell to 64 from 91. SG&A increased to $425.3 million from $223.4 million, including advertising expense of $111.2 million versus $55.7 million. The company remained loss-making; its accumulated loss was approximately $571.6 million at year-end.
Fourth quarter: Revenue was $584.8 million, gross profit $56.1 million, net loss $86.4 million, and net loss per Class A share $0.74. Revenue increased sequentially from $534.9 million in Q3, while gross profit declined from $57.3 million and net loss widened from $64.4 million.
Debt, liquidity and capital
- Year-end cash and cash equivalents were $78.9 million; restricted cash was $9.8 million. Reported available liquidity resources totaled $409.8 million, including $253.6 million available under the floor plan facility based on the borrowing base and $77.4 million under sale-leaseback arrangements.
- Total debt instruments were approximately $641.1 million before unamortized issuance costs: $197.0 million under the floor plan facility, $350.0 million principal of senior notes, $33.0 million notes payable, $45.0 million finance leases and $16.2 million capital leases. The floor plan facility is secured by substantially all assets other than real property interests.
- The 8.875% senior unsecured notes mature in October 2023 and carry restrictive covenants; the company reported compliance at year-end. The floor plan facility was expanded to $650 million and extended to October 2020.
- Net cash and restricted cash declined to $88.7 million from $187.1 million. Operating cash use increased substantially, driven in part by the $183.1 million increase in vehicle inventory and higher net loss.
Changes, outlook and material risks
- Gross profit improved with higher sales volume and per-unit economics, including faster inventory turns. However, losses and cash use increased as the company expanded markets, inventory, advertising and infrastructure.
- Management expects continued investment and losses while pursuing growth; it provided no quantified revenue, earnings or cash-flow guidance. Management said existing liquidity, including expected financing, should fund operations for at least the next 12 months. Future capital needs depend on growth, market launches, facilities and technology spending.
- Finance-receivable sales are an important source of gross profit: gains on sales were $51.7 million in 2018 versus $21.7 million in 2017. Carvana depends on financing partners and renewals or replacement of receivable-sale arrangements; reduced access or pricing could hurt liquidity and results.
- The CEO’s 100k Milestone Gift generated $11.8 million of equity-compensation expense in 2018, including $4.0 million in cost of sales. Management also presents non-GAAP results excluding this expense; those measures should be considered alongside GAAP results.
- Key risks include persistent losses, rapid-growth execution, used-car price and inventory risks, seasonality, customer acquisition costs, regulatory compliance, cybersecurity, and reliance on lenders, logistics, technology providers and DriveTime affiliates. A Tax Receivable Agreement entitles LLC unitholders to 85% of certain realized tax benefits; the company disclosed an estimated $110.8 million unrecorded liability at year-end.
- The Garcia Parties held approximately 95% of voting power at year-end through the dual-class structure. The company reported that its financial statements and internal controls received unqualified audit opinions and that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether retail-unit growth and lower days to sale persist while gross profit per unit improves on a GAAP basis.
- Whether operating cash use, inventory investment and expansion spending can be funded without repeated external capital raises.
- Availability, pricing and renewal terms for vehicle-inventory financing and finance-receivable sale agreements.
- How much of reported gross profit depends on receivable-sale gains and ancillary products, and how sensitive those gains are to partner demand and credit performance.
- The eventual expense and share effects of the Milestone Gift, and potential cash obligations under the Tax Receivable Agreement.
- Quarterly seasonality, debt covenants and maturities, related-party arrangements, and the effects of concentrated voting control.