Carvana Co. — Q1 2018 Form 10-Q
Business context and reporting period. Carvana operates an online used-car sales platform with vehicle sourcing, reconditioning, delivery, financing, and ancillary products. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net sales and operating revenue | $360.4 million | $159.1 million |
| Gross profit / gross margin | $34.2 million / 9.5% | $9.7 million / 6.1% |
| Net loss | $52.7 million | $38.4 million |
| EBITDA, non-GAAP | $(44.5) million; (12.4)% margin | $(34.3) million; (21.6)% margin |
| Cash used in operating activities | $131.4 million | $52.9 million |
| Cash used in investing activities | $28.0 million | $18.6 million |
| Cash provided by financing activities | $112.3 million | $41.8 million |
| Cash and cash equivalents | $121.5 million | $172.7 million at Dec. 31, 2017 |
| Restricted cash | $18.4 million | $14.4 million at Dec. 31, 2017 |
| Floor plan facility | $348.5 million outstanding; about $1.5 million available | $248.8 million at Dec. 31, 2017 |
| Long-term debt, including current portion | $72.9 million | $53.6 million at Dec. 31, 2017 |
Current assets were $541.3 million and current liabilities were $419.8 million at March 31, 2018. Total assets were $720.7 million and total liabilities were $493.8 million. The floor plan facility rate was approximately 5.53%; it matures December 31, 2018 and is secured by substantially all assets other than real property. Cash, cash equivalents, and restricted cash together totaled $139.9 million at quarter-end.
Class A common-stockholders’ GAAP loss per share was $0.53. The company also reported adjusted net loss per share of $0.40, a non-GAAP measure assuming full exchange of LLC units; these measures have different ownership and share-count assumptions.
Material changes versus Q1 2017
- Revenue increased 126.6%, led by used-vehicle sales, up 125.1% to $334.1 million. Retail units sold rose 121.6% to 18,464, and markets increased from 23 to 56.
- Gross profit increased 251.3%. Total gross profit per retail unit rose 58.6% to $1,854; used-vehicle gross profit per unit rose to $902 from $555. Average days to sale decreased to 70 from 93.
- Other sales and revenues increased to $16.2 million from $5.0 million, including $9.9 million of gains on finance-receivable sales, versus $2.9 million. These products and gains contributed materially to gross profit.
- SG&A increased 81.2% to $83.2 million, including advertising of $25.0 million versus $11.4 million. The net loss widened to $52.7 million, while EBITDA margin improved.
- Operating cash use increased to $131.4 million, principally reflecting a $72.0 million increase in vehicle inventory and the larger net loss. Capital expenditures were $28.0 million.
Outlook, commentary, risks, and unusual items
- Management expects continued losses and higher operating expenses as it expands markets, logistics, advertising, technology, and infrastructure. It gave no specific revenue, earnings, or unit-sales guidance.
- Management stated that working capital and expected inventory and capital-expenditure financing should fund operations for at least one year from the financial-statement issuance date. This depends in part on obtaining or extending financing: the floor plan facility was nearly fully drawn, and finance-receivable sale agreements expire in November 2018.
- On April 30, 2018, after quarter-end, the company completed a follow-on offering of 6.6 million primary shares and received approximately $173.3 million net of underwriting discounts and commissions, before estimated offering expenses. Selling holders also sold shares; the company received no proceeds from those sales.
- On April 12, 2018, Carvana Group acquired Car360 for approximately $6.7 million cash, subject to adjustments, and issued 930,047 LLC units exchangeable for 744,037 Class A shares.
- Carvana Co. owned approximately 13.9% of Carvana Group at quarter-end; existing LLC unitholders owned 86.1%. Preferred-stock dividends and beneficial-conversion-feature accretion affected amounts attributable to Class A common stockholders.
- Risks highlighted include ongoing losses and capital needs, rapid-growth execution, dependence on inventory and finance-receivable funding and third-party purchasers, used-car price and seasonal fluctuations, related-party relationships with DriveTime, and website reliability, cybersecurity, and intellectual-property claims. Management reported no known pending legal proceeding expected to have a material effect and no material changes to internal controls.
Important facts for investors to verify
- Whether Carvana renews or replaces the floor plan facility before its December 2018 maturity, and obtains additional inventory capacity.
- Whether the finance-receivable sale agreements are extended or replaced before their November 2018 expirations, and whether sale gains remain sustainable.
- How quickly retail-unit growth translates into improved unit economics and operating cash flow, given rising SG&A and inventory investment.
- The effect of the follow-on offering, LLC-unit exchanges, convertible preferred stock, and non-controlling interests on future dilution and per-share results.
- Whether the company’s stated liquidity expectations remain achievable without additional financing, and how expansion spending, seasonality, and related-party arrangements affect cash needs.