Carvana Co. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; dollar amounts below are in millions unless otherwise noted.
Business context
Carvana operates an online used-car sales platform with vehicle financing, service-contract commissions, trade-ins, and wholesale sales. It completed its IPO on May 3, 2017, raising approximately $205.9 million net of offering costs. At June 30, it operated in 30 markets, compared with 14 a year earlier, and listed 7,503 vehicles online.
Financial and operating results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $209.4 | $86.5 | $368.4 | $159.5 |
| Gross profit | $16.0 | $6.0 | $25.8 | $10.0 |
| Net loss | $(38.9) | $(18.1) | $(77.3) | $(35.4) |
| EBITDA (non-GAAP) | $(33.8) | $(16.4) | $(68.1) | $(32.1) |
| Operating cash flow | Not separately presented for the quarter | $(61.3) | $(100.6) |
- Revenue grew 142% in Q2 and 131% in the first half year over year. Retail units sold rose 145% in Q2 to 10,682 and 134% for the first half to 19,016.
- Gross margin was approximately 7.7% in Q2 versus 7.0% a year earlier, and 7.0% for the first half versus 6.3%. Total gross profit per retail unit increased 8% in Q2 to $1,501 and 10% for the first half to $1,356.
- SG&A was $52.0 million in Q2 and $97.9 million for the first half, up from $23.3 million and $44.0 million, respectively. The filing attributes the increase to market expansion, hiring, advertising, and corporate infrastructure. EBITDA margin was (16.1)% in Q2 and (18.5)% for the first half.
- Cash and cash equivalents were $144.4 million at June 30, versus $39.2 million at year-end 2016. First-half investing cash outflow was $42.6 million, principally reflecting property and equipment purchases of $42.6 million. Financing cash inflow was $209.2 million, including IPO proceeds.
- Debt included $166.8 million outstanding on the inventory floor-plan facility and $9.2 million of equipment notes. The floor-plan rate was approximately 5.02%; $33.2 million of capacity remained at quarter-end. The facility was secured by substantially all company assets other than real property.
- Current assets were $376.9 million and current liabilities $203.8 million. Management stated working capital and available liquidity were expected to fund operations for at least 12 months.
Changes, outlook, and risks
- Growth was accompanied by materially higher losses and spending. First-half net loss more than doubled year over year, while vehicle inventory declined by $11.1 million from year-end to $174.4 million.
- Average days to sale increased to 105 in Q2 from 93 a year earlier; average retail selling price declined 1.8% to $18,156. Management cited inventory mix and delayed IRS refunds, which it said contributed to slower sales and price reductions. Used-vehicle gross profit per unit nevertheless rose to $765 from $531.
- Management expects continued growth through new-market launches and deeper penetration in existing markets, with further investment in technology, reconditioning, logistics, and advertising. It expects additional losses and rising expenses; the filing provides no quantified revenue, earnings, or unit-sales guidance.
- In August 2017, the floor-plan facility was amended to extend maturity to December 31, 2018 and raise capacity to $275 million through year-end 2017 and $350 million during 2018.
- Key risks include continued losses, rapid-growth execution, used-car price and inventory risk, seasonality, reliance on third-party buyers of originated finance receivables, access to inventory financing and capital, and dependence on related-party arrangements with DriveTime. Management disclosed no material pending litigation and no material changes to previously disclosed risk factors.
- Carvana reported that disclosure controls were effective and that no material change to internal control over financial reporting occurred during the quarter. The filing notes a full valuation allowance against deferred tax assets and potential future obligations under a tax receivable agreement; no TRA liability was recorded at June 30.
Important facts for investors to verify
- Reconcile the filing’s net-loss attribution and EPS disclosures: the statements of operations report Q2 and first-half net loss attributable to Carvana Co. of $14.5 million and $53.0 million, while Note 11 presents $4.3 million and $8.5 million as attributable to Carvana Co. and reports EPS of $(0.28) and $(0.56). Confirm the appropriate figures and their relationship to the non-controlling interests.
- Assess whether gross profit per unit and days-to-sale trends can hold as markets and inventory scale, particularly amid seasonal used-car price declines.
- Review the availability, terms, and renewal conditions of floor-plan and receivable-sale facilities, as well as the company’s continuing cash burn and capital requirements.
- Evaluate related-party exposure, including DriveTime-administered service contracts, leases and services, and the company’s post-IPO ownership structure. Existing LLC unitholders held approximately 89% of Carvana Group at quarter-end.