Carvana Co. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results are compared with the corresponding 2016 periods. Carvana operates an online used-car sales platform and completed its IPO on May 3, 2017.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $225.4 million | $98.8 million | $593.8 million | $258.3 million |
| Gross profit | $20.4 million | $6.8 million | $46.2 million | $16.8 million |
| Gross margin | 9.1% | 6.8% | 7.8% | 6.5% |
| SG&A | $58.7 million | $28.0 million | $156.6 million | $72.0 million |
| Consolidated net loss | $39.8 million | $22.0 million | $117.1 million | $57.4 million |
| EBITDA, non-GAAP | $(35.8) million | $(20.1) million | $(103.9) million | $(52.2) million |
| Operating cash flow | Not separately provided | Not separately provided | $(116.0) million | $(144.8) million |
Q3 revenue increased 128% year over year; nine-month revenue increased 130%. Retail units sold rose 133% in both comparison periods: 11,719 for Q3 and 30,735 year to date. Total gross profit per retail unit was $1,742 for Q3 and $1,503 year to date, up 29% and 18%, respectively.
Growth came with substantially higher expenses: SG&A more than doubled in both periods, driven by market expansion, advertising, headcount and infrastructure. The consolidated net loss widened, while EBITDA margins improved to negative 15.9% in Q3 and negative 17.5% year to date, from negative 20.3% and negative 20.2%.
At September 30, cash and cash equivalents were $103.5 million and restricted cash was $11.8 million. Current assets were $366.2 million against current liabilities of $244.4 million. The floor plan facility balance was $195.1 million, with $79.9 million available; its rate was approximately 4.88%. Long-term debt, including current portion, totaled approximately $19.7 million. The floor plan facility is secured by substantially all assets other than real property. Nine-month capital expenditures were $59.4 million; investing cash outflow was $60.9 million. Cash increased $64.3 million, supported principally by $206.3 million in net IPO proceeds and debt financing.
Material changes and business developments
- Markets increased to 39 from 16 a year earlier; website inventory available was 6,689 vehicles versus 4,565.
- Average days to sale increased to 97 in Q3 from 92, and to 99 year to date from 90. Retail average selling prices declined 3.2% in Q3 and 2.2% year to date, attributed primarily to inventory mix and, year to date, longer time to sale.
- Used-vehicle gross profit per unit improved to $841 in Q3 and $737 year to date, which management attributed to purchasing and pricing technology and reconditioning or transportation efficiencies.
- The May IPO raised approximately $205.9 million net of offering costs; proceeds were used in part to repay the $35.0 million Verde credit facility, which was terminated.
- After quarter end, Carvana expanded its receivable-sale capacity: the purchase-and-sale agreement limit increased to $1.5 billion, and a replacement transfer agreement provided up to $357.1 million of capacity. It also entered an agreement to sell and lease back up to $75 million of real estate interests.
Outlook, commentary and risks
Management expects continued retail-unit growth through new market openings and deeper penetration in existing markets, while investing in technology, inventory operations, logistics and infrastructure. It states that losses are expected to continue and that SG&A will rise in absolute terms as the company expands. No specific earnings or revenue guidance is provided. Management believes available working capital and expected capital-expenditure financing can fund operations for at least 12 months, but future capital needs depend on growth and expansion; additional financing may not be available on favorable terms or at all.
Key risks include the history of losses and execution of rapid growth; dependence on third-party sales of originated finance receivables for cash and a substantial portion of gross profit; inventory acquisition, pricing and turnover; seasonal used-car demand and depreciation; competition; access to inventory and financing; and related-party relationships with DriveTime. A 100-basis-point change in rates would change annual interest expense by approximately $2.0 million based on floor-plan borrowings at quarter end. The company reported no pending legal matter it considered reasonably likely to have a material effect and no material changes to previously disclosed risk factors.
Other notable items: DriveTime administered the VSCs generating $2.4 million of Q3 and $6.1 million of year-to-date commissions. No income-tax provision was recorded; a full valuation allowance was maintained against deferred tax assets. The company disclosed no off-balance-sheet arrangements. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile reported net loss attributable to Carvana Co. and per-share figures across the statements and notes, given the IPO-related ownership and non-controlling-interest structure.
- Assess whether improving gross profit per unit can outpace continued increases in SG&A, capital spending and operating cash burn.
- Verify ongoing access, pricing and terms for floor-plan financing and receivable sales, including post-quarter amendments and committed capacity.
- Evaluate inventory aging and turnover, given higher average days to sale and the seasonal risk of fourth-quarter vehicle depreciation.
- Review related-party arrangements, the planned sale-leaseback terms and the potential obligations under the tax receivable agreement as LLC-unit exchanges occur.