Carvana Co. 10-Q Summary — First Quarter 2017
Business context and reporting period
The filing covers the three months ended March 31, 2017. Carvana Co. was a newly formed holding company with no operations, assets, or issued shares at quarter-end; the operating results and financial position below are for Carvana Group, LLC and subsidiaries, Carvana’s used-car eCommerce business. Carvana completed its IPO on May 3, 2017, after the reporting period.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $159.1 million | $73.0 million |
| Gross profit / gross margin | $9.7 million / 6.1% | $4.0 million / 5.4% |
| SG&A | $45.9 million | $20.6 million |
| Net loss | $38.4 million | $17.3 million |
| EBITDA, non-GAAP | $(34.3) million | $(15.7) million |
| Operating cash flow | $(52.9) million | $(58.4) million |
| Investing cash flow | $(19.8) million | $(8.6) million |
| Cash at period-end | $8.3 million | $12.4 million |
Retail units sold rose 120.3% to 8,334; the company operated in 23 markets versus 11 a year earlier. Average monthly unique visitors increased to 698,796 from 337,486. Total gross profit per retail unit rose to $1,169 from $1,046. Average days to sale lengthened to 93 from 83, while average retail selling price declined 1.7% to $17,804.
At March 31, 2017, total assets were $349.0 million, including $199.9 million of vehicle inventory. Total liabilities were $252.3 million. Debt included $189.7 million drawn on the $200 million floor plan facility, $20.0 million under the Verde credit facility, and $6.8 million of equipment notes. Floor-plan capacity remaining was $10.3 million. Restricted cash was $11.5 million. The filing states management believed working capital was sufficient for at least one year from issuance.
Changes versus the prior comparable period
- Revenue increased 118.1%, chiefly reflecting retail unit growth and expansion to more markets. Used vehicle sales rose 116.6%; wholesale sales rose 267.3%.
- Gross profit increased 146.3%, and used-vehicle gross profit per unit increased to $555 from $299. Wholesale gross profit per unit improved to $120 from a $139 loss.
- SG&A more than doubled, mainly due to added personnel, advertising, market occupancy, logistics, and corporate infrastructure. Net loss more than doubled as these costs outpaced gross profit growth.
- Operating cash use improved by $5.5 million, while investing cash use increased, primarily due to higher property and equipment purchases. Cash declined $30.9 million during the quarter.
Outlook, material events, and risks
- Management expects to continue expanding markets, retail unit sales, technology, and operating infrastructure; it also expects SG&A to rise with growth and public-company costs. No quantified earnings or revenue guidance is provided.
- On May 3, 2017, the IPO sold 15 million Class A shares at $15 per share and generated $210.7 million net proceeds. Proceeds were contributed to Carvana Group; the company repaid the $35 million Verde facility balance, paid approximately $5.5 million of IPO and organizational expenses, and planned to use the remainder for working capital and general corporate purposes.
- The IPO triggered conversion of the Class C preferred units into Class A units and ended the 12.5% preferred return accrual. The post-IPO structure gives the Garcia parties approximately 97% of voting power through Class B shares. Carvana Co. will consolidate Carvana Group and report non-controlling interests from Q2 2017. A tax receivable agreement requires payment to certain unit holders of 85% of specified realized tax savings.
- Key risks include sustained operating losses, rapid-growth execution, inventory acquisition and resale timing, reliance on finance-receivable sales and third-party financing, seasonal demand and vehicle-price movements, and dependence on DriveTime-related services, leases, and arrangements. DriveTime was considering strategic alternatives, and continued arrangements on similar terms were not assured.
- The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether unit growth and improved vehicle gross profit per unit can offset rising SG&A and narrow losses.
- Post-IPO cash and liquidity after repayment of the Verde facility, including floor-plan availability and refinancing or extension of the floor plan facility, which matured in December 2017 unless extended by the lender.
- Trends in days to sale, inventory levels, vehicle pricing, and finance-receivable sale gains and capacity.
- The terms and economic effects of related-party arrangements, the tax receivable agreement, and the dual-class voting structure.
- The precise post-IPO consolidated balance sheet and cash position: this quarter’s Carvana Co. holding-company balance sheet is presented as zero, while the operating company’s March 31 balance sheet predates the IPO.