Carvana Co. — Q2 2018 Form 10-Q
Business context and reporting period. Carvana operates an e-commerce platform for used-car sales, financing and related products. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods. Carvana reported one U.S. operating segment.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales and operating revenues | $475.3m | $209.4m | $835.7m | $368.4m |
| Gross profit | $49.0m | $16.0m | $83.3m | $25.8m |
| Gross margin | 10.3% | 7.7% | 10.0% | 7.0% |
| SG&A | $95.7m | $52.0m | $178.8m | $97.9m |
| Consolidated net loss | $51.3m | $38.9m | $103.9m | $77.3m |
| EBITDA, non-GAAP | $(41.8)m | $(33.8)m | $(86.4)m | $(68.1)m |
| Operating cash flow | Not separately provided for quarter | $(179.5)m | $(61.3)m |
Q2 net loss attributable to Carvana Co. was $10.0m; net loss attributable to Class A common stockholders was $11.3m, or $0.41 per share. For the six months, those amounts were $17.0m and $21.1m, or $0.92 per share. The larger consolidated loss includes losses allocated to non-controlling interests.
- Growth and unit economics: Q2 retail units sold rose 111% to 22,570; six-month sales increased 116% to 41,034. Revenue rose 127% in Q2 and 127% for the six months. Total gross profit per retail unit increased to $2,173 in Q2 from $1,501 and to $2,029 for the six months from $1,356.
- Inventory and markets: Carvana operated in 65 markets at June 30, versus 30 a year earlier, and listed 11,386 vehicles online versus 7,503. Average days to sale fell to 66 in Q2 from 105, and to 67 for the six months from 100.
- Liquidity: Cash and cash equivalents were $199.2m; restricted cash was $18.4m. Current assets were $643.5m and current liabilities $438.8m. Six-month financing cash inflow of $290.0m—largely including the $172.3m net follow-on offering proceeds—offset operating and investing outflows.
- Debt: The floor plan facility had $347.1m outstanding at approximately 5.74%, with only $2.9m of capacity available and $17.4m restricted cash pledged to it. Long-term debt was $83.5m, including $52.3m associated with financing-structured sale-leasebacks. Total liabilities were $522.7m.
Material changes versus prior period
Revenue and unit sales more than doubled, while gross margin and per-unit gross profit improved. Management attributed improved retail vehicle economics partly to faster inventory turnover. SG&A increased 84% in Q2 and 83% for the six months, driven by advertising, hiring, market expansion and infrastructure. The company’s consolidated net loss widened, and six-month operating cash use increased by $118.2m, reflecting higher losses, inventory investment and timing of finance-receivable originations and sales.
Outlook, risks and unusual items
- Carvana provided no quantified financial guidance. Management expects continued retail-unit growth and further investment in markets, logistics, facilities, advertising, technology and software; it also expects operating expenses to rise and additional losses may occur.
- Management said available working capital and expected continued inventory and capital-expenditure financing should fund operations for at least one year from the financial statement issuance date. This depends on financing access and execution: the floor plan facility matures December 31, 2018, and finance-receivable sale agreements expire in November 2018. The company planned to extend or replace these arrangements.
- Risks highlighted include sustained losses, managing rapid growth, inventory acquisition and resale, dependence on finance-receivable sales and third-party funding, vehicle-price and seasonal fluctuations, competition, regulation, and the company’s relationship with DriveTime. The company reported no pending legal matter it believed likely to materially affect results or financial condition.
- On April 12, Carvana acquired Car360 for approximately $16.7m, including $6.7m cash net of acquired cash and approximately $10.0m in LLC units. The filing states the acquisition’s historical operating results were not significant.
- On August 7, after quarter-end, Carvana purchased and immediately resold approximately $253m of finance receivables under a new transfer agreement and received an approximately $4.0m fee.
- ASC 606 adoption had no material impact on revenue recognition. The company anticipated that adoption of lease accounting guidance in 2019 would materially increase reported assets and liabilities. It recorded a full valuation allowance on deferred tax assets; the approximately $67.9m potential Tax Receivable Agreement liability was unrecorded because realization of the related tax benefits was not considered more likely than not.
Important facts for investors to verify
- Whether the company extended or replaced the floor plan facility before its December 2018 maturity, and the resulting cost, capacity and collateral terms.
- Whether finance-receivable sale commitments expiring in November 2018 were renewed on comparable terms, and how dependent profitability and cash generation remain on loan-sale gains.
- Whether improving gross profit per unit and days to sale can keep pace with rising SG&A, inventory investment and expansion spending.
- Cash burn, available liquidity and capital needs, including the difference between cash and restricted cash and the limited remaining floor plan capacity at quarter-end.
- Related-party arrangements with DriveTime, preferred-stock dividends and conversion terms, and potential dilution from LLC-unit exchanges and equity awards.