Carvana Co. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; comparisons are with the corresponding 2018 periods. Carvana operates an e-commerce platform for buying and selling used vehicles and reports one operating segment. Figures below are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,094.9 | $534.9 | $2,836.3 | $1,370.6 |
| Gross profit | $137.5 | $57.3 | $363.9 | $140.6 |
| Gross margin | 12.6% | 10.7% | 12.8% | 10.3% |
| Net loss | $(92.2) | $(64.4) | $(238.9) | $(168.3) |
| Net loss attributable to Carvana Co. | $(39.0) | $(16.0) | $(94.2) | $(33.1) |
| Class A loss per share | $(0.78) | $(0.50) | $(2.06) | $(1.43) |
| EBITDA ex-Gift (non-GAAP) | $(56.2) | $(44.6) | $(144.7) | $(130.9) |
| EBITDA margin ex-Gift (non-GAAP) | (5.1)% | (8.3)% | (5.1)% | (9.6)% |
For the nine months ended September 30, operating cash flow was $(434.7) million, investing cash flow $(148.8) million, and financing cash flow $603.2 million. Cash, cash equivalents and restricted cash totaled $108.5 million at period end, including $94.9 million of unrestricted cash.
At September 30, total assets were $1,684.3 million and total liabilities $1,373.1 million. Short-term revolving facilities were $262.2 million; long-term debt was $776.6 million, plus $40.2 million current portion. Senior notes had a carrying value of $590.5 million, bear 8.875% interest and mature in October 2023. The company reported $408.5 million of availability under short-term revolving facilities and $578.5 million in total committed liquidity resources, including cash and sale-leaseback availability.
Material changes versus prior periods
- Q3 revenue rose 104.7% year over year, while retail units sold increased 83.3% to 46,413. For the first nine months, retail units sold rose 91.7% to 127,179.
- Gross profit increased faster than revenue, and gross margin expanded. Total gross profit per retail unit was $2,963 in Q3 versus $2,263 a year earlier; excluding the 100k Milestone Gift expense, it was $2,996 versus $2,302.
- Losses widened in dollars: nine-month net loss increased $70.6 million. SG&A rose to $545.1 million from $294.6 million for the nine-month period, reflecting growth in compensation, advertising, logistics and market operations. Interest expense rose to $56.0 million from $13.4 million.
- Operating cash use increased by $170.8 million year over year, including higher investment in vehicle inventory. Property and equipment purchases were $151.4 million for the nine-month period, versus $107.2 million.
- Carvana raised approximately $297.6 million net from its May and June 2019 equity offering and issued $250 million of additional senior notes. The company also began sponsoring securitizations in 2019 and retained $75.8 million of related beneficial interests at quarter end.
Outlook, commentary and risks
- Management expects continued retail-unit growth through deeper penetration of existing markets and new market launches, and plans continued investment in technology, logistics, inventory, IRCs and vending machines. The company had 146 markets and seven IRCs at September 30.
- Management stated that available working capital and expected continued inventory, capital-expenditure and receivables financing should fund operations for at least one year from issuance of the financial statements. The company nevertheless expects further losses and says additional capital may be needed; financing may not be available on favorable terms or at all.
- Management cautions that growth investment and operating expenses will continue to increase and that returns on those investments are not assured. Used-vehicle sales are seasonal, with the lowest relative sales generally expected in Q4; vehicle prices may also depreciate faster in the second half of the year.
- On November 1, 2019, after quarter end, the floor plan facility was increased from $650 million to $950 million. The amendment raised the required restricted-cash reserve to 7.5% of principal and set a lower spread under specified borrowing conditions. The facility matures October 2020.
- A September 2019 lease for additional Tempe office space provides for approximately $132.4 million of minimum payments over its initial 13-year term. The filing identifies risks including continuing losses, rapid growth, reliance on financing and loan-sale gains, vehicle pricing and inventory risks, competition, seasonality, and dependence on DriveTime and other counterparties.
- The company reported compliance with senior-note covenants and effective disclosure controls. It said ordinary-course legal matters were not expected to have a material adverse effect; outcomes of current or future litigation remain uncertain.
Important facts for investors to verify
- Whether unit growth and higher per-unit gross profit can translate into narrowing losses and improved cash generation, given rising SG&A and interest costs.
- The sustainability and economics of finance-receivable sales and securitizations, including gain-on-sale levels, financing-partner capacity, and exposure from retained securitization interests.
- Liquidity and refinancing needs: availability under facilities depends on eligible collateral, the floor plan facility matures in 2020, and the company continues to use external financing.
- The impact of the higher floor-plan capacity and restricted-cash requirement, and the funding and operating consequences of the long-term office lease commitment.
- Related-party arrangements with DriveTime and affiliates, including leases, VSC administration, servicing, and the $15 million of senior-note principal held by an affiliate.
- Non-GAAP measures exclude specified 100k Milestone Gift costs; compare them with GAAP results. The filing says Gift-related expense is expected to affect results through the first half of 2020.