Carvana Co. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited.
Business context
Carvana operates an online used-car buying and selling platform, combining vehicle retail, financing, ancillary products, reconditioning and delivery. At year-end, it served 146 metropolitan markets, up from 85, and reported 25,977 vehicles listed on its website. Retail units sold rose 88.7% to 177,549.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $3.940 billion | $1.955 billion |
| Gross profit | $506.4 million | $196.7 million |
| Gross margin | 12.9% | 10.1% |
| Net loss | $364.6 million | $254.7 million |
| Operating cash flow | $(757.1) million | $(414.3) million |
| Investing cash flow | $(227.7) million | $(150.3) million |
| Financing cash flow | $1.015 billion | $466.3 million |
Revenue grew 101.5%. Gross profit per retail unit increased to $2,852 from $2,090; management’s non-GAAP figure excluding the employee “100k Milestone Gift” was $2,883 versus $2,133. SG&A rose to $786.7 million from $425.3 million, including advertising expense of $204.0 million versus $111.2 million. Interest expense increased to $80.6 million from $25.0 million.
Fourth quarter: Revenue was $1.104 billion, gross profit $142.5 million and net loss $125.7 million, versus $584.8 million, $56.1 million and $86.4 million, respectively, in Q4 2018.
At December 31, cash and cash equivalents were $76.0 million, with restricted cash of $42.4 million. The company reported $459.8 million of committed liquidity resources, including revolving-facility and sale-leaseback availability. Outstanding principal debt, including finance leases, was approximately $1.5 billion; this included $600 million of 8.875% senior notes due 2023 and $515.5 million drawn on the vehicle floor-plan facility. Total assets were $2.058 billion and total liabilities $1.866 billion.
Changes, outlook and risks
- Growth in sales, gross profit and unit economics was accompanied by a larger net loss, higher operating cash use and substantially increased debt. Operating cash use reflected expansion spending, inventory investment and timing of finance-receivable originations and sales.
- Management plans to expand market coverage and invest in inventory, advertising, technology, logistics and reconditioning capacity. It expects continued losses and higher operating expenses while investing for growth; the filing provides no specific financial guidance.
- Finance-receivable sales are a significant source of gross profit. The company recognized $137.3 million in gains on loan sales in 2019 and depends on continued access to financing partners and securitization markets. Retained securitization interests expose it to credit, prepayment and valuation risk.
- Other material risks include inventory acquisition and resale, used-car price changes, execution of rapid expansion, regulatory and licensing compliance, cybersecurity, competition, and dependence on certain DriveTime relationships. The founder-related Garcia Parties held approximately 93% of voting power at year-end.
- The company disclosed an immaterial prior-period error in allocating losses between Carvana Co. and non-controlling interests. It revised 2018 information and said it would revise 2019 quarterly information; the revisions did not affect cash flows. The auditor issued unqualified opinions on the financial statements and internal controls. Going concern was identified as a critical audit matter: management believed available working capital and expected financing would fund operations for at least one year from issuance.
- Subsequent to year-end, the company entered into two finance-receivable facilities with aggregate commitments of $925 million, potentially increasing to $1.0 billion with lender consent, and terminated the prior DART I and SART 2017-1 facilities.
Important facts for investors to verify
- Whether retail-unit growth and improving gross profit per unit can translate into lower losses and cash burn as expansion continues.
- Availability, cost and renewal terms of inventory financing, finance-receivable facilities and securitization funding; also review debt maturities and note covenants.
- Quality and saleability of finance receivables, realized gains on loan sales, retained securitization exposure and potential repurchase obligations.
- Progress on liquidity, operating cash use and capital spending, including commitments for four IRCs under construction.
- Revised 2019 quarterly loss allocations and per-share figures, and the assumptions behind the reported liquidity and going-concern assessment.
- Related-party arrangements, the 85% Tax Receivable Agreement obligation when applicable, and the implications of concentrated voting control.