Carvana Q1 2019 revenues up 110% YoY
my “shaka” sign of approval as a Native Polynesian-Hawaiian.
Holy moly, 21 consecutive quarters of triple-digit revenue growth! And finally, after 20 consecutive quarters of triple digit growth in the number of retail used car units sold, this quarter “fell short” showing an increase of only 99%!!
All the above by a company, acknowledged in my original Carvana post here on 11/26/18, that:
(a) is disrupting and transforming the retail used car sector with their company’s custom-built business model and e-Commerce platform.
(b) is not a software company with recurrent revenue,
(c) sells things, i.e., used cars,
(d) is capital intensive,
(e) has low gross margins akin to its automotive retail industry,
(f) has a low P/S of 1.09 and EV/Revenue of 4.74,
(g) continues aggressive expansion into new markets and expansion of its network of inspection and reconditioning centers (IRCs).
Equally gratifying is Carvana’s ongoing kick-ass stock price performance as of 5/8/2019:
• up 119% year-to-date
• up 184% over the recent past 52-week period, and
• YTD substantially out-performing my favorites, e.g., AMRN, TWLO, ZS and MDB, as shown in this Big Chart.
• Over the recent past 52-week period, performing well in comparison with the other aforementioned companies, except against AMRN’s overwhelming performance in this ?Big Chart.
Today 5/9/19, the day after reporting its Q1 results, Carvana closed up 5.2% at $75.38, after a tumultuous day on Wall Street, awaiting and uncertain about the outcome of U.S. -China trade talk.
CARVANA Q1 2019 RESULTS
In his 5/08/2019 Letter to Shareholders, Carvana (CVNA) co-founder and CEO Ernie Garcia III reported the following for Q1 2019:
[Note: Throughout the letter there is reference to items as “including Gift” that include the impact of the compensation expense related to the 100k Milestone Gift to employees, in accordance with GAAP. There is also reference to several measures that are presented “ex-Gift,” which exclude the impact of the 100k Milestone Gift to employees.]
We grew units and revenue by 99% and 110% respectively in Q1 YoY, marking our 21st consecutive quarter of triple-digit revenue growth. Unless otherwise noted, all financial comparisons stated below are versus Q1 2018.
Q1 2019 GAAP Results
• Retail units sold totaled 36,766 an increase of 99%
• Revenue totaled $755.2 million, an increase of 110%
• Total gross profit, including Gift, was $88.5 million, an increase of 159%
• Net loss, including Gift, was $82.6 million, an increase of 57%
• Basic and diluted net loss, including Gift, per Class A share was $0.69 based on 41.4 million shares of Class A common stock outstanding
Q1 2019 Ex-Gift Results, NON-GAAP
• Total gross profit per unit ex-Gift was $2,429, an increase of $575
• EBITDA margin ex-Gift was (7.4%), an improvement from (12.4%)
• Adjusted net loss per Class A share, was $0.53, based on 150.3 million adjusted shares of Class A common stock outstanding, assuming the exchange of all outstanding LLC Units for shares of Class A common stock
Q1 2019 Other Results
• Opened 24 new markets and 1 vending machine in Pittsburgh, PA, bringing our end-of-quarter totals to 109 and 16, respectively.
• Completed our first auto loan securitization, marking a major step forward in monetizing our finance platform.
• Completed the sale and leaseback of our Indianapolis inspection and reconditioning center (IRC), continuing the efficient financing of our balance sheet.
• Began production at our 6th IRC outside of Cleveland, Ohio.
Recent Events in Q2 2019
• Thus far in Q2 we opened 15 markets and a vending machine in Chicago bringing our totals as of May 8, 2019, to 124 and 17 respectively.
• We elected a new member to our Board—Neha Parikh, President of Hotwire—who brings a wealth of expertise in online customer experience and customer acquisition.
• Began production at our 7th IRC outside of Nashville, Tennessee.
Our IRC build-out will continue to ramp both by expanding existing facilities (adding shifts and lines) and adding new facilities. These additional locations will benefit our customers by moving inventory closer to them on average, which reduces delivery time and delivery expense, thereby increasing conversion all else being equal. However we expect average delivery distances to remain at similar levels in the near term, until the IRC network further expands, and then to come down significantly over time.
FY 2019 Guidance
The CEO letter states: Following solid execution in the first quarter, we are increasing our guidance for units and revenue and reiterating guidance for GPU and EBITDA margin. After a strong start to market launches, we are raising the low end of our market openings range for the year.
**FY 2019 GUIDANCE** Retail unit sales 165,000 - 170,000 Increase of 75% - 81% Total Revenue $3.5 B - $3.6 B Increase of 79% - $84% Total Gross Profit per unit $2,450 - $2,650 Increase from $2,133 EBITDA margin (5.5%) - (3.5%) Improvement from (9.9%) Market openings 55 - 60 Increase from 41 market openings in 2018, bringing our end-of-year total to 140-145 markets and our total U.S. population coverage to at least 65%
Q1 2019 EARNINGS CALL on 5/8/19
CEO Ernie Garcia made the following comments about completion of their first auto loan securitization, marking a major step forward in monetizing their finance platform:
In the first quarter, we also completed our first securitization. This is a significant accomplishment that required a lot of work and preparation. All the hurdles clear, the deal was completed laying out a template for similar deals in the future and lighting the path for significant progress in the finance contribution to our total GPU. The calculations we have done historically to determine we believe is ultimately achievable for our finance program simply rely on the way other mature issuers in the market are executing similar transaction today. So in a sense, completing our securitization doesn’t really impact our view of where we’re headed at all. That said, it does mark a significant milestone and provides with a nice empirical datapoint with our own loans that cements our view of what is possible. We also did continue to make exciting progress in our business of buying cars from our customers where we grew units by 230% year-over-year, which now represents us buying 40% cars from our customers that we are selling. The experience we offer our customers when we buy a car from them is very simple, They got a carvana.com, get a value, pick a time for us to pick up their car and we put money in their account. That customer facing simplicity requires complex technology and operations capabilities in the background. And we’re very excited to see it generating the same kinds of reviews from our customers that we’ve seen on the retail side of the business, which we expect to fuel the same kind of explosive growth.
The following corporate financials for AMRN show the following:
• Superb strong growth in retail units sold and revenue by 99% and 110% respectively in Q1 YoY, marking our 21st consecutive quarter of triple-digit revenue growth.
• Explosive share price increases: over 184% during the recent 52-week period; and 119% YTD.
• No positive annual and quarterly net income and earnings.
**CARVANA** 5/08/19 GICS SECTOR Consumer Discretionary GISC INDUSTRY Automotive Retail MARKET CAP $ 10.9 B Employees 3,879 52-WK HIGH 74.17 PRICE/SHARE 71.65 52-WK LOW 24.03 Price Y-T-D change 119% Price change 52-wk 184% S&P 500 52-wk change 5.9% EV/EBITDA (mrq) -18.67 P/E (ttm) N/A Fwd P/E -65.14 EV/Revenue (ttm) 4.74 P/S (ttm) 1.09
5-YEAR SUMMARY OF CVNA CORPORATE FINANCIALS
**MARKET NO. USED WHOLESALE NET Diluted SHARE** **CARVANA CAP OF VEHICLE Change VEHICLE Change REVENUE Change INCOME EPS PRICE Change** **FY/QTR ($M) MKTS UNITS SOLD YoY UNITS SOLD YoY ($M) YoY ($M) ($) ($) YoY** Q1 '19 10.88 B 109 36,766 99.1% 6,701 186.1% 755.234 109.6% (28.549) (0.60) 41.82 82.4% **FY 2018 4.712 B 85 94,108 112.7% 15,125 132.4% 1,955.467 127.7% (61.754) (2.24) 32.71 71.1%** Q4 '18 4.712 B 85 27,750 105.3% 4,717 155.8% 584.838 120.6% (28.704) (0.74) 32.71 71.1% Q3 '18 5.428 B 78 25,324 116.1% 4,408 145.3% 534.921 137.3% (16.042) (0.50) 38.75 164.0% Q2 '18 5.818 B 65 22,570 111.3% 3,658 131.5% 475.286 127.0% (9.965) (0.41) 41.60 103.2% Q1 '18 3.003 B 56 18,464 121.6% 2,342 81.8% 360.422 126.6% (7.043) (0.53) 22.93 106.6% **FY 2017 2.606 B 44 44,252 135.9% 6,509 145.5% 858.870 135.2% (62.841) (1.31) 19.12** Q4 '17 2.606 B 44 13,517 141.4% 1,844 152.3% 265.053 148.1% (5.480) (0.45) 19.12 Q3 '17 1.949 B 39 11,719 133.3% 1,797 128.3% 225.379 128.0% (4.380) (0.29) 14.68 Q2 '17 2.718 B 30 10,682 145.3% 1,580 151.2% 209.365 142.0% (14.542) (0.28) 20.47 Q1 '17 23 8,334 120.3% 1,288 155.6% 159.073 118.1% (38.439) (0.28) 11.10 **FY 2016 21 18,761 187.6% 2,651 147.8% 365.148 180.0% (93.112)** Q4 '16 21 5,600 155.5% 731 106.827 151.3% (35.694) (0.26) Q3 '16 16 5,023 182.8% 787 98.844 177.1% (21.985) (0.16) Q2 '16 14 4,355 224.3% 629 86.526 202.5% (18.108) (0.13) Q1 '16 11 3,783 212.1% 504 72.951 237.7% (17.325) (0.13) **FY 2015 9 6,523 209.9% 1,070 681.0% 130.392 212.8%** Q4 '15 9 2,192 182.8% 42.514 200.7% Q3 '15 5 1,776 206.7% 35.668 202.4% Q2 '15 5 1,343 208.0% 28.607 202.8% Q1 '15 4 1,212 284.8% 21.603 243.0% **FY 2014 3 2,105 137 41.679** Q4 '14 3 775 14.137 Q3 '14 3 579 11.795 Q2 '14 2 436 9.449 Q1 '14 1 315 6.298
CARVANA MANAGEMENT OBJECTIVES
Excerpts from the latest Q4/FY 2018 report:
Our management team focuses on delivering an exceptional and unparalleled customer experience while simultaneously growing the business rapidly and achieving our financial objectives. We firmly believe wowing the customer is the core of our model and drives all other metrics. To realize our long-term vision, our three primary financial objectives remain unchanged: (1) Grow Retail Units and Revenue; (2) Increase Total Gross Profit Per Unit; and (3) Demonstrate Operating Leverage. We believe continued focus on these goals will lead to a strong long-term financial model.
Long Term Financial Goals
Below we present our long-term financial model that we introduced at our Analyst Day on November 29, 2018. We believe this is the appropriate frame through which to evaluate our results and progress towards each of our financial objectives.
**LONG TERM** **Carvana (CVNA) FY 2016 FY 2017 FY 2018 Q1 2019 TARGET** YOY Revenue Growth 180% 135% 128% 110% - Gross Margin 5.3% 7.9% 10.1%/10.3% 11.7%/11.8% 15% - 19% (include Gift/exclude Gift) Advertising 7.4% 6.5% 5.7% 5.2% 1.0% - 1.5% SG&A ex. Advertising & D&A 21.1% 18.2% 14.9%/14.5% 14.3%/14.0% 4.5% - 5.5% (include Gift/exclude Gift) D & A 1.3% 1.3% 1.2% 1.1% 0.5% - 1.0% SG&A Total as % of Revenue 29.8% 26.0% 21.7%/21.3% 20.6%/20.3% 6% - 8% (include Gift/exclude Gift) Net Loss Margin (25.5)% (19.1)% (13.0)%/(12.4)% (10.9)%/(10.5)% - (include Gift/exclude Gift) EBITDA Margin (exclude Gift) (23.2)% (16.9)% (9.9)% (7.4)% 8% - 13.5%
Objective #1: Grow Retail Units and Revenue
CVNA reported the following:
We grew units and revenue significantly again in Q1. Retail units sold increased to 36,766, up 99% from 18,464 in the prior year period. Revenue in Q1 grew to $755.2 million, up 110% from $360.4 million in Q1 2018. Our growth in the first quarter was broad-based, driven by gains across our markets nationwide. The 2019 cohort continued the historical trend of new cohorts ramping faster than previous cohorts.
Buying Cars from Customers
We sourced substantially more cars from our customers in Q1 than in any previous quarter, aided by our first TV advertising campaign that highlights Carvana’s offer of buying cars from customers. We are actively enhancing and developing the customer experience for selling a vehicle to Carvana and believe this remains one of our business’s largest opportunities.
Total vehicles acquired from customers grew by 232% in Q1 2019 vs. Q1 2018, meaning that we bought 40% as many cars from our customers as we sold in the first quarter, up from 24% in Q1 2018 and 36% last quarter. The industry leader in our market buys approximately 100% as many cars as they sell, illustrating the huge potential in this business. Wholesale units sold, which are primarily sourced from customers, increased by 186% to 6,701 in Q1 2019 from 2,342 in Q1 2018. Retail units sold sourced from customers increased to about 14% from about 6% in Q1 2018. This was lower than the 17% in Q4 due to the expected rapid growth in auction-sourced inventory in preparation for Q1 2019.
These powerful results reflect the quality of the customer experience we offer, which to date has resulted in even higher NPS scores than our retail business.
Objective #2: Increase Total Gross Profit Per Unit (GPU)
The following are Carvana excerpts:
We achieved another strong quarter of total GPU growth in Q1, demonstrating additional progress toward our $3,000 midterm goal. Items “including Gift” reflect the impact of the compensation expense related to the 100k Milestone Gift to employees, in accordance with GAAP. Ex-Gift items exclude the compensation expense impact of the 100k Milestone Gift to employees and are non-GAAP metrics.
For Q1 2019:
o Total GPU (incl.Gift): $2,408 vs. $1,854 in Q1 2018
o Total GPU ex-Gift: $2,429 vs. $1,854 in Q1 2018
o Retail GPU (incl.Gift): $1,282 vs. $902 in Q1 2018
o Retail GPU ex-Gift: $1,302 vs. $902 in Q1 2018
o Gains in Retail GPU were primarily driven by market conditions, as the prior first quarter was impacted by Hurricane Harvey, incremental shipping revenue, and a reduction in average days to sale to 63 from 70.
o Wholesale GPU (incl.Gift) was $83 vs.$73 in Q1 2018
o Wholesale GPU ex-Gift was $83 vs. $73 in Q1 2018
o Changes in Wholesale GPU were driven by higher wholesale unit volume (+186%) relative to retail units (+99%), partially offset by lower gross profit per wholesale unit sold ($453 incl. Gift and $456 ex-Gift vs. $579 in Q1 2018).
o Other GPU was $1,044 vs. $879 in Q1 2018
o Gains in Other GPU were driven by improvement in loan monetization from our inaugural auto loan securitization. Total finance GPU, including gain on loan sale and interest income net of securitization fees and expenses, was $625 in Q1 compared to $561 in Q1 2018. Additional GPU gains were primarily driven by higher attachment of VSC and GAP waiver coverage.
Objective #3: Demonstrate Operating Leverage
The following are Carvana excerpts:
We demonstrated meaningful operating leverage again in Q1 2019 as Net Loss margin incl. Gift levered by 3.7% and EBITDA margin ex-Gift levered by 4.9%, reaching record levels for both metrics. We expect to make additional progress toward our long-term SG&A goals over the remainder of 2019.
For Q1 2019:
Total SG&A levered by 2.5% incl. Gift and 2.8% ex-Gift, primarily reflecting increased cohort advertising leverage and benefits from scale
• Compensation and benefits levered by 0.2% incl. Gift and 0.5% ex-Gift, primarily reflecting benefits from scale
• Advertising levered by 1.7%, reflecting leverage in existing markets, shifting mix towards older markets, and benefits of lower initial CACs in the 2019 cohort.
• Logistics and market occupancy was levered by 0.2%, reflecting improving efficiency and volumes through our fulfillment network.
• Other SG&A levered by 0.4%, primarily reflecting benefits from scale.
For the full year 2019, we expect to significantly improve our EBITDA margin ex-Gift as the underlying leverage in our cohorts continues to become more visible at the corporate level.
Carvana margins demand investor vigilance. So far, during its ongoing growth and expansion phase, Carvana is realizing fiscally positive improvements in all three margins.
In the Carvana Long Term Financial Goals, management set forth a long term target of 15% to 19% for Gross Margin.
**MARGINS GROSS OPERATING PROFIT** Q1 ’19 11.7% (10.9%) (3.8%) FY '18 10.1% (11.7%) (3.2%) Q4 '18 9.6% (12.7%) (4.9%) Q3 '18 10.7% (10.9%) (2.9%) Q2 ‘18 10.3% (9.8%) (2.1%) Q1 ‘18 9.5% (13.6%) (2.0%) FY '17 7.9% (18.1%) (7.3%) Q4 ‘17 8.3% (17.0%) (18.9%) Q3 ‘17 9.1% (17.0%) (1.9%) Q2 ‘17 7.7% (17.2%) (7.0%) Q1 ‘17 FY '16 5.3% (24.5%) (25.5%)
Regarding gross margin, cost of sales includes the cost to acquire used vehicles and direct and indirect vehicle reconditioning costs associated with preparing the vehicles for resale. Vehicle reconditioning costs include parts, labor, inbound transportation costs and other incremental overhead costs, which are allocated to inventory via specific identification and standard costing. Occupancy and labor costs incurred in connection with expanding production capacity are expensed as incurred as a component of selling, general and administrative expense. The Company has certain inventory that does not meet its specifications to sell to customers and disposes of this inventory through sales at auction or through other channels. The cost of these disposals are recorded on a net basis in cost of sales. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
STOCK-BASED COMPENSATION (SBC)
SBC/revenue ratios are favorably low.
**PERIOD SBC SBC/Revenue** **($ M)** Q1 ’19 7.711 1.0% Q4 '18 6.205 1.1% Q3 '18 13.800 2.6% Q2 ‘18 2.580 0.5% Q1 ‘18 1.510 0.4% FY '18 24.095 2.5% FY '17 5.611 0.7% FY '16 0.555 0.2% FY '15 0.490 0.4%
In my previous Carvana posts here, I’ve related that the U.S. retail used car marketplace is not only huge, but also highly fragmented. There are approximately 43,000 used car dealerships in the U.S. according to Borrell Associates’ 2017 Outlook, including approximately 27,000 independent dealerships. The largest dealer brand commands approximately 1.7% of the U.S. market and the top 100 used car retailers that include the likes of big boys CarMax and DriveTime collectively hold only about 7.0% market share, according to Edmunds.com, publicly-listed dealership filings and Automotive News. That leaves Carvana mucho room to grow and expand especially as an e-commerce business.
Carvana is disrupting and transforming the retail used car sector with their company’s custom-built business model and e-Commerce platform. Its business plan and operations provide a distinct diversification for my family’s portfolios.
I primarily and normally invest in companies operating in the black with on-going positive growth in revenue, earnings, margins, ROIC-WACC spreads and FCF, among others, with stable capital structure in place. I do make and hold exceptions, e.g., Carvana, Amarin, Twilio, Zscaler and MongoDB, only after conducting my own deep dive due diligence that gives me strong confidence in their business model, operations and corporate leadership and execution to deliver and sustain strong revenue growth with light at the end of the tunnel to achieve positive earnings in the near term.
As always, conduct your own due diligence and decision-making.