Letter To Shareholders - Carvana
Letter to ShareholdersQ4 2017March 6, 2018Dear Shareholders,1
Annual Key Metrics2
Dear Shareholders,We’re pleased to announce our fourth quarter and full year 2017 results. This was a big year for Carvana. Wegrew retail unit sales 136% YOY, improved GPU 50% YOY as we march towards our mid-term target of 3,000,and we opened a record 23 markets. Those milestones are important, but exploring what we learned alongthe way and what we expect from here are equally important.We are growing rapidly and have more conviction than ever about the business we are building. At the sametime, extremely rapid growth paired with a relatively thin operating history has occasionally made the pathdifficult to predict. Our retail unit sales came in just below our guidance range for Q4 and the full year, largelyattributable to weaker than expected results from our Cyber Monday promotion. That said, we are proud ofour substantial growth and total GPU gains this year, and as you’ll see in our 2018 guidance, we expect ourfifth straight year of triple digit top-line growth for Carvana. We look forward to discussing our Q4 resultsand outlook with you on our conference call today.Summary of Q4 and 2017 ResultsQ4 2017: All financial comparisons stated below are versus Q4 2016, unless otherwise noted. Completefinancial tables appear at the end of this letter. Retail units sold totaled 13,517, an increase of 141%Revenue totaled 265.1 million, an increase of 148%Total gross profit was 21.9 million, an increase of 798%Total gross profit per unit was 1,619, an increase of 1,184Net loss was 47.2 million, an increase of 32%EBITDA margin was (15.5%), an improvement from (30.6%)GAAP basic and diluted net loss per Class A share was 0.45 based on 15.9 million shares of ClassA common stock outstanding; absent 1.65 million in accrued charges associated with ourconvertible preferred stock issuance net loss per Class A share would have been 0.34.Adjusted net loss per Class A share, a non-GAAP measure, was 0.36, based on 136.9 millionadjusted shares of Class A common stock outstanding assuming the exchange of all outstandingLLC Units for shares of Class A common stock; absent 1.65 million in accrued charges associatedwith our convertible preferred stock issuance adjusted net loss per Class A share would havebeen 0.34.We opened 5 new markets, bringing our end-of-quarter total to 44We achieved the lowest quarterly average days to sale in our history of 72, compared to 97 inQ3FY 2017: All financial comparisons stated below are versus 2016, unless otherwise noted. Retail units sold totaled 44,252, an increase of 136%Revenue totaled 858.9 million, an increase of 135%Total gross profit was 68.1 million, an increase of 255%Total gross profit per unit was 1,539, an increase of 516Net loss was 164.3 million, an increase of 76%EBITDA margin was (16.9%), an improvement from (23.2%)GAAP basic and diluted net loss per Class A share was 1.31 based on 15.2 million shares of ClassA common stock outstanding3
Adjusted net loss per Class A share, a non-GAAP measure, was 1.21, based on 136.9 millionadjusted shares of Class A common stock outstanding assuming the exchange of all outstandingLLC Units for shares of Class A common stockWe opened 23 new markets, bringing our end-of-year total to 44Our average days to sale for the full year 2017 was 91, an increase of 2 daysRecent EventsWe had a few other notable accomplishments in Q4 2017 and already in Q1 2018, including: We raised 100 million through the sale of convertible preferred securities to Dundon CapitalPartners in early December. The additional capital adds liquidity and cushion to our balancesheet and provides flexibility to accelerate market openings.We sold and leased back 24.3 million of vending machines in Q4, including 19.2 million soldand leased back under our 75 million Master Sale-Leaseback Agreement, and 5.1 million undera separate transaction. We still have over 55 million available under our MSL agreement, whichwe intend to utilize over the course of this year, while also securing additional asset financingfrom other third parties.We have opened 10 markets quarter-to-date, bringing our current total to 54.Q1 and 2018 OutlookWe anticipate continued triple digit growth in units and revenue for both Q1 and the full year 2018 as weincrease penetration in our existing markets, open new markets, and broaden our brand awareness withnational advertising and additional vending machines. We have historically estimated used vehicle demandto be seasonally strongest in the first half of the year, correlating closely with customer receipt of federal taxrefunds; however, as tax refunds have begun arriving later over the last two years the true strength of thatseasonality is shifting to favor Q2 over Q1. We expect to make progress on GPU and EBITDA margin in Q1,although less than we may have experienced throughout our history largely due to the shift in seasonality.We expect our EBITDA losses to peak in Q1 this year, followed by a significant reduction in Q2.Our Q1 guidance is as follows. All financial comparisons stated below are versus Q1 2017, unless otherwisenoted. Retail unit sales of 17,000 – 18,500, an increase of 104% – 122%Total revenue of 325 million – 355 million, an increase of 104% – 123%Total gross profit per unit of 1,650 – 1,750, an increase from 1,169EBITDA margin of (15.0%) – (13.0%), an improvement from (21.6%)Our FY 2018 guidance is as follows. All financial comparisons stated below are versus FY 2017, unlessotherwise noted. Retail unit sales of 89,000 – 93,000, an increase of 101% – 110%Revenue of 1.725 billion – 1.825 billion, an increase of 101% – 112%Total gross profit per unit of 1,950 – 2,150, an increase from 1,539EBITDA margin of (9.0%) – (7.0%), an improvement from (16.9%), reflecting both our decisionto accelerate market expansion along with increasing operating leverage on our growth30 – 40 market openings, an increase from 23 markets in 2017, bringing our end-of-year total to74 – 84 markets and our total U.S. population coverage to at least 55%4
For more information regarding the non-GAAP financial measures discussed in this letter, please see thereconciliations of our non-GAAP measurements to their most directly comparable GAAP-based financialmeasurements included at the end of this letter. Guidance for EBITDA margin excludes depreciation andamortization expense and interest expense. We have not reconciled EBITDA guidance to GAAP net loss as aresult of the uncertainty regarding, and the potential variability of, interest expense. Accordingly, areconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measure is notavailable without unreasonable effort. Depreciation and amortization expense, which is a component of thereconciliation between EBITDA and GAAP net loss, is expected to be between 1.2% and 1.4% of total revenuesfor both Q1 2018 and FY 2018.5
Markets and CohortsWe delivered continued improvements in our markets during 2017, with penetration increasing in ourexisting markets and our newly launched markets off to the best start in our history. Atlanta, our oldest andlargest market, continued to show impressive unit growth of 44% in both FY 2017 and Q4, reaching marketpenetration in Q4 of 1.54% vs. 1.07% in Q4 2016. As a result, we reduced our advertising cost per unit inAtlanta to 440 in Q4 vs. 551 in Q4 2016. Our other market cohorts continue to grow rapidly, leveragingadvertising expenditures, and with our move towards national TV, new markets are launching with lowercustomer acquisition costs.Market PenetrationThe charts below show the market penetration and advertising expense per unit of our five annual marketcohorts (2013 through 2017) by quarters since launch. The charts align performance of all markets in a cohortwith their first quarter in operation and includes data in quarters where all markets in a cohort were active(e.g. there is one data point for the 2017 cohort, five for the 2016 cohort, etc.). Additional details onmethodology are provided in our Annual Report on Form 10-K.6
The 2014 market cohort comprised of Nashville and Charlotte, our smallest cohort by population, showed aslower rate of growth in 2017. We ran an extended marketing test in Nashville and Charlotte that ultimatelyproved less effective than campaigns in other markets. By continually testing marketing channels andcreative content across markets, we can optimize our marketing strategies over time. We saw sequentialimprovement in both markets following the end of the test and expect positive trends to continue.We believe the cohort penetration chart demonstrates the power of our customer offering and the longrunway for growth in front of us.Customer Acquisition CostsSimilar to cohort market penetration, cohort advertising expense per unit has shown steady improvementboth within and across cohorts. For the full year, advertising expense per unit sold in all cohorts declinedyear-over-year, and our 2015 and 2016 cohorts declined steeply, to 1,154 from 2,363 and to 2,204 from 5,093, respectively. For the full year, the 2017 cohort advertising expense per unit was 2,730, which was 2,363 lower than the 2016 cohort expense during its first year. As displayed in the quarterly cohort graphbelow, our 2017 cohort had the lowest first quarter advertising expense per unit in our history, we believedue largely to the benefits of national advertising. We believe the overall trends in advertising expense perunit bodes well for the replicability of our market rollout model, as well as our ability to leverage advertisingexpense over time.*Excludes out of market advertising costs, which primarily consist of production costs, pre-opening advertising costs, and a portionof national television advertising costs representative of the population not served by an open market7
ExpansionWe launched five new markets in the fourth quarter. This brought our total number of markets to 44 onDecember 31, 2017. This expansion increases the total percentage of the U.S. population our marketscollectively serve to 41.2%, up from 19.7% at the end of 2016. Opening Newark last quarter begins our rolloutinto the New York metro area and the broader Northeast. Less than five years after establishing our firstmarket in Atlanta, we’ve built a coast-to-coast production, logistics and fulfillment network using a nimble,capital-light expansion model that allows us to quickly and efficiently enter new markets. As our logisticsnetwork covers more of the country, we can more easily fill in markets within our footprint and betterleverage our assets. As a result, we plan to open 30-40 markets in FY 2018 to reach a total coverage of atleast 55% of the U.S. population, another record for market openings.*2018E bar represents high and low end points of end-of-year total market guidance range.*Represents facilities and markets as of December 31, 20178
Vending MachinesVending machines are the most visible element of the Carvana brand. They generate awareness and interestfrom local communities and enable us to deliver fun and memorable experiences to our customers at evenlower variable costs than home delivery. While the vending machines are differentiated relative to anythingelse in the market, they still require physical real estate and are therefore more difficult to scale.Last year, we successfully opened five vending machines, but wish we could have opened more. Our realestate team is hard at work in site selection, city approvals, and construction to launch more as quickly aspossible.2017 provided additional information on how vending machine performance evolves over time, which hasreinforced their value, while also improving our understanding of how a vending machine enhances amarket's sales.Based on our experiences to date, we have found that initially a vending machine generates significantexcitement in the local market. That excitement leads to fairly rapid unit growth, increasing marketpenetration. Over the next few quarters, the slope of the market penetration curve tends to moderate beforereturning to the original growth rate, albeit from a higher level of penetration.Management ObjectivesOur management team continues to believe that customer experience quality is the most important focalpoint to drive the long-term success of the business, and that by offering customers lower prices, widerselection, and simpler experiences, we can improve that customer experience quality over the traditionalstandard in automotive retail, which will power our growth. To realize that long-term vision, we focus onthree primary financial objectives: (1) Grow Retail Units and Revenue; (2) Increase Total Gross Profit Per Unit;and (3) Demonstrate Operating Leverage.Objective #1: Grow Retail Units and RevenueQ4 was another strong growth quarter, despite units coming in below our guidance, as retail units soldincreased to 13,517, up 141% from 5,600 in the prior year period. Revenue in Q4 grew to 265.1 million, up148% from 106.8 million in Q4 2016. In addition, we are encouraged by Atlanta unit growth of 44% in FY2017 because it implies we have yet to reach a market saturation point in our oldest and largest market. OurQ1 guidance of 17,000-18,500 units equates to 104% – 122% year-over-year growth, and reflects theexpected timing of consumers receiving income tax refunds in 2018.*Q1 2018E bars represent high and low end points of quarterly retail unit sales and quarterly total revenue guidance ranges.9
Our growth in retail units sold during 2017 was broad based by market cohort and demonstrates strongunderlying trends.Objective #2: Increase Total Gross Profit Per UnitTotal GPU in Q4 2017 grew to 1,619 per unit, up 1,184 vs. Q4 2016. As expected, total GPU for the quarterdecreased sequentially, primarily driven by the impact of our Cyber Monday and Hurricane promotions.These impacts were partially offset by other efficiencies in our retail business and the rollout of GAP waivercoverage.For the full year 2017 our GPU grew to 1,539 per unit, an increase of 516 over the previous year. Our GPUimprovements were broad-based, including improvements on retail used vehicles, wholesale vehicles, andother products. Our gains in retail used vehicle GPU were driven by improvements in purchasing and pricingoptimization ( 229 benefit) partially offset by an increase in days to sale (approximately - 20 impact), andinventory management and reconditioning process efficiencies, among other items (collectively 216benefit). Our gains in other GPU were driven by higher upfront premiums on the sale of our financereceivables, which benefited from the launch of our new proprietary credit scoring model in early 2017. Wealso saw small gains in wholesale gross profit, driven by technology and process improvements in bidding forand subsequently selling wholesale cars. We expect further gains in all three gross profit components in 2018.In addition to increasing GPU, we also successfully reduced the average days to sale for vehicles in ourinventory over the course of 2017 by leveraging our centralized eCommerce inventory model, which allowsus to rapidly grow markets and increase market share without significantly adding inventory. While we didnot see GPU benefits from lower average days to sale in the full year 2017, we exited the year with our lowestquarterly average days to sale ever at 72 days in Q4, versus a recent high of 105 days in Q2 and 97 days inQ3. We expect this metric to fall further in 2018, particularly in the second and third quarters.10
We expect to again significantly improve total GPU in 2018 as we march towards our 3,000 mid-term goal.The mid-point of our full year guidance implies a roughly 500 improvement in total GPU, similar to theimprovement in 2017. We anticipate that approximately half of the improvement will come from higher retailused vehicle GPU primarily driven by a reduction in average days to sale, while the other half of theimprovement will come from all other GPU sources.*Q1 2018E and 2018E bars represent high and low end points of quarterly and annual GPU guidance ranges.Objective #3: Demonstrate Operating LeverageIn Q4, we continued to invest in our infrastructure and staffing in preparation for the significant seasonaltailwinds in the first half of 2018. While the fourth quarter was another substantial investment quarter forus we did achieve positive operating leverage from our 141% unit sales growth. Total SG&A as a percent ofrevenue was 25.2% in Q4, compared to 34.4% in Q4 2016. For the full year, SG&A decreased to 26.0% ofrevenue despite large investments in public company costs, compared to 29.8% in 2016, and our net loss forthe quarter was 47.2 million, as compared to 39.8 million in Q3. Full year net loss was 164.3 million, upfrom 93.1 million in FY 2016.We consider EBITDA margin an important measure of the leverage in our business. EBITDA margin in thefourth quarter of 2017 was (15.5%), a slight improvement from (15.9%) in Q3. For the full year EBITDA marginwas (16.9%) an improvement from (23.2%) in 2016. A reconciliation of EBITDA, a non-GAAP measure, to netloss, its most directly comparable GAAP measure, is provided in the appendix.For the full year, we expect to again make significant gains in improving our EBITDA margin and EBITDA perunit. We anticipate that about half of our improvements in SG&A per unit will come from leveraging our fixedoperations with the remainder of the improvement split between lower customer acquisition costs and lowerfulfillment operations costs. As noted earlier, we expect our EBITDA losses to peak in Q1 this year, followedby a significant reduction in Q2.11
SummaryThank you for taking the time to read through our letter. Our goal in writing these letters is to keepshareholders informed of the trends in the business and our progress so that you can better interpret ourresults.We also want to communicate our own thoughts on that progress through the lens of our experience overthe last 5 years and our plans for the future.We have never been more confident in the path we are on.The customer experiences we are delivering are exceptional, differentiated, and very difficult to replicate.The response to those experiences is clearly apparent in our cohort penetration curves. We know that thepath along a triple digit growth curve into this tremendous opportunity won’t always be a straight line, butthe pieces are in place.We are focused and determined. We will remain aggressive and will keep our customers at the center ofevery decision we make.Sincerely,Ernie Garcia, III, Chairman and CEOMark Jenkins, CFO12
AppendixConference Call DetailsCarvana will host a conference call today, March 6, 2018, at 5:30 p.m. EST (2:30 p.m. PST) to discuss financialresults. To participate in the live call, analysts and investors should dial (877) 270-2148 or (412) 902-6510,and ask for “Carvana Earnings.” A live audio webcast of the conference call along with supplemental financialinformation will also be accessible on the company's website at investors.carvana.com. Following thewebcast, an archived version will be available on the website for one year. A telephonic replay of theconference call will be available until March 13, 2018, by dialing (877) 344-7529 or (412) 317-0088 andentering passcode 10116688#.Forward Looking StatementsThis letter contains forward-looking statements within the meaning of the Private Securities LitigationReform Act of 1995. These forward-looking statements reflect Carvana’s current expectations andprojections with respect to, among other things, its financial condition, results of operations, plans,objectives, future performance, and business. These statements may be preceded by, followed by or includethe words "aim," "anticipate," "believe," "estimate," "expect," "fore
fifth straight year of triple digit top-line growth for Carvana. We look forward to discussing our Q4 results and outlook with you on our conference call today. Summary of Q4 and 2017 Results Q4 2017: All financial comparisons stated below are versus Q4 2016, unless otherwise noted. Complete fi
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Fair Lending laws require us to treat consumers fairly and equitably through the credit process and life-cycle of their accounts. This is a good thing! It aligns with our business, creates mutual trust, and helps us get and retain the best customers. Some other ways we comply at Carvana include:
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the novel coronavirus disease (COVID-19). As a result, some shareholders may be denied entry upon arriving at the meeting venue on the specified date. We appreciate your understanding in this regard. We ask that shareholders give careful consideration to the prospect of attending the Shareholders Meeting upon having read the attached
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