Carvana Co. (NYSE:CVNA) Q4 2023 Earnings Call Transcript
Carvana Co. (NYSE:CVNA) Q4 2023 Earnings Call Transcript February 22, 2024
Carvana Co. misses on earnings expectations. Reported EPS is $-1 EPS, expectations were $-0.95. Carvana Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Carvana Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Meg Kehan with Investor Relations. Please go ahead.
Meg Kehan: Thanks, Joe. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's fourth quarter and full-year 2023 earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the Company's corporate website at investors.carvana.com. The fourth quarter shareholder letter is also posted on the IR website. Additionally, we posted set of supplemental financial tables for Q4, which can be found on the Events and Presentations page of our IR website. Joining me on the call today are Ernie Garcia, Chief Executive Officer; and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
A detailed discussion of the material factors that cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Carvana's most recent Form 10-K. The forward-looking statements and risks in this conference call are based upon current expectations as of today, and Carvana assumes no obligation to update or revise them whether as a result of new developments or otherwise. Our commentary today will include non-GAAP financial metrics. Unless otherwise specified, all references to GPU and SG&A will be to the non-GAAP metrics and all references to EBITDA will be to adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our shareholder letter issued today, a copy of which can be found on our IR website.
And with that said, I'd like to turn the call over to Ernie Garcia. Ernie?
Ernie Garcia: Thanks, Meg, and thanks, everyone, for joining the call. 2023 was an exceptional year for Carvana. It was our best year from a financial perspective by a long way. Full-year, GPU was nearly $1,000 better than our previous best in 2021. Our full-year adjusted EBITDA per unit was over $900 higher than our previous best, and we have clear visibility to further improvements, as you can see in our outlook. The last two years have been initially characterized as negative for Carvana. In early 2022, we took a quick trip from a company that was perceived to be able to do a little wrong to one that was perceived to be able to do little right. That wasn't a fun transition for anyone. In each of our letters since we went public in 2017, we have signed off with the march continues.
The reason is because we believe this statement is a simple reduction of a massively important and generally underappreciated principle. Getting up again and again and relentlessly pushing forward is part of every success story, but that tenacity is easy to claim and hard to achieve. It's hard because the moments when you have to get back up again, feel very different in the moment than when they are imagined. They feel different for every stakeholder and most importantly, they feel different for every member of the team. I will never know exactly we did right to attract the team that we have, but that combination of things, which undoubtedly includes elements of luck, is almost certainly the most important thing we have ever done as a company.
It's very hard for a group to go through a period like the last two years and not to disintegrate under the pressure. We didn't disintegrate. We thought, we came together and we got better. The fact that we got better creates room for the last two years to be recharacterized in the future. Time will ultimately pass judgment on the impact of the last two years on the Carvana story. But my personal take is that it's been our proudest period and that when the story is written, this period and our team's response will be viewed very favorably. To the Carvana team, there is nothing we can say in words that will convey the gratitude we have for the fight you've always put up, but I hope you know it's real. Thank you. While the success of 2023 deserves a moment of reflection, the truth is we still have a lot of marching to do.
Our goals are big. From here, the key questions are this. Where are we? Where are we going? And how are we going to get there? First, where are we? Today, Carvana sits in the strongest position we have ever been in for five reasons. I would ask that you come back to this and evaluate each element for yourself. Number one, our customers love the experiences we deliver. And as we execute these experiences are getting even better. Number two, the financial power of our business model is becoming clear every quarter and is highly differentiated across every line item of our income statement, there remain many significant opportunities for additional improvement. We plan to get them. Number three, our infrastructure is simply unmatched. We have built a vertically-integrated machine with 6,500 acres of land and over 500,000 parking spots that scalably and cost effectively gets cars from one customer to another more efficiently than any other machine that serves the same purpose.
Number four, competitively, we have never had more separation as we continue to execute, that gap is getting bigger. And number five, we compete in a $1 trillion market, and we currently have approximately 1% market share. The potential is obvious. So where are we going? From the early days of Carvana, we have never flinched in our goals. They have been and remain to become the largest and most profitable automotive retailer and to buy and sell millions of cars per year. And finally, how are we going to get there? We are going to continue to march. We are still an ambitious group with big dreams and hustle. We will keep sprinting in our goals to drive as much positive changes as we can as quickly as possible as we always have. We are also a group that is constantly learning.
Every stage in Carvana's journey teaches us new lessons and adds to our toolkit. As long as that is true, and as long as we always get back up, our best day is always today. The march continues, Mark.
Mark Jenkins: Thank you, Ernie, and thank you all for joining us today. Our fourth quarter highlighted the significant and sustainable progress we have made on our path to profitability. We set company records for fourth quarter and full-year total GPU and adjusted EBITDA, completing a year in which we improved adjusted EBITDA by nearly $1.4 billion and positioning us well for further adjusted EBITDA growth in 2024. As part of our earnings materials this quarter, we provide a detailed look at our fourth quarter and full-year results. I'll start by summarizing three key takeaways. First, our FY2023 results and Q1 2024 outlook resoundingly demonstrate the ability of our online sales model to generate significant adjusted EBITDA.
Based on our Q1 outlook, we expect to generate significantly above $100 million of adjusted EBITDA, equating to significantly above $1,200 per retail unit sold. Despite declining used vehicle prices, industry volumes that remain below pre-pandemic levels and sizable costs of carrying capacity for future growth. Second, we are now beginning to demonstrate record adjusted EBITDA profitability while also showing early signs of growth. Based on industry data sources, we gained market share on a sequential basis in Q4 and our outlook calls for retail unit growth not only on a sequential basis, but also on a year-over-year basis in Q1 and in full-year 2024. Third, we have a unique and powerful infrastructure for significantly and efficiently scaling retail unit volume with excess capacity in our existing footprint to support multiples of profitable growth.
We expect this growth to be paired with significant operating leverage as we leverage our underutilized overhead costs. Moving now to our fourth quarter results. As we previously discussed, our long-term financial goal is to generate significant GAAP net income and free cash flow. In service of this goal, our management team remains focused on driving progress on a set of key non-GAAP financial metrics that are inputs into this long-term goal, including non-GAAP gross profit, non-GAAP SG&A expense and adjusted EBITDA. Due to the dynamic nature of the current environment, we will focus our remaining remarks on sequential changes in these metrics. Retail units sold declined by 6% sequentially, in line with our outlook and better than the industry on a sequential basis.
Total revenue was $2.424 billion, a decrease of 13% sequentially. In the fourth quarter, non-GAAP total GPU was $5,730, a sequential decrease of $666 driven primarily by the absence of non-recurring benefits, which positively impacted Q3 and seasonality. Non-GAAP retail GPU $2,970 in Q4 versus $2,877 in Q3, a new company record. Our strength in retail GPU came despite higher-than-normal fourth quarter depreciation and continues to be driven by fundamental gains in non-vehicle cost of sales, customer sourcing, inventory turn times and revenues from additional services, highlighting the value of our vertically-integrated business model. We expect non-GAAP retail GPU in Q1 to be similar to Q4, with the potential for upside. Non-GAAP wholesale GPU was $881 in Q4 versus $951 in Q3.
Sequential changes in wholesale GPU were primarily driven by fourth quarter seasonality. We expect a sequential increase in wholesale GPU in Q1. Non-GAAP other GPU was $1,879 in Q4 versus $2,568 in Q3. Sequential changes in other GPU were primarily driven by selling a lower volume of loans in Q4 relative to retail units sold that in Q3, as well as lower premium on loan sales resulting from higher industry-wide loss expectations that we have since passed through to our pricing. We expect a sequential increase in other GPU in Q1. Non-GAAP SG&A expense was $376 million in Q4 versus $370 million in Q3. Sequential changes in non-GAAP SG&A expense were primarily driven by the absence of a small non-recurring benefit that impacted Q3 and small incremental expenses in Q4.
Finally, adjusted EBITDA was $60 million in Q4, a new fourth quarter company record. I'll turn now to our first quarter outlook. While the macroeconomic and industry environment continues to be uncertain, looking toward the first quarter of 2024, we expect the following as long as the environment remains stable. One, we expect retail units sold slightly up on a year-over-year basis; and two, we expect adjusted EBITDA significantly above $100 million. Our confidence about driving significantly above $100 million of adjusted EBITDA is driven by our results so far this quarter. This outlook does not anticipate any material one-time benefits or costs in Q1. For FY2024, we expect to grow retail units sold and adjusted EBITDA compared to FY2023. We are excited about the path we are on, and we look forward to making continued progress toward our goal of becoming the largest and most profitable auto retailer.
Thank you for your attention. We'll now take questions.
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