Carvana Co. (CVNA) Earnings Call Transcript & Summary

Good afternoon. I'm Sharon Zackfia with William Blair. Thanks for joining us. Really happy to have with us today, Mark Jenkins, who's the CFO of Carvana. Carvana has been 1 of the most explosive growth stories over the last several years. And I think the good news is we're probably in the early innings of seeing what this model can do over the longer term. It's clearly a huge TAM. Used cars are about 10% of all retail sales, and they're only really 2 national brands. And I think the power of the economics of this model are just starting to unfold, and we're very excited about what Mark has to share with us here today. I need to tell you, before I let Mark take over that there's a complete list of research disclosures and potential conflicts of interest at williamblair.com.

Thank you. Well, thanks, everyone, for coming today. It's great to be here. I think -- I was thinking back in preparing for this presentation to the first time we were here. It was just a few weeks after our first earnings report as a public company in 2017. And since then, we've grown about 16x over the last 8 years. We've improved our margins by just over 30 points over that same period to -- from just over a negative 20% adjusted EBITDA margins to now industry-leading at 11.5% adjusted EBITDA margin in Q1. So it's been a great 8 years. It's great to be back, and I look forward to talking to you a bit more about Carvana over the coming minutes. So the standard safe harbor statements apply to this presentation. So I'm joining you today coming off of a record quarter. We had an amazing quarter in Q1. We set a company record for retail units sold at approximately 134,000 retail units sold. It's our first quarter over $0.5 million annualized run rate of retail units sold, making us the second largest seller of used cars in the country. We're also, by far, the fastest growing, which is something I'll talk about a little bit more on the next slide. We also had a record quarter on a number of profitability metrics, including our company record for adjusted EBITDA, just shy of $500 million for the quarter, a company record on GAAP operating income, approximately $400 million for the quarter. First quarter records on adjusted EBITDA margin and net income margin and a number of others that I haven't listed. So it's a great quarter, and I think that is the result of a great couple of years of strong execution from our team, paired with a powerful differentiated business model. I'll talk a bit more about that as we continue on over the coming slides, but we've positioned the business to have the industry's leading offering. I think there's a couple of ways that you can see that in the data. One is that we are significantly outgrowing our industry today. So we grew retail units sold by 46% in the first quarter of 2025 compared to a range from negative low single digits to mid-single digits for other large players in the industry. So we're meaningfully taking share with our customer offering. At the same time, we're doing that, we're taking substantial share with approximately twice the average industry margins based on publicly available data. And I think that those 2 things done in tandem reflect a very powerful customer offering that our customers love and a very powerful business model that is based around vertical integration and providing a great customer experience. And so I think these are -- we feel very, very strongly positioned. I'll talk a little bit more about where we want to go using this as our starting point. But we feel like we've positioned the business to become a very powerful long-term profitable growth story, and that is what we are going to be seeking to do. So moving forward, the next thing I wanted to spend a little bit of time talking about is our growth is significant, and the significant growth is happening at a substantial scale. So more than $4 billion in revenue in Q1, growing at units at 46% year-over-year. A natural question to ask might be how is that happening? It's not happening by giving away a lot of margin given that we're operating at 2x the industry margin. And so how is that happening? And I think the answer to that question, we break down into 3 fundamental drivers of this outsized growth, the first of which is just having a better offering. And so we, over the last decade, have invested significantly in providing the most seamless customer experience for customers who want to buy a used car and want to do it entirely online, either by clicking through their phone or purchasing a car entirely on their laptop and having that car delivered directly to their door. We provide a seamless built from scratch, from the ground up online experience for that, and it's resonating with customers. As we've improved our profitability over the last few years, we've also improved our customer experience ratings. We're providing an experience that customers love, and this is a powerful driver of our growth. We also expect it to be a powerful driver of our growth looking forward. And our goal is going to be to continue to improve our customer offering, a more seamless website experience, faster delivery times, better selection, improving the customer experience across the board, we believe will continue to be a strong driver of our growth going forward. In addition to that, we see lots of opportunities across the business to drive further fundamental gains in unit economics. And by that, I mean fundamental gains in our variable costs and our variable revenue streams where we see meaningful opportunity to improve those, and we would like to pass those fundamental gains on to customers, further strengthening our offering relative to the competition and providing further differentiation. So this is a very powerful source of growth. We're seeing it in our results today, where we have like I said, 46% retail unit growth in Q1, paired with improving margins and industry-leading margins. And that's only possible if you have a better offering. We think we have a better offering, and we think there's lots of ways to improve it going forward as a long-term fundamental driver of growth. The second long-term driver of growth. And I think this is also fueling our growth today is we have a big opportunity to continue to increase awareness, understanding and trust of our offering. I think a simple way to think about that is just where we are today on the e-commerce adoption curve in auto, relative to where other retail sectors are on the e-commerce adoption curve. And we have this chart here in the slide that shows using some of the federal data, e-commerce penetration over time in non-auto, the broader retail sector. And as you can see, it's been a steady tailwind. Customers want to purchase this way as the offering continues to get built out as selection continues to improve, as delivery times continue to improve. Customers have demonstrated that they want to buy goods online in a seamless, mobile-driven transaction and have the goods delivered to their door. That's proven. In other parts of the economy, we've seen e-commerce penetration go from below 1% up into the high teens, even 18% or 19% across non-auto retail verticals. We are incredibly early in that journey in auto down in the 1% to 2% range. And so I think we just think we are as large as we are today, and we're 1 of the 4 fastest companies, along with Meta, Google and Amazon to join the Fortune 500. We just jumped up 60-plus spots in the Fortune 500 this year. So we're at a powerful scale today. But as far as we've come already, we think we're incredibly early in the overall story about e-commerce adoption, awareness and trust of buying a car online. And so we just view that as a long-term tailwind. We want to help aid that tailwind, of course, by providing great customer experiences and by continuing to advertise, share with customers the benefits of our brand, the benefits of our offering and play a part in driving that story. So growth driver #2, which we absolutely think we are benefiting from today, but intend to benefit from even further over time is building awareness, understanding and trust in our offering and in Carvana as a brand. The third driver of growth that I think we're benefiting from, from a degree today, but we also view as a powerful long-term growth driver is benefits of increasing selection and other forms of positive feedback. I think the used vehicle market has this unique feature that unlike some other retail verticals there are a very large number of unique SKUs. There are so many specific cars, if you get down to option and feature, mileage condition, interior color, exterior color and so on and so forth, level. There are a very large number of SKUs. And at any point in time, as big as we are today, the cars that we have available on the site, providing selection for our customers are a very small fraction of the total SKUs available in the market. This creates a lot of white space to be able to expand our selection over time, satisfying more customers, give them a better ability to find a match on our platform with the car that they're looking for. And this also creates forms of positive feedback in the rest of the model. So as we're having a greater selection selling more cars, our advertising becomes more efficient. That's a positive feedback cycle. As we have more selection and add more inventory reconditioning locations, that creates more inventory pools that puts more close -- more cars closer to customers, increasing delivery speeds for those customers and further improving the customer experience. So there are all sorts of positive feedback in the model of which selection is 1 component that we view as a powerful long-term growth driver. And so putting these 3 together, I think, it underpins our next set of goals that we intend to pursue, which is to go into a phase of very meaningful and sustained long-term profitable growth. And so building up to that a couple more points about our progress. So I talked about some of the drivers of growth. We're also generating very strong margins, and that's both adjusted EBITDA margins on a non-GAAP basis, but also very strong GAAP operating margins. We've had 4 consecutive quarters within our long-term financial model range. I'll talk a little bit more about this as I move forward in the presentation. But in 2018, we laid out a long-term financial model that sought adjusted EBITDA margins in the 8% to 13.5% range. And it took us about 5.5 years to get there. We've now been there for 4 consecutive quarters, I think, demonstrating very strong execution by our team in achieving that long-term goal. And then as I alluded to, we also have very high-quality adjusted EBITDA. In Q1, we converted more than 80% of adjusted EBITDA into GAAP operating income which, of course, is a very important long-term profitability metric. And we expect to be able to drive that even higher over time as we scale and lever some of our fixed costs. So I think we've really proven out the profitability of the model. Where does this profitability come from? I've touched on some of the key points. We have a tremendous customer offering, great demand for our product. In addition to that, we have really invested in vertical integration through all parts of the business and that vertical integration has given rise to very powerful unit economics. That have put us in an industry-leading position on these key metrics. Okay. So with that said, I wanted to spend the remainder of the talk, talking about our next objective. So following our Q1 results, we retired our previous management objectives and outlined our next objective, which is to sell 3 million cars per year within 5 to 10 years at adjusted EBITDA margins of 13.5%. And the reason that we laid out this objective is to provide you all as well as other stakeholders, including our employees, partners, et cetera visibility into our medium-term goals and set a key milestone for what we're going to be working toward over the next several years. And I think, this goal, the combined volume and margin and the time line, I think, creates a lot of clarity, we hope, about where we hope to take the business in the coming years. And I think 1 question you might ask is, okay, why now for this goal? And I touched on this concept a little bit. But the primary reason for that is we achieved the previous goal that we had set out. So I talked a little bit about our 2018 Analyst Day, where we set long-term financial targets for 8% to 13.5% EBITDA margin. At the time, we were selling just under 100,000 units per year, just under 25,000 units per quarter. At that time, we had a negative 9% EBITDA margin when we set out this 8% to 13.5% adjusted EBITDA goal. And here we are, about 6.5 years later. We've achieved the margin goal for 4 consecutive quarters and we have improved margin by about 20 points over the last 6.5 years. Having achieved that goal and really done it on a very strong time line with very meaningful unit growth made this feel like the right time to set a new set of goals that we could all concentrate around and really manage the business in order to achieve. And so on that note, putting our next objective in context when we last had our 2018 Analyst Day and set our long term financial targets, at years and goal carries some meaning. And I think the one thing to take away from that is we really believe we could achieve our goal just by continue doing what we're doing and by getting better at it every single day. So a question that people have frequently asked us about the 3-million-unit goal is, well, what do you have to do to achieve that goal? Do you have to go into different vehicle segments, do you have to tackle different customer segments. What else do you have to change about the model? And I think the simple answer to those questions is we believe running our playbook, executing our model, taking it to more and more customers is what we need to do to achieve our 3-million-unit goal. And that really mirrors the way that we felt 6.5 years ago when we set our long-term financial model goals, and we were about 1/6 the size of today. So at least in our minds, when we think about this goal, we think about it as a parallel to what we set out to do in 2018. I've also put up on this slide, the margin goal, we're at 11.5% adjusted EBITDA margin in Q1. The goal in -- the 3-million-unit goal would be 13.5% adjusted EBITDA margins achieved on the 3-million-unit volume within 5 to 10 years. So that's the new goal. Now a natural question you might ask is, okay, well, how do I think about what needs to happen in order to achieve that goal. And a big part of that is execution. So I think 1 of the most important aspects of running our business is being able to operationally execute at greater and greater scales. In order to execute an online used vehicle transaction add strong unit economics with a great customer experience, you need to have a number of things working well together. And in particular, you need to be able to inspect and recondition the car. You need to be able to transport the car from these inspection and reconditioning centers out to the markets where the customers live. You need to be able to effectively deliver the car out to the customer's door, and you need to be able to provide good sales support in centralized operations functions such as a contact center or document processing functions. And so to be able to execute this plan, we need to have well-oiled scalable operations. And we think we're very well positioned on that front for a few reasons. The first reason is compared to previous growth phases, we now have a national footprint. So as many of you know, we acquired the ADESA physical auction network in 2022. That came with 56 geographically distributed locations. That really expanded our nationwide footprint of automotive infrastructure. That positions us very well to have the scaling of our operations be more seamless before. And I would say we're seeing that play out so far this year. So growing retail units sold at 40% plus and doing that at a level of customer experience that is improving with unit economics that are improving with costs that are declining. And I think a big part of the reason we're able to pair all those things together is that we have a lot of infrastructure in place to help us achieve these growth goals and help us do it as efficiently as possible. So this is 1 of the, I think, biggest assets we have is our footprint of automotive infrastructure that we think strongly supports the goal. And so to just build a little bit more on that, I think 1 of the key dimensions on scaling to our 3-million-unit goal will be scaling production capacity. And to provide a little bit more color into how we think about that. The way that we're really thinking about it is how much production capacity can we add each week as a company. But then in addition to that, how much production capacity can we add each week per location per active location. And so we've been adding about 80 units per week of production capacity in total, which across 23 existing locations, at least over -- average over the last 12 months. That's about 4 units produced of incremental production per location per week. And we think that's a very manageable rate that we've obviously demonstrated that we can achieve, but I think our playbook from here will be to continue to add locations. I think the first way that we plan to do that. The primary way that we plan to do that is by integrating more ADESA sites into the Carvana retail reconditioning footprint and then steadily march up production across that set of locations in order to march toward our 3-million-unit goal. So I think this slide has a bit of granular numeric detail. But I think it's a way to illustrate the operating plan that underlies our 3-million-unit goal, where scaling production capacity, scaling the other operational functions that pair with production capacity in order to increase our overall capacity, how we think about that playing out and how we think about our ability to achieve that. So I think that's a bit of the detail behind this new goal that we have. So with that, I'd like to just do a quick summary of where we are today. So I think we find ourselves in a very exciting position. I think we're a leading large-cap growth company. I mentioned 1 of the quickest companies to reach the Fortune 500. We're quickly moving up the Fortune 500 list from a revenue perspective. And our Q1 growth was greater, is faster growth than 98% of companies in the S&P 500. So we're growing very, very quickly. We're doing that relatively comfortably with improving margins and with improving customer experiences. And it's a very powerful combination. We've set this long-term goal to continue to build the business. Our goal is to be the largest and most profitable auto retailer where we've achieved the second dimension of that as measured by adjusted EBITDA or GAAP operating margin. We're getting closer on the first part of that, but we want to really continue to run our playbook and grow to become a very large and profitable company over time. And with that, I'll wrap up. Thank you for your time, and I look forward to answering your questions in the breakout session.