Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our Class A common stock . For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.” Unless otherwise stated, this prospectus assumes no exercise of the underwriters’ option to purchase additional shares.Our Company
Carvana is a leading eCommerce platform for buying used cars. We are transforming the used car buying experience by giving consumers what they want – a wide selection, great value and quality, transparent pricing and a simple, no pressure transaction. Each element of our business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.
We provide a refreshingly different and convenient car buying experience that can save buyers time and money. On our platform, consumers can research and identify a vehicle, inspect it using our proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle and schedule delivery or pick-up, all from their desktop or mobile devices. Our transaction technologies and online platform transform a traditionally time consuming process by allowing customers to secure financing, complete a purchase and schedule delivery online in as little as 10 minutes.
Our technology and infrastructure allow us to seamlessly and cost efficiently deliver this car buying experience to our customers. We use proprietary algorithms to optimize our nationally pooled inventory of over 9,500 vehicles as of December 31, 2017, inspect and recondition our vehicles based on our “Carvana Certified” 150-point inspection process and operate our own logistics network to deliver cars directly to customers as soon as the next day. Customers in certain markets also have the option to pick up their vehicle at one of our proprietary vending machines, which provides an exciting pick-up experience for the customer while decreasing our variable costs, increasing scalability and building brand awareness.
From the launch of our first market in January 2013 through December 31, 2017, we purchased, reconditioned, sold and delivered approximately 71,900 vehicles to customers through our website, generating $1.4 billion in revenue. Our sales have grown as we have added new markets and increased our market penetration in our current markets. As of December 31, 2017, our in-house distribution network services 44 metropolitan markets, and we plan to continue to expand our network into additional markets. Since we launched our first market in 2013, we have grown organically across the United States, adding two markets in 2014, six in 2015, 12 in 2016 and 23 in 2017.
Our revenues have grown from $130.4 million in 2015 to $365.1 million in 2016 and $858.9 million in 2017, representing a 135.2% increase over the $365.1 million in revenue that we generated for the year ended December 31, 2016. We continue to invest heavily in growth and generated a net loss of $164.3 million for the year ended December 31, 2017, compared to a net loss of $93.1 million for the year ended December 31, 2016.
Industry Background & Market Opportunity
The U.S. automotive industry generated approximately $1.2 trillion in sales in 2017, which comprised roughly 21% of the U.S. retail economy and made it the largest consumer retail market in the United States according to the U.S. Census Bureau. Edmunds.com estimates the U.S. used vehicle sales market at over $739 billion in 2016, representing approximately 38.5 million used vehicle transactions at an average sales price of $19,189.
The used car retail industry is highly fragmented. There are approximately 43,000 used car dealerships in the U.S. according to Borrell Associates’ 2017 Outlook. The largest dealer brand commands approximately 1.7% of the U.S. market and the top 100 used car retailers collectively hold approximately 7.0% market share, according to Edmunds.com, publicly-listed dealership filings and Automotive News.
Consumers in this large and fragmented market have a distinct set of expectations that are challenging for traditional used car retailers to address.
Historically, consumers have discovered vehicles for sale through local print and broadcast media as well as word of mouth, and would go to dealerships to educate themselves on potential purchases. However, 97% of customer vehicle purchases involve online research, according to the Cars Online 2014 report from Capgemini, and the typical used car buyer spends approximately nine hours researching a prospective car purchase online, according to the 2016 Car Buyer Journey report from Autotrader.
As eCommerce has become more established, reaching 10.5% of total retail sales in the U.S. in the fourth quarter of 2017 according to the U.S. Census Bureau, consumers have become more comfortable buying taste-driven, higher-priced products such as consumer electronics and home furnishings online. Similarly, auto consumers are interested in eCommerce solutions for their car purchasing needs — 80% of U.S. car buyers would consider completing their entire car purchase online if given the opportunity, according to Capgemini’s 2017 Cars Online Trend Study.
Carvana’s Solution
In response to these evolving consumer needs, we built Carvana to provide a no pressure, no haggle experience with flexible and fast transactions. We aim to deliver the best selection, best value and best experience for used car buyers.
optimize a local inventory of a few hundred vehicles at each dealership location, even if they own thousands of vehicles across multiple distributed locations.
We believe that our customers value the ease of use and transparency of our platform. They have responded favorably to our solution, as illustrated by the ratings we receive. Our customers rated us an average of 4.7 out of 5.0 as of December 31, 2017, and 95% of them said they would recommend us to a friend when responding to over 13,000 satisfaction surveys we solicited from our inception through December 31, 2017. These positive reactions create opportunities for repeat customers and a strong referral network.
Strengths & Competitive Advantages
Our business model is disrupting the traditional used vehicle sales model. Our primary goal is to rapidly scale vehicle unit sales by focusing on delivering an unparalleled customer experience. Since our inception in 2012, we have been developing and leveraging the following key strengths of our robust platform, which we believe provide significant competitive advantages.
Our Growth Strategies
The foundation of our business is retail vehicle unit sales. This drives the majority of our revenue and allows us to capture additional revenue streams associated with financing, VSCs and GAP waiver coverage, as well as trade-in vehicles. As we mature, we believe we will continue to improve conversion on these revenues and expand our offering of complementary products. However, all of these additional revenue opportunities are derived from retail vehicle unit sales and as a result, our growth strategies are primarily focused on this metric.
Our ability to generate vehicle sales is a function of the number of markets we operate in, our penetration in those markets and our ability to build and maintain our brand by offering great value, transparency and outstanding customer service. We plan to continue growing our vehicle unit sales, number of markets, market penetration and complementary product revenues while enhancing competitive positioning by executing the following key elements of our growth strategy:
Risks Associated with Our Business
There are a number of risks related to our business, this offering and our Class A common stock that you should consider before you decide to participate in this offering. You should carefully consider all the information presented in the section entitled “Risk Factors” in this prospectus. Some of the principal risks related to our business include the following:
These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, you could lose all or part of your investment in our Class A common stock.
Recent Unaudited Operating Results
Set forth below are certain preliminary estimates of our operating results for the three months ended March 31, 2018 compared to our actual operating results for the three months ended March 31, 2017. We have not yet finalized our operating results for the three months ended March 31, 2018, and our consolidated statements of operations and related notes as of and for the three months ended March 31, 2018 are not expected to be available until after this offering is completed. Consequently, our final operating results for the three months ended March 31, 2018 will not be available to you prior to your investing in this offering. We may identify items that would require us to make adjustments to our preliminary estimates of our operating results set forth below during our financial statement preparation process. See “Forward-Looking Statements.”
The preliminary financial data included below has been prepared by, and is the responsibility of, our management. Our independent auditors have not audited, reviewed, compiled or performed any procedures with respect to such preliminary financial data. Accordingly, our independent auditors express no opinion or any other form of assurance with respect thereto. These preliminary operating results are not a comprehensive statement of our financial results as of and for the three months ended March 31, 2018, and should not be viewed as a substitute for full consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
We are providing the following preliminary estimates of our operating results for the three months ended March 31, 2018:
A reconciliation of EBITDA to net loss, the most directly comparable GAAP measure, and the calculation of EBITDA margin are as follows:
For more information about our non-GAAP supplemental measures of operating performance see “Summary Historical Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”
Recent Acquisition
On April 12, 2018, Carvana Group acquired Car360, Inc., a provider of app-based photo capture technology (the “Acquisition”). Carvana Group paid approximately $6.7 million in cash, subject to certain post-closing adjustments based on expenses and working capital, and issued 930,047 new Class A Units to the former stockholders of Car360 (which are exchangeable for 744,037 shares of Class A common stock).
General Corporate Information
Carvana Co. was incorporated as a Delaware corporation on November 29, 2016 in anticipation of our IPO. Our corporate headquarters are located at 1930 W. Rio Salado Pkwy, Tempe, AZ 85281. Our telephone number is (602) 852-6604. Our website address is www.carvana.com. The information on, or accessible through, our website is not deemed to be part of this prospectus.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of December 31, 2022, the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, the date on which we are deemed to be a large accelerated filer (this means the market value of our ordinary shares that are held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year), or the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:
We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation in this prospectus and expect to elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We chose to “opt out” of this provision at the time of our IPO and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.
Ownership and Organizational Structure
We are a holding company and our sole asset is the capital stock of a wholly owned subsidiary, Carvana Sub, whose only assets are its equity interests in Carvana Group and Carvana, LLC. We operate and control all of the business and affairs and consolidate the financial results of Carvana Group. See “Organizational Structure” for a complete description of the Organizational Transactions.
In connection with the Organizational Transactions:
The net proceeds to us from the sale of our Class A common stock in this offering, after deducting underwriting discounts and commissions but before deducting estimated expenses payable by us, will be approximately $168.3 million, based on an assumed public offering price of $29.37 per share (the last reported sale price of our Class A common stock on the NYSE on April 20, 2018). We will contribute such net proceeds to our wholly owned subsidiary, Carvana Sub, that will in turn use such net proceeds to pay $168.3 million to acquire newly-issued Class A Units in Carvana Group at a purchase price per Class A Unit based on the public offering price (7,500,000 Class A Units based on an assumed public offering price of $29.37 per share, the last reported sale price of our Class A common stock on the NYSE on April 20, 2018) less underwriting discounts and commissions. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders in this offering.
In turn, Carvana Group intends to use the remaining proceeds for general corporate purposes. See “Use of Proceeds.”
The following diagram depicts our structure upon the completion of this offering and the use of proceeds therefrom. This diagram is provided for illustrative purposes only and does not purport to represent all legal entities owned or controlled by us, or owning a beneficial interest in us.
Our corporate structure is commonly referred to as an “Up-C” structure, which is commonly used by entities treated as partnerships for U.S. federal income tax purposes when they undertake an initial public offering of their business. Our Up-C structure allows the pre-IPO owners of Carvana Group to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “passthrough” entity, for income tax purposes following the IPO. One of these benefits is that future taxable income of Carvana Group that is allocated to such owners will generally be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the LLC Units that the pre-IPO owners will continue to hold are exchangeable for shares of our Class A common stock or, at our option, for cash, the Up-C structure also provides the pre-IPO owners of Carvana Group potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. See “Organizational Structure” and “Description of Capital Stock.”
Each of the pre-IPO owners of Carvana Group Class A Units holds a number of shares of our Class B common stock equal to 0.8 times the number of Class A Units they own. Our Class A common stock and Class B common stock have what is commonly referred to as a “high/low vote structure,” which means that certain shares of our Class B common stock have ten votes per share, while other shares of Class B common stock and all shares of Class A common stock only have one vote per share. Each share of our Class B common stock held by the Garcia Parties, which includes Ernie Garcia, III, our Chief Executive Officer, as well as his father (who is also our controlling shareholder) entitles its holder to ten votes per share for so long as the Garcia Parties maintain direct or indirect beneficial ownership of at least 25% of our total outstanding shares of common stock. All other shares of our Class B common stock have one vote per share, which is on par with the voting rights of our Class A common stock. This high/low vote structure enables the Garcia Parties to control the outcome of matters submitted to our stockholders for approval, including the election of our directors, as well as the overall management and direction of our company. Furthermore, the Garcia Parties will continue to exert a significant degree of influence, or actual control, over matters requiring shareholder approval until they own as little as approximately 25% of our outstanding common stock. We believe that maintaining this control by the Garcia Parties will be important for enabling them to successfully guide the implementation of our company’s growth strategies and strategic vision. Meanwhile, holders of our Class A common stock have economic and voting rights similar to those of holders of common stock of non-Up-C structured public companies that have a high/low vote structure.
Carvana Co. holds Class A Units indirectly through its wholly owned subsidiary, Carvana Sub, and therefore receives the same benefits as our pre-IPO owners on account of its ownership in an entity treated as a partnership, or “passthrough” entity, for income tax purposes. As Carvana Sub purchases LLC Units from the pre-IPO owners under the mechanism described above, Carvana Co. will obtain a step-up in its share of Carvana Group’s (or, as applicable, Carvana Group’s subsidiaries’) tax basis in assets. This step-up in tax basis will provide Carvana Co. with certain tax benefits, such as future depreciation and amortization deductions that can reduce Carvana Co.’s taxable income. Carvana Co. entered into the Tax Receivable Agreement under which it agreed to pay the pre-IPO owners of Carvana Group 85% of the value of these tax benefits; however, the remaining 15% of the value of such benefits will be available to Carvana Co.
Generally, Carvana Co. (through its wholly owned subsidiary, Carvana Sub) will receive a pro rata share of any distributions made by Carvana Group to its members. Additionally, pursuant to the LLC Operating Agreement, tax distributions will be made quarterly by Carvana Group to the holders of convertible preferred units and Class A Units (including Carvana Sub) in each case on a pro rata basis based on Carvana Group’s net taxable income allocable to the holders of such units and to the holders of Class B Units based on such holder’s allocable share of Carvana Group’s net taxable income (rather than on a pro rata basis). Tax distributions made in respect of the convertible preferred units will be calculated at the assumed tax rate that is determined to be sufficient for Carvana Sub to pay its actual, current income tax obligations with respect to the net taxable income allocated by Carvana Group to Carvana Sub in respect of such convertible preferred units, and thus are expected to be calculated at a lower effective tax rate than tax distributions made in respect of the Class A Units and Class B Units. Tax distributions made in respect of the Class A Units and Class B Units will be calculated based upon an assumed tax rate, which, under certain circumstances, may cause Carvana Group to make tax distributions that, in the aggregate, exceed the amount of taxes that Carvana Group would have paid if it were a similarly situated corporate taxpayer. Funds used by Carvana Group to satisfy its tax distribution obligations will not be available for reinvestment in our business. See “Risk Factors — Risks Related to Our Organizational Structure.”