2019 ANNUAL REPORT - Investor Relations | Carvana

2019 ANNUAL REPORT

OUR MISSION IS TO CHANGE THE WAY PEOPLE BUY CARS.

LETTER TO OUR VALUED SHAREHOLDERS

Dear Shareholders,

2019 was another incredible year for us. We completed our sixth straight year of triple digit revenue growth. We had the biggest organic growth year that any US automotive retailer has ever had (+83k retail units). We had our sixth straight year of $400+ of progress in Gross Profit per Unit and our sixth straight year of EBITDA leverage.* In addition, we more than tripled the number of cars we bought from customers, a fundamentally important step in deepening our offering. But those aren't the most important things we did this year. The most important thing was staying on the path. We continued our progress toward achieving our mission of changing the way people buy cars. It's easy to read over that, but it's a big mission and it's worth a pause. We want car buying, something done by over 40 million people a year in the US, to mean something different in the future than it has meant in the past.

We have imagined and built the business to do it. Our customer response is a testament to that. We have the people and the culture to do it. A quick walk through of our locations makes that clear. And we have executed. The gaudy milestones above make the case there. So what will it take to remain on the path for years to come?

We are just a seven year old company. We still have more questions than answers and we hope that we always will. But we do have some unwavering convictions that have served us pretty well thus far.

So here is what keeps us on that path:

1. A GREAT BUSINESS IS TRULY BETTER FOR ITS CUSTOMERS AND IS KNOWN FOR IT. We like to think of businesses as having two layers. First is the layer of business truth. What would a perfectly rational customer with a perfect understanding of your entire industry do? You want to build a business where that person would transact with you. Second is the communication layer. How do you get your message across to all the real people in the world who don't have the time or the desire to expend the effort necessary to know everything about your industry?

A consumer facing business with the first layer and without the second layer will fail fast. A business with the second layer and without the first can succeed, maybe even significantly. For a while. A great business requires both.

We think we fare pretty well when evaluated against this first point. We have built transaction technology that enables a customer to buy a car without being physically adjacent to it. That innovation unlocks a completely different kind of supply chain, which we have also built. When combined they deliver broader selection, a lower price, and a better, simpler experience.

We are also making quick and steady progress in the communication layer. All new businesses need to build awareness. To build something fundamentally better, you often need to ask customers to change their behaviors somewhat, introducing two additional hurdles: understanding and trust. We're seven years in and so far have less than 10% unaided awareness nationally. Understanding and trust are harder to measure, but our best efforts to measure these suggest we still have significant opportunity there as well. We view this as great news. We have lots of upside. We have a great truth to tell. And we have a great team working hard to tell it.

2. A GREAT BUSINESS IS CUSTOMER CENTRIC AND HAS A LONG TERM PERSPECTIVE. Point 1 above is a prerequisite to this. Without a fundamentally better business, the lack of real differentiation and the pressure of a competitive market make it nearly impossible to truly be customer centric. If your customers aren't actually better off transacting with you, it is hard to attract the people or build the culture that you need to continually deliver great customer experiences.

*All references in this letter to EBITDA margin refer to EBITDA margin ex-Gift. A reconciliation of EBITDA margin ex-Gift, a non-GAAP measure, to the nearest comparable GAAP measure can be found in Carvana Co's annual report for 2019 on Form 10-K attached hereto. Unless otherwise noted, all comparisons are on a year-over-year basis. In 2019, Carvana Co. had the fastest organic growth year of any automotive retailer in U.S. history as measured by incremental retail units sold.

CARVANA 2019 ANNUAL REPORT

And now to touch on "long term" for a moment. This is a hard one to write about. I am not sure that phrase is particularly well defined and I am pretty sure it is overused. In an effort to use the term as cleanly as we can, let's first try to define what it means to us. Any business has the constituencies of shareholders, customers, and the team of people that make up the business. The choices of a business are often thought of as balancing the interests of these groups and sometimes the conversation can be over-reduced to a simple prioritization of these constituencies.

In our opinion, unless you have invested in a fundamentally better business for your customers, you haven't really given yourself choices. Eventually, you will be forced to put your short term shareholders first and the other stakeholders will slowly drift away from you. That is the beginning of the end.

A fundamentally better business model is the key to solving this problem. Warren Buffet said "you get the shareholders you deserve" and like most things he says, he was probably right. We think what "long term" actually means is that you have earned shareholders, through all the prerequisite steps, that will support you focusing on your other constituencies because they believe that focus will work out for them in the end.

Over the last three years (since going public), we have been lucky enough to accumulate some pretty great shareholders. And you are playing an important role in all of this. That isn't something we are just saying. It is something we believe. Thank you for the belief you have put in us. There are few things that motivate people more than being believed in. It makes a difference. And it makes us better.

3. A GREAT BUSINESS GETS A LOT DONE, FAST.

A luxury of a mature business is that the default works. If you don't change anything, the machine keeps spinning. You can afford to work on one thing at a time. When you're building something new, everything has to get better. All the time. It's a tall order.

A word we have gained more respect for over the last seven years is "Organization." Productivity is driven by three things: the people in a company, organizational structure, and culture. These three things are really important and they all feed back on one another.

When you're small, organizational structure doesn't matter that much. If you have great people that care, culture and people will just feed back on one another positively. As you grow, you have to figure out the "Organization" part. You have to focus on the right things. You have to prioritize them properly. You have to give people the autonomy they need to make fast progress and feel connected to outcomes every day, but you also have to make sure that all these people's actions are strategically cohesive. In the end, this may be the hurdle that separates the good from the great.

A central driver here is having values and principles that are more than just writing on a wall. They have to mean something real to everyone at the company. They have to change what people do. Values and principles provide the level of guidance that enables scalability with strategic cohesion. In that way, they are the key to effective scale.

These have each been areas of focus for Carvana since the beginning. And they will remain so. We haven't solved these problems. They are all problems that are hard enough that they are never solved. You are either walking toward the answers or you are walking away from them. We are walking toward them. We are marching down the path.

We believe we are standing today at the foot of the same curve we stood in front of seven years ago. We are still so small compared to what we can be that our progress to this point barely registers against the scale of the opportunity in front of us. As we have for the last seven years, we will keep working hard, learning quickly, and having fun. And we will keep you informed along the way.

Thanks for believing in us,

ERNIE C. GARCIA III Chairman and Chief Executive Officer

CARVANA 2019 ANNUAL REPORT

CUSTOMER RESPONSE

OVER CARVANA'S LIFETIME

46'910 CUSTOMER REVIEWS ON

4.7

AVERAGE STAR RATING

82

NET PROMOTER SCORE

2019

RESULTS

For a reconciliation of EBITDA margin and Gross Profit per Unit Ex-Gift to the nearest GAAP measures, see Item 7. "Management's Discussion

and Analysis of Financial Condition and Results of Operations--Non-GAAP Financial Measures" of our Annual Report on Form 10-K following

this letter.

CARVANA 2019 ANNUAL REPORT

CUSTOMER ACQUISITION COST BY COHORT*

*For additional information on methodology related to this chart, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Market Cohorts" of our Annual Report on Form 10-K following this letter. CARVANA 2019 ANNUAL REPORT

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download