A tech-enabled approach - Transcript

Joe:

Hello and welcome to Innovators and Ideas, an Executive Interview series from RBC Capital Markets, where we share ideas, perspectives and advice from today's industry leaders. I'm your host, Joe Coletti. Today I'm at RBC’s Technology, Internet, Media, and Telecom Conference, also known as TIMT. And I'm joined by Mark Jenkins, Chief Financial Officer at Carvana. Mark, thanks for being here.

Mark:

Hey, thank you very much. It's very nice of you to have me so happy to be here.

Joe:

I'm going to start this off. I think a lot of people know the brand Carvana, have heard a lot about it, particularly in the last 3 to 5 years. But I also know you mentioned you've been through a lot of change. You’ve evolved a lot as a business. Can you give us sort of a snapshot of what you're talking to investors about today? What's going on, the business and kind of where you guys are headed?

Mark:

So just as a little bit of background, Carvana is an online seller of used cars. I think in our first eight years as a company. We were one of the fastest-growing technology companies of all time. One stat on that note is we were one of the four fastest companies to join the Fortune 500 alongside Facebook, Google, and Amazon. And so our product is one that has been really appealing to consumers and the auto industry. We've seen a tremendous amount of growth, particularly for those first eight years. More recently, we've been through a bit of a transition in our business.

When interest rates started to rise, used vehicle prices rose. We really shifted our company's focus toward efficiency and profitability, and that's where we're still focused today. I think that's been very successful. I think we've meaningfully improved the profitability of the business the last two quarters. We've, generate a significant amount of adjusted EBITDA and we're positioning the business for a very successful return to growth when it's time to do so. That's where we are today. I think we're very excited about both the progress we've made, our profitability as well as our future growth prospects.

Joe:

Awesome. Now let's take a little bit of a step back and then we'll come back again to the company itself. When we think about the forces of change cutting across the industry, are there certain trends, certain things you're seeing, whether it's in your space or around your space, that you think investors really need to pay a bit more attention to?

Mark:

I think some of the big broader themes absolutely have an impact on our industry and our business in particular. So I think obviously the e-commerce trend, the trend toward mobile commerce, people more and more frequently buying things on their phone and that can start small. But, now we see many customers buying cars on their phone. All the way from searching, swiping through a selection of cards with their thumb all the way to digitally signing contracts with your fingertips to be able to complete an entire vehicle purchase transaction.

I think that's pretty novel and obviously a bigger trend that we want to be a big part of. I'm sure at this conference there'll be a lot of discussion about the role of AI and its impact on industries and companies. We absolutely think that's a relevant trend for us. You know, whether it's customer communication or, internal or external content creation or expediting software development, we think those are roles that those uses of AI can really play in our business and can also plan our Industry.

Although on that note, one thing I know a lot of people are studying for perhaps yourself or other people at this conference included, is which companies will really benefit from the advancements in AI. And I think, companies that are larger scale and have access to more data to train the models and make them as effectively as possible.  We certainly think is a benefit to companies that are growing faster versus slower companies that are more digital versus more focused on brick and mortar. All these sorts of things we think can help dictate who the biggest winners are from all the advances in AI.

Joe:

That's great. I want to pick up on something. We've talked about e-commerce a little bit and obviously changing habits of people purchasing more and more things online. I want to pivot that to maybe talk about your customers for a little bit. What are you seeing in terms of interest demands that are changing? And how is the company been sort of adapting to how your customers are changing their behaviors?

Mark:

Absolutely. So I Talked a little bit about, you know, trends in mobile commerce over time. That's definitely something we've seen over time, an increasing fraction of our digital sales happening on phones versus, on a desktop. Right now one of the key focus areas for our customers is actually industry-specific, and it just has to do with affordability in our industry, which has been greatly impacted by high-use vehicle prices coming out of COVID.

Also the recent increase in interest rates. Those two things have combined to really raise monthly payments for auto purchasers. And so, with respect to Carvana specifically, that's definitely a key area of focus. We try to address that with technology to a degree by guiding customers toward cars that are more affordable for them, for example, when they're searching through the website and by lowering our cost structure, which allows us to provide better value to customers. But I think that's certainly a key demand element impacting our industry specifically today.

Joe:

I think if you told people, you know, 15 plus years ago, you could potentially buy your car online, they probably think you're a little bit crazy. So I do think it's sort of fascinating how your business model and customers have evolved their behaviors over time.

I want to go back to AI just for a second. Let's see if there's anything more you might want to add to that. When you think about AI as sort of a tailwind for your business, which is kind of what you were talking about before, how are you guys specifically thinking about AI and how it's benefiting or how you might harness it?

Mark:

So if you think about the role AI plays in our financial story and, eventually our growth story, I think there's a few different ways to think about it. One is lowering variable costs. So one of the things that is nice about e-commerce when well-executed is lower variable costs, higher fixed costs, but those lower variable costs allow you to grow quickly and be profitable when you grow.

And so there's lots of examples where that can reduce variable costs, needing fewer people because we have good automated customer communications, training people faster because you have really great tools where AI can answer questions for the people that are working for you.

And so I think lowering variable costs is a key tailwind for AI. On a similar note, the ability of AI to expedite software development, which feeds back then into your ability to drive variable costs lower and lower and have even faster and more profitable growth, I think is a secondary benefit when we think about the potential tailwinds to our overall financial and growth story.

Joe:

So we're going to pivot back to the company again. There are some private companies here and we have our own private company conference in the spring. And so one of the constant questions I think that we receive and really want to ask guys went public about six years ago. Can you talk a little bit about post that experience, how you guys have continued to innovate, how you've had to evolve, what was different about it once you became sort of a public company?

Mark:

Sure. Some of the differences between being a private company and a public company, maybe the number one difference in my experience has been just the amount of time that is necessary to devote to communication. You have a diverse set of widely spread investors who really want to understand the direction that the company is headed, and particularly in a complex industry, a complex story, a very fast-growing company within the context of a complex industry and business, communication is just, you know, obviously incredibly important. So that would be the number one thing that I would point to in terms of operating as a public company relative to a private company.

Joe:

I think it's I think it's a really important point and it's something that we definitely talked to private companies about a lot because it is a massive change. So staying on the company, this wouldn't be a discussion with an investment bank unless we talk about M&A to some extent. So, last year you closed on your acquisition of Odessa. Can you talk us through what that means for the business now? How you may or may not expect Carvana to continue to diversify and what how you might have over the next kind of five years from here.

Mark:

We continue to be as excited as ever about our acquisition of Odessa. There are many reasons for that. I think one, it is becoming increasingly integrated into our operations today. And as a component, there are many components, but a component of our efficiency story over the last year and a half, I think probably even more importantly than that is what we believe Odessa can be in the future.

This is a unique automotive asset with, enormous amounts of potential vehicle inspection and reconditioning capabilities, large amounts of storage capacity, an existing wholesale auction business today. And we think that those assets are really unique and valuable within the context of the industry and when looking at our opportunities for future growth, which we think are significant, just as one data point there. We’re around 1% of the U.S. used vehicle market, we think there's an opportunity to increase that very, very significantly.

Joe:

That’s excellent. Let's pivot a little bit, maybe keep your CFO hat on. The CFO role obviously just in general has changed dramatically, you know, in the last 5 to 10 years. So if you think about yourself, what are kind of the major challenges you think are facing tech software CFOs, when you think about this sector in your space in the next 5 to 10 years?

Mark:

So, the way I think about the biggest challenges is I think managing through the continued ripple effects of COVID. And I just think COVID was such a large shock to economies and industries. And coming out of it, we've seen so many things that we haven't seen in decades or if ever before. You know, in our industry, we talk about its the first time ever we've seen, you know, 40 to 50% increase in vehicle prices in a short period of time.

It's one of the fastest increases in short-term interest rates that we've seen in many decades in 2022. I think COVID was such a shock that the ripple effects are likely not complete and we likely don't understand exactly what all of those will be as they roll through various industries. And I just think being flexible and thoughtful and just making sure your position to manage uncertainty is very, very important in the aftermath of COVID.

Joe:

We always want to end on a personal note. You have a big job, very busy job. How do you relax?

Mark:

I love to hike. I live in Phenix. We’re very fortunate to be based in Phenix, which has incredible weather, especially during the winter and also amazing hiking all over the state. So get out there, you know, in the desert. If you could find cool air, that's great. But that's that's my favorite way to relax.

Joe:

And that's a wrap. Mark, I really want to thank you for joining us today. I really appreciate your time.

Mark:

Thank you. Pleasure.