Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Yesterday afternoon, Vroom, an online car buying service, filed to go public. Based on its SEC filing, Vroom is a highly-successful private company in fundraising terms that has attracted over $700 million during its life as a startup. T. Rowe Price, AutoNation, Durable Capital Partners, General Catalyst and other investors fueled the firm during its youth according to Crunchbase data.
Vroom most recently raised $254 million in December 2019, a Series H round that valued the company at around $1.5 billion. From its mid-2013 Series A to today, Vroom has tried to accelerate from the startup world to the grown-up domain of the public markets. How did it do?
Finding out is our goal this morning. We’re also curious why the firm would pursue an IPO today; public offerings tend to shun volatile, uncertain periods. So let’s dig into the numbers and do a bit of a unicorn check-up.
What does a private, car-focused e-commerce company worth $1.5 billion look like under the hood?
Un-profits
TechCrunch dug into Vroom’s market last year, writing that the company “looks a lot like Carvana and Shift,” and noting that in 2018 the company had “laid off 25-50% of its staff as it exited several markets.” Vroom was therefore a bit early to the waves of unicorn layoffs that we’ve seen in 2020.
I raise the layoffs as they imply that the company might be in reasonable financial shape; what did the cuts buy the company in terms of profitability?
Turning to the S-1 filings, it’s hard to say. In 2018, Vroom turned revenues of $855.4 million into just $60.8 million in gross profit (the money left over after costs of revenue are deducted from top line), and an $85.2 million net loss. In 2019, the company turned $1.19 billion in revenue into even less gross profit ($57.9 million) and a larger $143.0 million net loss.
Vroom grew revenue 39.3% in 2019 compared to 2018. Over the same period, its gross margin fell from about 7.1% to 4.9%. And its net losses as a percent of revenue rose from 10% in 2018 to 12% in 2019. (We’re not counting costs relating to “accretion of redeemable convertible preferred stock” in our net loss notes. If you’d like to count the non-cash cost, you can add $13 million to Vroom’s 2018 net loss and $132.8 million to its 2019 figure.)
Vroom cut staff back in 2018, but those reductions do not appear to have put the firm on a more profitable course. Indeed, the trends that we’ve noted continue in the most recent period — Q1 2020 — when compared to the year-ago quarter.
In the first three months of 2020, Vroom generated revenue of $375.8 million, leading to gross profit of $18.4 million, or about 4.9% of revenue. The company’s net loss of $41.1 million in the three-month window puts it on a run-rate to lose even more money in 2020 than it did in 2019.
In Q1 2019, the year-ago quarter, Vroom’s revenue was smaller — just $235.1 million — but that top line had a higher gross margin (5.1%) and Vroom’s net loss was a slimmer $27.1 million.
If you aren’t feeling super-hyped about this IPO, observing the company’s low margins, modest growth (for a venture-backed unicorn), history of rising unprofitability and the like, I hear you. A good question for us to answer then is, why would this company go public now?
Does it need cash?
The first thought you should have whenever an obviously financially immature company tries to go public is, does it need cash? Sometimes private investors tire of tipping lorries of cash into burning bins and decide, instead, to ask public investors to start footing the bill for their portfolio company’s losses.
Vroom wrapped Q1 2020 with $169.8 million in cash, which make sense as the unicorn raised more than a quarter billion dollars in Q4 2019.
That figure is a little out of date. Given the recent changes to the domestic economy, the company provided some even more recent numbers: Vroom wrote that as of “April 30, 2020, we had $156.4 million in cash and cash equivalents and $280.8 million was available under our 2020 Vehicle Floorplan Facility.” So, the company’s cash balance dropped over $13 million in April 2020.
What’s that $280.8 million? The “2020 Vehicle Floorplan Facility” is a credit line Vroom uses to finance cars, with the company noting in its S-1 that it has “historically funded vehicle inventory purchases primarily through our Vehicle Floorplan Facility.”
Vroom can continue to finance cars and has a good amount of operating cash on hand. And optimistically, perhaps the one area where Vroom has made progress in its historical financial results is a reduction in operating cash burn. In Q1 2020, Vroom’s operations consumed $25.1 million in cash; in the same quarter of 2019 that figure was $37.9 million.
But as the firm’s April cash burn appears larger than what the firm recorded in Q1 2020 on a per-month basis, its cash needs could be accelerating. Why? Well, what happened in the United States toward the back half of March? COVID-19–related shutdowns and economic disruptions.
We’re getting closer to understanding our question. Read the following text from its S-1 and then think about what it might mean for Vroom’s IPO timing. From its S-1:
The COVID-19 pandemic began to have an impact on our e-commerce operations during the last three weeks of our fiscal quarter ended March 31, 2020. Between March 11, 2020 and March 31, 2020, we experienced an approximate 15% decrease in total e-commerce revenue due to a decrease in consumer demand as compared to the 20 days prior to March 11, 2020.
So, the company’s revenue was decelerating into Q2. Here’s some more:
Due to the inventory price reductions that began in late March, our demand returned to pre-COVID-19 levels, and we experienced robust e-commerce vehicle sales; however, those sales were at a greatly reduced gross profit per unit. During April 2020, we sold 2,880 e-commerce units and gross profit per unit was approximately $1,236, as compared to the 2,771 units we sold at $1,769 gross profit per unit in March 2020. Due to the significant reduction in our inventory through April 30, 2020, we expect material decreases in future unit sales, revenue and gross profit until we are able to return inventory levels to pre-COVID-19 levels.
Ah. It appears that the company’s Q2 is going to be a mound of yuck.
I don’t mean to pile on, as the firm was already an interesting financial experiment, but this is rough. The company’s April 2019 gross profit was around $4.9 million. Its April 2020 gross profit looks like $3.6 million.
Vroom goes on to note that, in response to COVID-19 and its economic disruptions it is tinkering with inventory, pricing, and that management has “taken measures to reduce operating expenses by negotiating reductions and deferrals in payments to landlords, vehicle listing sites, service providers and commercial vendors, as well as significantly reducing planned marketing expenditures by approximately $3.5 million through the end of May.”
We now have a clearer picture of what’s up.
Given the amount of money that Vroom needs to operate in general, the possible acceleration of those cash needs in the COVID-19 era and the possibility of lackluster growth in the quarters ahead, this unicorn wants to go public now. When the public markets are hot (again), investors are valuing growth (again), and it might be able to raise enough cash at an attractive valuation to stay afloat into the future when it can get back to more normal business.
Vroom doesn’t need cash this minute — or even this quarter — but if it waits to go public, its COVID-19 era results could handicap the growth story it wants to tell investors. So, now is probably better than later.
The next question is whether public investors will weigh its Q1 2020 growth over its March and April, 2020 problems.
More when it prices.
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