Vroom, Inc. Q1 FY2022 earnings call

• Executive leader changes: Tom Shortt promoted to CEO, Bob Mylod now independent executive chair to counsel Tom. - Operational challenges: Issues with titling and registration of cars leading to customer experience problems, impacting financial performance. - Acquisition of UACC: Completed in Q1, UACC generated a $30 million gain from first securitization in the quarter, expected to generate $65 million to $75 million in securitization gains in fiscal year 2022, and is originating loans for Vroom customers. - Realignment plan: Prioritize unit economics over growth, reduce operating costs, maximize liquidity. Focus on four initiatives: build a well-oiled titling and registration machine, build a well-oiled metal machine, build a regional operating model, build a captive finance offering with UACC.

In the first quarter, total revenue was $924 million, which was 6% ahead of guidance. Ecommerce units increased 26% year-over-year to 19,473, which was ahead of the high end of guidance. Ecommerce revenue was $675 million, driven by a 26% growth in units and a 27% increase in ecommerce average selling prices. Ecommerce vehicle GPPU was $595, which declined year-over-year but improved 26% sequentially from the fourth quarter. Ecommerce product GPPU was $1,168, which increased year-over-year and sequentially. A new Retail Financing segment was added with revenue including gains and servicing income related to securitization of UACC originations and interest income for acquired loans, contributing to the overall financials.

• 2022 full-year expectation: Approximately 45,000 to 55,000 ecommerce units, adjusted EBITDA loss of approximately $375 million to $325 million, year-end liquidity of $450 million to $565 million. - Expect to further improve ecommerce GPPU for the full year versus the first quarter, lighter quarterly SG&A spend from Q2 through Q4, and significant cost savings and operating improvements from the realignment plan.

• Operational issues with titling and registration causing customer experience problems, impacting inventory turns, increasing likelihood of markdowns, customer returns or make good payments harming gross margins, and increasing operating expenses. - Strained relationships with state DMVs. - Macro market forces affecting valuation, with market demanding near-term visibility to profitability.

Q: Just a question on your first one on unit economics. In 1Q excluding UACC, the EBITDA per car was a loss of roughly $6,500. The full year guidance implies 2Q to 4Q EBITDA loss of roughly $280 million or roughly $260 million excluding the non-recurring costs on maybe like 35,000 units or so for the remainder of the year. That's a loss of roughly $7,000 to $7,500 a car. Even as you assume a rate of roughly $7,000 after cost savings layering probably $1,000 from the captive finance integration, we still get to something like $6,000 of EBITDA loss per car which would imply a significant degree of cash burn next year as well roughly $400 million as per my calcs after accounting for UACC and CapEx on maybe 65,000 to 70,000 units next year. The fixed cost reduction in the realignment plan also seems to be just 14% workforce, but with units down roughly 50% in the near-term. So the question here is -- sorry for the long question, but you're trying to get comfortable with the new economics progression to a profitable level. And what level of volume will that take? And how do you expect to fund the business in the interim?

A: Hi, Rajat. This is Tom. Thank you for the question. Before I answer your question I just want to clarify something I said on slide 5. I believe I said we expect to have liquidity at the end of the quarter of $0.5 billion I meant to say at the end of the year. Yes. So I appreciate your question Rajat. Here's how we think about it. This year as you can tell from our initiatives it's really about building the core processes systems and infrastructure we need to create a profitable business model. So within that we are very focused -- so the actions we've taken are intended to significantly improve variable contribution margin, which we're defining as GPPU less variable operating costs like marketing, customer experience and logistics. We expect our fixed cost to be reduced in absolute dollars. However, as you point out our fixed cost per unit will increase in the short-term. And we're maintaining our fixed costs because we have strategic assets in those fixed costs that we'll need as we accelerate growth.

Q: So are you anticipating -- any color on when you what level of volume do you anticipate to be profitable with this new realignment plan, or is that something we will probably look to get at the Investor Day?

A: Yes. On the Investor Day we plan to share our long-term economic model. And we believe that the four initiatives that we've laid out today make significant progress not only in 2022, but in the years ahead and really lay the foundation for that continued improvement. So when you think about building a well-oiled title and registration machine, well-oiled metal machine and the regional operating model those things don't happen overnight. And as you implement those strategies, we'll expect continued positive unit economic momentum beyond 2022.

Q: Just a question on your first quarter. Is there a way to quantify the pressure of operational issues or Omicron or price mix in the first quarter on the e-commerce vehicle in GPPU? Just asking in order to get a sense of comfort around expectations of higher GPPU exiting the year in the used-car pricing environment that might moderate at some point? So just curious how do you manage that transition?

A: So Rajat I've mentioned a couple of things. So we talked about the nonrecurring -- we've nonrecurring costs that we're going to incur the $17 million to $27 million in nonrecurring costs that we're going to be incurring this year. So that had an impact for us in the first quarter. With respect to Omicron and the reconditioning facilities, which has been an issue for us in prior quarters it was -- in January we had some disruptions and some issues in recon as a result of Omicron but really February-March for us has been -- has not -- we haven't had any issues as a result of the virus at all. Tom I, don't know if there's anything you want to add to that?

Q: Maybe touch upon your unit guidance a little bit. I know you already talked about this in detail, but your guidance implies that you're stepping down units from 20,000 this quarter to roughly 10,000 on a run rate going forward. Can you talk about why you think this is the right level to balance growth and profitability? What drove that number specifically? And how long do you think we'll need to stay at this run rate before you can once again pivot back to growing units aggressively?

A: Yeah. Hi, Sam it's Tom. Thank you for the question. When we -- during the quarter as we implemented new metrics and data structures around titling and registration to really get a better handle on the challenges that we had, we started realizing where we're at and what we needed to do to get caught up. And so as we begin to decide how long it would take us to really improve the customer experience, we didn't want to continue to sell at a high rate when we know that we had those issues. So that was one factor. The second factor was we made dramatic changes in the way we price the cars we buy and the price that we sell cars at. And those two things combined led us to believe that this is the right level of units for the balance of the year to enable us to improve our structure around all four of the initiatives and at the same time improve our unit economics.

Q: Firstly, on the titling and registration issues. Can you give us some perspective on the time line for normalization on those issues please?

A: What I can share with you is that, we began making significant progress in Q1 towards improving our processes. We've already implemented a couple of systems that are dramatically improving our process. And I'll tell you there is a daily call every day we are making progress on improving the process. Right now, we're focused on ensuring that all our customers have vehicles that they can drive where we failed them. And we are building and having a strategy in place that we're working on that we think, as Bob mentioned in his remarks, could ultimately be a long-term competitive advantage for us. So we're not prepared to share an exact timing other than to tell you it is truly our number one priority. So there is a tremendous amount of focus on it.

Q: You don't think that there are any long-lasting impact to your brand or relationships with DMVs from the issues you've experienced?

A: We certainly believe that we have some repairs to do there and we're actively working on that. But our first step is to ensure we take care of all our existing customers and ensure that all customers and purchases that are happening now, we deliver titles and registrations in that.

Q: On pricing inventory management. You are changing some of your pricing tools and it also seems like you're shifting your inventory a little bit based on the market environment. But are you first thinking about focusing on certain areas of the market from a consumer income standpoint moving up or downstream? And then, secondly, from a pricing standpoint what's your goal in terms of pricing relative to the market?

A: Yes. We definitely -- our goal holistically on pricing is to be competitive in the market and those are analytics that we're looking more and more at, especially, over the last couple of months. We have begun tapering the number of units that we purchase to begin to right-size our inventory. And it really takes two things. It takes the metal supply chain and the title and registration supply chain to work, because for our cars to be listed for sale, we need to get the title. So we have initiatives in place to speed up the entire process. So if you think about how it works, we want to speed up how fast we pick up the car, because then we can put in inventory faster. So we have to pick it up faster. We have to pay off the loan faster. We have to get the title faster. And then we can make it available for sale faster. And the same thing with just traditional supply chain elements that you would do to improve inventory turns. So we have initiatives that we're focused on in both of those process -- processes to improve inventories over time.

Q: Thanks for taking my questions. I wanted to start with the cost savings program. Given your business relies on third parties for reconditioning customer service and a fair amount of delivery, along with the fact that you said, you need to improve the user experience which presumably requires some investments in technology, I was curious if you could walk through kind of the key cost buckets or buckets of cost savings opportunities. And also maybe help give us a sense for how much of the realignment of our cost savings are coming from improved GPU or unit economics versus pure cost reductions?

A: Yeah, sure. Thanks for that question. John, this is Tom. The way we think about it is really driving productivity on all levers of the P&L. So we think we have opportunities across our costs really across the board. And the -- what you're seeing in the realignment plan is largely driven by contribution margin improvements, by improving our gross profit per unit as well as improving for example our marketing efficiency. We're very focused on and have already made several changes to only spend marketing on our highest ROI channels. And so we believe that we're just at the beginning of making those and we'll share with you in our Investor Day later in the month, how we think those levers will change in the long-term to build a profitable business.

Q: Okay. A couple of questions. So, on this sort of year-end cash position, I'm curious what are you thinking in terms of the exit cash burn rate versus where we are right? So, we're going to implement these strategies as we progress throughout the year and wondering how we end the year? And also in terms of the sort of the unit guide for the full year, should we think about the -- how should we think about the curve? Should we expect to kind of see a trough somewhere in the middle and then coming back up at the other end or should we model it kind of more evenly? And maybe just on the GPPU sort of dynamics from here on, the pricing environment continues to be pretty volatile, so just wondering what gives you the confidence in sort of the bridge you laid out for in your cash position and EBITDA?

A: Yes. Thank you for the question. I'll take the last two and then turn it over to Bob for the first one. We expect the units be relatively consistent over the next three quarters with possibly some seasonality downward pressure in Q4. And that -- and back to the GPPU, as I mentioned earlier, we implemented several changes already that we are seeing positive GPPU momentum from Q1 rates. And we believe that from the items that we've implemented already and the trajectory that we're seeing in units, that those two will look better than Q1 -- or the GPPU will look better in Q1 than rest of the year. And really the way I think about that is there's just -- the significant shift we made in the entire business driven towards triple-digit unit growth to more focus on profitability, we had some pricing levels that we are able to change to make that change and the changes are relatively significant.

Q: With respect to the exit cash burn, really the way to think about it the actions that we're taking, we began those actions during the second quarter. And you can look at our existing run rate and then adjust for the actions that we've taken. But I think one of the things that's really important to understand in terms of exit run rate as well is just -- I also mentioned there is a third to fourth quarter securitization with UACC, which is another -- from an overall -- from an optimal EBITDA perspective another $35 million to $40 million in terms of improving the exit rate, depending upon market conditions and when we execute. But as we continue to improve on the transactional processes and kind of, talked about productivity -- and improve overall productivity, we are continuing to expect improvement in our overall run rate as we go through the year.

Q: Yes. And just to add one last thing. Your point is well taken, which is why we built a large range in our forward guidance. We recognized that we're not operating in a vacuum and there are macroeconomic forces that could impact our GPPU.