Carvana : Q3 2022 Letter to Shareholders

Dear Shareholders,

In the third quarter we achieved strong operational progress against a difficult industry and macroeconomic backdrop.

The difficult backdrop is visible in our sequential decrease in retail units and the resulting limited progress in SG&A per retail unit sold. The strong operational progress appears through our sequential reduction of Carvana-related SG&A expense by approximately $90 million and sequential improvement in Adjusted EBITDA.

Since the end of the third quarter, we have seen additional industry and economic headwinds that further pressure sales volume, and which are likely to put additional pressure on GPU. To manage the business through this period, we are seeking to rapidly decrease expenses while optimizing for volume flexibility to be able to adjust the business to changes in unit sales as quickly as possible.

While the current environment has drawn our focus to the near-term, the long-term remains extremely exciting. All the things that defined our opportunity a year ago are unchanged. We were always going to have to traverse difficult periods and cycles on our way to fulfilling our mission. Like other companies we admire in history, our goal is to be made better by the challenges we face. On the other side of this period, we plan to be a better company as a result of having gone through it.

While progress is rarely linear, we remain firmly on the path to changing the way people buy and sell cars and to becoming the largest and most profitable automotive retailer.

Summary of Q3 2022 Results

Q3 2022 Financial Results: All financial comparisons stated below are versus Q3 2021, unless otherwise noted. Complete financial tables appear at the end of this letter.

• Retail units sold totaled 102,570 a decrease of 8%
• Revenue totaled $3.386 billion, a decrease of 3%
• Total gross profit was $359 million, a decrease of 31%
• Total gross profit per unit was $3,500, a decrease of $1,172

• 1. Total gross profit per unit, excluding depreciation, amortization, and share-based compensation, was $3,870
• Net loss margin was (15.0%), a decrease from (2.0%)
• 1. Net loss margin included a (2.1%) non-cash impact from a change of the fair value of Root warrants
• Adjusted EBITDA margin1 was (5.9%), a decrease from 0.3%
• 1. Adjusted EBITDA margin, excluding non-Giftshare-based compensation, was (5.5%)
• Basic and diluted net loss per Class A share was $2.67 based on 105.9 million shares of Class A common stock outstanding

Other Results and Recent Events:

• On September 22, 2022, we amended and restated our floorplan facility with Ally to secure $2.2 billion of capacity through September 22, 2023, and $2.0 billion of capacity thereafter through March 22, 2024.
• We opened our second vending machine near Phoenix, AZ.
• We opened a new Carvana IRC near Richmond, VA.
• Following quarter-end, we opened a new Carvana IRC near Sacramento, CA.

1 Adjusted EBITDA margin excludes the impacts of the CEO's Gift and Other Income and Expense

1

Outlook

We made strong progress reducing SG&A expenses in Q3 2022. In May 2022, we outlined a stretch goal of $4,000 SG&A expense per retail unit sold, excluding depreciation, amortization, share-based compensation, and ADESA expenses in Q4 2022. This equated to a stretch goal of $4,350 to $4,450 including ADESA expenses. We are making strong progress reducing SG&A expenses on an absolute dollar basis, but due to the current volume environment, we do not expect to reach this stretch goal on a per unit basis in Q4.

In Q4, we expect a sequential reduction in retail units sold and total GPU as the impacts of reduced used vehicle industry demand, increasing benchmark interest rates, higher used vehicle depreciation rates, and our profitability initiatives flow through. We also expect to continue our progress reducing SG&A expenses through our efficiency and cost initiatives.

Our goal is to manage the business to achieve >$4,000 total GPU and significant Adjusted EBITDA profitability at current volume levels, while also building in flexibility to achieve profitability at higher or lower volume levels.

Looking toward 2023, we are not providing a quantitative outlook at this time. In light of current industry and macroeconomic conditions, we believe forecasting the environment over the coming months and quarters is difficult, and we plan instead to provide more real time color on how certain key dynamics are likely to impact our results.

For more information regarding the non-GAAP financial measures discussed in this letter, please see the reconciliations of our non-GAAP measurements to their most directly comparable GAAP-based financial measurements included at the end of this letter.

2

The Current Environment

We are currently operating in a challenging industry and macroeconomic environment, while simultaneously adapting our business to drive profitability. This environment raises two key questions about our progress: (1) what are the drivers of our current retail units sold volume? and (2) what is our path to profitability and positive free cash flow?

Part 1: Units

Industry-wide used vehicle prices are up 7% YoY and up 43% since 2019 as of September 2022, based on industry data. At the same time, benchmark interest rates have increased on an absolute basis by 3.9% YoY and 2.6% since 2019, and credit spreads have increased 1% YoY and 0.8% since 2019. Putting these together, the monthly payment for a customer buying a typical car in 2022 has increased by 22% and 57% since 2021 and 2019, respectively. This increase in the cost of buying a used vehicle has significantly outpaced the increase in the cost of buying goods and services in the economy as a whole over the same periods.

As a result of these and other affordability headwinds, based on industry data sources industry-wide used vehicle sales declined by 10-15% YoY in Q3 2022. We gained market share against this industry backdrop despite taking numerous actions that are focused on driving profitability but reduce sales, other things being equal.

Our focus on profitability impacts retail unit volume in several ways. Historically, when we were primarily focused on growth, we incorporated the value of future sales, including from repeat customers and word of mouth, into our marketing budget and pricing decisions. As a result, we more frequently acquired sales that were less profitable in the immediate period but were expected to generate higher net present value over time. Currently, as we are primarily focused on profitability, we are intentionally acquiring fewer of these sales.

Additionally, the rapidly rising interest rate environment is creating a headwind to conversion and total GPU. Lower conversion and total GPU reduce the number of profitable sales, other things being equal, leading us to further reduce sales volume.

One example of this occurs in markets with lower profitability due to long distance from inventory (e.g., the Pacific Northwest). We have historically had strong success growing these types of markets over time, but in a profitability- focused or lower GPU environment it makes more sense to reduce advertising or take other actions to improve profitability, such as increasing long-distance shipping fees, in these markets.

As a result of our actions, markets in the central part of the country, excluding Illinois, which are closer to large inventory pools and experienced fewer adjustments, grew by 4% YoY in Q3 2022, significantly outpacing the industry. By comparison, markets in the eastern part of the country performed approximately in-line with the company as a whole, and markets in the western part of the country significantly underperformed the company as a whole.

In Q3, we estimate that the four largest drivers of our retail unit sold volume, outside of the significant decline in industry sales, were rising benchmark interest rates, reduced advertising, reduced inventory, and other actions we are taking to reduce and improve less profitable transactions. These drivers are described in more detail below.

1. First, we continued to see significant increases in benchmark interest rates in Q3 vs. Q2. On average through the quarter, the 2-year Treasury increased by 0.7% to 3.4% in Q3 from 2.7% in Q2. The price Carvana earns on loans sold through both our forward flow and securitization channels is strongly related to the spread between origination rates and the 2-year Treasury rate. Thus, we generally adjust origination rates in conjunction with movements in the 2-year Treasury rate. Meanwhile, we see evidence today that many lenders are increasing rates at a pace that appears to be more closely in line with increases in the Fed Funds rate, which has lagged increases in the 2-year Treasury rate so far this year. We believe different approaches to setting rates have resulted in a temporary sales headwind for Carvana. For example, sales to our cash customers, who aren't directly impacted by interest rates, grew over 20% year over year. Over time, we believe different approaches to setting rates will converge as interest rates settle, leading to normalization of this headwind.

3

1. Second, we reduced advertising spend by -11% sequentially in Q3. As discussed above, a key driver of this reduction has been less advertising in distant markets with less profitable sales. More advertising positively impacts retail unit sales volume, other things being equal, by driving more users to our website.
2. Third, we reduced our website inventory by -10% sequentially in Q3. We are continuing to normalize our inventory size and expect to further reduce inventory in Q4. Larger inventory positively impacts conversion, other things being equal, since with larger inventory customers have a higher likelihood of finding a car that matches their preferences.
3. Fourth, we are testing or have rolled out several initiatives that increase sales profitability but have some offsetting sales impact, including requiring payment at the time a customer places their order instead of at delivery, incentivizing pickups and drop-offs at vending machines, and continuing inventory visibility metering on long-distance inventory.

The drivers described above had an impact on growth in Q3 but lay the groundwork for a more efficient and profitable business moving forward.

Part 2: Profitability

We reduced quarterly SG&A expenses by approximately $90 million in Q3 vs. Q2, excluding the impacts of consolidating a full quarter of ADESA expenses. We also levered SG&A per retail unit sold slightly excluding these impacts, despite lower retail units sold.

Our SG&A expense reductions in Q3 vs. Q2 were broad-based, including in payroll, advertising, logistics, and other SG&A expense. These expense reductions were primarily driven by our cost savings initiatives across all areas of the business, including increasing operational efficiency, standardizing processes across our nationwide network of locations, and focusing advertising on profitable transactions.

Q3 2022 Sequential Changes in SG&A Expense, Excluding ADESA

Dollars in millions
Q2	2022 SG&A, GAAP	$	694
Q2	2022 SG&A ex D&A ex SBC	$	637
Sequential changes:
RIF one-time expenses		(10)
RIF recurring savings		(14)
Other payroll savings		(20)
Advertising		(14)
Logistics		(14)
Market occupancy		(1)
Other SG&A		(19)
D&A		(4)
Total ex D&A ex SBC	$	(96)
Q3	2022 SG&A ex D&A ex SBC	$	541

4