Shift Technologies, Inc. (SFT) Q4 2022 Earnings Call Transcript

Shift Technologies, Inc. (SFT) Q4 2022 Earnings Conference Call March 28, 2023 5:00 PM ET

Company Participants

Susan Lewis - VP, IR

Jeffrey Clementz - CEO & Director

Oded Shein - CFO

Conference Call Participants

Richard Reid - Wells Fargo Securities

Michael Baker - D.A. Davidson & Co.

Marvin Fong - BTIG

Operator

Good day, and welcome to the Shift Technologies, Inc. Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Ms. Susan Lewis, Vice President of Investor Relations. Please go ahead, ma'am.

Susan Lewis

Good afternoon, and welcome to the Shift Technologies Fourth Quarter and Full Year 2022 Earnings Call. Joining me on the call today is CEO, Jeff Clementz; and CFO, Oded Shein.

During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements.

Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise after this conference call.

During the course of the call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials.

With that said, I will now turn the call over to Jeff.

Jeffrey Clementz

Thank you, Susan, and good afternoon, everyone. 2022 was a year of significant change for Shift. Given auto industry and capital market dynamics, we adjusted our strategy to prioritize balance sheet health, reduce cash burn and accelerate our path to profitability.

To that end, over the past several months, we have rapidly executed a number of strategic initiatives in a short period of time. This included our merger with CarLotz, which closed in December bolstering our balance sheet and bringing omnichannel capabilities. We reduced our geographic footprint both at Shift and CarLotz and enacted other cost-cutting measures, such as reducing operating and corporate expenses in turn, lowering headcount.

These were not easy decisions, but our teams have done an incredible job to continue innovating and executing throughout the change, and I can't thank them enough for all their hard work over the past few months. Ed will cover our financial results shortly, but let me just comment that in the fourth quarter, excluding the impact of the December acquisition, both revenue and adjusted EBITDA loss came in range of the guidance provided in our third quarter call for Ship standalone.

Before I turn to our strategic priorities, I want to emphasize that cash usage and maintaining balance sheet health is our top priority. We expect sequential improvement throughout 2023 in units sold, unit economics and EBITDA. We also expect our cash use to moderate significantly in the coming quarters. We acknowledge the need for additional capital to get to profitability, but we believe that based on our current outlook, we have sufficient cash to execute our strategy.

We are actively exploring a variety of avenues to maximize shareholder value and to fund future business needs. Turning to our first strategic priority, achieving positive unit economics by expanding GPU and leverage in sales and marketing, while tightly controlling G&A expenses. We believe that our work in the second half of 2022 and first quarter of 2023 has adequately adjusted SG&A to the size of the company today.

Starting with the CarLotz merger. On December 9, 2022, we closed the transaction and immediately got started on an integration by eliminating duplicative costs and roles. It was a difficult decision in early February, we decided to exit CarLotz's presence on the East Coast. We have also shut down the Downer Grove, Illinois location in order to focus on our core West Coast markets. The remaining CarLotz location in Pomona, California, is where we have the most operating expertise, logistical and brand awareness leverage and ability to scale. We now have 3 markets that serve Los Angeles, the Bay Area and Portland.

Turning to the full company. While difficult, we reduced headcount by approximately 30% in the first quarter. In addition to corporate roles, the majority of reductions were due to our move to decentralized sales organization, which occurred in February, which I will discuss in just a moment. We believe that the CarLotz integration and strategic moves to rightsize our SG&A are largely behind us.

While we remain disciplined on G&A and tightly controlled costs, our focus is on driving leverage through revenue and unit sales growth. This leads to our second strategic priority, increasing penetration in our West Coast markets to grow retail units full. At Shift, we believe that we have a leading technology-forward omnichannel experience. Consumers want the convenience of being able to browse and purchase online, but also want the flexibility of being able to view vehicles and research their purchase in person. We have created a model that enables Shift customers to shop for the vehicle the way they want.

As part of our shift to an omnichannel model, as mentioned earlier, we moved to a decentralized sales organization. Going forward, local teams will take on more ownership of individual deals and will be assisted by a smaller central organization. This model will decrease handoffs and improve the overall customer experience while simultaneously increasing efficiency and cutting costs. Results so far have been positive with the new sales model lowering our cost per unit sold.

Additionally, we have seen positive results from our new buyer checkout and dashboard experience that we talked about last quarter, including increased conversion rates and lower CAC. Turning to our third strategic priority, which is to create a differentiated auto marketplace. Partner dealers on Shift's Marketplace will strategically participate in e-commerce to grow their market share margins and develop long-term relationships with digital customers.

Shift customers will benefit from a -- from the marketplace's expanded assortment with the same seamless trusted experience. We will continue to optimize and improve our marketplace platform and expect that we will fully launch later in 2023. In closing, I believe 2 things to still be true today as when I first joined the company. First, we believe the auto industry as a whole is shifting from off-line to online as consumers increasingly prefer digital first transactions. Second, we believe Shift has a differentiated technology asset to power an exceptional omnichannel experience.

Shift has repositioned the business to remain on a path to profitability by 2024.

I'd now like to turn the call over to Oded to review financial results and guidance. Oded?

Oded Shein

Thank you, Jeff, and good afternoon, everyone. I will first go over our fourth quarter financial results and then review our guidance.

For the fourth quarter of 2022, total revenue was $66 million. This includes 2,520 retail units and 354 wholesale units. Adjusted GPU of $1,041 came in below our expectations, primarily due to sell-through of aged inventory, steeper-than-expected market depreciation and below capacity reconditioning activity. We expect the fourth quarter to be the low point for GPU and expect sequential improvement throughout 2023.

Additionally, we were pleased that F&I remained relatively flat sequentially at $1,334 per unit. Adjusted SG&A was $28.1 million, down from $39.4 million in the previous quarter. The decrease was primarily due to lower selling and marketing expenses as a result of the restructuring.

Adjusted EBITDA loss was $25.5 million. Please keep in mind that these results include approximately 3 weeks of CarLotz's operations. Excluding the merger, both revenue and adjusted EBITDA loss came in range of the guidance provided on our third quarter call for Shift standalone. Our adjusted EBITDA performance despite the GPU shortfall speaks of the G&A cost actions we have implemented over the past few months.

We ended the fourth quarter with $110 million of total cash. The increase quarter-over-quarter was primarily due to the closing of the CarLotz merger and working capital benefits, partially offset by our net loss. As of December 31, 2022, we had 17.2 million shares outstanding. The share outstanding at year-end have been retroactively adjusted for the 1-for-10 reverse stock split enacted on March 8, 2023. To bring Shift into compliance with the minimum bid price requirement for its listing on NASDAQ.

As of March 22, we were back in compliance with the minimum bid requirement. Turning to our first quarter guidance. During the first quarter, we continue to experience some disruption to the business as we integrated CarLotz and fully establish the omnichannel experience. We are expecting sequential improvement from the fourth quarter, but the first quarter does not represent a normalized quarter of our updated omnichannel strategies.

For the first quarter, we are expecting revenue in the range of $56 million to $58 million. Adjusted GPU in the range of $1,600 to $1,800 versus $1,681 last year, and adjusted EBITDA loss in the range of $24 million to $26 million versus a loss of $46.6 million last year. For adjusted SG&A, we expect to see further sequential reductions to end the year with annualized adjusted SG&A between $85 million and $95 million.

We expect to end the first quarter with approximately $70 million of cash and cash equivalents. During the first quarter, other uses of cash included transaction costs, costs associated with hub closure, including grant and timing of accounts payable. We do not expect a similar impact to cash from these items in future quarters.

From an operating perspective, we expect cash usage to decrease in future quarters as we have the CarLotz integration behind us and other cost reduction initiatives are fully realized.

We'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question will come from Brian Nagel with Oppenheimer.

Unidentified Analyst

This is on for Brian Nagel. Thank you for the details so far. So in Q4, you successfully closed the merger and completed the transition to the omnichannel model. So congrats on that. And I just wanted to ask if you could elaborate further on what this means for your business, what operational and financial leverage could this ultimately allow you?

Jeffrey Clementz

William, thank you for that question and also for your nice comments. Moving to the omnichannel model, which we put in place in Q4 and have continued to optimize in Q1 really allows us, as I mentioned in the opening remarks that to serve our customers the way that they want to shop. We believe we have a leading online experience, which kudos to our technology team have continued to optimize the checkout process and create a really seamless experience so that customers can go ahead and fully purchase the car for pickup or delivery online, or they can complete a lot of the paperwork ahead of time, schedule a test drive seamlessly and come into one of our stores.

And we really believe that giving customers that choice is an advantage for us. And further, working with the CarLotz team, we applied a lower-cost selling model that is associated with the omnichannel business. And what we've done there is decentralize many of our teams, put them in the store and empowered them and our operational leaders did an excellent job implementing that. So all told, that will help us to improve our conversion rates, improve our sell-through, increase our sales and do that while reducing our cost and staying on our path to profitability, where our goal is to positive unit economics in 2023.

Unidentified Analyst

Perfect. That's helpful. And one question just more on the near term. Obviously, these things are hard to do, especially during a difficult backdrop. Can you characterize what you're seeing in the used car business right now, particularly how has demand progressed through the quarter and here in recent weeks?

Jeffrey Clementz

You bet. Certainly, in Q4 and especially in December, demand was very soft and depreciation was strong. I think that's been well reported. We're seeing solid demand and improving demand month-over-month in Q1. And we think that, that's a combination of the external market, but also the new omnichannel model that we've put in place. So we're feeling optimistic about the start of the year, and we're hoping that it continues.

Operator

The next question will come from Sam Reid with Wells Fargo.

Richard Reid

Quick one on GPU. What are the levers that get you from, let's say, 1,000-ish GPU in Q4 to your Q1 target. I understand there was a lot of Lotz noise in there. But could you maybe walk us through any other drivers to bridge those 2 numbers?

Jeffrey Clementz

Sure. Thanks, Sam, for the question. I think what we felt in Q4 were depreciation, which put some pressure on the prices that we could charge. We also had write-offs that were associated with some inventory overhang. And so going into Q1, what we're seeing are stabilized prices and then improvement both on the front end and on our F&I margins. So those are the main contributing factors to the GPU improvement quarter-over-quarter that we expect.

Oded Shein

Just to add that even in our guidance, we already indicated that we're going to see better results in Q1 than in Q4, a lot of the costs and GPU burden that we had in consolidating all of the inventory between the acquisition and what was going on in the marketplace in Q4 is behind us that we should see a better journey going forward. And we expect to see that continue and improve quarter-over-quarter going forward.

Richard Reid

That's super helpful. Maybe a follow-up here. Just -- and more broadly, now that you're a combined entity and the merger is closed, any updated thoughts on what unit count you'll need to get to in order to ultimately hit breakeven EBITDA?

Oded Shein

So we haven't shared an update to the model yet. We may do it in the future quarter. But I can tell you that with the new omni strategy and our reduced cost structure, both on selling and marketing and G&A. So all aspects of cost. We think we can get to breakeven unit economics even an EBITDA at a lower level than we shared in the past. Additionally, the development of our technology assets, marketplace and other things should help us get there, again, at the lower retail number.

Operator

The next question will come from Michael Baker with D.A. Davidson.

Michael Baker

Can you square the comments that you acknowledge that you're going to need additional capital to get to profitability, but you have sufficient cash to execute your strategy, presuming your strategy is to get to profitability. I guess can you square those 2? And then I guess related to that, so your cash is down -- will be down $40 million in the first quarter versus the fourth quarter. You said that won't be the burn rate going forward. But any color on what we should expect for the cash burn to be over the coming quarters?

Oded Shein

Yes. And it's obviously a very good question. Just let me start by saying that cash and liquidity are top of mind focus for the management, the Board, we see it as absolutely our top priority. We started the year with about $110 million in total cash. We guided the first quarter to somewhere around $70 million. But the first quarter had some unusual cash outlays, such transaction cost and hub closures, integration and rent and extra rent and so on. So that was -- that put pressure on cash, but we do not expect to see that going forward on our cash balance.

Michael Baker

You said that in the prepared remarks, any color on how much less or what -- can you quantify what those onetime costs were?

Oded Shein

So we haven't done that, but if you think about it, EBITDA guided loss is $24 million to $26 million, and we're talking about $40 million, so that's a pretty big gap. And just going forward, not only we expect many of those costs to go away, but also we expect improvement on the EBITDA line based on better volume, improved GPU and harvesting all the expense reduction initiatives that we have in place. So standing here, let's say, with $70 million as the starting point, we think that we have, as we said, sufficient cash to execute the initiatives. And what we mean by that is to continue to grow and improve our omnichannel stores.

And additionally, we continue to develop the tech assets that Jeff talked about. Down the road and in order to get to profitability and beyond, we now believe that we're going to need additional fund raise. The extent and the timing hasn't been determined yet, and we look forward to, again, update that in the near future. But that's what we have for today.

Jeffrey Clementz

Oded, I just wanted to build on top of that, and thank you, Michael, for the question. As we look ahead to future fundraising, I do want to kind of double down on the comment that we think that Shift's omnichannel selling capabilities, the combination of our technology and our operational assets and processes and then the future development of the marketplace, which is underway at the -- right now are both really in line with where the market is headed and where digital customers are looking for an experience going forward. So we're very happy with the path that we're on right now.

Operator

Your next question will come from Marvin Fong with BTIG.

Marvin Fong

I guess just kind of a macro question. I mean, I think in recent weeks, we've seen wholesale prices up, retail prices may be ticking up as well. And I appreciate you guys derive most of your inventory from trade-ins. But just -- is this the environment that you're sort of basing your comments on about improvement quarter-to-quarter, or what kind of assumptions are you making about the -- about the car industry in general when you're kind of providing that sequential guidance?

Jeffrey Clementz

Yes. Certainly, we're in a seasonally strong period right now, and we're seeing those same trends, but we actually believe that the fundamentals that we've built into the business in terms of our conversion rates, our sell-through, the funnel that we're optimizing from customers coming in and making its way to a purchase or coming to our stores, are really the underlying foundation.

As you know and as you mentioned, the cellular car flow or our trading capability where we acquire the vast majority of our units from direct from customers is the strength of ours, and we're continuing to lean into that. So we actually are basing most of our sequential improvement on the capabilities. And certainly, as the market kind of moves, we are well positioned to navigate within that.

Marvin Fong

Great. And I guess my follow-up question is, I think you mentioned that first quarter looking better. I think you mentioned from a conversion standpoint also, but is that entirely occurring in the core shift.com business? Or is some of that being influenced by the new omnichannel strategy? Is it possible to break things down that way? Or is it too early to say?

Jeffrey Clementz

We look at our business as -- is kind of -- we look at our business as an omnichannel business. So it's hard to pull the 2 apart, and we're seeing strength in consumers that want to buy fully online and those that want to come in person and for a test drive and to stage the purchase online in advance. So it's really across the board. We're seeing the model working well for us right now.

Marvin Fong

Okay. Great. And maybe one last question. I think you didn't say any change, so I'm assuming it's about the same. But the new strategy, I think, is a little more emphasis on value cars. I think your mix you had said in the past, you want over 50%. Is that still true? Or is that -- might that change in response to sort of what you're seeing in the market?

Jeffrey Clementz

Yes, we still think that the 50% value car mix and 50% core car mix is a great place for us to be. We're seeing that in terms of a value prop to our consumers that are looking for a range of vehicles, given the interest rates and the appreciation that it's been in the market. And it's really an optimal place from a reconditioning throughput as well.

So I think that, that is our target. We don't want to get too much above that or even too much below it. We think that the 50-50 is an optimal place and I think we're really thankful that we made that switch last year, especially as the economy started changing, and we are really well positioned for where our consumers were at.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Mr. Jeff Clementz for any closing remarks. Please go ahead, sir.

Jeffrey Clementz

Thank you. I'd like to close with 2 thoughts. First, none of this is possible without our team. I'd like to thank each and every person for their hard work and dedication. The Shift team continues to shine even with all the challenges we faced as we've restructured our business. And second, we believe that we've made the right decisions to improve the unit economics and the overall financial performance of the business.

It was not easy to shrink the business in 2022 to better align our sales and cost structure to the evolving industry and economic environment. However, after these difficult decisions, we are now in a place to improve our performance throughout the year, showing the benefits of our omnichannel experience while continuing to provide amazing customer experience.

And even though our short-term focus is on growing and leveraging our current assets in place, we continue to develop and lay the groundwork for future growth, including the marketplace. We look forward to speaking with you again soon. Thank you all for joining us today.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.