Business Overview and History
Vroom, Inc. (NASDAQ:VRM) is a leading automotive finance company and an AI-powered analytics and digital services platform for automotive retail. The company has navigated a challenging landscape in recent years, marked by the discontinuation of its ecommerce operations and a strategic pivot towards its core financial services and data analytics businesses.
Vroom was incorporated in Delaware on January 31, 2012 under the name BCM Partners III, Corp. On June 25, 2013, the company changed its name to Auto America, Inc. and then on July 9, 2015, it changed its name to Vroom, Inc. Initially founded as an end-to-end ecommerce platform for buying and selling used vehicles, Vroom has undergone significant transformations since its inception.
In June 2020, Vroom completed its initial public offering and its shares began trading on the Nasdaq Global Select Market. This milestone marked a new chapter in the company's growth trajectory and provided additional capital to fuel its expansion plans.
A pivotal moment in Vroom's history came in February 2022 when the company completed the acquisition of Unitas Holdings Corp., including its wholly owned subsidiaries United PanAm Financial Corp. and United Auto Credit Corporation (UACC). This strategic move allowed Vroom to significantly expand its capabilities in automotive finance. UACC, which has been engaged in automotive finance since 1996, brought with it extensive application processing, underwriting, and servicing capabilities.
UACC operates as an indirect lender, offering vehicle financing to consumers through a nationwide network of independent and manufacturer-franchised dealers in 49 states. The company's focus is primarily on the non-prime market, providing financing options to consumers who may have limited access to traditional vehicle financing.
In addition to the UACC acquisition, Vroom further diversified its business portfolio in January 2021 with the acquisition of CarStory, a leader in AI-powered analytics and digital services for automotive retail. CarStory offers its digital retailing services to dealers, automotive financial services companies, and others in the automotive industry, enhancing customer experiences and driving increased vehicle purchases through its innovative solutions.
Discontinuation of Ecommerce Operations and Strategic Pivot
On January 22, 2024, Vroom announced that its Board of Directors had approved a Value Maximization Plan, pursuant to which the company discontinued its ecommerce operations and wound down its used vehicle dealership business. This strategic decision was made to preserve liquidity and enable Vroom to maximize stakeholder value through its remaining businesses, UACC and CarStory.
As part of the Value Maximization Plan, Vroom ceased transacting through vroom.com, completed transactions for customers who had previously contracted with the company to purchase or sell a vehicle, halted purchases of additional vehicles, sold its used vehicle inventory through wholesale channels, and paid off its vehicle floorplan financing facility. The company also executed a reduction-in-force commensurate with the reduced operations, resulting in the layoff of approximately 800 employees, or 93% of the workforce not engaged in UACC's or CarStory's ongoing operations.
The discontinuation of the ecommerce business was a significant strategic shift for Vroom, as the company had previously positioned itself as an end-to-end ecommerce platform for buying and selling used vehicles. This decision was driven by the company's desire to preserve liquidity and focus on its more profitable and sustainable businesses, UACC and CarStory.
Financial Performance and Liquidity
As of September 30, 2024, Vroom had cash and cash equivalents of $51.1 million and restricted cash of $47.1 million. The company's primary source of liquidity is now cash generated through UACC's financing activities, including its four senior secured warehouse facility agreements, which have an aggregate borrowing limit of $825.0 million.
For the nine months ended September 30, 2024, Vroom reported a net loss from continuing operations of $101.5 million, compared to a net loss from continuing operations of $57.7 million for the same period in 2023. The increase in net loss was primarily driven by higher interest expense, realized and unrealized losses, and expenses related to the Ecommerce Wind-Down.
Adjusted EBITDA, a non-GAAP metric that the company uses to evaluate its operating performance, was $65.2 million for the nine months ended September 30, 2024, compared to $52.6 million for the same period in 2023. The improvement in Adjusted EBITDA was largely attributable to the discontinuation of the lower-margin ecommerce business and the continued performance of UACC and CarStory.
For the most recent fiscal year ended December 31, 2023, Vroom reported revenue of $893.20 million, a net loss of $365.54 million, operating cash flow of -$533.68 million, and free cash flow of -$548.49 million. In the most recent quarter ended September 30, 2024, the company reported revenue of $50.21 million, a net loss of $37.74 million, operating cash flow of -$110.98 million, and free cash flow of -$112.16 million.
Vroom's liquidity position as of December 31, 2023, showed a debt-to-equity ratio of 224.46, cash of $135.59 million, a current ratio of 1.11, and a quick ratio of 1.11. The company has four senior secured warehouse credit facilities with an aggregate borrowing limit of $825 million and $32.9 million of excess borrowing capacity as of September 30, 2024.
Segment Performance
Vroom operates two main reportable segments: UACC and CarStory.
The UACC segment, which represents the operations of United Auto Credit Corporation, is an indirect lender offering vehicle financing to consumers through third-party dealers, primarily in the non-prime market. As of September 30, 2024, UACC serviced a portfolio of approximately 80,000 retail installment sales contracts with an aggregate principal outstanding balance of $1.1 billion.
Interest income for UACC increased 5.7% to $50.8 million for the three months ended September 30, 2024, compared to $48.1 million in the prior year period. This increase was primarily due to growth in UACC's loan portfolio to $850.6 million as of September 30, 2024, up from $800.5 million a year earlier. However, interest expense increased 31.9% to $15.4 million, driven by higher outstanding balances and interest rates on both the warehouse facilities and securitization debt. This contributed to a slight decline in UACC's net interest income, which decreased 2.7% to $35.5 million.
Realized and unrealized losses, net of recoveries, decreased slightly by 0.7% to $30.1 million for the three months ended September 30, 2024, as UACC continued to manage credit performance amid a challenging macroeconomic environment.
The CarStory segment represents Vroom's artificial intelligence-powered analytics and digital services platform for the automotive industry. CarStory revenue decreased 3.6% to $2.9 million for the three months ended September 30, 2024, as the company experienced a change in the scope of services provided to customers. CarStory's Adjusted EBITDA decreased 139.2% to $0.2 million during the quarter as the segment faced higher expenses.
Entering the Prepackaged Chapter 11 Restructuring
On November 12, 2024, Vroom announced that it had entered into a Restructuring Support Agreement (RSA) with creditors holding, in the aggregate, over 80% of the company's outstanding funded debt and its largest shareholder. The RSA contemplates a comprehensive restructuring of Vroom's debt obligations and capital structure to be implemented through a prepackaged plan of reorganization.
Under the proposed plan, Vroom's $290 million of unsecured convertible senior notes due in 2026 will be restructured into equity, with holders of the notes receiving a pro rata share of 92.94% of the new common stock in the reorganized company. Existing shareholders will receive a pro rata share of the remaining 7.06% of the new common stock, subject to dilution by new warrants, a management incentive plan, and post-effective date equity awards.
The Prepackaged Chapter 11 Case is intended to address the impact of the outstanding notes and their upcoming maturity, while providing the potential for Vroom's shareholders to retain value in their investment, limiting disruption to the company's ongoing operations, and enabling Vroom to emerge as a public company without any long-term debt at the parent company level.
Risks and Challenges
Vroom faces several key risks and challenges as it navigates the Prepackaged Chapter 11 restructuring and seeks to grow its core UACC and CarStory businesses:
1. Execution of the Prepackaged Chapter 11 Case: The successful completion of the Prepackaged Chapter 11 Case is subject to numerous conditions and approvals, and there is no assurance that the transactions described in the RSA will be consummated.
2. Continued Liquidity Concerns: While Vroom currently has sufficient liquidity, its future cash needs may increase as it focuses on growing and developing UACC and CarStory. Failure to secure adequate funding beyond the expiration of the current Warehouse Credit Facilities in 2025 could have a material adverse effect on the company's operations and liquidity.
3. Credit Losses and Portfolio Performance at UACC: UACC has experienced higher credit losses and delinquencies in its finance receivables portfolio, which has negatively impacted the fair value of its assets and the company's financial results. Improving UACC's portfolio performance is crucial to the company's long-term success.
4. Competitive Landscape: Vroom operates in a highly competitive automotive finance and data analytics industry, which could impact its ability to grow and maintain market share for UACC and CarStory.
5. Regulatory and Legal Risks: As a financial services provider, Vroom is subject to various regulatory requirements and legal proceedings, which could have a material adverse effect on the company's operations and financial condition.
Legal and Regulatory Issues
Vroom has faced several legal and regulatory challenges in recent years. Beginning in March 2021, multiple putative class action lawsuits were filed against the company and certain officers alleging violations of federal securities laws. Vroom believes these lawsuits are without merit and is contesting the claims.
In April 2022, the Attorney General of Texas filed a lawsuit against the company alleging violations of the Texas Deceptive Trade Practices Consumer Protection Act. In December 2023, the company reached an agreement to resolve these claims.
Additionally, in January 2022, Vroom received a civil investigative demand from the Federal Trade Commission (FTC) related to certain business practices. On May 6, 2024, the company reached an agreement with the FTC to resolve the allegations.
Management Changes
On February 29, 2024, Vroom announced significant changes in its UACC leadership. James G. Vagim, III, UACC's Co-President and Chief Executive Officer, and Ravi Gandhi, UACC's Co-President and Chief Financial Officer, stepped down from their positions. Tom Shortt, Vroom's CEO, succeeded Mr. Vagim as President and CEO of UACC, while Jon Sandison, the company's Vice President of Investor Relations and Financial Planning Analysis, succeeded Mr. Gandhi as UACC's Chief Financial Officer.
Outlook and Conclusion
Vroom's strategic pivot away from its ecommerce operations and towards its UACC and CarStory businesses represents a significant shift for the company. While the discontinuation of the ecommerce business resulted in substantial one-time costs and disruption, it has positioned Vroom to focus on its more profitable and sustainable operations.
The Prepackaged Chapter 11 restructuring, if successful, will provide Vroom with a stronger financial foundation and the potential to unlock long-term growth opportunities for UACC and CarStory. However, the company faces several critical challenges, including execution risks related to the restructuring, ongoing liquidity concerns, and the need to improve credit performance at UACC.
As Vroom navigates these obstacles, its ability to leverage its technology-driven approach, deep industry expertise, and diversified business model will be crucial to its long-term success. Investors will closely monitor the company's progress in streamlining operations, enhancing profitability, and capitalizing on the growth potential of its remaining business units.
The used vehicle industry and automotive finance sector have experienced significant volatility in recent years due to factors such as the COVID-19 pandemic, global supply chain issues, and rising interest rates. Vroom's success will depend on its ability to adapt to these changing market conditions while effectively managing its restructured operations and financial position.