What happened

Shares of Carvana (CVNA -0.36%) were surging today after the online used car dealer significantly narrowed its quarterly revenue in its first-quarter earnings report.

Fears of a bankruptcy had crushed the stock last year, but the first-quarter update shows management is making significant progress toward stabilizing the business.

As of 3:01 p.m. ET, the stock was up 22.9%.

So what

Carvana's revenue in the quarter fell 25% to $2.61 billion, but that was by design, as the company slashed its inventory in order to cut costs. That result essentially matched estimates at $2.6 billion.

Even as revenue fell sharply, the company still managed to grow gross profit, a key metric, as it sold off older vehicle inventory, encouraged customers to pick up vehicles at vending machines and reconditioning centers, and charged for long-distance delivery. Gross profit also benefited from a $51 million reserve allowance in the previous quarter, and rose 14% to $341 million, though it would have been down slightly without the benefit of that allowance.

Total gross profit per unit (GPU) rose 52% to $4,303, another sign of progress, and on the bottom line, it posted an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $24 million, or 0.9% of revenue, which compared to an EBITDA loss of $348 million in the quarter a year ago.

On a free cash flow basis, the company lost $98 million, a significant improvement from an $813 million loss in Q1 2022, and it reported a generally accepted accounting principles (GAAP) loss per share of $1.51, which was better than estimates at a loss of $2.00.

In the shareholder letter, management said, "The first quarter illuminated the path we are on to execute our three-step plan to increase profitability and to return to growth. Our progress is highlighted by the fact that we achieved company‐best first-quarter GPU and adjusted EBITDA margins."

Now what

Looking ahead to the second quarter, management said it expected positive adjusted EBITDA and would continue to work to generate positive adjusted free cash flow. 

While the company isn't out of the woods yet, especially if the economy turns south, the results show that management can control costs in line to drive profitability. If Carvana can fully get out of the red, the stock could soar.