Earnings Call: Q1 2018

May 9, 2018

Good afternoon, and welcome to the Carvana First Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mike Levin, Vice President of Investor Relations. Please go ahead. Thank you, Austin. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's Q1 2018 earnings conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors. Carvana.com. The Q1 shareholder letter is also posted on the IR website. The schedule of investor conferences we will be attending over the next several weeks can be found in the Events section of our IR site, and we look forward to seeing all of you out on the road. Joining me on the call today are Ernie Garcia, Chief Executive Officer and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal securities laws, including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of the material factors that cause actual results to differ from forward looking statements can be found in the Risk Factors section of Carvana's most recent Form 10 ks and Form 10 Q. The forward looking statements and risks in this conference call are based on current expectations as of today, and Carvana assumes no obligation to update or revise them whether as a result of new developments or otherwise. And now with that said, I'd like to turn the call over to Ernie Garcia. Ernie? Thank you, Mike, and thanks everyone for joining our call. We're very proud of our strong Q1, which was a great start to the year. We exceeded our guidance across the board and are raising our estimates for the year. This outperformance was driven by strong demand for our offering and strong execution, which allowed us to continue servicing that growing demand while delivering exceptional experiences to our customers. Q1 was the first time where our quarterly unit sales grew by over 10,000 units year over year. Our triple digit growth rate has been the fastest among the public auto retailers since we launched, but for the first time this quarter, we also have the fastest organic growth in absolute unit terms among all the public automotive retailers. This is a significant achievement that speaks clearly to the quality of experiences we are delivering to our customers, to the level of demand that exists for those experiences, the scalability of our business model and to the quality of our execution to date. We are proud of this achievement and excited about what it suggests for the future. We had a strong quarter in GPU, comfortably surpassing our guidance. Mark will give more detail on what drove those gains, but they are broad based and have us feeling very confident about our mid term goal of $3,000 We continue to show significant progress in EBITDA margin in the Q1, driven by unit growth, improvement in total GPU and the leveraging expenses that is inherent in the business. The path to profitability is clear. Q1 was a great quarter of market openings as well. We opened 12 markets in the quarter and increased our population coverage to just over 45%. We also opened a vending machine in Tampa and opened another this morning in Charlotte. Our market ops expansion, real estate and logistics teams continue to deliver and we are grateful for everything they do. In April, we completed our acquisition of Car360. Car360 blew us away with both the quality of their technology and even more importantly with the quality of the team they assembled the building. They bring the Carvana expertise in computer vision and 3 d reconstruction that we didn't previously have and pair that expertise with enthusiasm and creativity that complements our own and will continue to push us to put highly functional and beautiful products in front of our customers. We believe the combination of this expertise with our proprietary photo booths will create experience unlike any other. We'll be rolling out some of the initial integrations prior to year end and plan to relentlessly continue improving our merchandising technology from there, always aiming to increase the power and improve the usability of our interface to allow our customers to explore the cars they're interested in and to get them to smile while they're doing it. We've now been a public company for just over a year and in that short time we've made a tremendous amount of progress. 1 year ago we are coming off a year of about 18,000 units. This year, we expect to sell roughly 5 times that amount. A year ago, we are coming off a year of $10.23 in total GPU. This quarter, we expect to cross 2,000. A year ago we are coming off a year of negative 23.2 percent EBITDA margin. This quarter we expect to be between negative 8.5% 11% EBITDA margin. Taking an even larger view, we crossed over the 5th anniversary of our first market launch in the Q1. 5 years ago, we were a small team with the dream that we could change the way people buy cars by being thoughtful about what the customer needed and wanted and leveraging modern technology to reimagine the entire process of buying a car. We wanted to change the way cars were produced, so we built a system to do it all online and in a centralized way excuse me, procure, so we built a system to do it all online and in a centralized way. We wanted to change the way cars were merchandised, so we built a photo booth that we paired with a 7 day return policy that we believe could replace the test drive. We wanted to take advantage of the fact that eliminating test drives would allow us to centralize our inventory, so we built reconditioning and certification centers at a scale that had never been seen before. We wanted to give our customers everywhere access to all those centralized cars, so we built the logistics network from scratch to maximize our customer selection. Wanted to change the way customers finance cars, so we built a simpler, more intuitive system that allowed our customers to complete the process in minutes. We want to give our customers memorable experiences, so we built a team of exceptional people and united them with a culture of customer centricity. We want to do all that and prove that the unit economics could be compelling. In summary, we wanted to build a paradigm shifting company. That was just 5 years ago. Over the last 5 years, this team has systematically turned that dream into a reality. We aren't done dreaming or building. We aren't even close. We look forward to the next 5 years and believe we can accomplish even more over that period than we did over the first five. Mark? Thanks, Ernie. Thanks, everyone, for joining us today. Unless otherwise noted, all comparisons in what follows will be on a year over year basis. Q1 was the strongest quarter in our company's history and we're excited about what this quarter means for our growth trajectory. Retail units sold totaled 18,464 in Q1, an increase of 122%. Total revenue was $360,400,000 an increase of 127%. Total gross profit in the quarter grew by 2 51 percent to $34,200,000 and total GPU in Q1 was $18.54 an increase of $6.85 We continue to see broad based improvements in GPU, including a reduction in average days of sale to 70 days in Q1 from 93 days a year ago, as well as gains in reconditioning, wholesale, financing and new products. EBITDA margin was negative 12.4% in Q1, an improvement of more than 300 basis points from the prior quarter and more than 900 basis points year over year. In addition to GPU gains, we are showing significant operating leverage while also rapidly expanding our geographic footprint. We opened 12 markets in Q1, our largest number ever and have opened 6 more so far this quarter. We now expect to open 35 to 40 markets in 2018, bringing our end of year totals to 79 to 84 markets. There are more than 200 metropolitan areas in the U. S. With a population greater than 200 1,000 people. And these markets collectively make up about 80% of the U. S. Population. We believe our online sales model is well suited to serving customers of all sizes and that these statistics provide a useful framework for our expansion opportunities over time. For the full year, we are raising our outlook to 90,000 to 90 4000 units and 1,750,000,000 to 1,850,000,000 in total revenue. We are also raising our GPU outlook for the year to $19.75 to $2,175 based on the strong execution we are seeing across all parts of the transaction. In the Q2, we anticipate continued gains across our key financial metrics. We expect retail units sold of 20,000 to 22,000, an increase of 87% to 106%. We expect total GPU to be 2,000 to 2,200, an increase of 500 to 700 year over year as we march toward our midterm goal of 3,000. We expect EBITDA margin to be between negative 11% and 8.5%, reflecting continued operating leverage as we grow. You should use approximately 143,000,000 weighted average shares on a fully exchanged basis in Q2 and approximately $145,000,000 for Q3 and Q4. We ended Q1 with $121,500,000 in cash and equivalents. We also ended the quarter with $46,200,000 in capacity under our master sale leaseback agreement and more than $40,000,000 in real estate assets on our balance sheet eligible to be sold under this agreement. On April 30, we completed a follow on public offering of 6,600,000 shares of Class A common stock, yielding proceeds after underwriting discounts of approximately $173,000,000 We believe this additional capital provides a significant amount of operating flexibility as we continue to execute our plan. As we look forward to the remainder of 2018, we are excited about continued progress toward our financial goals. We intend to continue to expand our footprint, rapidly grow sales, increase GPU and demonstrate operating leverage. Thanks for your attention. We'll now take questions. Our first question comes from David Lim with Wells Fargo. Please go ahead. Hi, good afternoon, everyone. The question that I have is, can you explain or can you dimensionalize why was wholesale so strong from a GPU perspective? And then can you bridge the retail GPU, the 902 versus the 555? I How much of it came from the days turn, the inventory improvement versus reconditioning process and other efficiencies? Sure, David. So happy to hit that. So we had our strongest wholesale quarter in our company's history in Q1. I think we averaged $5.79 per wholesale unit sold. When you apply that to retail units, it was approximately $73 per retail unit sold of wholesale gross profit. Those are the strongest numbers that we've had to date. I think there's a number of things that are driving that. So first, I think our wholesale team did a tremendous job executing and selling these units. I think we're starting to build up a brand in the wholesale market, much like we've done in the consumer side of the market, where dealers know we're a place that you can come to buy high quality wholesale cars. I think secondly, we've talked about this before, but we acquired Carlifso in mid-twenty 17 and placed 1 of the Carliptso founders over the product side of buying cars from customers, increasing our management focus on that area and also have enhanced our technology for valuing cars that we buy from customers. Now having said all that, we still view ourselves in the very early innings of building out a business of wholesaling cars or buying cars from customers. I think we're cautiously optimistic about how that business is going, but it's still very, very early and we are pleased with the results in the quarter and we'll look to continue to build on those, but are in the early innings there. As it relates to retail gross profit, the second part of your question. So we stepped up by about $137 in retail gross profit quarter over quarter. The biggest contributor to that sequential gain was the absence of any promotional activity in Q1. As you may recall, in Q4, we do our annual Cyber Monday promotion, which has an impact on retail GPU. In this particular Q4, we also did some hurricane related promotion activity. And so that was the biggest driver of the sequential increase. I think as you may recall on the previous call, we thought Q1 retail GPU might be a little softer than we otherwise would have expected, given the patterns that we were seeing in the wholesale market and the associated depreciation rates at the end of Q4, we were generally pleased with the number that we put up, which is part of our GPU beat, was exceeding our own expectations there on retail. We were generally pleased with that outcome given what we were seeing in the wholesale market dynamics. David, this is Ernie. All I would add is, I think the path to $3,000 is clearer than it's ever been. As we said in the prepared remarks, we expect to cross over $2,000 this quarter. We expect to be at a similar turn time to where we were in the Q1. It gets really easy to extrapolate up to that $3,000 number by imagining that we continue to push down that term over time. We continue to get the benefits of scale from better leveraging the logistics network and the inspection centers. From there, it's a hop, skip and a jump to $3,000 and we think we can get there with products that we're already offering to customers. So we're feeling really, really good about that path. Just to follow-up on that 902 versus the 555 was I mean was like half of that coming from essentially the inventory turnovers, improvement in inventory churn or was it a little bit more significant than that? Yes. Sorry, David. To be clear, I was talking about sequential changes in retail GPU, just to be clear. On a year over year basis, you're certainly right. So we decreased average days of sale by 23 days year over year. That's a large part of the bridge between Q1 'seventeen retail GPU and Q1 2018. We also made gains in reconditioning and inventory management over that period. I think we talked about those over the course of our calls in 2017, some of the initiatives that we executed there. But average days of sale coming down was the big driver and then gains on the cost side, particularly as it relates to reconditioning was the secondary driver. Got you. And then my final question is, can you also bridge the 879 and the 596? Is it just more add ons or are you getting a little bit more on the Allied side? Thank you. Sure. So adding GAAP waiver coverage in mid-twenty 17 was certainly part of that bridge year over year. Another part of that bridge year over year was increase in our finance gross profit per unit. That came from in part a softer than normal quarter on finance gross profit in Q1 2017 as we were transitioning over to Ally for the first time. And so we made some gains there just by lapping that softer than usual quarter. We've also made gains over time in optimizing our scoring and pricing technology and that has led to finance gross profit relative to a year earlier as well. Great. Thank you and congratulations. Thanks, David. And our next question comes from Alvin Concepcion with Citi. Please go ahead. Hi, this is Nick Jones on for Alvin. I guess, first question would be, and I know it's probably still a little early, is there any update on repeat customers in your early markets? I know you commented on lapping your 5th anniversary, I think, in Atlanta. And then any additional color on vehicle? Will you need to build out a larger team to improve on that and match kind of what CarMax is doing? Yes. So on your first question, I think to your point, we just kind of crossed over our 5th year in operation in Atlanta. The average consumer purchase cycle for buying a car is about once every 5 years. So we're just kind of heading into the meat of repeat purchases for that cohort, which was on the order of 100 cars in that 1st year in Atlanta. So the data is still relatively thin. That said, we do have early data from customers that are buying a second car or third car much more quickly than average. And I would say that the early data there looks very strong and we're very excited about it, but it's still noisy enough and the counter small enough to where I don't think we're comfortable quantifying that. But I would say we're optimistic about that and feel good. I think if you look at the cover of our shareholder letter, for example, there's a picture up there of a family that's bought 6 cars from us. And I think that's not the early the early indications are good, but nothing to statistically nail that down just yet. As far as progress in sourcing our vehicles goes, I think I'd go back to Mark's answer as it related to the wholesale gains. This was our record quarter in average wholesale margin and every bit is importantly our record quarter in terms of cars that we bought from customers. I think we are making a lot of progress that looks really good. It is off a relatively small base. So I don't know that we're ready to give visibility into what our expectations are for the future there yet. But I would say the last several months have been very encouraging. The team is doing a great job. They're testing a number of things and working on just improving conversion of the funnel and then also starting to test getting more people into the top of that funnel. And I think that looks good, but it's too early to quantify that as well. Great. Thank you. Thank you. The next question comes from Matt Schindler with Bank of America Merrill Lynch. Please go ahead. Yes. Hi. Is there any way you can comment at all on the average credit score of your customers that you're sending on to Allied for on your financing are rising rates having an effect allowing for potentially more money to be from Allied for loans that you're passing there? So on your first question, I think what I would say is in every demographic dimension, credit age, income, gender mix, etcetera, we've seen a pretty standard mix of buyers that are buying cars from us. So I don't think there's anything significant to call out there and there hasn't been any meaningful migration in that the kind of population that we're servicing. So I think that continues to play out as expected. As it relates to rising rates, I think rising rates do impact us. And I would say that the impact is moderately negative. When rates rise, it makes any given receivable that we originated worth less. We then can take those rising rates and put them into our pricing system and pass them on as long as that's what the rest of the market is doing. But the way that we actually implement that instead of just passing those rates straight through, we basically watch to see what's happening to consumer and straight price sensitivity to make sure that we can kind of see in customer responses that the rest of the market is passing us through and then we will pass them through. And that kind of creates a little bit of a natural lag there that creates something of a headwind. We don't think it's super meaningful, but it is a negative all else considered. Okay. And one more follow-up that's completely unrelated. The question about I was wondering about your GPUs. Have you done any change to what you think your basic discounting is versus comparable used car sales? No. That's been consistent. Nothing specific call out there either. Wonderful. Thank you. Thank you. Thanks. And our next question comes from Colin Sebastian with Robert Baird. Please go ahead. Great. Thanks and nice quarter guys. Ernie, maybe just a couple for you to start. Could you perhaps expand on more details around the pinch points that you mentioned have emerged over the past several months? And then you also talked about improving conversion rates in the funnel on website traffic. Is that something you've already seen even with the national ad campaign presumably bringing more out of market traffic? Or is that more of an expectation you have as you add more functionality to the website? Yes. Well, first of all, I think, Colin, you're the first one to ever give us credit for a good quarter at the beginning of your question. So we got to thank you for that. So that's a moment for celebration. I think on your first question, I think we view this as a really high class problem. So I think the first thing I would say is for the year, we're raising our estimates for total revenue and units sold. And I think that what kind of is driving these points is we saw roughly a 50% jump in sales 45 days ago when or roughly 45 days ago when tax refunds hit. And we obviously have a plan going into tax season, and we're prepared for the expected volume increases. But 50% at this scale, that increases sales on a monthly run rate basis by something on the order of 2,500 units a month. That's basically like a $600,000,000 a year that shows up kind of out of nowhere. And whenever that volume shows up that quickly, I think you're always going to find some holes in your plan. So I think it's going very well, but the form that those pinch points take is just we'll see a little extra demand versus when we are ready to handle that kind of strain certain logistics routes. And so while most of the logistics system has excess capacity, there are certainly routes inside the system that are overwhelmed right now and that are extending out delivery times and we tend to see those delivery times being extended out leading to decreased conversion rates. Similarly, we now have 62 markets open. When you have 60 2 markets, sometimes your staffing doesn't quite keep up with the pace of demand in some of those markets. And that can also lead to kind of pushing out delivery times, which also can constrain demand a little bit. So I think those are what are driving it. Now as it relates to the demand that we're seeing, I would say we're seeing very, very high quality demand and are extremely excited about it. Basically, I've seen that all this year starting in January and flowing all the way through. We're definitely seeing much higher growth rates, kind of at the top of the funnel than we're able to convert into sales today, because of some of these pinch points, but we're working very quickly to resolve them. And that demand is what has us feeling so good about the year. Okay. And then maybe, Mark, regarding the advertising expense, I was wondering if you could break that out between the portions that are brand or national ad spend versus more direct response or local spend and how you expect that to trend over time? Sure. So at a high level, our marketing mix in terms of brand versus more direct has not changed too much. I think we've hovered around 50% TV as a fraction of total spend for quite a while now. That's still roughly the case. Within that TV bucket, we are transitioning more toward national advertising as we expand our geographic footprint. That's one of the places where we see a lot of positive feedback in opening more markets. So one of the nice things about opening markets is the more markets we have, the more efficient it becomes for us to utilize national TV spend as opposed to more local brand channels. And so that has good positive impacts overall. I think the results that we're seeing early on from our marketing spend are positive. Our 2018 cohort has the lowest Q1 CAC that we have on record. So we're excited about that. I do think as we look forward over time, we'll continue to expand our national TV advertising as a share of spend. And again, that just comes with opening more markets and expanding our service to a wider set of customers nationwide. All right. Thank you. Thank you. Our next question comes from Sharon Zackfia with William Blair. Please go ahead. Hi, good afternoon. I guess Ernie, you were talking pretty quickly about those pinch points that you were seeing in satisfying demand. Is that am I understanding correctly, is it the you don't demand. Is that am I understanding correctly, is it the you don't have adequate amount of haulers to get the cars to people and the time that you'd like to or could you go over that again? And I guess I'm asking that in relation to logistics costs because they kind of went up on a per car basis for the first time, I think at least as far back as my model goes. So I'm wondering if that's kind of tied together. Yes. So first of all, I guess just yes is the answer of sort of, I would say. So if you think about we have 62 markets now, there are many, many different logistics legs that are connecting all those markets together. We've got legs connecting to different inspection centers and we've got legs connecting out to all different markets. When we're shipping cars to customers across the country, oftentimes cars go through many different legs. So all you need is a pinch point in any of those legs and it can result in delivery times being extended out for some customers in markets that rely on those legs. And so that's the form that's taking. Now we also invested significantly in the logistics network in preparation for all of this growth. And so that's a big part of what you're seeing. And across logistics network in general, we've got excess capacity, but we certainly have legs that are kind of constrained today. And then Sharon, one other point that I would make there is, when we're growing at these very, very high rates, there's a bit of a lag between when we have to make expenditures on things like the logistics network and when we realize the large sales gains. So in a quarter like Q1, we're building out the logistics network, getting ready for that 50% jump in demand that Ernie described. We're doing that well ahead of time. And so that sort of lag effect can give rise to some temporary fluctuations in something like logistics expense as well. Okay. Thank you. And then a follow-up. Mark, could you give us an idea of what kind of the range of CapEx might look like for 2018? Sure. So we historically have not given CapEx guidance. Part of the reason for that is one of the more unpredictable parts of business is predicting when exactly we're going to launch vending machines. And vending machines are far and away the largest CapEx component for us. I think if you think about the key drivers of CapEx, again, we've talked about it quite a bit, but it is those vending machines as well as our hauler network. Those together make up the meaningful majority of our total CapEx. So in terms of specific guidance, we haven't done that because of the uncertainty around when exactly and how many exactly vending machines we're going to open. But we've had a relatively consistent pattern over time. I wouldn't expect anything too crazily out of the ordinary. Okay. Thank you. And our next question comes from Ron Josey with JMP Securities. Please go ahead. Great. Thanks for taking the question, guys. And just maybe two quick ones. On the days of sale outstanding, I just wanted to drill down a little bit further there, just given the importance to gross profit. And so 1Q's DSO 70s, the 2nd quarter in a row in 70s, and that's despite the inventory ramp into the 1Q seasonality. So Mark, is it fair to think basically going forward, we're most likely to see DSOs continuing to come down rather than revisiting the 90 to 100 DSOs that we saw last year? And then Ernie, just as a follow-up to your comment on like the pinch points and there are certain legs that are constrained today, totally understand that. But when you're launching new markets, are you doing so to avoid those overstress legs? And maybe bigger picture, can you just talk about the trade off between perhaps slowing down market roll offs rollouts, excuse me, to basically get those legs up and running versus accelerating them as we're doing now? Thank you. Sure, Ron. So to hit the point on average days to sales, so we've obviously made a tremendous amount of progress on bringing down average days of sale. We were at 97 days as recently as Q3 2017 and it pulled that down to 70 days in Q1. We do expect that to fall a bit further in Q2. And then given all the progress we made, we're looking for the rest of the year to keep that in a relatively stable and reasonable range from Q2 on the rest of the year. Part of that is driven by our inventory plan. I think when you think about our plans for inventory over the course of the rest of this year, we expect inventory to remain relatively flat within a range up or down for the next couple of quarters and then grow toward the end of the year as we have done in the past in order to satisfy first half twenty nineteen demand. Yes. And then just to get into your second question, I do think so most of the stress in the system is basically moving cars out to the east, where we have our oldest and most mature markets. And we most of the or many of the markets that we're opening are in parts of the network where we are less stressed. So we do take that into account, but we also expect to fix these pinch points relatively quickly over a matter of months. So I wouldn't say it's a huge consideration. I also would say that the pinch points emerge less as a direct result at least of market openings. It's more as a result of just kind of the large discontinuous growth that we see as we head into kind of late February when we see tax refunds drop. And there's just a lot of demand that shows up there. We do our best to plan for that demand ahead of time. But as I said, you have 62 markets and you're predicting demand at that level of granularity and then you've got many, many logistics routes. If you're off a little bit here or there, some pinch points are going to emerge and then we just got to work to quickly remedy that. Great. Thanks guys. Super helpful. And our next question comes from Seth Basham with Wedbush Securities. Please go ahead. Thanks a lot and good afternoon. Hey. Hey. My first question is on the cadence of the quarter. Clearly, you guys did a great job beating your top line expectations. Could you describe what happens from a monthly cadence perspective? What drove the upside in March specifically? Sure. We'll give some color on that. So I guess what I would say is, I think on our last call, we talked about the expected increase in demand that we would see in late February. We kind of called out being able to handle that operationally as probably the biggest variable in our guidance. I think we did a good job handling that in March, But we definitely believe that there was more demand in March than we were able to convert. I think that's much less true of January February because that kind of comes at a point when we're more at a steady state and we're able to handle kind of that level of sales. And then I think just the pitch points that emerged in March as you see those higher volumes are kind of rolling over into April May and we're expecting to resolve those relatively quickly, which is why we feel so good about the full year. Got it. That's helpful color. And then secondly, as we think about your vehicle acquisitions, how are those trending from a cost standpoint? Are you guys making progress on lowering acquisition costs of vehicles you're acquiring from auctions? And what is that mix between vehicles acquired from auctions and other sources and how has that trended? Sure. So I think I would describe broadly our vehicle acquisitions from auctions as being approximately even or stable. I think we're constantly looking to make improvements there. We're constantly improving our technology. And so we really like what we're doing there overall, but it's been relatively stable over the last short time period. I think in terms of mix, I think that's been fairly stable as well. One thing that we've talked a lot about, particularly as it relates to wholesale on this call, is the opportunity in sourcing more cars directly from customers. I think we've seen some nice progress there in terms of the volume of cars that we're taking in from customers that's showing up to a degree in our wholesale volumes. We're also feeling good about the margins on those cars that we're taking in. And so as I mentioned earlier, we're cautiously optimistic about our abilities to source more cars from customers. We're in very early innings of that today. Okay, that's helpful. And then lastly for me is thinking about one of your oldest markets, Atlanta, I know you don't like to talk about individual markets in too much detail, but how should we as investors think about the EBITDA margins you're earning right there as a proxy for the future when the markets mature? Sure. So I think the most straightforward way to think about market contribution is to use the CAC data that we provided in our most recent 10 ks. And then you also have you see our results and our guidance on GPU. One key element in thinking about market economics is the fact that our company GPU was a pretty good proxy for the average market because we do have centralized inventory, we have a centralized transaction platform and all markets are drawing upon that centralized inventory using that centralized transaction platform. And so one easy way to think about contribution is we had a 440 TAC in Atlanta in Q4. We had an $18.50 GPU this quarter. And so that's the starting point. Now there are other expenses in the market. We have to do last mile delivery. We've got advocates in the market who are driving haulers out to the customer's door. We're spending some gas to get those haulers out to the door. That's a relatively inexpensive cost compared to the cost of operating a brick and mortar dealership. So those costs are relatively small, but those are there as well in addition to the 2 big line items that you have. Yes. And then one just I think useful and interesting data point there as well is in March, we had in terms of sales per market operations employee, nationwide, we were up to 32 sales per market operations employee, which was up 40% year over year. So you can see there's a lot of leverage showing up in those additional line items as well. Thank you, guys. Thank you. The next question will come from Steve Dyer with Craig Hallum Capital Group. Please go ahead. Good afternoon, guys. This is Ryan on for Steve. Just one question for us. You guys have talked a lot about operating leverage. And when I look at your 2018 guidance for revenue and GPU, both went up implying better gross profit. However, EBITDA margin guidance implies a bigger loss. Can you help me reconcile the higher gross profit and what appears to be even higher incremental OpEx? Thanks. Sure. Yes. So I think we're obviously very pleased with the operating leverage that we've shown in the business. I think in Q1 we increased improved EBITDA margin loss by 900 basis points. That included a reduction of approximately $1,000 per unit in SG and A. That reduction in SG and A was split across 2 big buckets, compensation and benefits and then other overhead costs. And so we do expect to see future leverage there as well. As it relates to the rest of the year, I think we're feeling good about all of our guidance. I think we saw very strong results on GPU in Q1. We are feeling very good about our above $2,000 GPU guidance for Q2. And so we're feeling good about the year generally. And our next question comes from Sameet Sinha with B. Riley FBR. Please go ahead. Yes, thank you. So I guess staying on the topic of operating leverage, the ad spend per unit kind of stayed pretty much flat year over year. And I guess, Mike, to your point, you're talking about how you're prepping or investing in advance of your seasonally strong quarter. So can you touch on that and also talk about ad spend and the kind of factor that you use to decide on ad spend? Is it number of markets, your population, number of expected units? Can you help us think about that, especially as we try to model this out? And my second question for you Ernie is, Ernie, you spoke about the pinch points. I guess one of the other pinch points I'm thinking about is just in terms of people searching on your site and not finding the right inventory. Can you quantify that? Is there a way to figure out how many people leave or do not purchase just because they couldn't get something in the right age or right mileage or configuration and just leave and that and how you use those data points to kind of configure your future purchases? Thank you. So, Sameet, on advertising leverage, let me hit that first. I think the really important point to make there is we think about advertising leverage 1st and foremost at the cohort level. And so we provided some data in the most recent 10 ks that shows how advertising expense per unit evolves over time within a cohort, which you can also think about as within a market. And what we've seen there is very steep declines in advertising expense per unit as markets age. Adx per unit starts high when we first launch a market and begin our brand advertising and begin raising awareness. But then as that awareness grows, we see steep declines in advertising expense per unit, with Atlanta being the most mature market, all the way down to $4.40 per unit in Q4. So I think when you're then kind of stepping up to the company level, what you see at the company level is a mix of more mature markets that have gone through that steep decline in advertising expense per unit as they've aged, paired with new markets that tend to start at a higher advertising expense per unit. And it's that mix that generates the company overall number, which of course, when you're opening a lot of markets, can be relatively stable based on mix effects. The other thing that I would add there is that although new markets are more expensive from an advertising expense per unit than more mature markets, we've seen very positive trends there in the 1st quarter advertising costs of new markets. 2017 was lower than any of the cohorts before it as we presented in the 10 ks, and then 2018 was lower still. Yes, I would just add to that. I think national marketing is an exciting tool here because I think when you think about local marketing, if you double market, what you basically have to do is you double your marketing spend and then you expect to see similar responses in the new markets to what you saw in the old markets. When you move to national marketing, if you double markets, you then have this choice. So I want to double marketing, which then kind of doubles marketing everywhere. Or do I want to hold marketing flat, which then will lead to the same level of exposure in all the new markets, but will decrease kind of the overall spend per sale. And so I think that sort of a network effect is not unlike the inventory network effect that exists in our business as a result of our ability to access national markets. So I think that's exciting. I think that we'll continue to watch that and look at the sensitivity to national TV marketing over time and make the right decisions as we continue to learn more. That's the same choice that we've got in inventory. And I think you asked this question about inventory. There's no doubt that having the car a customer wants absolutely is a primary driver of converting any given customer. And so having either a larger inventory or a more intelligently distributed inventory leads to more sales. And so I think as it relates to more intelligently distributed inventory, we're leveraging all kinds of data for many different data sources, some of them external data sources and then many of them data sources of just all of our customers clicking on our website every single day that are informing which cars we want to buy, where we want to buy and how much we want to pay for them. And I think we're I do believe that we're exceptional at that. And then as it relates to the number of cars that we put on the site, that's this question of at any given time, are you going to leverage growth to push down turn time by holding inventory flat or you're going to leverage growth to be a reason to grow inventory and increase conversion everywhere. And over the last 12 months for the most part, on average, we've roughly held inventory flatter and we've pushed turn times down significantly. That's always a choice that we get to make. And I think it won't be long until we get to a place where our turn time is inside the range that we wanted and we'll start to just grow inventory continuously with demand, which I think will be an exciting time for conversion. And then Samit, just to your second question very quickly, the biggest determinant of our market spend is the population that we're marketing to, which is obviously also heavily correlated with the number of markets that we're in. And our next question comes from Gary Prestopino with Barrington Research. Please go ahead. Hi. Most have been answered, but do you have the unique visitors, average monthly unique visitors for the quarter? It was $1,600,000 and I think in the shareholder letter, we also said that we crossed over $2,000,000 in April, and that was up from $1,000,000 9 months prior. Okay. And then just in terms of inventory, Ernie, how much did you have to flex up your inventory here in Q1 to get into the spring selling season or did you keep it flat with Q4? No. So I mean we definitely flexed up inventory in Q1 versus Q4. I think that's something that we've done historically. And I think that is commensurate with the increases in sales that we've historically seen when tax season hits. And so we did grow inventory in Q1. We did that while lowering average days of sale and that just corresponds to the big increase in demand that we see starting late in Q1. Can you give us an idea of what your inventory is going into the quarter here? So Q1 with just under $300,000,000 in inventory on the balance sheet. Okay. That's all I'll get from units. And then as you grow, have you considered taking advantage of the leading auction companies to do some reconditioning for you, especially in areas of the country where you might not have a presence with an IRC? Yes, we're doing that all internally. We think that that's important to control the quality of the car. And we've got a really strong process at our inspection centers where we take a car in, stock it in. We can go through and make sure we've got all the right data about the car. So we make sure we can merchandise it properly. We put it through our reconditioning standards. We can make sure that we certify it to a level that we believe is a high enough level to put in front of our customers. And then we're able to photograph the car as well for merchandising it. So we think that's all important for us to control. So we're controlling that all today. Okay. Thank you. Thank you. Our last question for today will come from James Albertyne with Consumer Edge. Please go ahead. Very good. Thanks for squeezing me in gentlemen and congratulations on a solid Q1. Thank you. I wanted to ask and as well congrats on the follow on offering. I wanted to focus on capital allocation here a little bit if I may. You did an acquisition here of Carliptso. I'm curious how you think that's going to flow through? How we should sort of gauge the necessity in terms of timing, and then the progress you're making in terms of integrating those benefits, where we're going to see that manifest itself and how soon perhaps? And then as well, as you're balancing growing into new markets, you're talking a lot about pinch points, you're talking a lot about excess demand for where you have supply to fulfill. And we're not seeing vending machines carry into every market you're opening and you're obviously leveraging your national branding to some degree there too. I'm just wondering, given it's one of your highest CapEx uses right now, does the ROIC that you're calculating on your vending machine additions necessitate further vending machine investment at this point? Or is it better served to sort of utilize it elsewhere, given the successes you're having in large swaths of the country without a vending machine? Okay. So let's start with CAR 360 there. So and you also mentioned CARLYPSTO, so I'll briefly touch on that. So CARLYPSTO was the first acquisition that we did that was earlier in the year in 2017. A lot of benefits that are already flowing through and as Mark brought up earlier in the call, one of the founders of Carlipto is now running our efforts to buy cars directly from customers and doing a great job. So we're feeling really good about where we are there and how we've been able to integrate that. We're definitely still working on many, many things that we expect to be rolling out over time. But in general, that's going very well and we're very happy with kind of that partnership. As it relates to Car360, Car360 built really pretty exceptional technology and where you should expect to see that is just in enhancements to our vehicle player where customers can go on our website, click on a car and then explore that car. I'll just say when I got the demo from the first time, I laughed out loud because I thought it was so incredible and my mind was spinning a 1000000 miles a second trying to figure out how they were doing what they were doing. And we're really excited to integrate that technology and give that experience to our customers. So that will take time because there are many different levels of integration that we plan to do and many interesting functionality that we expect to roll out over time. I think we expect the first iterations and integrations to start to roll out toward the end of the year. And then we'll be working as quickly as possible to continue to roll out more of the incredible technologies they've built. So I think we're very excited about that. I'll let Mark come back around and talk about how that flows through the financials. As with the vending machine, you're right, we definitely do not have vending machines in all of our markets and we're very pleased with the growth that we're seeing across the company and in both markets with and without vending machines. We do believe that we have excess demand today and I think that's very exciting. We also believe that vending machines continue to be very high ROI. We feel that we can measure that ROI pretty surgically because we put the vending machines on the ground. We see the changes to sales. We see the operational benefits that we get. We can quantify those and then put those up against kind of the cost to finance those vending machines through sale leaseback arrangements that don't even end up tying up equity capital. And the math remains very clear and the response remains very consistent across many of those different markets. So I would say we're feeling great about the core offering. We're excited about the benefits of national marketing as we continue to leverage that more fully. And we continue to believe very strongly in the power of vending machines and we'll keep investing in those. And then as it relates to Car360 and the financials, so in terms of revenue, gross profit, OpEx other than depreciation and amortization, the impacts will be immaterial. There will be some additional depreciation and amortization associated with the acquisition and we'll provide additional details on that in Q2. Okay. Listen, I really appreciate the thoughtful answer. And to the degree that you've shared data in the past on your market share and trajectory there to the degree you're willing to share it on the ROI side, I think that could go a long way. But I understand it's a trade secret. But I do appreciate the comments and thanks again and best of luck. Thank you. And this will conclude our question and answer session. I would like to turn the conference back over to management for any closing remarks. Thank you everyone for joining the call. We had a great quarter, much more importantly the pieces are in place for a bright future full of great quarters. Thanks everyone on Team Carvana for everything you do every day. Companies are nothing more than a collection of people working toward a common goal and I'm proud to be part of this collection of people to share with you all the mission to change the way you feel like cars and to be succeeding in fulfilling that goal to the degree we are. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.