Earnings Call: Q4 2017

Mar 6, 2018

Good afternoon, and welcome to the Carvana 4th Quarter Earnings Conference Call. All participants will be in listen only mode. 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, everyone, and thank you for joining us on Carvana's 4th quarter and full year 2017 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 Q4 and full year shareholder letter is also posted on the IR website. 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 Annual Report on Form 10 ks for 2017. 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? Thanks, Mike, and thanks, everyone, for joining the call. As we have in prior quarters, we put a shareholder letter out on the Investor Relations site. We put a lot of detailed information in the letter relating to both the Q4 and the year as a whole, so I'll spend most of my time today focusing on key milestones and trends in our business. Let me start in the obvious place. There's admittedly some noise in our results. We missed our own guidance in unit sales in the Q4. We also grew revenue 148% year over year, our highest growth rate ever as a public company, which begs the question, how did that combination of facts happen? The answer is that we had a great Q4 by any reasonable measure. We also had unexpectedly weak results from our Cyber Monday promotion that surprised us and we failed to sufficiently factor the unexpected into our guidance. That noise was completely self inflicted. That said, it is noise. So what are we excited about as we head into 2018? In the shareholder letter, we included several graphs that we believe highlight the most important financial measures of the business. They include units, revenue, GPU, number of markets, number of vending machines and EBITDA margin. Examining these numbers annually is helpful because it provides a bigger perspective that makes the Carvana story very clear. Please take a moment to go over these graphs. In addition, we included our cohort market penetration curves. We also really like the story these curves tell. Our growth continues to be significant and consistent across markets. Our most mature cohort, the 2013 cohort, reached a market penetration of 1.54 percent on growth of 44% in the Q4 year over year. We don't know how high our market penetration can ultimately be, but even if you assume that 44% growth rate drops to 0 from here, the penetration we have already achieved in that cohort would enable us to get to scale that is over 13 times where we ended 2017 if we can get nationwide penetration to the same level. We are just getting started. Carvana is now a 5 year old company. In that short time, we've established ourselves as the leaders in automotive e commerce. Our customers can buy a car and then it's on our website while getting approved for financing, pricing their trade in and signing contracts without ever leaving their couch. They can have their car delivered as soon as the next day through our in house logistics network with the car arriving at their door accompanied by a Carvana customer advocate who shares their enthusiasm for the moment. This offering is powerful and difficult to replicate as it requires expertise in many areas. The numbers reflect this power and uniqueness. All of this has been accompanied by significant GPU growth and significant operating leverage. Over the last 3 years, we've grown GPU from negative $200 per unit to over $1500 per unit and we have improved our EBITDA margin from negative 32% to negative 17%. We have achieved this while rapidly scaling, evidenced by a cumulative annualized growth rate of over 175% and 140% in units and markets respectively over that period. We view this as a significant accomplishment with few precedents in either the public or private markets. Accomplishing all of this so quickly is a testament to 4 things: the size of our opportunity, the quality of product we have put in front of our customers, the scalability of our model and most importantly, the caliber of people who have made the Carvana mission their mission. These graphs extrapolate to achieving massive scale and straightforward ways. So what stands in our way? We believe the biggest hurdle we face is execution risk. We need to continue scaling sourcing cars for our customers, certifying them, transporting them through our logistics network and delivering them to our customers' doors and most importantly, wiring our customers at every step along the way. Each step carries risk and we think a useful way to examine these risks is to separate them into 2 buckets, the operational bucket and the customer experience bucket. The operational bucket is a big one. The good news is that this risk is mostly impacts the time it takes us to achieve any given milestone more so than the ability to ultimately hit that milestone. We are very focused on anticipating and mitigating operational risk and have an incredible team with strong leadership in each operational area, which gives us confidence in our ability to manage this risk going forward. This confidence is underscored by the fact that we opened 23 markets in 2017 and have already opened 10 more so far in 2018. We also opened our 1st Carvana built inspection center and opened 5 vending machines, the most in our history. That all came together with the delivery of over 44,000 cars to happy customers this year. 2nd is the customer experience bucket. This reduces to a simple question. Can we continue to deliver and improve upon the customer experience we pioneered at the next order of magnitude? In our opinion, this is the most important risk we face it not only impacts the time it takes to achieve any given milestone, but also dictates which milestones are ultimately achievable. This is a measure we have fared very well on to date. We now have reviews from over 14,000 customers with an average rating of 4.7 stars. 10,000 of those reviews came in the last year alone. Given these risks to the sheer size of the opportunity we face, our strategic plan is to be aggressive while always keeping the customer experience at the center of every decision we make. Opening markets quickly kicks off key network effects in inventory, marketing and brand, but also generates additional execution and customer experience risk that we must be mindful of. This reality puts our goals of aggressively seizing this opportunity and delivering the best customer experience available to our customers in conflict to some degree. That conflict is resolved by the quality of our operations. As long as we continue to execute the level that enabled us to grow revenue by 135%, grow markets from 21 to 44 and to deliver customer experiences that earned us those 14,004.7 star reviews, we will continue to accelerate with this exciting opportunity to our customers, team members and shareholders benefit from the positive feedback of growth inherent in our model. We know that the triple digit growth path into this tremendous opportunity will not always be a straight line, but we believe we will achieve our goals as long as we keep our eyes on our mission to change the way people buy cars. We're entering 2018 proud of our accomplishments, but not satisfied. We also believe the opportunity we had is incredibly unique, and we feel privileged to be the team tackling it. We are up to the challenge. Mark? Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons are on a year over year basis. We are pleased to report another quarter of triple digit growth in both retail unit sales and revenue. Retail units sold totaled 13,500 and 17 in Q4, an increase of 141% and an acceleration from Q3. Total revenue was $265,100,000 an increase of 148%. We expect retail units sold of 17,000 to 18,500 in Q1, an increase of 104% to 122%. We expect the timing of IRS refunds this year to be similar to last year. Total gross profit in Q4 was $21,900,000 and total gross profit per unit in Q4 was $16.19 For the year, total gross profit per unit was $15.39 an increase of $5.16 Our growth in GPU in 2017 was broad based, including gains in purchasing and pricing, inventory management, reconditioning, financing and new products. We expect total GPU to be dollars to $17.50 in the Q1, followed by a significant increase in Q2. Our outlook for Q1 GPU is lower than we normally would have expected in Q1 due to several factors, including higher than normal wholesale prices on purchases in Q4 after Hurricane Harvey followed by accelerated depreciation rates in December as well as due to a sharp rise in short term interest rates from Q4 through present, which impacts financing gross profit. We view these effects as largely transitory and expect a record quarter for total GPU in Q2 as we march toward our midterm goal of $3,000 per unit. In addition to increasing GPU in 2017, we also successfully reduced our average days to sale through our inventory strategy. We exited the year at 72 days in Q4, our lowest quarter ever and expect further gains in 2018, particularly in the second and third quarters. We expect reduced average days of sales to contribute to higher total GPU in 2018. Our outlook for the full year is $19.50 to $21.50 an increase at the midpoint of $5.11 EBITDA margin was negative 15.5% in Q4, a slight improvement from the prior quarter. As with GPU, we expect EBITDA margin to improve in Q1 and then to improve significantly in Q2. In terms of our full year outlook, we expect significant growth in retail units sold, totaling 89,000 to 93,000 for the year, up from 44,252 in 2017. We expect to open 30 to 40 markets in 2018, reflecting an acceleration of market openings relative to the 23 we opened in 2017. As we move into 2018, we expect to continue to grow retail unit sales, open new markets and drive operating efficiencies to improve GPU and EBITDA margin. We expect OpEx to increase in dollar terms as we expand, but to decrease as a percent of revenue. We expect very modest increases in fully exchanged share count in Q1. You should use approximately 137,000,000 shares on a fully exchanged basis. We ended the year with $172,700,000 in cash and equivalents. In the 4th quarter, we entered into a master sale leaseback agreement that provides for the sale leaseback of up to $75,000,000 of existing and future vending machines and IRC construction projects. We sold and leased back $19,200,000 of vending machines under this agreement in Q4 and intend to sell and lease back additional assets over time. As we discussed previously, we believe this demonstrates our ability to use our balance sheet to provide additional financial flexibility as we continue our rapid growth. We also increased our financial and operating flexibility in Q4 by issuing $100,000,000 of convertible preferred stock to Dundon Capital Partners. This preferred stock pays an annual dividend of 5.5 percent and is convertible to common shares at a conversion price of 19.6945 dollars Due to the rapid increase in our stock price following the announcement but prior to the closing of the deal, this issuance gave rise to a beneficial conversion feature under GAAP, which increased the loss attributable to Class A common stockholders by $1,237,000 in Q4 and will increase the loss attributable to Class A common stockholders by $1,380,000 in Q1 2018. In our 1st year as a public company, we made significant progress toward achieving our financial goals. As we look toward 2018, we intend to continue to expand our footprint, rapidly grow sales, increase GPU and demonstrate operating leverage. Thank you all for your attention. We'll now take questions. We will now begin the question and answer session. And our first question will come from David Lim with Wells Fargo. Please go ahead. Hi, good afternoon, everyone. Hey, Ernie and Mark, I don't know if you guys have this metric, but I'm sort of wondering if you look at Q4 2016, I think you guys had 21 markets then. How did those markets sort of fare in Q4 of 2017, sort of like on a same store sales? I guess this would be like a same store geographic metric? So I think you can kind of see that in the cohorts. I mean, what I think I would do is I would look at the cohort curves that we put in the shareholder letter and basically look at all the curves that came prior to 2017, I think you can get a pretty good sense. So I think that's where we would point to. We're not currently giving a same store sales metric, but I think those curves have been remarkably consistent. Hopefully, you can see that in those curves. Got you. And then my follow-up question would be, I think you said $500 $7,000,000 And David, are you asking about 2017 over 2016? I'm sorry. The 20 I think it was the 2018 guidance on GPUs. I think it was a $500 improvement over 'seventeen, half of it's coming from inventory. Yes, great. Yes, I'll take that one. So in terms of our guidance for 2018, I think the other half of the $500 total increase is going to be broad based. I think we expect to see gains in wholesale gross profit per unit as well as the various other buckets, financing as well as our ancillary products. So I would just think of that $2.50 as being broken up across the rest of the transaction, but we expect improvements in all areas. Yes. And David, I think that's been pretty consistent across 'seventeen, our expectations in 'eighteen and even forward from there. I think as we said in the past, on our path to $3,000 we expect about half of that's come from product, about half of that's come from scale. We've been roughly eating into those buckets at kind of the same speed as we've moved through the growth we've seen over the last year and a half, and we expect to continue that at roughly a similar speed going forward. Got you. Great. I'll just jump back into the queue for a follow-up. Thank you. And our next question is from Sharon Zackfiault with William Blair. Please go ahead. Hi, good afternoon. I think in the shareholder letter, you talked about a test that you did in marketing in Charlotte and Nashville that didn't work very well. So I'm just curious what that test was, what you learned from that about how your marketing effectiveness could evolve going forward? And then secondarily, on the vending machines, did you talk about how many vending machines you're planning on opening in 2018? I didn't see that. Yes. So I'll hit the marketing test. So first of all, we're running marketing tests all the time. I think the nice thing about having 44 markets open now is we're able to test all kinds of different treatments, whether it's different creative mixes, different channel mixes, different ways we present to the market. So we're testing different things all the time. I think we did run a fairly substantial test in both Charlotte and Nashville, which are the 2 markets under the live 2014 cohort, where we actually changed creative on TV and we also made some changes to a number of channels. We ran that test for around 9 months starting at the end of Q1 roughly through the end of this year and then kind of reverted back to our standard marketing mix at the end of 2017. That did not work out great. Normally, I think we wouldn't call out specific test results for marketing. We're doing that because you can see in the 2014 cohort, it kind of looks like it folds over and stops growing. And that's basically the result of those marketing tests and then it's the blend of Charlotte, which is one of a small handful of markets that's been below Atlanta from the beginning and then Nashville kind of being blended together. So we just want to point that out that that's driven by a marketing test. And then on the number of vending machines? On the vending machines, Karen, so we are building vending machines. We have several vending machines in progress, some of which are visible to varying degrees. We're not providing specific guidance on vending machines for 2018. Okay. Thank you. Our next question comes from James Alberty with Consumer Edge. Please go ahead. Great. Thank you and good afternoon, evening. I wanted to ask, I think last quarter you provided a metric on customer demographics, talked about millennials, I believe, or a certain percentage, maybe I assumed it was millennials, but you talked about percentage of customers that were buying from beginning to end on their mobile phones. I was wondering if you could update that number for us for the Q4. So I think as it relates to both millennials and kind of mobile trends, the trends are very consistent. They both continue to trend upward fairly slowly, but consistently. I don't think we have any additional numbers to give you on this call. The numbers from last quarter's call are still pretty consistent. Okay, great. And as a quick follow-up, if I may. As we think about advertising costs, you're leveraging a lot of your nationwide branding initiatives. Just wondering if you sort of have a good sense now with some marketing tests perhaps that have failed and now you're sort of retracing and going in other directions. Do you have a pretty good sense now of the base and it's only a question of sort of opening new markets and leveraging with unit volume over time? Or should we expect an additional sort of step function change in advertising spend looking ahead to 2018? Yes. So the first thing I would do is I'd point to those cohort cat curves. I think those are also very, very consistent just like the market share curves. You can see them all kind of trending down in a very tight spread to one another. I believe in the Q4, Atlanta got down to $4.40 and the rest of the curves are on a very similar path. So I think in terms of getting the entire company down to $4.40 that's basically just a matter of getting all those other cohorts to catch up to Atlanta. Atlanta, despite growing 44% in the 4th quarter, also lowered its marketing expense, its CAC by about 20% year over year. I think those continued reductions are the result of continued learnings that come from all these different marketing tests that we run as well as word-of-mouth in the market. And interestingly, I think the 5 year transaction cycle in automotive, we have we're a 5 year old company. And so we've been in Atlanta now for 1 automotive purchase cycle basically. And we've been advertising on TV for about 4 of the 5 years that we've been around. So I think there's still reason to believe that there will be strong downward momentum in those curves over time. I think the unit economics work great as long as we get all markets down to where Atlanta is today. But I think there's reason to believe that we can push even further down. There's a lot of momentum in those curves. And then go ahead. And then and Jamie, to answer the second part of your question, so we do think of advertising spend as being highly correlated with the number of markets in which we operate, that pattern has been consistent over time. There is some variability in that. There's some seasonality. There's also some variability in cross markets in advertising intensity. But as a good approximation, our advertising spend is highly correlated with our number of markets. Our next question comes from Nat Schindler with Bank of America Merrill Lynch. Please go ahead. Hi, guys. Just a couple of questions. Thanks for this. But so just looking at the cohort analysis and thank you for providing that. There's really great detail. But if you look at the 2014 cohort, which I believe is just 2 cities, that's Nashville and I believe Charlotte, they took a tick up. Is that because of the in both the tick down in market share as well as a tick up in marketing cost per vehicle. That's uncharacteristic of all the other markets. Is that because of the marketing plan that just didn't work the way you expected it to in those markets? And do you think or is there something more seriously going on in those markets? And then I have a couple of others. Yes. So I think we definitely would attribute that to the marketing test. And then also just the blend of those two markets. As you said, it's Charlotte and Nashville. Charlotte has always grown steadily but been lower than Atlanta and that's kind of flowing the whole curve down. And then the marketing test, I think, is what kind of drives that shape. There's some other methodological reasons. We only show the cohort curve. You can only see points where every market has made it through that quarter in its life. So for example, the last data point is Nashville's Q3 and Charlotte's Q4. And so you don't see Nashville's 4th quarter in there. Both of those markets are now growing market penetration again. So you just kind of can't see that underlying curve. And what I would say, I think that's driven by the marketing test. And I think the more important thing there is just those curves are very, very consistent. I think what's more important than the consistency of those curves is the driver of that consistency, which is our business model is very scalable, it's centralized and so it gets it's very easy for us to roll out markets quickly and deliver a customer experience that consistently leads those curves. Okay. That folds back into my next question. And I just have 2 more. Sorry, everyone. But so you're going to roll out as many you're going to double your markets again this year. And that's adding incrementally twice as many as you added last year. That's a big move. Is it getting easier to open markets at this point? Yes. I think there's been a number of operational improvements that we made. So in the last call, we talked about kind of our hub in a box, which is an innovation that we kind of put together to enable us to open up markets more quickly. I think as our logistics network spreads across the country, it gets easier to fill in markets. The hardest part of expansion for us today is really expanding that logistics network more so than even adding additional markets along that logistics network. So now that that network is broadening, it's getting much easier to open markets. Great. And one last question. I'm looking on your site now and you have over 11,000 cars available. That's a lot more than your historical range of around 7,500. I know there is a seasonal aspect to this. Could you go over some of the seasonal aspect and also talk about whether or not there is going to be new heightened levels of inventory available as you get up to market, 80 or so markets? Yes. I would say, in general, we held our inventory fairly flat last year. As we kind of talked about throughout the year, a major goal last year was to drive down our turn time. We did that pretty successfully in the Q4. Our turn time was 72 days off of 97 days in the Q3. So that's a tremendous amount of progress in the single quarter. I think a testament to the real leverage inherent in the model and kind of being able to see that all show up at once, I think speaks to our ability to continue that curve. We also tend to grow inventory heading out of the Q4 and into the 1st 2 quarters of the year where you get tax rebate season and tend to see kind of larger discontinuous growth. And so we grew inventory a bit. I think you should expect the shape this year to be roughly similar to last year, relatively flat and then growing again toward the end of the year heading into next year's tax season. Okay. And then just as a final last question. As you obviously, this goes beyond your 2018 guidance. So but as you look at your cash position now after the preferred offering in December and how you're getting the margin the improving declines in EBITDA as a margin basis, obviously trending towards breakeven. Do you make it to breakeven, do you believe on existing cash or do you believe there could be another raise? Hey, Matt, I can take that one. So just to walk through the basic stats there, we had $173,000,000 on the balance sheet at the end of 2017. We also had $55,000,000 outstanding with our recent master sale leaseback agreement to be able to sell over vending machines and other real estate assets. When you combine those two things, plus our demonstrated ability to finance our balance sheet, including our Floor Plan line and all of our success financing haulers and real estate, we're feeling very good about where we are from cash position. And as it relates to raising money, I think we'll handle that the same way we always have. We're going to continue to monitor the business. We'll monitor opportunities for investment in the business. And we'll keep an eye on the capital markets and how we can go out and finance our balance sheet. And we'll make the right decision for the business and our shareholders when the time is right. Our next question is from Sameet Sinha with B. Riley FBR. Please go ahead. Yes. Thank you very much. Can you elaborate on what exactly happened during the Cyber Monday and the hurricane promotions? What exactly went wrong? And talk about the learnings from there? 2nd question is, if you look at the GPU guidance, I mean, you're basically implying the GPU at the midpoint, your guidance implies about a $5.20 improvement, half of that from used cars would be 260. This is a slowdown from the 400 or so that you did this year. So from that 250 improvement, should we expect that to go down below $215,000,000 in 'nineteen? I'm just trying to get a sense of where this could peak. I'll take the first part and Mark why don't you jump in on a second. So I think the Cyber Monday promotion, we basically merchandised the Cyber Monday promotion and marketed a little differently than we did in years past. And I think that clearly was not as effective. We probably gave up something on the order of 1,000 units. If we just kind of extrapolate what we would have expected and the side of money promotion was similar year over year growth to what we got across the rest of the business versus what we actually got. So I think we made a couple merchandising market choices that were just less effective there and that's what drove it. Now I think the good news is if you look at Atlanta, we called out that it grew 44% year over year in terms of market share. If you take out the promotion, which was soft across all the markets, but extra soft in Atlanta, Atlanta actually grew at 58% year over year, up from 53% last year excluding promotion sales. So that's actually accelerated. So I do think the business performed very well in the Q4 and then we did not handle the semi promotion as well as we have in the past and that ended up causing us to come a little short. Great. And then I'll hit the GPU point. So I think that one thing to keep in mind as it relates to our 2018 guidance on total GPU as well as our breakdown is one thing that's impacting that is Q1. Q1 GPU in total and also retail GPU are lower than we normally would have expected given some of the factors that I described, particularly the dynamics, the wholesale pricing dynamics that we saw in Q4 and then the corresponding depreciation rates in December leading into Q1. And so I think that's one factor to keep in mind. In terms of the relationship between 2018 increases and 2019 increases, I wouldn't infer anything particular about our 2019 from the guidance that we've given for 2018. I think the way we think about this in a big picture sense is we're marching toward our $3,000 midterm goal. All of the key drivers of our walk to the midterm goal are intact and we feel like we're just marching down that path. Excellent. Thank you. Our next question is from Steve Dyer with Craig Hallum. Please go ahead. Thanks. Good afternoon. You talked about the cohorts and as you pointed out, Ernie, they're trending very pretty much the same on everyone, very consistently. On one hand, I would expect maybe they would the newer ones would trend a little bit more strongly just given the ability to leverage advertising, etcetera. On the other hand, you obviously have some of your more appealing markets behind you. How do you sort of think about the cohorts and the markets you roll out from here? Is this sort of the benchmark you hope to set or do you think you can sort of improve on that? I think as long as we continue to roll them out similarly to how they grow out in the past, I think we're going to be very happy. I think some of the drivers of how any given market performs that we spoke about in the past, in general, smaller markets ramp even faster than bigger markets. In general, markets that we are launching today are ramping faster than markets that we launched in years past. In general, markets that are closer to pre existing markets have tended to ramp faster and we've attributed that to more pre existing brand awareness. So I think there's a couple of things there that could lead us to be hopeful for even faster growth in the future. But I think as long as it's consistent, we're going to be very, very happy and that's kind of at the market level. At the cohort level, there tends to be a blending of many of those factors, which is also I think what drives so much of the consistency. In most of those cohorts there is, well, I guess in the more recent cohorts there is 20 markets and then there's 10 markets and one before that, etcetera. So I think that's part of what's driving all the consistency as well is that all the other variation kind of gets massaged out in terms size of market and proximity to nearby markets. Thanks. And then Mark, I haven't had a chance to read the K yet, but can you remind us what you're paying on your floor plan line and sort of how we should think about that this year in light of interest rate movements? Sure. So the line does have a variable interest rate. Right now, that interest rate is just over 5% on the Floor Plan line. And then I think the way we expect to use the Floor Plan line going forward is similar to how we used in the past. We use that to enhance inventory, used car inventory. And to the extent that interest rates move, our interest expense on that line will move. And I think we actually have a touch of commentary in the K that helps you quantify that. But that should be reasonably understandable from what you see in the K. Yes. Thanks. Our next question is from Seth Basham with Wedbush Securities. Please go ahead. Thanks a lot and good afternoon. My first question is around inventory management. As you guys entered the Q4, I would assume that you expected similar year over year tax refund seasonality. However, it seems like your inventory is a little bit imbalanced, a little bit heavy here with more depreciation than you're anticipating. What are you guys going to do to better manage your inventory through these seasonal effects going forward? I think managing inventory, I think, is a function of projecting demand and then buying the right cars. And we're going to do the best job that we can to project demand by extrapolating those cohort curves out. We feel like we've got a great sense of all the different seasonal factors that drive automotive retail. I think that understanding is growing with every passing year as we get more information. And then I think we have a really good sense of exactly which cars our customers want because we have all the information of them clicking around on the website that helps to inform which cars we want to buy and put in front of them. So I think that's sort of a multipart question where there's a question about which cars we're buying. I think we feel very good about that and think that as we get more data, we continue to get better. There's a question about how many cars we're buying. That's a question of forecasting demand. And to the extent we miss forecasts here and there, there will be a little heavier, a little light in inventory sometimes, but we're going to do the best job that we can. Yes. Just so I'm clear, so the forecast and demand was off. You're not concerned or anything about the inventory and the quality of inventory right now? No. I mean, one way to talk about that particular concept, Seth, is in the average days of sale. So what we did say is we expect average days of sales to be declining in Q2 and Q3. We expect to be roughly in line with Q4 and Q1. And so I think we're happy with continued progress going into 2018 on average days of sale, which I think is a pretty good metric for how we're managing inventory size. I think the thing that we've discussed as it relates to Q1 2018 on inventory is there was a unique wholesale market dynamic in Q4, given the hurricanes. I think that made depreciation rates and the timing of accelerated depreciation rates look different than other years. And I think that causes some I don't know if I'd say difficulty, but it just makes forecasting depreciation rates different when you have a major market shock like that. And so that's the way kind of I would think about the inventory management question. But I would just reiterate again, we're very happy with the progress we made on average days of sale through Q4. And I think we're optimistic about the continued progress we'll make throughout this year. Got it. Okay. And I really appreciate all the cohort data that you guys provided. Just one question on the CAC cohort data. CAC excludes a number of advertising costs. Approximately how much of your advertising costs in total are excluded from CAC? So the I think what you are referring to is when we started national cable, a lot of our national cable is hitting markets that are not in any of these cohorts because these cohorts only include markets that we've launched with the full Carvana delivery experience. And so the primary advertising expense that's not included in these cohort curves is again, it's some national advertising that's hitting other markets that we haven't launched yet. Understood. Could you provide an approximate amount or not? Yes, it will be in the K. Okay. Thank you. Our next question comes from Ron Josey with JMP Securities. Please go ahead. Great. Thanks for getting me in here. So I guess a few questions and maybe more higher level for Ernie and Mark. And around 1Q guidance, it suggests a pretty big decel in growth overall. And understanding we're now 2 thirds into the quarter, is this all because of primarily the IRS trends you highlighted, similar to 2017 or something else? And then as it relates to 2018 guidance for units, you're potentially doubling your markets again this year. Understood it's easier to ramp new markets. So why shouldn't we see growth in units sold at least be steady, maybe even potentially accelerate? And then the last question, the third one, sorry guys. Just in terms of marketing spend, with 4Q units coming in below expectations and Mark, your comments on cable TV advertising, understood the impact from Cyber Monday, etcetera. But do you think that as you go more national advertising, which I think is certainly more efficient, that impacts your local exposure and so therefore you might need to just revert back to local over national? Thank you. Hopefully that made sense. I'll start swinging at the first one and why don't you come back in on marketing. So I think Q1 first kind of like outlines how Q1 unfolds. So I think in generally January February are much like November December and then tax refunds tend to come in at the very end of February or early March and that tends to be where a lot of the at least discontinuous growth comes from. So we can in a single month face thousands and thousands of units of growth at our current kind of scale. And so I think what we're guiding to in Q1 is, it's recognizing that there's a lot of scale coming very, very quickly and our ability to handle that in a single month, it's going to be difficult for us to do that. And so I think it has more to do with kind of our expectation on the supply side than on the demand side as it relates to Q1. So that's what I would kind of say for the detail heading into Q1. It's just we see 1,000 units of growth coming very, very quickly there and that creates some operational difficulties. Now your next question, I think, was about all the incremental markets and how does that impact what we expect for this year in 2018. So a couple of things. I mean, first of all, what you're saying is exactly right. The way that we provide guidance, I mean, there's basically 3 major inputs to that. It's what are the coworkers look like, how many markets are we opening, and how many vending machines are we going to launch on top of that because we have an expectation of how that works and that basically drives our unit expectations. If you look at those cohort curves, you can see that they're exponential and they're relatively flat early on. Each of the last 2 years, we roughly speaking doubled our markets, which proportionally is similar to what we expected to do this year. And in the last two years, our sales in those years that came from those newly launched markets were between 8% 10% of total sales for the full year. So those markets, they definitely contribute, but they start to contribute really in years 2 and 3 more so than they contribute in year 1. And that's all taken into account. I if you look at the cohort curves and extrapolate that yourself, you'll probably arrive at somewhat similar numbers. And then, Ron, on your point about advertising and the relationship to being able to test marketing, creative or other marketing mix, I think that's a good point. I do think as we scale national advertising, we'll have to be thoughtful about how we're testing new creative, new messaging. We will look to do that testing at the local level, generally speaking, before rolling out to our national audience. But that's something we'll certainly be thinking about and taking into consideration all of our learnings from Nashville and the rest of our experience here. Our next question is from Gary Prestopino with Derrington Research. Please go ahead. Hi. Good afternoon. Was there any changes in the amount of cars that were financed as well as warrantied and with GAAP insurance in the quarter that you could call out year over year? Hey, Gary. Those attachment rates have largely been stable. So no meaningful changes to call out. One thing that we've called out on previous calls is that we were very pleased following the introduction of GAAP waiver coverage at the end of Q2. We're very pleased with the take up we saw there from our customers and that was a place where we saw steady increases in attachment as we rolled that out to more and more customers following testing and the like. And so I think GAAP was a positive very positive experience for us. Other major attachment rates are roughly flat. And where are you in terms of the Ally funding commitment? It's up to $2,000,000,000 but how much have they taken on that? Sure. We have significant capacity on the Ally commitment over $1,000,000,000 Okay. Over $1,000,000,000 And then just lastly, Ernie, just kind of an industry question here. We're kind of in a environment where rates are going up. Based on your experience in the business, where does that pain point start to become an issue for consumers as rates go up in the purchase of a vehicle? I think that's hard to say. And I think we're starting to hear a little bit of noise of softness in the market that may be partially driven by rates. I don't think we've really seen that in our direct results yet. I think so far our growth has been fairly stable and predictable. I think I do think it's probably more likely than not that we're closer to the top of the cycle than the bottom. And so, yes, I think there very well could be some degree of macroeconomic headwinds that face market over the next couple of years. But we're not seeing anything specific that we would say merits call out today. Okay. Thank you. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Thanks again to everyone for taking the time to listen to our call and thanks to everyone on Team Carvana who has adopted our mission to change the way people like cars. We're tackling a mountain here. The progress we're making is remarkable and it is only happening because of all the passion and energy you bring with you every day. Thank you. In closing, I'd like to reiterate the points that I believe are most important to Garvana's story. We're expecting our 5th straight year of triple digit growth as a company. Our cohort mark penetration curves cut a clear path to significant growth beyond that. Our most mature cohort, the 2013 cohort grew at 44% year over year in the 4th quarter and actually accelerated its growth in 2016 versus 2016 when controlling for Cyber Monday sales. We plan to open 30 to 40 markets this year. We continue to make significant progress in our GPU march with over $500 of progress in 2017 and another $500 expected in 2018. Our cohort CAC curve shows clear path to significant leverage and there's clearly lots of additional leverage elsewhere in the business. We expect to cut our EBITDA losses by 8% to 10% of revenue this year despite the investment in new markets. Our brand is defining what automotive e commerce means to consumers and replicating that experience is proving to be incredibly difficult for those that are trying. And finally, all of this is happening in the backdrop of a $1,000,000,000,000 market. Thank you again for your time. We'll see you on the road.