CarGurus Inc

NASDAQ:CARG

Earnings Call Transcript 2017-Q4

[Operator]

Greetings, and welcome to CarGurus Fourth Quarter 2017 Earning Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Seth Potter, Investor Relations for CarGurus.

[Seth Potter, executive]

Thank you. Good afternoon, and welcome to CarGurus Fourth Quarter and Full Year 2017 Earnings Call.

We will be discussing the results announced in our press release issued after the markets closed today. With me on the call this afternoon is Langley Steinert, CarGurus' Founder and Chief Executive Officer; Jason Trevisan, Chief Financial Officer of CarGurus; and Sam Zales, CarGurus' Chief Operating Officer.

During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the first quarter of 2018 and full year of 2018, our growth strategy and our plans to execute on our growth strategy, the growth levers we expect to drive our business, our ability to maintain existing and acquire new customers and other statements regarding our plans and prospects. Forward-looking statements may be identified with words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, upcoming and similar words and phrases. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements, except as required by law. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.

For a discussion of our material risks and other important factors that could affect our actual results, please refer to those contained under the heading Risk Factors in our 10-K filing today and updated by our SEC filings, all of which are available on the Investor Relations section of our website at cargurus.com and on the SEC's website at sec.gov.

Finally, during the course of today's call, we will refer to certain non-GAAP financial measures, which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after the close of market today, which is available on the Investor Relations section of our website at cargurus.com and the SEC website at sec.gov.

With that, let me turn the call over to Langley.

[E. Steinert, executive]

Thanks, Seth, and I would like to thank everyone for joining us on the call today. We are pleased with the company's execution during the fourth quarter. This led to a strong finish to the year as we exceeded the guidance we provided on last quarter's call.

CarGurus' mission to become the world's most trusted and transparent automotive marketplace continues to resonate with automotive shoppers given our focus on delivering the best consumer experience, which is ultimately good for both consumers and dealers. During the fourth quarter, we continued to benefit from the investments we made in our technology platform and products. Our ongoing momentum is evidenced by the 44% increase year-over-year in total worldwide user sessions and 28% year-over-year increase in total worldwide monthly unique users during Q4. We believe that the rapid growth of our audience is a result of our commitment to providing unbiased transparency, which we believe creates the best consumer experience. This focus will help us further cement our market leadership position and result in long-term value creation for both our consumers and shareholders, even if it does not always optimize short-term revenue or margins.

The primary reason we're able to provide this transparency is the technology that underpins our platform. Our ongoing commitment to improve our platform and deliver innovative consumer solutions to the car shopper experience resulted in us growing our product, technology and development headcount by 68% in 2017. We anticipate we'll grow these teams at a similar pace in 2018.

We have a data-driven, mathematical approach to everything we do. Over the last 7 years-plus, we've used data analytics to optimize our algorithms. These algorithms are based on the daily analysis of millions of data points from tens of thousands of dealers aggregated from hundreds of data sources. This data is notoriously messy and unstructured as each dealer describes vehicle features and options in unique and nonstandard ways. The unstructured nature makes it difficult to standardize, however, our organization, as I stated, provides significant value to the consumer by allowing us to generate the most relevant vehicle search results for our users.

Our algorithms analyze each of these data points to appraise cars listed on our site and for used cars, determine what we call instant market value or IMV. The IMV is compared to the car's asking price and, together with dealer ratings from our user community, produce a simple but powerful deal rating that we use to sort the best deals from top-rated dealers in a highly intuitive way. The benefit that our consumers receive from this deal rating is further enhanced by our intuitive store ordering, which prioritizes search results based on deal rating, ranking the best deals from top-rated dealers at the top of the search results.

Now last year, we made significant investments in product development to broaden our offering with dealers, improve our consumer value proposition, launch new countries and enter additional segments of the automotive marketplace. During the past couple of years, we have successfully rolled out new marketing solutions for automotive dealers such as dealer display and, more recently, our dealer search engine marketing product. Selling additional products to our existing installed base of paying dealers is one of our most critical growth drivers. We expect to illustrate our progress here by providing, at year-end, the percent of paying dealers who subscribed to one of our products beyond our core listing product.

During our roadshow last year, we reported that as of June 30, 2017, 15% of our U.S. paying dealers also subscribed to our dealer display product. As of the end of 2017, 19% of our U.S. paying dealers subscribed to one or more products beyond our listing product. We will continue to build additional products and tools that help our dealers attract new customers, build their brand and sell more cars at an efficient ROI.

Now I'd like to highlight some of our fourth quarter results. Total quarterly revenue grew 49% year-over-year to $90.6 million, which was above the high end of our guidance of $85 million to $86 million. In Q4, our audience, as measured by average monthly unique users, grew 25% year-over-year in the U.S. and 53% in international markets, while average monthly sessions, a measure of our audience size and their engagement, increased 43% and 69% year-over-year in the U.S. and international markets, respectively.

During the quarter, we continued growing our installed base of paying dealers in the U.S. by bringing dealers onto our basic program and converting additional dealers from basic to Enhanced or Featured. We have improved how we measure and articulate the value proposition that dealers realize when they upgrade from our Enhanced and Featured products. When a dealer upgrades from our free service to a paid product, they receive higher volumes of connections, improved conversion, dealer branding with our large audience and access to our pricing and merchandising tools. In a study we recently conducted of certain dealers who upgraded from basic to Enhanced, we found it, on average, paying dealers receive more than triple the number of connections. Coupled with the improved conversion rate the dealers experienced with our paid listing product, our research shows that they could sell more than 5x the number of cars from CarGurus' connections by subscribing to one of our paid listing products.

A terrific example of this is Joe Cooper Auto Group in Oklahoma City. This 7-store group benefited from anonymous leads through our free basic product, and they noticed how ready to buy those consumers were. However, the Joe Cooper team knew they could convert these connections better if they had more consumer information, so they upgraded to our paid Enhanced product. Their Corporate Internet Director summarized the change by saying, "Engagement went up. Close rates went up, and we started selling more vehicles." We're proud to hear the Joe Cooper Group tell us, "CarGurus as a lead provider and a business partner is, without a doubt, one of the highest-value relationships we have." The cost per lead, the results and the relationship that we have are second to none.

Q4 also illustrated continued growth in our advertising and other revenue, which was up 30% from Q4 2016. This solid growth is a function of our now directly owning the relationship with the OEMs for a full year after taking our advertising sales function in-house from our former third-party network partner in 2016. Our advertising growth is also a function of the industry's recognition of our large and highly engaged audience and the strong performance that OEMs experienced in the first 3 quarters of 2017. In our international segment, revenue grew 171% year-over-year during the fourth quarter, yet it represented only 3% of our total revenue. We believe in our long-term international growth strategy, and we'll continue to invest in our existing markets and new countries.

During the quarter, our GAAP EPS was $0.02 and non-GAAP EPS was $0.05, which was above the high end of our guidance range. We are pleased with our ability to exceed guidance while, at the same time, investing heavily in our technology and ramping our investment in brand building. We believe that investing in our brand will not only improve our awareness with consumers, which will drive added traffic growth and engagement, but also will help reinforce our relationships and affinity with dealers as they want to partner with companies that have not only large audiences but proven brands as well.

Looking forward, our growth strategy for 2018 and beyond will continue to focus on further strengthening our leadership position and becoming recognized as the largest, most trusted and transparent automotive marketplace that connects millions of buyers with sellers every month. The growth levers that we expect to drive the ongoing momentum in our business include adding new paying dealers in the U.S. We have a large installed base of paying dealers as well as a large number of dealers that use our basic product. We will continue to add more paying dealers by continuing to prove our value proposition and delivering true value to dealers, like we've done with the Joe Cooper Group.

We intend to focus on growing our average revenue per subscribing dealer or AARSD by growing our audience, delivering more connections, testing new pricing and packaging models and cross-selling additional products. We believe that our commitment to invest in product, technology and development will continue to drive growth as dealers purchase more products like dealer search engine marketing from our expanding product suite. We'll continue to ramp our efforts in international markets, including Canada, the U.K. and Germany, as well as look to expand into other countries. We are confident that there is a need for an unbiased, transparent marketplace in countries outside the U.S. We will invest in building these international markets, but we'll fund those investments from the profits of our growing, profitable U.S. business.

Finally, in long term, P2P or Sell my Car remains an emerging growth area as we believe this represents an opportunity for us to utilize our large audience and transparent platform to dramatically improve the process of consumers buying and selling cars with other consumers. So in summary, our strong fourth quarter capped off an exciting year for CarGurus. Looking to 2018, we believe that the company is well positioned to maintain its momentum by further capitalizing on the global need for unbiased, transparent marketplaces.

With that, let me hand it over to Jason, who will walk through the financials in more detail.

[Jason Trevisan, executive]

Thanks, Langley. I'll first start with a more detailed overview of our fourth quarter and full year financial performance and then provide our outlook for the full year and first quarter of 2018. Following my closing remarks, we'll open up the call to your questions.

We were pleased with our fourth quarter performance, which exceeded the guidance we provided on last quarter's call. Our better-than-expected performance was driven by continued momentum in both the U.S. and international markets. During Q4, our total revenues were $90.6 million, up 49% year-over-year and above the high end of our guidance range of $85 million to $86 million. Within total revenue, marketplace subscription revenue was $80.8 million, up 52% year-over-year, and advertising and other revenue contributed the remaining $9.8 million in total revenue, an increase of 30% compared to last year.

From a geographic perspective, U.S. revenue totaled $87.5 million, up from $59.6 million in Q4 of 2016. And international revenue represented $3.1 million, up from $1.1 million in Q4 of 2016. We ended 2017 with 27,670 total paying dealers, up 30% year-over-year. Of the total paying dealers at the end of 2017, the U.S. totaled 25,122, up 23%; and international totaled 2,548, up 168% compared to the end of 2016. Our continued growth of dealers in the U.S. is driven not only by the growing volume of connections to in-market car shoppers we provide our dealers but also by our clear value proposition of upgrading to our Enhanced and Featured listing products. We plan to provide an update of our connection volume annually. And in the U.S., in 2017, our platform drove approximately 51 million connections, representing growth of 21% from the prior year.

Not only are we attracting new subscribing dealers, but we're also continuing to satisfy and grow our existing dealers. We believe that a telling gauge of the value we provide our dealers is the average annual revenue per subscribing dealer or AARSD. Our U.S. AARSD for 2017 was $12,055, up 16% year-over-year. AARSD growth continues to be fueled by our delivering higher connection volumes, cross-selling additional products and testing new pricing and packaging models. International AARSD was $4,904 during the fourth quarter of 2017, an increase of 28% year-over-year.

I will now speak to non-GAAP expenses and profitability, which excludes stock-based compensation. We believe looking at non-GAAP expenses provides a better comparison of our operational performance since our stock-based compensation has become more material since our IPO. For example, total stock-based compensation was $5 million in 2017, with $4.8 million in the fourth quarter primarily due to the vesting of RSUs as a result of our IPO event in October. This compares to only $322,000 of stock-based compensation in 2016, of which $86,000 occurred in Q4. Thus, for 2017, our year-over-year operational performance is best viewed on a non-GAAP basis. For the fourth quarter, gross profit was $85.5 million for a gross margin of 94.4% compared to 95.2% gross margin from the same period last year. In terms of non-GAAP operating expenses, our total operating expenses were $80.7 million during the fourth quarter, up approximately 55% from last year.

Similar to last quarter, the majority of our OpEx, approximately 82%, related to sales and marketing as we invest in traffic acquisition, brand awareness and dealer acquisition and retention. We believe that investing in our brand in the U.S. will have a long-term positive impact on both our consumer awareness and strategic position with dealers. We're pleased with the brand-building television campaign we began in the middle of last year as it has materially grown our consumer awareness among in-market shoppers as measured by our own awareness surveys and brand interest trends on Google. We expect to grow our television and online brand advertising in 2018 and anticipate introducing evolved messaging and creative execution. This new campaign will support our consumer-centric value proposition of having the largest inventory of any major U.S. automotive marketplace; providing consumers with transparent information on the cars, prices and dealers; and presenting that information in intuitive ways that benefit consumers. In Q4, we significantly increased investments in product, technology and development as we continue our dedication to innovation and introduce new offerings for our large and growing dealer base. And finally, we grew our investment in G&A, a significant portion of which included investments related to being a public company.

Taking these costs into consideration, fourth quarter non-GAAP operating income was $4.8 million, above the high end of our guidance range of $1.2 million to $2.2 million, and adjusted EBITDA was $6 million. In the fourth quarter, our non-GAAP net income was $5.3 million or $0.05 per share based on 113.7 million weighted average diluted shares outstanding and was also above the high end of our guidance range. Our GAAP operating income in the fourth quarter was approximately breakeven, which included $4.8 million in stock-based compensation, the majority of which was a onetime catch-up resulting from the effect of IPO-related vesting. On a geographic basis, our GAAP operating income was $8 million in the U.S. and a loss of $7.9 million in our international segment.

As Langley mentioned, we will continue to utilize earnings from our U.S. operations to fund our global expansion. Our international investment strategy has remained consistent, and we will continue to be in investment mode in this segment as we are still in the early expansion phases in the U.K., Canada and Germany and are in development and launch phases of additional markets we plan to enter in the future. GAAP net income attributable to common shareholders for the fourth quarter totaled $2.1 million or $0.02 per share based on 103.2 million weighted average diluted shares outstanding.

So to summarize our financial results for the full year 2017, our total revenues were $316.9 million, up 60% year-over-year. Within total revenue, marketplace subscription revenue was $282.7 million, up 65% year-over-year, and advertising and other revenue contributed the remaining $34.2 million of total revenue, up 27% year-over-year. From a geographic perspective, the U.S. represented $307.5 million and international revenue represented $9.4 million.

Non-GAAP operating income during 2017 was $20.3 million or 6.4% of total revenue. And adjusted EBITDA was $24.1 million or 7.6% of total revenue, an increase of 210 basis points compared to the prior year. Non-GAAP net income for the full year of 2017 was $15.8 million or $0.15 per share based on 108.6 million weighted average fully diluted shares outstanding, which was also above the high end of our guidance range. For the full year, our GAAP operating profitability on a geographic basis included an operating profit of $41.6 million in the U.S. and an operating loss of $26.3 million in our international operations. In 2017, GAAP net income attributable to common shareholders for the full year totaled $7.4 million or $0.12 per share based on 60.6 million weighted average diluted shares outstanding. A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in the press release issued today covering our financial results for the quarter and full year ended December 31, 2017, which can be viewed on our website.

On our balance sheet, as of December 31, 2017, we had $137.7 million in cash, cash equivalents and short-term investments and no debt outstanding. During the fourth quarter, we generated $7.1 million in cash flow from operations and $5.5 million in free cash flow, which includes CapEx and capitalized software development costs of $1.6 million. For the full year 2017, we generated $25.7 million in cash flow from operations and $18.3 million in free cash flow, which includes CapEx and capitalized software development costs of $7.4 million. We continue to be pleased with our cash generation, which highlights our capital-efficient business model that enjoys very low CapEx as a percent of revenue and highly efficient working capital.

Now I'd like to finish with some comments regarding our financial outlook for 2018. We started the year with great momentum behind the size and engagement of our consumer audience and our growing base of paying dealers. We also continued making great progress in our international markets and believe that we have a significant opportunity to offer our disruptive value proposition on a global scale.

Prior to discussing the details of our guidance, I'd like to touch on 2 accounting-related matters: the new accounting standard known as ASC 606 and the impact of tax reforms. The company is currently assessing the impact of FASB's ASC Topic 606, which could affect the measurement of its revenue recognition and the accounting for cost to acquire contracts. The company expects to adopt the standard using the modified retrospective method, under which the entity will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts but still require performance by the entity at the date of adoption. The year of adoption by the company is dependent on its emerging growth company status.

In addition, as a result of the 2017 tax reforms recently enacted, the company has recorded a provisional amount of $151,000 related to the remeasurement of the company's deferred tax balance and a onetime transition tax liability of $36,000 for its foreign subsidiaries. However, the company is still examining certain aspects of the Tax Cuts and Jobs Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

For the full year 2018, we expect the following: total GAAP revenues to be in the range of $396 million to $400 million; non-GAAP operating income in the range of $21 million to $25 million, which reflects the ongoing investments in R&D as well as our brand; non-GAAP EPS in the range of $0.14 to $0.16 per diluted share. This outlook assumes weighted average diluted shares outstanding of approximately 115.8 million, which includes the shares of Class A common stock issued by the company in its initial public offering as well as the automatic conversion of the company's convertible preferred stock into shares of Class A common stock that occurred concurrently with the closing of the offering.

In the first quarter of 2018, we expect total GAAP revenue to be in the range of $93.5 million to $94.5 million; non-GAAP operating income to be in the range of $2.5 million to $3.5 million, reflecting our focus to profitably grow the business. Non-GAAP EPS is expected to be in the range of $0.01 to $0.02 per diluted share, which includes an increase in costs associated with payroll taxes and initial sales and marketing investments for the year that is common in the first quarter. This outlook assumes weighted average diluted shares outstanding of approximately 114.7 million.

So in summary, 2017 was an exciting year for us. In the U.S., we further strengthened our audience leadership position, began building our brand in earnest and continued to grow our already large installed base of subscribing dealers. The growth in all these levers positions us well to maintain our momentum in the U.S. in 2018. Internationally, we grew our audiences and dealer bases in the U.K. and Canada and launched Germany. Our core value proposition of unbiased transparency for consumers and a high-volume, high-quality, high-ROI customer acquisition channel for dealers resonates globally. And we believe that our technology-driven approach will continue to disrupt legacy solutions.

With that, I'll now hand it over to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question is from Daniel Powell with Goldman Sachs.

[Heath Terry, analyst]

Actually, it's Heath Terry for Daniel. Just wanted to get a sense, you guys have invested more in brand advertising over the course of the quarter, sort of what you're seeing in organic traffic and initial ROI from those brand investments? And as you -- and then second question, as you have worked with dealers over the course of the quarter, where your outlook is. What's implied in the guidance for 2018 as it relates to pricing on a per dealer basis? And what's embedded in the guidance that you've given?

[Jason Trevisan, executive]

Sure. Thanks, Heath. It's Jason Trevisan here. So in terms of brand and brand spend, we don't break out traffic sources by channels, so I won't speak about that. But our brand spend has materially grown our consumer awareness among in-market shoppers, and that's as measured by our own brand awareness surveys and purchase intent surveys as well as brand interest trends on Google, which are publicly available. And so it provides both direct traffic, and as you said, it can give a boost to organic traffic. It also, though, has a very positive effect in creating a tailwind for our algorithmic traffic acquisition because as people search for terms that include our brand name, those are far more efficient for us than ones that don't. So we get both a direct benefit as well as a lift to our paid, which is another very large benefit as well. And then not to be forgotten, we also feel that building our consumer brand awareness helps significantly with dealers, because we know that they want to work with a vendor that has not only a large audience but strong brand recognition as well. Your second question was -- can you repeat your second -- the second part of your question, please?

[Heath Terry, analyst]

Essentially just looking for some sort of detail on the level of pricing power, pricing improvement or ARPU improvement on a per dealer basis that's implied in the guidance for 2018.

[Jason Trevisan, executive]

Yes. So we don't guide on that. As you know, we've had mid-teens growth in AARSD historically. And I think if you were to sort of pull your assumptions forward, you would see that it's going to be there or south of there, not too far south but may decline a little bit. So if you were to look at the 3 factors that we've always sort of beat the drum on in terms of what drives AARSD, it's connection growth, it is adding new products, and then it's pricing and packaging. And as our audience gets bigger, just like our installed base, the growth of that in percentage terms will get tougher with law of large numbers. New products, though, we -- many of them are early. Dealer SEM is a great example. It's early, but we're encouraged and we're excited. And so that's going to be a contributor. And then finally, on pricing and packaging, similar story there. Early, but we are quite encouraged by some of the early regional tests that we're doing that tie what dealers pay us closer to the value that we drive to them. But we often -- I'll take the opportunity to say something that we often say, which is we're not in a rush to really drive unit pricing quickly. We are in this for the long term, and we want to build a large installed base of dealers and a large audience. And we started at a low price point, and we're going to be very measured in how we bring that up. So you're not going to see us rushing to drive pricing in the near term.

[Operator]

Our next question is from Mark Mahaney with RBC Capital Markets.

[Zachary Schwartzman, analyst]

It's Zachary Schwartzman on for Mark. Two questions, if I may. Can you talk about your international markets in particular? Can you talk about your progress in the U.K. and what you're focusing on in that market for 2018? And second question, do you have any insight on the ROI for your paid dealers? Do you think that number has grown through the back half of 2017 as AARSD also ramped?

[E. Steinert, executive]

Yes. Zach, it's Langley. So the international markets, I guess specifically, you had some questions about the U.K. We remain to be very excited about the international markets. I will caution, though, that it's -- we're still pretty early in the game. I mean, the fundamental issues that we outlined in the IPO roadshow pretty much remain the same in the sense that we believe there's fundamentally 2 unmet needs in each of these markets that we're in, number one being that consumers are still looking for transparency, legitimate transparency, and dealers are looking for a better ROI. In the area of transparency, I believe some of our competitors in the overseas markets have kind of dabbled with this concept of transparency. But I think the fundamental issue that I would stress is to talk about unbiased transparency, so I think -- and I won't mention any specific competitors, but putting a good-deal, bad-deal analysis on a vehicle page around a specific car, I don't think is sufficient enough. I think to be truly unbiased, you need to use that information to inform how you rank the cars themselves. So some of our competitors, as I mentioned, have been dabbling with transparency on the vehicle detail page, but they haven't been using that information to inform how they sort the cars. An analogy I might give you is that Google developed PageRank and then didn't use PageRank to ordinate the URLs but, in turn, just ordinated the URLs based on who paid them the most money. That wouldn't be a very good customer experience. And so we believe that for transparency to be fully unbiased, you need to not only uncover or show the actual analysis for a specific car, but you'll have to use that data to inform how you rank the cars and, in fact, rank the cars based on what's the best outcome for the customer. And I believe it's that last step in the unbiased transparency that -- none of our competitors have been willing to make that move because it would be -- it would really jeopardize their installed base revenue. The second question you had was around the ROI for our paid dealers. We don't really specifically disclose that. But we continue to see that dealers find us to be, from an ROI standpoint, to be a significantly more effective channel than our competitors, really, in all the markets we're in across the world. Your next question might be do we send much time trying to convince our dealers not to spend money with our competitors, and the answer is no, actually. We're very careful about training and kind of advising our sales team to speak only to the benefits that we provide the dealer, not -- we don't spend a whole lot of time characterizing our competitors' ROI. We figure the dealer can figure that out for themselves.

[Operator]

Our next question is from Ron Josey with JMP Securities.

[Ronald Josey, analyst]

I want to ask Langley on the additional just product adoption. You talked about adoption of display and search and other tools reaching 19% of the paying dealer base. And so just wondering if you can help with the sales process here. What is the process? If you can help -- is it -- how do you build awareness of these products? Any insight there would be helpful. And then, Jason, you mentioned about, I think when talking about pricing and packaging as a component of AARSD, a regional test to tie price paid by dealers to results. Can you update or give us any additional information about those tests? Is this something that's just continuing, ongoing? Or is this a new thing?

[E. Steinert, executive]

Yes. So it's Langley. I'll take the first question. So around rolling out new products, I think that the fundamental premise with all our dealers is that they believe and trust us that we have trust with them because of the performance of our core listings products. So I think they think very favorably of us in that regard. I also think they see us as a technology company. And I'm not necessarily sure I would characterize our competitors as technology companies, perhaps, more media companies. So I think dealers see us as a technology leader. They see us as a trusted partner. How we actually sell a dealer display product, a display product or a search engine marketing solution, it really all goes back to that issue I was just highlighting around our core listings product. It's really about return on investment. We like to think much the way I believe a Google AdWords rep would talk about the ROI in Google AdWords. We believe it's really about return on investment. So whether it's our listings product or our display product or it's our search engine marketing, we believe it's about helping dealers see a really good return on investment on their dollars. So it's typically a very analytical sell, and it's driven based on the performance that we drive to them, how many cars do we help them sell.

[Jason Trevisan, executive]

Ron, it's Jason. On the tests that I mentioned, I would probably first answer by saying we're always running a lot of tests at any given time, and that's both -- just by being a data-driven company, we're running dozens of tests every day on our site and on our user experience and so forth. So and when one of those is wildly successful and we think it's ready to be expanded more universally, we'll certainly share that if it changes any of our fundamental pricing strategies. I would characterize some of the tests that we're doing now that I referenced. Some of them are around just simply packaging and bundling in ways that we haven't done before. Others are trying to tether the value that we drive to our customers closer to the value that we receive from those customers. And so a good example of that is, right now, as you know, we have a fixed subscription model. But in any given month and over the course of the year, we're typically growing our volume of connections to a dealer. But we're not capturing any of that value because it's a fixed subscription, so we're looking at ways to potentially tweak that. And then also in any marketplace, there's the potential for auction models, which we're -- again, with the fixed subscription model, we're not there at all, but we're exploring in very discrete and controlled ways what might serve both us better as well as our dealer customers better.

[Operator]

Our next question is from Ralph Schackart with William Blair.

[Ralph Schackart, analyst]

Two questions, if I could, please. First, on the improved dealer measurement tools that you talked about in the prepared remarks. Any more color you could add on this in terms of what change and would you sort of characterize it as a natural evolution or anything more pronounced that occurred this quarter? And then second, on the outlook for '18, revenue's stronger than we're expecting. It looks like margins at the midpoint may tick down a little bit. Curious what's driving that. Is it the new marketing campaign? Are you contemplating opening up some new markets in '18? And any other color you could share on that would be great.

[Jason Trevisan, executive]

Sure. Ralph, can you help -- it's Jason. Can you help us clarify your first question on -- you said dealer measurement?

[Ralph Schackart, analyst]

Yes. You talked about some new measurement tools, I believe, in the prepared remarks.

[Unknown Executive]

[indiscernible]

[Samuel Zales, executive]

ROI?

[Jason Trevisan, executive]

Yes, [ one of us should ]...

[Samuel Zales, executive]

Sure. Great. Ralph, thanks. It's Sam Zales here. We talked about a couple of things in the remarks upfront. One was research on our dealer base moving from basic to paid programs. We've done significant studies to understand the value a dealer derives from our free listings, which are -- can be interesting and significant, and then the significantly increased value from moving to our paid program. So we look at connection volumes. We look at close rate and deriving a significant increased percentage in sales for those dealers. And that value proposition has worked tremendously for us, but putting pen to paper to have that analysis on the incremental value has helped us in our marketing and sales efforts to convert many more dealers from free to paid. So that's been a welcome addition. You'll see more of that from us as we continue to build what we'd call our attribution studies, where we're taking data from DMS Systems' back-end systems on closed sales, looking at the connection volume we're driving to those dealers and measuring the impact of not just the direct leads, so that would be a text, a chat, an e-mail, a phone call, but also the clicks to a dealer's website or clicks on the map and directions to a dealership and being able to look at back-end data to confirm that ROI and measurement of our programs. So we've known that's a significant opportunity for us given the connection volume we're driving to our dealers. That ROI story will further cement our ability to not only retain dealers but continue to increase AARSD over time. I'll let Jason turn to 2018 projections.

[Jason Trevisan, executive]

Sure, thanks. So on 2018, the midpoint, yes, it's a touch lower. And I would say that is driven by the probably 2 areas you've often heard us talk about these heavy investment areas, and then a third, which you'll notice that we spoke to in the opening remarks. So international continues to be an area of investment for us. And as we continue to look at new markets, that's going to continue to be a heavy investment area for us. Brand, this will be our first full year of brand spend, and by brand, we really mean television as well as some online video. That began in June and sort of July of last year, and this year, it's -- in 2018, it'll be a full year of that. And then the third is, Langley talked about growing our headcount in technology, product and development. Last year, it grew by 68%, and we think it will have roughly similar growth in headcount this year. So that's going to be an area of negative leverage for us. But we think of it as roughly sort of flat consolidated margins at the midpoint. It's down a few basis points.

[Operator]

Our next question is from Aaron Kessler with Raymond James.

[Aaron Kessler, analyst]

A couple quick questions. First, just on the dealer growth, it's slightly below our estimates. Can you talk about -- is there much seasonality in terms of like the U.S. dealer growth number? And how are you thinking about that growth longer term given kind of you're getting up to the maximum of what some of your competitors have in terms of paying dealers? And then just on demographics, with some maybe brand awareness initiatives you've done, can you talk about maybe how the demographics of the platform of users are changing?

[Samuel Zales, executive]

Yes, Ari (sic) [Aaron], it's Sam Zales. I'll jump in on dealer growth. We're really proud of the growth we continue to find. Reminder that we are far, far exceeding the rest of the market in terms of a base of dealers that we've acquired and that we're working with over time. We lead the industry in that regard. The results, they are somewhat seasonal in that certain times of year, based on holiday periods and the slow winter season, when car buying and car dealership selling is impacted, there's slight impacts in those regards. Obviously, because we're so far ahead of where the rest of the market is in terms of that paid dealer community, we do expect, over time, that our acquisition of dealers in the paid program will slow down. But we're highly confident that we'll continue to see the rapid expansion of our paid dealer base. So I think there's slight seasonal impacts, but that always picks up again as a new time of year ramps up. And as I mentioned, this ROI calculator and the look at what a dealer can expect moving from our free to paid program has been an exceptional source of continued growth in our acquisition levers.

[Jason Trevisan, executive]

On the demographic front and brand awareness, we don't really over index or under index much in many areas. If there's one area that we do tend to skew more, it's toward mobile users because we have a much higher mobile usage as a percent of total usage than most others in the market, which you'd think -- I would have thought that skewed a little bit younger, but it actually doesn't in a very strong way. So what we see and what you can see on sort of public sources, Google Analytics and so forth, we're fairly -- we fall in line with the market of car buyers in the U.S.

[Operator]

That is the end of our question-and-answer session. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.