ACV Auctions Inc. (NASDAQ:ACVA) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good day, and thank you for standing by. Welcome to the ACV First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand a conference over to your speaker today Tim Fox, Vice President of Investor Relations.

Tim Fox: Thank you, operator. Good afternoon and thank you for joining ACV’s conference call to discuss our first quarter 2023 financial results. With me on the call today are George Chamoun, Chief Executive Officer; and Bill Zerella, Chief Financial Officer. Before we get started, please note that today’s comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of the risks and uncertainties related to our business can be found in our SEC filings and in today’s press release, both of which can be found on our Investor Relations website.

During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today’s earnings materials, which can also be found in our Investor Relations website. And with that, let me turn the call over to George.

George Chamoun: Thanks, Tim. Good afternoon, everyone and thank you for joining us. We are very pleased with our strong start to the year highlighted by a number of record achievements in the quarter. This includes: record revenue which was well above the high end of our guidance range; record ACV Capital attach rates; and record margins in ACV Transport. While we benefited from positive market tailwind from the quarter, it was continued execution by the ACV team that drove market share gains, while also delivering to the bottom line. Looking at the balance of 2023, we expect the industry headwinds experienced over the past two years to continue to moderate, while remaining focused on growing market share, expanding our technology moat and driving scale to deliver on our adjusted EBITDA target.

With that, let’s turn to a brief recap of first quarter 2023 results on slide 4. First quarter revenue of $120 million was $10 million above the high end of guidance resulting in 16% growth year-over-year. GMV of $2.4 billion was flat year over year with solid unit growth in the quarter offsetting an 8% decrease in GMV per unit as wholesale vehicle prices decreased from historical highs in the first half of 2022. We sold 152,000 vehicles on our marketplace, which was 21% sequential growth from last quarter and 8% growth year-over-year, which exceeded our expectations due to continued market share gains and conversion rates improving from low levels we experienced in the back half of last year. On slide 5, I’ll frame the rest of today’s discussion around the three pillars of our strategy to drive long-term shareholder value: growth, innovation and scale.

I’ll begin with growth. On slide 7, we’re again providing context on the dealer wholesale market in relation to the broader automotive market. In Q1, new light vehicle SAAR increased 8% year-over-year, which is the third quarter in a row of growth. Of course, SAAR is still running about 12% below pre-pandemic levels. But inventories are slowly building which is key to a more robust recovery in retail sales. Used vehicle retail sales increased quarter-over-quarter in Q1, but were down in the mid-single digits year-over-year as affordability issues impacted demand in segments of the used vehicle market. Combined new plus used retail sales increased modestly year-over-year, which is a positive sign for supply in the wholesale market. As I mentioned earlier, conversion rates bounced back in Q1 as wholesale price depreciation normalized.

And we assume conversion rates will normalize throughout the year. On balance, I think, it’s fair to say that end market conditions are showing some early signs of improvement giving us confidence to raise guidance for the year, which Bill will take you through later. Turning now to slide 8. We estimate that the US dealer wholesale market continues to remain below normalized volume, but showed a nice sequential improvement in the seasonally strong first quarter. We remain focused on executing against our key growth initiatives and gaining market share. Given our 8% year-over-year unit growth and an estimated market contraction of 11% this implies that ACV grew market share by approximately 19% in Q1. Next, I would like to wrap up the growth section with highlights on our value-added services.

On slide 9, I’m pleased to share that ACV Transportation delivered another impressive quarter and continues to scale ahead of schedule. Our strong carrier network and fast cycle times resulted in attach rates once again exceeding 50%. In fact, we achieved record cycle times again this quarter, benefiting both sellers and buyers on our marketplace. Over 80% of our transports were automatically dispatched in Q1, which is a great example of how our technology investments are driving growth and operating efficiencies. These efficiencies resulted in revenue margins in the mid-teens, which is impressive given that ACV Transport was breakeven a year ago. As a reminder, our current 2026 financial targets assumes Transport revenue margins of 15%. So we managed to achieve this target three years ahead of plan.

Turning to slide 10. Our ACV Capital team also delivered great Q1 results. Capital attach rates exceeded 10% for the first time, driving over 85% loan volume growth. And combined with RPU expansion resulted in over 100% revenue growth. We have continued to ramp our investments to drive dealer engagement and scale to ensure that ACV Capital is an important growth and profit driver going forward. Turning to the second element of our strategy to drive long-term shareholder value innovation. On slide 12, I’d like to highlight a few of our growth-oriented product innovations that helped contribute to our strong Q1 results. Two areas of focus were dealer acquisition and conversion rates. On the dealer acquisition front, solutions like private marketplaces and consumer sourcing tools like Drivably and Monk were key to attracting new dealers to ACV’s marketplace.

This was especially true with large dealer groups, which continue to be an attractive source of new dealer partners. Next, we expanded several capabilities to enhance conversion rates, including new auction formats and pricing intelligence. As you know, ACV’s traditional format is a 20-minute live auction, which has experienced broad market adoption. Based on dealer feedback, we began testing new formats and the results were very encouraging, especially on higher-end vehicles. In just a few short quarters, we now have about half of our auctions running for two hours. And our strong Q1 conversion rates demonstrates this is working. We will continue to invest in testing enabling us to continuously optimize auction formats for different types of vehicles.

Additional innovation enabling our growth is our pricing engine, powered by machine learning leveraging both our industry-leading vehicle condition data and a growing curated automotive dataset. This innovation is leading to better guidance for our dealer partners. For the past year, we’ve expanded the price point coverage, and its use cases creating a broader range of guidance for our dealer partners. The ACV pricing engine now powers several ACV products, including ACV Auctions Market Report, consumer tools such as Drivably and elements of MAX Digital. On slide 13 are examples of tech investments that extend into our operations, delivering customer success while reducing costs. In Q1, our costs of revenue declined year-over-year despite delivering 16% revenue growth.

As I mentioned earlier, ACV Transport was a key contributor to these results. We also benefited from lower arbitration frequency, which reflects ACV’s investment in technology and inspector training. Several innovations that are improving inspection accuracy and efficiency are Apex, Copilot and ArbGuard. Our next-gen collection device Apex delivers significantly higher transparency into vehicle operating conditions, while also increasing the inspection productivity of our VCI teammates. More recent innovations like Copilot and ArbGuard, leverage machine learning predictive analytics, and sensor data to inform our VCIs on vehicle-specific issues before and after conducting an inspection again driving inspector accuracy and efficiency. To wrap up on innovation, I think you’ll agree that our team is delivering industry leading technologies to the market and our own operation.

We have an exciting roadmap of innovation to drive both growth and scale, and we look forward to providing more detail at our Analyst Day in June. With that, let me hand it over to Bill to take you through our financial results and how we’re driving growth at scale.

Bill Zerella: Thanks, George, and thank you everyone for joining us today. We are very pleased with our Q1 financial performance. We delivered record revenue above our guidance range, with upside to adjusted EBITDA. We also demonstrated the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q1 2022. Turning to slide 15, I’ll begin with a review of our first quarter results. Revenue of $120 million was above the high end of our business model, with meaningful revenue margin and adjusted EBITDA margin expansion versus Q1 2022. Turning to Slide 15, I’ll begin with a review of our first quarter results. Revenue of $120 million was above the high end of our guidance range and grew 16% year over year compared to the strong results in Q1 2022.

, Adjusted EBITDA loss of $6 million, also beat our guidance range and EBITDA margin improved approximately 1,200 basis points versus Q1 2022 demonstrating the attractive operating leverage in our model. Next on Slide 16, I will cover additional revenue details. Total revenue of $120 million represented a 32% CAGR since Q1 2021. Auction and Assurance revenue, which was 57% of total revenue increased 17% year over year versus strong results in Q1 2022. This revenue performance reflects 8% year-over-year unit growth and record Auction and Assurance ARPU of $454, benefiting from our fee increase last October. Marketplace Services revenue, which was 36% of total revenue also increased 17% year over year. Results were driven by strong. Performance in both ACV Transport and ACV Capital.

Our SaaS and Data Services products comprised 7% of total revenue and grew 2% year over year. As I mentioned last quarter, we are taking a more measured approach to customer acquisition while we make significant improvements to the MAX Digital platform, positioning ourselves for reacceleration of growth entering 2024. Turning now to Slide 17. I will review costs in the quarter. Q1 cost of revenue as a percentage of revenue decreased approximately 900 basis points, year over year. The improvement was driven by both strong Auction and Assurance results and by ACV Transport. As George mentioned, we achieved our 2026 Transport revenue margin target in Q1 three years ahead of schedule. Non-GAAP operating expense including cost of revenue increased 9% year over year in Q1 versus 42% year over year growth in Q1 2022.

This reflects the significant investments, we made in prior years to support market expansion and technology initiatives and reflects our continued focus on expense discipline, as we optimize and scale our business. Moving to Slide 18, let me frame our investment strategy and path to profitability. Our focus on spending discipline and operating efficiency is expected to result in a material decrease in OpEx growth in 2023. And as you’ve seen reflected in our Q1 results, we have accomplished this while preserving our go-to-market and technology investments, to ensure ACV is in a strong position as market conditions improve. Next, I will highlight our strong capital structure on Slide 19. We ended Q1 with $526 million in cash and equivalents and marketable securities and $96 million of long-term debt to finance the growth of ACV Capital.

Note, that our Q1 cash balance includes $188 million of float in our Auction business. As we discussed previously the amount of float on our balance sheet, can fluctuate meaningfully based on business trends in the final two weeks of each quarter, and has a corresponding impact on operating cash flow. In Q1 cash flow from operations was $43 million, driven by the sequential increase in float and was a significant improvement from the $31 million loss in Q1 2022. Now, we’ll turn to guidance on Slide 20. For the second quarter of 2023, we are expecting revenue in the range of $117 million to $120 million. And adjusted EBITDA is expected to be a loss in the range of $8 million to $10 million. For the full year 2023, we are raising our expected revenue to a range of $468 million to $478 million, representing growth of 11% to 13% year over year.

Adjusted EBITDA is expected to be a loss in the range of $27 million to $32 million, an improvement of nearly 50% versus 2022 and we remain committed to achieving adjusted EBITDA breakeven exiting this year. As it relates to our guidance, we are assuming that new vehicle supply remains constrained in the near-term, but improves as production and inventory continue to recover throughout the year. We’re also assuming that conversion rates normalize throughout the year, as wholesale price depreciation moderates. Let me wrap up on Slide 21, by reviewing our 2026 financial target. We are very pleased with our execution in a challenging macroenvironment, and we remain confident in our ability to achieve $1.3 billion of revenue and $325 million of adjusted EBITDA in 2026, with 25% adjusted EBITDA margin.

Our confidence is reinforced by a number of factors, including: strong dealer penetration and increased wallet share resulting in sustained market share gains; opportunities to expand our TAM into adjacent markets including commercial wholesale; our broad technology platform enabling durable long-term growth and operating efficiency; consistent improvement in revenue margin and a commitment to balancing growth and investment as our business scales. We look forward to providing you with the details, on our long-term targets at our upcoming Analyst Day on June 1st. And with that, let me turn it back to George.

George Chamoun: Thanks Bill. Before we take your questions, let me summarize. We are very pleased with our strong execution in the first quarter. We are especially proud of our ACV teammates that delivered these results. We continue to gain market share by attracting new dealers to our marketplace and by gaining wallet share, which positions ACV for attractive growth as market conditions improve. We are executing on our territory penetration plan and gaining traction with an expanding suite of offerings. We are delivering an exciting product roadmap to further differentiate ACV and expand our addressable market. We are on track to achieve our near-term adjusted EBITDA targets and over the medium term, generate over $1 billion in revenue with attractive margins that we believe will drive significant shareholder value.

We are committed to achieving these results while building a world-class team to deliver on our goals. With that I’ll turn the call over to the operator to begin the Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Daniel Imbro with Stephens. You may proceed.

Operator: Thank you. Our next question comes from John Colantuoni with Jefferies. You may proceed.

Operator: Thank you. Our next question comes from Rajat Gupta with JPMorgan. You may proceed.

Operator: Thank you. Our next question comes from Chris Pierce with Needham & Company. Your may proceed.

Operator: Thank you. Our next question comes from Bob Labick with CJS Securities. You may proceed.

Operator: Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. You may proceed.

Operator: Thank you. Our next question comes from Ron Josey with Citi. You may proceed.

Operator: Thank you. Our next question comes from Michael Graham with Canaccord. You may proceed.

Operator: Thank you. Our next question comes from Nick Jones with JMP Securities. You may proceed.

Operator: Thank you. Our next question comes from Nat Schindler with Bank of America. You may proceed.

Operator: Thank you. And this concludes the Q&A session. I’d now like to turn the call back over to Tim Fox, for any closing remarks.

Tim Fox: Great. Thank you. I guess I don’t need to remind everybody, that we have an Analyst Day on June 1st, but you can find registration details on our in today’s press release and on our website. And we look forward to seeing those of you who are joining us then, and thanks again for your interest in ACV and have a great evening.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.