ACV Auctions Inc. (NASDAQ:ACVA) Q2 2023 Earnings Call Transcript

ACV Auctions Inc. (NASDAQ:ACVA) Q2 2023 Earnings Call Transcript August 7, 2023

ACV Auctions Inc. misses on earnings expectations. Reported EPS is $-0.09771 EPS, expectations were $0.07.

Operator: Good day and thank you for standing by. Welcome to the ACVA Second Quarter 2023 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Tim Fox, Vice President of Investor Relations. Please go ahead.

Tim Fox: Thank you, operator. Good afternoon, and thank you for joining ACV’s conference call to discuss our second 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 on 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 ACV’s continued momentum in the second quarter, another record-breaking quarter in revenue that once again exceeded the high end of guidance, reflecting strong execution by the ACV team as we continue to gain market share. Demand for ACV Transport and ACV Capital was very strong, which contributed to both revenue growth and revenue margin expansion versus Q2 2022. And our continued focus on driving profitable growth resulted in adjusted EBITDA, also exceeding guidance, highlighting the leverage in our model. With that, let’s turn to a brief recap of the quarter on Slide 4. Second quarter revenue of $124 million was $4 million above the high end of guidance, resulting in 8% growth year-over-year.

GMV of $2.5 billion declined 10% year-over-year, reflecting continued moderation of wholesale market prices. Despite this price moderation, ARPU increased year-over-year, reflecting our price increase from last fall. We sold 153,000 vehicles in our marketplace, a sequential increase from strong results in Q1 and growth of 3% year-over-year. Year-over-year unit growth benefited from an increase in conversion rate, which benefited from a range of data-enabled marketplace innovation, focused on enhancing dealer engagement. On Slide 5, I will again frame the rest of today’s discussion around the three pillars of our strategy to maximize long-term shareholder value; growth, innovation and scale. I’ll begin with growth. On Slide 7, I’ll begin by sharing observations about the broader automotive market as context for the trends we are seeing in the dealer wholesale market.

In Q2, light vehicle retail volumes increased 2% quarter-over-quarter and increased 17% year-over-year from depressed levels. SAAR is still running about 10% below pre-pandemic levels, but inventories are slowly building, which is key to supporting the recovery in retail sales. Used vehicle retail sales were flat quarter-over-quarter and year-over-year as affordability issues continue to impact consumer demand. In fact, used retail volumes were about 15% below 2019 in the first half of this year. Combined, new and used retail units increased about 6% year-over-year, which is a positive sign for supply into the wholesale market. As we expected, wholesale prices and conversion rates declined quarter-over-quarter from seasonally high levels in Q1.

However, we believe prices will follow a more normalized depreciation curve this year and conversion rates will also follow normal seasonal patterns. On balance, we continue to believe that end market conditions continue to show early signs of improvement, giving us confidence to again raise guidance for the year, which Bill will take you through later. Turning now to Slide 8; we estimate that the U.S. dealer wholesale market remained well below normalized volumes in Q2, but were in line with the seasonally strong first quarter. We remain confident that as the market continues to recover, our growth will benefit from both market expansion and market share gains. In Q2, given our 3% year-over-year unit growth and an estimated market contraction of 14%, this implies that ACV grew market share by approximately 17%.

Next, I would like to wrap up the growth section with highlights on our value-added services. First, on Slide 9; the ACV Transportation team delivered another strong quarter and is scaling ahead of schedule. Our strong carrier network in record cycle times resulted in attach rates reaching the mid-50% range. Our technology investments in dispatching and pricing optimized by AI are driving both growth and operating efficiencies. These efficiencies resulted in revenue margins in the mid-teens, an increase of over 900 basis points year-over-year. As we discussed at our recent Analyst Day, our 2026 financial targets assume transport revenue margin in the high teens. So we are squarely on track to achieve that objective. Turning to Slide 10; our ACV Capital team also delivered strong results in Q2.

After achieving 10% attach rates for the first time in Q1, ACV Capital maintained this level in Q2, resulting in 50% loan volume growth year-over-year and combined with a very strong ARPU expansion, delivered over 110% revenue growth. Along with our core floor plan offerings, we are investing in new ACV Capital products for our sellers, enabling the emerging consumer to dealer market. We remain confident that ACV Capital will be an important long-term growth and profit driver. Turning to the second element of our strategy, innovation; on Slide 12, I’d like to highlight how we’re leveraging innovation to drive growth and in this case, our improving conversion rates. We have further expanded the rollout of our two-hour auction, complementing our traditional 20-minute live auction format.

In just a few short quarters, we are running over half of our auctions for two hours. We’re also testing new merchandising links where vehicle listings are segmented by a specific set of criteria to provide buyers with even more flexibility on searching for the right inventory. Our mantra for continuous improvement extends to our enhanced vehicle display page that makes vehicle condition data easier to digest, enabling faster buying decisions for our dealer partners. We are leveraging AI to enhance our inventory matching capability that feed alerts to dealers based on their historical buying patterns. Lastly, we continue to innovate on our pricing engine, which is powered by machine learning and leverages our industry-leading vehicle condition data along with the growing curated automotive data set.

The goal here is to provide dealers with holistic pricing guidance to drive even higher success rates on our marketplace. The ACV pricing engine now powers several ACV products, including ACV Auctions market report, our clear car brand of consumer sourcing tools and upgrades we’re making to MAX Digital. As I mentioned earlier, our conversion rate expanded over 150 basis points year-over-year and we believe innovation is a key element in driving these results. On Slide 13, we highlighted examples of tech investments that extend into our operations, delivering customer success while reducing costs; in this case, arbitration costs. As you know, minimizing arbitration has been a key focus for both customer satisfaction and optimizing margins. The key here is inspection accuracy.

Several innovations that are improving inspection accuracy and efficiency; our CoPilot, ArbGuard, Apex and our AI-powered imaging apps. CoPilot, and ArbGuard, leverage machine learning, predictive analytics and sensor data to inform our VCIs and vehicle-specific issues before and after conducting an inspection. Our next-gen collection device, Apex, delivers significantly higher transparency into vehicle operating additions while also increasing the inspection productivity for our VCI teammates. Our imaging AI continues to improve. Virtual list increases accuracy by identifying specific conditions like catalog converters and rust. In Q2, these innovations helped drive an 8% reduction in arbitration costs year-over-year, which is great performance in the current market.

To wrap up on innovation, I think you’ll agree that our team is delivering industry-leading technology to our dealer partners and to our own operations. We have an exciting road map of innovation to drive both growth and scale, and we look forward to sharing more next quarter. With that, let me hand over to Bill to take you through our financial results and how we’re driving growth at scale.

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Bill Zerella: Thanks, George, and thank you, everyone, for joining us today. We are very pleased with our Q2 financial performance, again delivering 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 Q2 ’22. Turning to Slide 15. I’ll begin with a recap of our second quarter results. Revenue of $124 million was above the high end of our guidance range and grew 8% year-over-year. Adjusted EBITDA loss of $4 million also beat our guidance range adjusted EBITDA margin improved approximately 900 basis points versus Q2 ’22, demonstrating the attractive operating leverage in our model.

Next, on Slide 16, I will cover additional revenue details. Auction and insurance revenue, which was 56% of total revenue, increased 6% year-over-year versus solid results in Q2 ’22. This revenue performance reflects 3% year-over-year unit growth and auction and assurance ARPU of $453 which also grew 3% year-over-year. As George mentioned earlier, despite a decline in GMV per unit of 13% year-over-year, we were able to grow ARPU by 3% and reflecting our price increases last fall, and we believe we still have pricing headroom going forward. Marketplace Services revenue, which was 37% of total revenue, grew 12% year-over-year. Results were driven by record revenue for both ACV Transport and ACV Capital. Our SaaS and data service products comprised 7% of total revenue and grew 1% year-over-year.

As we discussed over the last few quarters, we are making significant improvements to the MAX Digital platform, while taking a more measured approach to customer acquisition in the near-term. We’re confident these improvements position MAX for a reacceleration of growth entering 2024. Turning now to Slide 17. I will cover costs in the quarter. Q2 cost of revenue as a percentage of revenue decreased approximately 480 basis points year-over-year. The improvement was driven by both strong auction and assurance results and by ACV Transport. As George mentioned, we delivered mid-teens transport revenue margins in Q2, which is within striking distance of our 2026 target. We continue to focus on expense discipline as we optimize and scale our business.

Non-GAAP operating expense, excluding cost of revenue, increased 2% year-over-year versus 36% year-over-year growth the prior year. This reflects the significant investments we made in prior years to support market expansion and technology initiatives. 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 this year, resulting in our adjusted EBITDA loss declining by over 50% year-over-year. And as you’ve seen reflected in our Q2 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 Q2 with $500 million in cash and equivalents and marketable securities and $105 million of long-term debt to finance the growth of ACV Capital. Note that our Q2 cash balance includes $168 million of float in our auction business. As we’ve discussed previously, the amount of float on our balance sheet can fluctuate meaningfully based on the business trends in the final two weeks of each quarter and has a corresponding impact on operating cash flow. For the first half of 2023, cash flow from operations was $23 million. a significant improvement from the $73 million loss in the first half of 2022. Now I’ll turn to guidance on Slide 20. For the third quarter of 2023, we’re expecting revenue in the range of $115 million to $119 million.

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 $474 million to $482 million, representing growth of 12% to 14% year-over-year. We are also reducing our expected adjusted EBITDA loss to a range of $23 million to $27 million, and we remain committed to achieving adjusted EBITDA breakeven exiting this year. As it relates to our guidance, we are assuming that new and used vehicle supplies remain lower at historical levels in the near-term that improve as production and inventory continue to recover. We’re also assuming that conversion rates follow normal seasonal patterns in the second half of the year, and wholesale price depreciation continues.

Let me wrap up on Slide 21 by reviewing our 2026 financial targets. We are very pleased with our execution in a challenging macro environment and 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. As we detailed at our Analyst Day in June, 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 long-term growth and operating efficiency, consistent improvement in revenue margins, and a commitment to balancing growth and investment as our business scales.

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 second quarter and we are especially proud of our ACV Teammates to deliver these results. We continue to gain market share by attracting new dealer and commercial partners to our marketplace and by gaining wallet share, which positions ACV for attractive growth as market conditions improve. We’re executing our territory penetration plan and gaining traction in an expanding suite of offerings. We are delivering an exciting product road map to further differentiate ACV and expand our addressable market. We are on track to achieve our near-term adjusted EBITDA target and over the medium-term, generate over $1 billion in revenue with attractive margins, and 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Michael Graham with Canaccord.

Michael Graham: Can you hear me okay?

George Chamoun: We can.

Michael Graham: Okay. Good. I just want — thanks for the question and congrats on the execution. I just wanted to ask a macro question on the environment for dealer wholesale. You mentioned new car sales are sort of picking up inventory levels are getting more healthy, which helps prime the pump for the used market, but also that we’re still facing this period of high prices for used retail I just want to kind of ask where you think we are on that curve of marching towards normalcy in the used market? And how long do you think it takes to get there if the new vehicle market can continue its sort of positive trend? .

George Chamoun: Yes. Michael, again, thanks for the question. And we talked quite a bit about this on our Investor and Analyst Day. And one of the — we talked about really the steps that all take place in sort of that return to normal market conditions, one being new car production, a new car sales starting to come back towards normal. We’re seeing great progress there. So very, very excited to see that even with this sort of — all the thoughts of the concerns around the economy, consumers are buying new cars. They’re excited about these new cars. There’s all these great products coming out. OEMs are putting incentives are starting to put incentives around these new cars. So step number one has been seeing new car production come back.

And that is starting to happen. That’s really an important part. We’re also starting to see used car value start to come down. That’s important because if you could buy — you don’t want to buy a new car, used car has to be of lower value than that said, new cars. And with that also, it will help once interest rates also come down to those used cars. So I think new car sales right direction. We’d like to see used car volume sales come back a little bit more significantly. And then we’ll also start to see used cars start to add up on dealer lots over the next couple — when you think about net path of normalcy. So I really said the same thing I probably said on the Investor Analyst Day, but we are — these are all positive signs. We also said this year, we thought would be the trough where — and that was all part of our forecasting for the year, part of our expectations.

really, we’ll start to see next year be the year where we’ll start to get back towards normal. And then between now and 2026, we’re thinking by 2026, things are normal. But this year being the trough, and it starts to come back from that.

Operator: Our next question comes from the line of Nick Jones with JMP Securities.

Nick Jones: Great. Thanks. I guess one on some of your expectations around depreciation for the rest of the year. I guess, what gives you confidence in kind of the trajectory of unit depreciation? And then I guess, in a scenario where there’s more volatility, do you feel dealers are better prepared to bid on cars that are more volatile and maybe result in less arbitration if things do get more volatile? .

George Chamoun: Yes, Nick. Thanks for the question. We do have, as part of our planning for the year. We do have used car values going down. And we feel very comfortable that Bill can chime in, more if I don’t answer completely, but we feel very good about how we’ve modeled used car values declining and what that means from average GMV. So one, I would say we feel good about it, but then I think the flip side to your question, which I think is a great question. is what does this all mean for dealers because at the end of the day, they’ve got put together a number on a trade and a consumer is walking in. They’ve got this trade of a vehicle, let’s say, it’s got 80,000 miles or whatever how many miles are on it. And they’ve got to put a new number on this, and that number will be going down throughout the year.