ACV Auctions Inc. (NASDAQ:ACVA) Q3 2023 Earnings Call Transcript

ACV Auctions Inc. (NASDAQ:ACVA) Q3 2023 Earnings Call Transcript November 6, 2023

ACV Auctions Inc. misses on earnings expectations. Reported EPS is $-0.11 EPS, expectations were $-0.07.

Operator: Good day and thank you for standing by. Welcome to the ACV Auctions Third Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speaker’s 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 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 third 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. ACV’s momentum continued in the third quarter with revenue at the high end of guidance and adjusted EBITDA once again exceeding our guidance. Our performance reflects another quarter of strong execution by the ACV team as we gain market share and launch new innovations that expand our TAM and drive operating efficiencies. Strong demand for ACV Transport and ACV Capital contributed to revenue growth and revenue margin expansion and a continued focus on driving profitable growth resulted in our adjusted EBITDA margin expanding 800 basis points year-over-year. With that, let’s turn to a brief recap of Q3 on slide four. Third quarter revenue of $119 million increased 13% year-over-year, with growth accelerated sequentially.

We sold 150,000 vehicles in the quarter, resulting in 13% year-over-year growth, reflecting further adoption of our marketplace solutions targeting dealer engagement. GMV of $2.1 billion was flat year-over-year, reflecting continued moderation of wholesale market prices. Despite this price moderation, ARPU once again increased year-over-year, reflecting the strength of ACV’s core value proposition. On slide five, 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 seven, I’ll share our observations about the broader automotive market as context for factors impacting the dealer wholesale market. In Q3, new vehicle retail units declined sequentially but increased approximately 10% year-over-year from depressed levels.

While volumes continue to lag pre-pandemic levels, inventories improved which is key to supporting a sustained recovery in retail sales, trade and dealer wholesale supply. Used vehicle retail units modestly increased sequentially and year-over-year, but also remain well below historical levels as affordability issues continued to pressure consumer demand. In terms of vehicle sourcing, our data indicates that dealers retain a higher-than-normal percentage of trade for retail inventory, creating a near-term headwind for wholesale supply. We believe the retail wholesale mix will begin to normalize as inventory levels for both new and used vehicles recover. While supply remains muted, price depreciation and conversion rates across the industry have generally been following normal seasonal patterns and have marginally improved in recent months.

This is in stark contrast to industry trends in the back half of 2022, which resulted in challenging operating conditions in the wholesale market. On balance. We believe that end markets are showing early signs of improvement, giving us confidence to again raise guidance for the year. Turning now to slide eight. We estimate that the US dealer wholesale market remained well below normalized volumes of Q3, but grew modestly quarter-over-quarter. Relative to Q3 ’22, the market only declined about 2%, which was a significant improvement from the 14% year-over-year decline in Q2. As the market begins to recover, our growth will benefit both from market expansion and for market share gains. In Q3, our 13% year-over-year unit growth and an estimated market contraction of 2% implies 15% market share growth for ACV.

Next, I would like to wrap up the growth section with highlights on our value-added services. First, on slide nine. The ACV Transportation team delivered another strong quarter and continues to scale ahead of schedule. Our strong carrier network and improving cycle times resulted in a attach rate in the mid-50% range again this quarter. Our technology investments and expanded carrier coverage of AI optimized pricing are driving both growth and operating efficiencies. This combination yielded record revenue margins in the high teens, an increase of approximately 500 basis points year-over-year. As a reminder, our 2026 financial targets assume transport revenue margin in the high teens. While margins may fluctuate modestly over time, the fact that we achieved our target last quarter speaks to the value we’re delivering to our dealer partners and to the strong execution of our transport team.

Turning to slide 10. Our ACV Capital team once again delivered strong results in Q3. Attach rates in the low double-digits resulted in 40% loan volume growth year-over-year and combined, the strong ARPU expansion delivered about 80% revenue growth year-over-year. In addition to our floor plan offerings, we are investing in new ACV Capital capabilities that will help our sellers source consumer vehicles, leveraging ClearCar. We remain confident that ACV Capital will be an important long-term growth and profit drive. Turning to the second element of our strategy, innovation. On slide 12, I’d like to touch on the formal launch of ClearCar, ACV’s consumer sourcing solution that leverages AI and real-time market data to deliver highly accurate condition-based pricing.

As a reminder, consumers looking to sell their vehicle is a very large market opportunity, including 10 million transactions that historically are sold peer-to-peer and, therefore, do not end up in a dealership. As I discussed earlier, the below normal supply of new and used inventory in the market, especially late model used vehicles, is a challenge for our dealer partners. ACV is addressing this challenge with ClearCar, which has experienced strong early adoption with hundreds of dealer rooftops. And based on dealer feedback, consumer conversion rates are significantly higher than competitive sourcing tools. This speaks to both the power of the offering and its effectiveness in driving qualify leads. At its core, ClearCar helps decode how vehicle condition influences vehicle value, allowing ACV dealers and commercial clients to have more transparent conversations with consumers.

And consumer benefits can have greater visibility into how their vehicle value is determined. The solution consists of ClearCar price and ClearCar capture. ClearCar price is an estimation tool that resides in the dealer’s website, providing consumers with precise value estimates for their vehicle. ClearCar Capture allows consumers to submit photos of their vehicles for further documentation of conditions through our AI imaging and self-inspection tool, which we acquired for Monk. ClearCar Capture digitally detects exterior damage during the photo capture process, enabling dealers to update their condition enhanced pricing without an on-site infection. We are very pleased with the early market momentum for this value-added solution and the opportunity to both expand our TAM and add another growth lever to our business.

To wrap up on growth. We are also pleased with the early stages of our commercial market strategy. We are operating in a few markets where we have the services required by these customers. And even though it’s early, we’re very encouraged with our progress and believe we can scale and capture the market share outlined in our 2026 financial targets. On slide 13. We highlight examples of tech investments that expand into our operations, delivering customer success while reducing costs. As we discussed last quarter, reducing arbitration remains a key focus for both customer satisfaction and optimizing margins. One of the key drivers is inspection accuracy. Our field team is equipped with CoPilot, ArbGuard, Apex and our AI-powered imaging apps to deliver high-quality inspections.

CoPilot and ArbGuard leverage machine learning, predictive analytics, and sensor data to inform our VCI on vehicle-specific issues before and after conducting an inspection. Apex delivers significant transparency into vehicle operating conditions while also increasing the inspection productivity of our VCI teammates. We continue to expand our imaging AI capability to identify specific important conditions with the presence of damage and rust. Together, these innovations have contributed to a low double-digit reduction in arbitration unit costs this year, which is a great performance in the current market. Our technology investments are also driving efficiency in our model with OpEx leverage increasing by over 200 basis points in Q3. To wrap up on innovation.

ACV remains committed to delivering industry-leading technology to our dealer partners and to our own operations, driving both growth and scale. We look forward to sharing more details with you next quarter. With that, let me hand it over to Bill to take you through our financial results and how we’re driving growth at scale.

William Zerella: Thanks, George, and thank you, everyone, for joining us today. We are very pleased with our Q3 financial performance with strong revenue growth and upside to adjusted EBITDA. We also continue to demonstrate the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q3’22. Turning to slide 15. I’ll begin with a recap of our third quarter results. Revenue of $119 million was at the high end of our guidance range and grew 13% year-over-year. Adjusted EBITDA loss of $4 million beat our guidance range and adjusted EBITDA margin improved approximately 800 basis points versus Q3’22. This demonstrates both the inherent operating leverage in our model and continued strong OpEx management.

Next on slide 16, I will cover additional revenue details. Auction and assurance revenue, which was 55% of total revenue, increased 17% year-over-year. This revenue performance reflects 13% year-over-year unit growth and auction and assurance ARPU of $439, which grew 4% year-over-year. Note that ARPU grew year-over-year despite a 10% decline in GMV per unit, reflecting our price increases from last fall and this September, and we believe we still have pricing headroom going forward. Marketplace Services revenue, which was 38% of total revenue, grew 11% year-over-year. Results were driven by strong ACV Transport performance and another record revenue quarter for ACV Capital. Our SaaS and data services products comprised 7% of total revenue and declined 6% year-over-year.

The decline was primarily related to our stand-alone inspection offerings which continue to be impacted by the weak off-lease market. While MAX Digital revenue grew modestly year-over-year, recall that we continue to take a measured approach to customer acquisition while making significant improvements to the MAX Digital platform. We’re confident these improvements position MAX for long-term growth. Turning now to slide 17, I will cover costs in the quarter. Q3 cost of revenue as a percentage of revenue decreased approximately 500 basis points year-over-year. The improvement was driven by both strong auction insurance results and by ACV Transport. As George mentioned, we delivered high teens transport revenue margins in Q3 and which is in line with 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 9% year-over-year in Q3 versus 18% year-over-year growth the prior year. This reflects a more metered approach to growing OpEx relative to our revenue and margin growth to deliver higher operating margins as we march towards profitability. 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 declined by over 60% year-over-year. And as you’ve seen reflected in our Q3 results, we have delivered margin expansion 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 Q3 with $450 million in cash and equivalents and marketable securities and $105 million of debt on our revolver. Note that our cash balance includes $162 million of float in our auction business. The amount of float on our balance sheet will continue to fluctuate meaningfully based on business trends in the final two weeks of each quarter, which has a corresponding impact on operating cash flow. Year-to-date cash flow from operations was $9 million, a significant improvement from the $75 million outflow in the same period of 2022. Now I’ll turn to guidance on slide 20. For the fourth quarter of 2023, we are expecting revenue in the range of $116 million to $120 million.

Adjusted EBITDA is expected to be a loss in the range of $7 million to $9 million. The sequential increase in adjusted EBITDA loss in Q4 reflects targeted investments to drive continued revenue growth in 2024. For the full year 2023, we are raising our expected revenue to a range of $479 million to $483 million, representing growth of 14% to 15% year-over-year. We are also reducing our expected adjusted EBITDA loss to a range of $20 million to $22 million and remain committed to achieving adjusted EBITDA breakeven exiting this year, setting us up to deliver a full quarter of profitability in Q1’24. As it relates to our guidance, we are assuming that new and used vehicle supplies remain lower than historical levels in the near term that improve as production and inventory continue to recover.

We are also assuming that conversion rates and wholesale price depreciation follow normal seasonal patterns for the balance of the year. Let me wrap up on slide 21 by reviewing our 2026 financial targets. We are very pleased with our continued execution in a challenging macro environment and remain committed to achieving $1.3 billion of revenue and $325 million of adjusted EBITDA in 2026 with 25% adjusted EBITDA margins. Our targets are underpinned by a number of factors, including sustained market share gains, dealer wholesale market recovery to historical volumes, TAM expansion into adjacent markets, technology innovation to drive growth and operating efficiency 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, I will summarize. We are very pleased with our strong execution in the third quarter. 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 are executing on our territory penetration plans and gaining traction with our expanding suite of offerings. We’re delivering on 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.

Operator: Thank you. [Operator Instructions] And our first question comes from Chris Pierce of Needham & Company.

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Q&A Session

Chris Pierce: Hey, good afternoon, everybody.

George Chamoun: Hey, Chris.

William Zerella: Hey, Chris.

Chris Pierce: Can you just talk about your unit growth versus the used units we see year-over-year at the publicly traded dealer groups? I know you don’t probably have that handy, but they averaged about down 5% year-over-year in their Q3, but you guys are up 13%. I think it’s because of your leverage to independent dealers, but I’d love to kind of hear why you’re able to grow versus them kind of shrinking? Or just kind of — just in general, how you’re able to kind of differentiate yourself?

George Chamoun: Yes, Chris, thanks. So there’s a couple of factors of why our units grew even though, to your point, the used car retail market shrunk. So one is that we did see new car sales, which is where our supplies comes from. So one is we are starting to see some of the health of the market come back, which is positive. Two, we are continually not only growing sellers, but getting more wallet share. So we’re expanding our capabilities and growth within our footprint. So look at the two main reasons why being both customer wins, customer wallet share and also the fact that new car sales is starting to come back, and new car sales coming back is helping us have trades coming in to dealerships, which then creates the wholesale opportunity. Now granted, we didn’t see dealer wholesale grow year-over-year, but we are seeing the market at least incrementally get healthy, especially compared to last quarter.

Chris Pierce: Okay. Perfect. And then just talking about normal seasonal depreciation at the year-end. Can you just speak to what gives you the confidence to say that given what we saw last year where — is it just that dealer inventories have loaded last year and they’re tighter this year? Or is there something else to it?

George Chamoun: Yes. Chris, the normalcy we’re referring to on the call was both regarding, thus far, I would say, listings and sell-through rate or conversion rate, I should say. We’re seeing a sense of normalcy as it relates to both. So, so far, we’re feeling good. We’re both seeing the — and actually, last but not least, I think to your point, though, is the value of used cars. We do have, in our plan, used car values going down. So it is part of the plan. We do expect moderate — moderation in GMV happening sort of month-over-month throughout the quarter. So when you look at all the trends, listings, conversion rate and also our expectations on GMV going down, it gets us comfortable for the plan we’ve outlined.

Chris Pierce: Okay. Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Eric Sheridan of Goldman Sachs.

Eric Sheridan: Thanks so much for taking the question. Hope everyone on the call is very. Maybe two, if I could. First, longer-term question about pricing. When you think about your long-term plan and where you are relative to competitors today, how should we be thinking as pricing as a lever to either gain more market share versus gather more unit economics and compound more revenue growth? So that would be number one, just a refresh on pricing versus competition. And then second, just in terms of the adjusted EBITDA guide for Q4. Just want to make sure that is maybe year-end one-timer type technology investments as opposed to maybe a new run rate or thought we should be taking in on incremental margins going into next year. I know it’s a little early to talk about 2024, but just want to understand the context around those investments that have some of the margin reversal in Q4. Thanks.

George Chamoun: Yes, certainly, Eric. Thanks. This is George. I’ll go first and then I’ll let Bill chime in on your second question. So on your first question, we — our long-term target at least — I would say, at least in 2026 model is about $500 in combined buy/sell fees. We’ve been averaging around 450 this year. So when you look at the fact that we — that’s only about $50 more. Now assuming GMV does decline a bit from time to time, we feel very comfortable that we’ve got the room. So instead of just giving you the gap, there is — the gap is larger than that $50 between us and some of our competitors. I think the way we look at it, at least for now, we feel very good about where we’ve got our — we’ve gotten the model between now and 2026, knowing that the buy and sell fees that the majority of traditional auctions is pretty significantly higher than that.

I think definitely well over $100 in room today, and that’s not where the competitors may go in the future. So that goes your first question. Bill, do you want to take the second?

William Zerella: Yes. Eric, so in terms of your second question, the short answer is there’s really no change in terms of our operating model going forward. But to give you a little bit of context, so even with the Q4 guidance, we’re reducing our OpEx guidance for the year by about $2 million. So if anything, we’re actually in a better position in terms of heading into next year to achieve our EBITDA breakeven, if not EBITDA profitability in Q1. But there is an opportunity for us to make some targeted investments to drive growth next year, and we’re taking an opportunity to bake that into our Q4 OpEx. So again, these are pretty targeted. We still have a lot of growth opportunities ahead of us, not just in dealer wholesale but commercial peer to peer.

And our focus is basically setting ourselves up as best we can for next year’s targets while still, again, lowering our total OpEx for the year by about $2 million. So hopefully, that gives you a little bit of context, but there certainly isn’t anything beyond that or anything you should adjust your models to reflect.

Eric Sheridan: Helpful on both fronts. Thanks.

William Zerella: Thank you, Eric.

Operator: Thank you. One moment for our next quarter. And our next question comes from Nick Jones of JMP Securities.

Nicholas Jones: Great. Thanks for taking the questions. I guess just maybe back on the normalization or time line to normalization. I think back at the Analyst Day, you said 2025, give or take, you expect kind of the industry to normalize. How are you guys monitoring what can kind of dislocate or change that time line as we see various data points come out, whether it be industry-specific or maybe more particularly kind of a for your consumer challenges may be causing an overcorrection and supply starts to build as consumers struggle to afford auto? So any color on kind of, I guess, to boil it down, are there any changes in your time line to normalization from here? And then the kind of the second question is how are you thinking about consumer challenges, auto affordability playing into that? Thanks.