ACV Auctions Inc. (ACVA) Earnings Call Transcript & Summary

Okay. All right. I think we're going to get started with our next session. It's my pleasure to have the team from ACV Auctions here, George Chamoun, CEO; Tim Fox, VP Investor Relations. Guys, thanks for being part of the conference again this year.

Thanks for having us.

Yes. Excited to be here.

Okay. Good to see you both. For those who don't know the story as well, George, maybe you can take us a step back and just sort of introduce the concept of what you're trying to build, how it's evolved. You've been on quite a journey over the last couple of years.

Yes. It's really been an exceptional ride. So in 2016, I joined as CEO and prior with an angel investor, and we really were taking on this fascinating dealer wholesale category, dealer-to-dealer wholesale category. And just taking a step back on what this TAM is. There was about 20 million cars a year sold pre-COVID, dealer-to-dealer being 1 segment wholesale and about 8 million commercial cars. A category that most investors hadn't really looked at because the largest companies like Cox Automotive were private. There was 1 company car in the category. Most investors hadn't really looked at it. So we brought in this digital-first opportunity. The digital-first opportunity meant cars didn't need to be shipped. We brought this unique inspection minded with the best inspection report. We're opening up the opportunity to bring demand regional, national demand to any given car. Started in the Northeast, going after this very large market share. Just in this -- so we spent 7-ish years. We're already a little north of 8% market share of dealer wholesale across the country. So really tremendous job of taking share. And when you look at that regionally, we've had incredible share on the East Coast where we've been here a number of years. And out West, we've got a lower percentage, but we're still new and we're young and we're growing. And so a digital-first model, disrupting primarily a legacy model. We've been growing both pre-COVID and post-COVID pretty consistently.

So it's always interesting to me. We've not seen each other a number of Investor Days and things over the years. The legacy component of what you're going after to disrupt, talk a little bit about that addressable market, like you talked about 8% penetration today, but talk about what the broader market landscape is, what you see is the realm of competition and how you're building towards disruption over the medium to long term.

Sure. I'll talk about the dealer -- the wholesale business first before I get to commercial because on commercial, we're still relatively young and just standing that up. On the dealer side, each and every market across the country had a market leader that was traditionally a physical auction. And in some cases, it was a mom-and-pop independent auction. In some cases, it might have been owned by Cox or owned by KAR or somebody else. In any 1 location, there was a different market leader. So a simple way to look at that is if you look at the country as 150-plus territories, like we do, there could have been, in any 1 of them, 200 different auctions that could have been the leader in that market. Very fragmented. Another way to look at it is the largest player in the space, Cox Automotive, had 2 of about 11 million to 13 million dealer wholesale cars. So even the largest player in the category had less than 20% share of dealer wholesale, very fragmented. Cars were shipped to an auction by the seller, buyers would show up. And the average distance between buyer and seller was probably a few hundred miles at best, and I'm being kind, okay? Move to our world. Car gets inspected. You don't -- you no longer need to know who the seller is. Bob Ford locally or Mary GMC, whoever that local dealer is, it doesn't matter. In the traditional world, we want to know who the seller was. The seller's credibility was whether or not you're going to buy that car. With the ACV inspection, I don't even know who that sellers were. The average distance in our platform is over 350 miles, average. That's how far they're going, average. So you're getting true reach. A car is ending up where it needs to -- wherever it should be. And that's been the -- I would say, the primary way we've disrupted has been about each and every car goes through our inspection. And because a buyer is more confident buying it, and we're -- and it ends up being in the right hands. Now from then to now, we begin today or later, we've added additional value-added components beyond that primary driver. But that's what's really driven the physical to digital change has been trust with the ACV inspection. That trust is what's converting folks to our world.

Got it. So maybe to skip from that macro view and the big picture down to something a little more micro. It feels like through most of the last couple of years, we've had an ongoing conversation about where supply and demand sit in the marketplace. I've joked with you that, yes, I think if we ever find balance between supply and demand, I don't even know what I'll do with myself covering the stock. But just talk us through the journey you've been on post-COVID and elements of the supply-demand dynamics in the broader automotive landscape and how that's impacted your business?

Yes. I'll start at a high level. Maybe Tim, you could -- any data you want to provide, but the main thing that happened to us shortly after COVID was a supply of new cars was basically shut down. Our dealers had less cars to sell therefore, less trades. And also, at the same time, they were holding on to more cars. So selling less, getting less trades a month from consumers and also holding on to more because they -- you're going to want to hold on to a car with 100,000 miles on to it. As a franchise dealer, why? Not because you really want to sell that car, because you don't have a choice. You're not going to have your lot be empty. So it was -- for some marketplace businesses you all cover, COVID was a good thing. For us, we were growing just fine, pre-COVID. So COVID, I would say, has been -- with us, it was really more of a nuisance than anything else.

It was more disruption.

It was more disruption and more challenging because it really disrupted our supply. Yes, it helped for demand for a period of time, and it helped a little bit on ARPU. But we're really a volume-driven business. And so there is more challenges. So we really had to grow the number of rooftops, which we've done. We had to get to our goals, which we've generally done a good job hitting our numbers, even with that disruption. But in our category, COVID brought some significant challenges. The great news is that it's starting to go back to normal. We really articulated and we thought this year would be the trough. And next year, between now and 2026, we'll see a build back to normal. So I think the -- I'm happy to share that we're starting to see dealers start to take more trades and also within some of our data products, we see how many of them they keep versus retail. And then we're starting to see a willingness to wholesale starting to go up each and every month.

Interesting. Okay. You talked a little bit about growing rooftops given the environment that presented itself. Talk a little bit about your go-to-market strategy, your land and expand strategy and what your learnings have been and how people should think about that strategy continue to evolve in the years ahead.

Yes, our core land and expand strategy was to first establish over 150 territories. And what that meant was primarily hiring a territory manager and that territory manager hiring vehicle condition inspectors. That was establishing at least a presence. Presence meaning, we might only get to 1 or 2 dealers in that 1 given market, but let's start our journey. Then we start to hire additional inspectors in that market to sort of -- as we start to grow our relationships in any given area. That's been our primary growth up until recently. In addition to us hiring territory managers, then hiring inspectors, taking more and more share, we've started to introduce additional value-added services. For example, ACV Private Marketplace where large dealer groups are trading within their group. That's a new way for us to grow beyond just growing store by store. Other value-added products like this new one, ClearCar, which is helping dealers buy cars from consumers. So looking at this, it has been our primary growth, which has been hiring our inspectors, getting them out in the field and then these new value-added services.

Got it. Sticking with those new value-added services for a minute, talk a little bit about how you approach building technology innovation and additional value-added services into the platform. And I don't know if it's best to go sort of innovation by innovation or product by product, but how should investors think about what those types of product innovations do to elements of retention, higher unit economics revenue growth. How to think about some of the outputs of some of those innovations?

Sure. So first is dealers voice their needs. This is not a shy industry. I've been in a few other verticals where you were trying to invent something before the market maybe even needed that product or service. This is very straightforward. You get in front of your dealer partners, they tell you, "Hey, this is my need, can you do it or not?" And it's been a very challenging category for dealers. There's not a lot of great tech companies in the automotive tech world. It's not like other verticals you all look at. So if a dealer told us, "Hey, inventory is important. I need to be able to keep more cars. I need to make sure I retail the right cars and wholesale the right cars." They don't come out and say, I need a private marketplace. They tell you, "I have these certain needs. And my own stores don't even trust each other. How do you help me?" So they express their need and we came out with a fantastic product offering. And how that expresses back to our unit economics to say, hey, we'll basically give you this product, charge them a little bit for it. As long as we get first try to your wholesale. The ClearCar one was -- the cars I buy from consumers are the cars that have the highest margin. They're the -- I win new customers with -- I need to get more consumers walking in the door. I can't have CarMax or Carvana eating my lunch. I need help. That's the way a dealer would tell us. They wouldn't say, "I want an AI-driven pricing engine." They're not going to say that. They're not going to say like -- they're going to say, "I need to win against CarMax. I need to win against Carvana. Help me." So a couple of years ago, we started our path, and we're just launching this product now. And it's been years in the making, where we were listening to what dealers need. And then how does it go back to our economics to say, okay, you can -- for feature A, it's $400 a month. For feature B, it's another $400. So let's call it $800 a month. But if you give me 10 cars a month, wholesale, which is about half your wallet share, I'll give it to you for free. So either pay me $400 to $800. I'll just give it to you for free. Whatever you want, Mr. Dealer, Mr. Dealer. Whatever works for you. So dealers express their needs. We've done a fantastic job of bringing true data-oriented products. A lot of investors are hearing AI everywhere you turn right now, but in our sector, what we're doing, from pricing, to condition and other factors, we are truly disrupting a category. And then business model, we're being fair with the dealer. How would you like to pay us? Do you want to pay us a few $100 a month in subscription? Or you want to give us your good cars? And we're happy either way.

Understood. You've had 2 Investor Days over the last sort of 1.5 years. In both of them, you've given a lot of great data about what's defined winning and gaining market share in certain pockets of where you operate. Talk a little bit about what defines outsized market share success for you in certain markets and how to think about reducing friction longer term to get even more market share where maybe you're underpenetrated today.

Why don't you take the first half of that so you can -- since you're up here with me. Then I'll answer the second half.

Sure. So when we look at the algorithm really for market share, it's a combination of penetration, so primarily franchise penetration. Franchise dealers generate about 80% of our units that come in from the supply side. So penetrating rooftops and then getting wallet share, right, getting a higher percentage of the amount of wholesale that they're transacting every month and quarter. If you look across the country, what we shared at the Analyst Day is that we're about 30% penetrated across all franchise dealers across the U.S. However, we're only about 30% of the wallet share. So multiply those 2 together, that gives you a sense of what our market share is in franchise. But if you look in the Northeast, even parts of the Southeast and Texas, even emerging parts of California, we have areas where we have 50%, 60%, 70% rooftop penetration, combined with 60%, 70%, in some cases, even higher wallet share, right? And when you get to that tipping point, which we start to see territory by territory, market by market and then region, that's where you really start to get the unit economics in the model, right, because volume drives it. We have a highly -- high level of fixed cost, right? And so as you start to drive that consistent growth, more rooftops, more wallet share, that really drives unit economics over time.

So the majority of what Tim described we've done with our core product, our ACV Auctions Digital Marketplace. Just rinse, repeat introducing the product to a market and getting share. It's only recently in the last couple of years where these other value-added services are offering even more value. So I would look at the numbers Tim represented, where we've taken in some markets 30% total market share. We've done that primarily with just a core product. And -- but you never stop -- to answer the second part of your question, you never stop investing in the future, right? It's all part of the formula. You -- we are building things that are helping the dealer make better choices, helping the dealer compete, helping them -- that are ways that a local physical auction just doesn't do. And so we're just going to keep winning share the way we've been doing it historically, but also adding this additional value so that in a way, it just further differentiates us from the decision-making of why use marketplace X versus marketplace Y.

Got it. So bring it back to what you talked about before, which is building value-add or ancillary services on top of the platform, which ones are you most excited about that can unlock elements of either volume/market share, defined either by rooftop or volume of cars that you think are the biggest unlocks for the growth in the business in a more stable supply-demand environment looking at over the next couple of years? Maybe I'll ask that as a first one.

So asking like which feature is like your favorite is almost like asking about your favorite child. So I'll answer it this way. If you looked at -- whether we're talking about ClearCar, which is the way to buy cars from consumers or ACV Capital, which is a funding mechanism for buyers or ACV Transport or MAX Digital, which is an inventory management, if you say, okay, what's the commonality of our data model that's going to help dealers make better decisions? So it's answering a different question you're asking. The commonality is the condition of the vehicle and understanding the condition unlocks better decision-making, in every single part of automotive. So if you ask me what's the most important part of our product tech investment thesis is whether the dealer in the future uses our inspection people, meaning our vehicle condition inspectors or doing a self-inspection or the consumer self-inspects, our data model will help dealers make the best decisions. So I had to pick a favorite. Maybe the underlining data structure that is literally fueling all these vertical features and products we're all talking about is the condition adjusted engine that helps you decide what to do, keep the car, retail the car, wholesale the car, transfer the car, don't transfer the car. You'll let your carrier because it's not -- the condition of -- like capital, how much to spend on the car. All of that dealers will go from gut and just professionals who have to look and smell a car to understand what to do with it, to do they go through one of ACV's models and it will win through one of our inspection models, it helps you make the right decision.

And talk about that a little bit because that's what struck me when I take a step back and look at the business at some of these Investor Days you put together, which is how much friction there still is in the offline process, right, even just inspecting a car or deciding about price. Can you just talk about what that -- how much friction you're reducing or quantify some way the differential between the offline world and the online world and how it feeds back into competitive differential?

So if any of you have been in an inspector, we had highly trained professionals who you need to look at a vehicle who -- they know everything. They know a Nissan Sentra really sounds this way or doesn't. Or a Subaru has this issue or that issue. And it's a category, automotive has been this category where 16,500 franchise dealers and over 30,000 independent dealers had an expert. And that expert might have been great in these cars, may be good in these cars. And however good that expert is or they have a bunch of experts inside that dealership, they're making decisions on buying a car, retailing a car, reconditioning a car, but it's not -- it wasn't structured. There wasn't a way to say, Subarus are supposed to sound this way. There wasn't a way to say, Nissan Altimas fall apart 35% of the time when they're this mileage and here's -- it wasn't structured. It was professionals who each and every [ part of trivia ]. So I would say dealers have done an incredible job making money and you -- for those of you that cover retail, you'll see a bunch of dealers have made lots of money doing what I'm talking about through professionals. All we're really doing is taking what the best can do and we're nailing it for everyone. And we're doing that in a structured way by -- we've now gotten to the point before you even inspect a car, before you even look at it, we can tell you, here's all the things you need to know about that given vehicle. Then after you inspect it, here are the things you should now be careful about. And so that just didn't really exist in this category. So what that can do to their overall economics, dealers can decide. They can decide maybe to invest different personnel. They can decide to invest more in acquisition of consumers. They could decide how to take their overall business plan and allocate it differently by having more of a technology-enabled decision-making methodology versus these experts, who were really the ones who are making all these decisions.

Got it. One of the questions we get a fair bit from investors is just the competitive landscape. I think people understand a marketplace disrupting the offline traditional ways of doing things. But many times, I'll run in to investors who think we haven't thought enough about what might be around the corner or how the competitive landscape might change. What do you try to protect against from a competitive standpoint of how the industry dynamic might change around some of the disruption you're trying to accomplish?

If I depict far enough out, I would say this industry, like all, will be -- AI will transform everything, and it's just a matter of time. So I would say she or he who has the most structured data and can unlock it in the most seamless way, will have advantages long term. I don't think this will be an industry that will change rapidly in like the next 3 years. I think it will take many more. But I think this industry, like most, will see massive disruption in the long run and decision-making will get easier and easier, which dealers should buy a car, which dealers should sell a car and how you make your -- it will all change. And I'm just trying to invest -- I'm trying to pace our investment. I think we're investing more than anyone else in the world in these categories to make sure as we move towards the systems just making decisions versus people that we're in the best position, and that's probably a global statement, not just a national statement, right? Because as you move to technology to help you make decisions versus just people, it changes everything.

Got it. Maybe last one on just ancillary services. Always interesting from the outside looking in. You talked about it a little bit before, but elements of driving more volume because of these ancillary services or more unit economics, how should we think about some of the businesses like Capital and Transport and things like that, that could move the needle either from a volume standpoint or a unit economic standpoint?

Tim, why don't you start with some of the things we've said publicly and then I'll chime in on after that.

Sure. So Transport has been really the most successful of the ancillary services and were the earliest that we got into. This past quarter, about almost 55% of our units used ACV Transport. It's a business that's a marketplace within a marketplace. We don't own any of the assets. It's obviously a very asset-light business. What's really important about Transport is that not only does it help fuel the volume and the growth and regionalization of our different territories, but that team has done an amazing job leveraging some of these ML and AI technologies to build better pricing algorithms, to actually build much more localized pricing to the point where we're running now in the mid-teens from like a revenue margin perspective. It was losing money a year ago, right? And our long-term goal in the 2026 or medium-term targets is to get that into the high teens. So we're very, very close to achieving that already. So that's a big driver of volume and growing our regionalization and also a key contributor to our margin improvement over the next 3 years. ACV Capital is a newer business, significantly higher revenue margins in that business. It's a great business. We're metering the growth there just because of the environment we're in right now. But even last quarter, revenue growth was over 100% on about, call it, 10% attach rates to the number of units that we're selling. The goal for 2026 is to get that to about 25% attach rate, we'd probably be close to that today if we really want it to be a little less risk averse. But we're just trying to meter that as we gain incremental share and scale in those businesses.

So when you think about -- the second half of your question is how is technology not only helping us today achieve these directives, but where does this thing go. We definitely had -- definitely beat our EBITDA targets for Transport this past quarter. And I really, by the way, was not holding anything back from you all. Like our advancements of our AI pricing engine within Transport, I was not expecting it to work that fast. It really was as simple as that. You build this stuff. You don't -- you build technology and you kind of pace yourself. In your mind, you go, "Hey, this will help us over the next 2 years." But sometimes it helps you a little faster. So now in the world of Transport, how do you -- look at it as almost like 1,000 different virtual lanes. This car is going from Buffalo to Miami in the wintertime. This one's going from New Jersey to over here to Philly, like it's like so many lanes. So how do you really price this? Well, we've built an AI pricing engine that's now allowing us to make these decisions. And the first quarter of launching, it feels like, "Woah, we got a lot more low-hanging fruit than we thought." And so it doesn't stop. It doesn't stop. Like each and every product, why -- the biggest ask I get on capital from dealers is I want to buy cars outside of ACV. I'll go with you, but give me money outside. And right now we say no. The next you ask will be if you're buying cars from consumers and if you're using ClearCar, then I'll say yes. We might have a dozen or so in trial right now that we're not telling everybody about just yet. Like, yes, of course, I'm trying that before I say it's launched. But why would I feel comfortable funding a dealer to buy cars from consumers, because they're using our pricing engine to buy the cars from -- so I know that there's about $600 to $800 of wholesale profit or $1,500 to $2,000 in retail margin if they use our pricing engine. So I feel comfortable funding that dealer I think better than anyone else in the world at funding that dealer to buy cars. No bank could do that. So it's -- you just keep investing with the thesis. That's why underlying this whole thing is really you keep investing more and more structured data to help make better decisions. And with that, the businesses will continue to evolve until we hit those [indiscernible].

Understood. Well, sticking with those longer-term objectives, I think the other big investment debate we always have with folks is just elements of bridge building towards the long-term revenue targets to long-term margin targets. Just -- I know they're out there in the public domain, but just help people understand some of the variables that you view as key to executing against those long-term objectives to build to the revenue base and the margin profile that you want to achieve with the company longer term.

Tim, why don't you go first on that.

So the fundamental building blocks of that, those 2026 targets starting with revenue and revenue growth, first of all, is that we share that we expect to achieve about 1.5 million units. About 10% of that comes from these emerging categories of consumer to dealer and commercial. So the rest, a little over 1.3 million would be dealer wholesale. That would imply at the time that we'd need about 12% share of a healthy dealer wholesale market. So that's the first assumption you have to believe that the market goes -- gets back from, call it, $8 million today, closer to $11 million over the next 3 years, and we would need about 12% share. The second element of that is that we would continue to drive incremental pricing increases. We've laid out that about a $500 auction and assurance ARPU would be the element of the model in '26. Q1, Q2, we are $450-ish this year. So we're closing in on that target. We feel very comfortable about that. And about -- so if we put in terms of percentages, about 50% of the growth needs to come from market share, a consistent amount of market share, call it, mid-teens market share growth, we've been delivering that now for 2 years, about 20% from pricing, about 10% from these new adjacent categories and then 20% from market recovery, right? So 80% of it are things that are really within our control. And that -- so that's the top line. EBITDA targets come almost primarily from volume growth. We laid out there that at about a $25 million run rate in a region, you get to break even from an adjusted EBITDA perspective. When you reach $50 million, you're talking mid-teens EBITDA margins, and then only another $15 million of revenue to $65 million do you get to 25% EBITDA margin. There's that much incremental leverage in the model. Today, we have probably 5 or 6 territories that are already 25% or more adjusted EBITDA. We expect by the end of this year to have 10 regions running in the mid-teens from an adjusted EBITDA perspective. So it really is kind of a volume recovery story to achieve those targets. We laid out how much of our business is fixed or cost basis. It's a pretty high percentage. Certainly, when you look at R&D, G&A, very, very high fixed cost. So there's a lot of leverage.

So maybe just to summarize that, we've already hit a similar unit economics and EBITDA profile in a handful of markets. So we're not talking about something we haven't already seen, taste. And we're doing that today with the amount of retail and wholesale and current market conditions. We've laid out this path that says we just have to keep growing the way we've been growing. We're not really expecting an accelerated growth. Even though I've said to you all these new things we're doing, the plan just says just consistent growth. And then we've given this 20% out of our control would be market recovery. So you can really see here is the 80, where's the 20? And it allows investors to really get their own opinion. One, I believe we should be growing the same or if not more than we're growing today. And I think the market will recover by 2026. But if any one investor wanted to go in there and have your own assumptions, we try to do our best to transparently show the plan, but we can taste this. This is not something like in other industries, you're waiting for something to happen, right, some massive event. This is a business model that's proven. Our overall economic profile in our mature areas is already doing what we need it to do.

Understood. So bring us home in the last minute, George. If we sit here and have this conversation a year from now, top priorities for allocating capital, building product, executing, what's top of mind for you over the next 12 months?

Yes, not to sound like a broken record, but much of our product technology investment is around how does condition affect price and value across, whether it be auctions or any one of these other features. So we're going to keep investing in that category. If you ask me that a year from now, I think I'll be saying that. If you ask me that 5 years from now, I think we're going to be saying that, right? I think we're on to something that's -- it would be like in the -- I was talking to one of the investors earlier about what's going on with AI and he or she who is investing in the right chips 5 or 10 years ago was in the right place at the right time. I think condition adjusted decision-making is that for this category. I think we're onto the right thing. I think we're doing a great job of focusing on dealer to dealer with the majority of our resources. And then we're -- and at the same time, we've got an investment in unlocking commercial and unlocking consumer to dealer, which is still B2B from our perspective, just one more element of it. So I think we're doing a great job of what's the core and then how do we then take this investment out to us expanding our TAM. So I feel really good about our plan.

Okay. Please join me in thanking ACV Auctions for being part of the conference this year.

Thanks, everyone.

Thanks, Eric.