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

Great. Thanks, everyone, for joining. Very pleased to have with us here the team from ACV Auctions, George Chamoun, CEO; and Bill Zerella, CFO. My name is Rajat Gupta, member of the automotive equity research team at JPMorgan. So thanks, George and Bill, for being here.

Thank you, Rajat.

Maybe, George, if you want to just spend like a couple of minutes to maybe just go over last week's results? Any quick update on the backdrop of the industry? Maybe you can throw in latest thoughts on tariffs and recent developments would be helpful just to kick start and then we can go deeper.

Yes, certainly. I'll start. Bill, you can chime in a little bit so we can get. Okay. So we -- quarter was -- we really delivered strong results. Middle of our range for revenue exceeded EBITDA. I think we delivered that all with lots of noise around the industry. I think at the end of the day, we've proven that regardless of the market conditions, we've been able to do a good job of guiding our investors and analysts on the right expectations. So I think we came into the expectations this year with really the right mindset as related to dealer wholesale. And we -- regardless of what's going on in the market, we continue to take share. We're very -- we've been consistently taking share. So both because our core marketplace is strong but also the additional value-added services, which hopefully we'll talk about today are also growing in interest both on the supply and demand side. So, so far, so good. You want to add in some more?

Yes. I mean, we had record revenues for the quarter, which grew 25% year-on-year. Adjusted EBITDA actually grew over 200% year-on-year, so just a lot of leverage in the business model. And George said, we ended up just a little bit over the midpoint of our revenue range, but exceeded our EBITDA ranges. So it was a good quarter and we maintained guidance for the full year. I know a lot of investors were concerned about kind of our viewpoints, but frankly, the assumptions that drove our initial 2025 guidance, we think, remain intact. So we're pretty happy with the results and again, kind of steady as it goes.

Awesome. Thanks for that color. You just mentioned share gains. You stayed consistent there. Could we double-click on that a little bit? Last year, third quarter surprised everyone, you had a massive share gain quarter. Fourth quarter and first quarter have been a little slower than that, but on a 12-month average, it's been consistent with your long-term guidance. Talk to us about some of the volatility in the share gains, like what causes that? Does different market backdrops mean different level of share gains for you? How should investors think about the consistency of the share gains? Or we should not just think about quarter-to-quarter, let just take it on a 12-month basis is the best approach?

Yes. We've been trying to consistently say, looking out over an annual basis makes more sense. If you noticed in Q3 of last year, we took a credit for doing well, but we tried to -- we kept it in a humble way, saying there will be quarters where we're over the mid-teens. There will be quarters that we'll be a little under the mid-teens. And I think what we've noticed is that when you just look at the overall data in the marketplace new, used, trade-in, what's truly dealer wholesale, you try to get to a certain percentage, whether that percentage is 15%, 13%, 18%, it's not perfect. I don't think on the quarters where we had 20% market share gains or 13% that we or our competitors did anything differently. So I think these quarterly -- just trying to figure this out in 3-months periods, we had 2 quarters last year where we were under 15%, and we had 2 quarters last year where we were over 15%. Does that mean we really did anything different or our competitors really did anything different in those 2 quarters? I don't think so. I think what's happening is we're growing pretty consistently. And I think until we would broadcast if we're growing faster or slower. And at this point, I think this sort of steady as can be is sort of the message.

Understood. And just one last one on -- just on more near-term stuff. On the guidance, you maintained it. Obviously, there's a lot of noise around tariffs. Do you feel very comfortable with range and enough flexibility in your model either on the growth levers with some of the products that you have or on the cost side, irrespective of what happens in the backdrop? Unless like it's a draconian recession or something, do you feel comfortable maintaining that range?

Yes. So the basis for our guidance and the reason why we maintained it was that we expected the wholesale market to be flat or flattish this year, which means it could be marginally up, it could be marginally down. And our guidance reflects that. If the market is marginally down, then unless we can offset with more share gains, then we would end up at the lower end of guidance and conversely, at the higher end of guidance if the market does a little better. So there are levers that we can pull and we've done that in the past. We've been very disciplined in terms of managing our cost structure. And if things are looking like they might be a little more towards the downside, we can try to defer some expenses and try to do our best to maintain our EBITDA guidance within our ranges. So, so far, we've been pretty successful in executing the business from an operational standpoint every quarter since we've gone public. So absent some major macro disruption, our view at this point anyway, is that we can still stay within our guidance ranges, which is why we maintained it.

Understood. That's clear. Looking long term, maybe an easy question here. Just on network effects, your business model seems like a pure candidate to benefit from network effects. What do you view as the key positive feedback loops that help your business? Where are we in terms of harnessing the power of these loops? And how do you see the company leveraging that over the next few years?

Yes, if you look at how we have communicated our network effects from really our IPO to now, we've been articulating both the benefits of having more supply, more demand, but also more data and why having additional data. And helps us build new products, you've seen our reinforcing files a few times over the years that we've discussed. And Rajat, I think what we're finally seeing this year is the benefits of those reinforcing data and products are starting to come true. We were evangelizing that they would become true someday. We would have products to help us predict the value of a consumer car. We would have products to help us predict the value for a dealer's wholesale. We've now gotten to the point that not only do we have SaaS products that allow a dealer to buy more cars from consumers, allow us to give a guarantee for a vehicle that's going to be transacted in our marketplace. These are the benefits of the 1 million-plus inspections we're doing a year, the 1,000-plus rooftops that we have, all their data, their retail data, their wholesale data, their recon data. The ability for us to build large language models that really could take all this data and make predictions. I mean, to the fact that we're now predicting the retail price of a car in the next 30 days, which is just incredible. So when you think about the typical marketplace, more supply, more demand, we have those benefits. And you're probably starting to see that in our data, where once we get to 300-plus units in one territory, we start to grow a little bit faster. So you kind of got your typical marketplace dynamics. But then with us, you also have this element of data and additional products and value-add that are also making us stronger. So I think what we've been communicating for several years now, we're starting to see the fruits of that labor.

And I want to double-click on some of those things. I do want to get into the products in a little more detail. But as you are on this growth trajectory that you have, what's the potential gating factor for growth from a company-specific lens? Is it more balancing supply/demand side of the marketplace that you mentioned? Is it just training, scaling in spectrum network? What's the limiting factor to growth for the company ex macro?

At the end of the day, it's getting the trust from dealers and soon, commercial companies that they can trust the supply that they're giving to us at the end of the day. We're going to get the yield. We're going to get the demand for their wholesale. So there's just continually bringing the right product mix and value-add and getting additional case studies you're seeing every week, every month. We're constantly out there going, here's the next dealer who's now shown they're doing better with ACV than they did one of the other legacy auctions. So first is trust, right? The more you can get the supply side to trust us while you continue to build the demand side, but you just got to keep working on both sides at the same time. And I would say what's changed is initially the only way we won supply was just getting a trial on wholesale in this, over time, winning more wallet share sort of 1 car a time, now you're seeing us go after bigger deals, go after larger groups. So I think we've reached a new paradigm for the business. Hopefully, we'll see those results over the next few years. It just won't be in 1 month or 1 quarter. But where we can now give a broader value-added service play, like we can price all your wholesale, we could help you price all your retail cars, but we really need X percent of your wholesale volume to deliver these products. So that type of bundling is this next phase of our business. So, so far, so good. But to your point, we still need to then convince a dealer or a commercial partner that they can trust our marketplace.

Right, makes sense. On the products, you've had a wide range of products launched last year, set to roll out over the next 6 to 12 months, ClearCar, Guaranteed Offers, Project Viper, Virtual Lift 2.0. MAX obviously has undergone some change. Can you talk to us about 1 or 2 offerings amongst these that excite you the most and likely to have the most direct benefit to the P&L in the near term directly or indirectly? And just level set for us the addressable opportunity, growth expectations, competitive landscape for these products, or maybe the 1 or 2 that you want to point to.

So I'll pick 1. If we have time, we'll go to 2, okay? If I had to pick one, our ability to predict the price of vehicle, the wholesale price, the retail price because it's our ability to predict. This team, we have a great leader who has an incredible team, dozens of data scientists on his team. That team is the nucleus. That's the data that's feeding ClearCar. It's the data that's feeding ACV MAX. It's the data that's feeding Project Viper. It's the data that is powering our guaranteed offering, which is now nearly 10% of our cars sold in ACV, we charge this additional fee. So if I had to pick one, which is always tough to pick one, but if you pick one, I'd say our ability to predict, based on the condition of that asset, so it's not just mileage, it's not just year, make and model. We could have 2 Ford 150s, 1 with lower mileage, 1 with higher mileage, and we would predict the one with the better condition with higher mileage at a higher value. That wasn't really easy. The industry wasn't able to do this before. So look at ClearCar as a way to do it a website. ACV MAX is the way to do this in an inventory management tool. Project Viper is going to be just drive-through station. But really, at the end of the day, they're all the same thing. They're all -- and it's oversimplify, it's a little more complicated than that. But to oversimplify it, we got this incredibly rich data that allows us to predict wholesale, retail, hopefully, soon, reconditioning and other capabilities that we think is very unique because there could be another product we developed. There could be products other companies want to develop around our data set. We have dealer groups who want to launch pure-play new offerings to buy cars from consumers. We have third-party marketplaces who want to go buy cars from consumers. We're really starting to get -- we have many companies coming to us. And it's not just because we've built hardware and software. It's because at the end of the day, this data structure and this -- the fact that we invested in machine learning and large language models way before anybody was talking about this, it should pay off very significantly to us.

Got it. That's helpful. And in terms of -- so it's more indirect benefit that you're going to start to see in the P&L?

Well, the direct benefits, again like 1 example and Bill will also chime in, if you just pick the Guaranteed Sale. We give a guarantee to a dealer. We charge an extra small fee for it. Those cars have 100% sell-through in our platform. So the benefit is for those specific vehicles, we're getting a little bit higher of a fee, we have a 100% sell-through. That means we don't have to put in additional time, energy. We didn't waste the time of our inspectors and buyers show up on a Tuesday, Thursday, Saturday sale when these cars are launched, and we average 10 bidders a car. So the direct benefit is more demand. The best -- the direct benefit is higher revenue and higher margin per car. So that's just kind of going deep on 1 specific area, but you're seeing that come out as we improve our margin. Any more you want to share about that?

Yes. Actually guaranteed sales are potentially significant in terms of the impact on the financials. So the way to think about this is our conversion rates, which are very similar to the industry would average, say, 55% to 60%, maybe even 65% depending upon seasonality, since it changes over time, which means you've got 40% to 45%, call it, of cars that don't transact, right? We incur inspection costs to inspect those cars in order to get them posted on our marketplace and we don't earn any revenue. So in a no-reserve sale, as George said, 100% of those cars transact, which means you're generating that incremental volume. And the ARPU associated with every unit last quarter was about $840 at 55%, call it, roughly blended margins last quarter. So that's an increment to our P&L revenue and margins. And in addition, we're basically leveraging fully those inspection costs. So no incremental inspection cost, we've already inspected the car. So the last point is that -- and again, we're no different than any other auction in this regard, so there'll be times when you'll have transactions where there's a difference between the bid and the ask but it's close enough for our team to work with the buyers and the sellers to bring them both together. And we'll typically throw a few bucks in the pot in terms of our fees. In a no-reserve type sale, every car sells, we get full fees. There's no negotiation because every car sells, right? The highest bidder wins. So it actually ripples through our financials in a very positive fashion. And to the extent that becomes a bigger portion of our revenue streams that could be material -- more material over time.

Yes. The incremental EBITDA per unit seems pretty attractive. Maybe the last point on Guaranteed Offers. Yes, it kind of like flew under the radar over the last couple of years, it seems like?

Purposely.

Yes on purpose, I guess. Can you reassure investors that -- obviously, we've had CarOffer that went through some challenges with a somewhat similar approach. If you can reassure investors that we might not get caught off guard again with that. What's different in your approach? Obviously, you have the inspection, but just anything else that you want to add?

Yes, certainly. So we're -- so we've been doing this. We kicked it off about 4 years ago, and we've been growing it incrementally a little bit. So it's actually been within our numbers kind of -- it was a small percentage of our base. We didn't plan on broadcasting it until it got to close to 10% of our volume. We didn't think -- we thought it was just noise up until this point. But there were periods of time in the last 4 years where it maybe was a little worse or a little better, but we've been able to predict these wholesale values generally within $100. There are quarters we were predicting it within $5. There's quarters where we're predicting it within $40. I say $100 to give myself enough room because there were a couple of quarters that we were as high as $100. But we've gotten really good at this. And if you look at the ACV culture, we don't typically broadcast things until we're really good or we call it -- or we say we're in beta, one of the 2. This is an area where we now have very little risk because of several reasons. We have our data profile. The dealer has to give us multiple cars. We take the gains and the losses plus our fees. So when you hear us say the dealer on average is getting $800 more per car over the guarantee, that meant, let's say they gave you 5 cars. A few make more than $800, a few of them maybe made less, but they netted out $800 more. Another thing to keep in mind is we're not actually giving the wholesale value. It's a number lower than the wholesale value. It's really the ability for that seller to go into this no-reserve auction lane to get 10 bidders per car. Look at it as almost like the golden ticket, okay? Do you want access to 10 bidders per car? No one else in the world has 10 bidders except our Tuesday, Thursday and Saturday sale. So it sounds a little riskier to investors and it probably what it is. But when you start something 4 years ago and you build a bunch of data science and other people around it, you do it slowly and you know what you're doing and you have bundling as part of the model as well as this little hedge because the value we gave is lower than the wholesale number, it's a really good model for us and our dealer partner.

Yes. I would just add 2 other points. So these algorithms are adjusted daily, right and actually can be modulated even hourly if we wanted to, right, depending upon the volatility that's happening in the marketplace. And second, these guarantees are for a very short period of time. They're typically no more than 48 hours. So we're really kind of bracketing the risk, and it's something obviously we've paid a lot of attention to internally for the very reason why you've asked this question, which is to ensure that we don't get to a place where we're losing money. And actually, the performance thus far has far exceeded our internal expectations in terms of the accuracy.

Understood. That's very clear. One more question, on the last earnings call, you talked about working with OEMs on the trading platforms. I'm wondering if this could potentially transform into your partnership for off-lease vehicles as well. I don't want to get on commercial a little more deeper, but just curious why that market has been historically a little tougher to crack despite of these volumes transacting in a digital format well before the pandemic as well.

The way the off-lease initiatives work is there's a private marketplace where cars are typically sold at 1 of the 2 primary competitors we have in that area. So either the consumer keeps it, the dealer keeps it, it gets sold in this private marketplace or it goes to an open auction. What we are talking to a few companies about, we'll see if we get a trial or not this year. We might get a couple of is they put us between the private sale and the open sale, like before it gets sent to a physical auction. So it's not that we're not talking to a couple of the captives. We might get 1 or 2 trials. But when you hear us say, it's the fourth leg of our commercial strategy, it's because the other 3 legs were just getting more traction faster. It's not that there's 0 traction. It's that rental car companies were moving faster. Fleet companies were moving faster. Repos were moving fast as if that's the right way to say it. So those 3 categories, then you mentioned OEMs, which are the captives. OEMs would be brand new to us. We are working right now in a very, very small sample with OEMs, ironically in Europe, okay, where they're using our AI technology to price cars via trade-in. And then we're starting to talk to some of those OEMs also launching us in the U.S. and other places as, at least, let's call it, early stages. None that can be announced yet. But where that fits in the ecosystem is the OEM wants to either put a trade or it could be company cars, which technically kind of like that off-lease type category, and there's a few other categories. So I think the good news is we're not at 0. We're starting -- we probably have, I don't know, a few hundred cars a month go through our platform in the sort of OEM captive category. We're learning. We're growing great relationships. Maybe it's a few thousands but it's not a big number. And our technology is growing in its capability. So the heart of your answer to this, if one of these companies want a way to take photos of a car, have the consumer go around and describe the vehicle or have the dealer do a self-inspection, come up with the recon estimates, come up with what to do with the vehicle, I think over the next year to 3 years, we're going to show we have the best product in the world. But we're -- again, these are the newest areas of our business. So it will take time for us to make some of that volume material. It's a little bit easier to get repos, rental car companies just to give us some cars. There's less for us to build out in that category to make a difference and start getting some volume.

Understood. I do want to move into commercial, another business just like Guaranteed Offers went from under the radar to 10% of volumes, looks like the commercial business is probably at the cusp of inflection at some point. Can you talk to us how the launch pad has been progressing? When can we start to see things inflect here to get to your midterm 15% target? Any key learnings challenges since you started building this with AutoIMS, the land that you have -- any update there would be helpful.

Yes, certainly. So we -- the key thing that you've seen us talk about is this ability to do a reconditioning estimate that -- so AutoIMS says here, we're giving you these 20 cars. I'm sorry, not AutoIMS, the actual commercial consignors going through AutoIMS and saying here's 20 cars. Well, we have to go back and say, what's the condition? And then what's the reconditioning cost for those 20 cars? And then they either approve or disapprove those recon costs. And then if they approve it, then you go ahead and you provide that recon. If they don't, they don't. That back and forth was what we didn't have, which you've heard us talk about. So getting access to AutoIMS was step 1 and now having this ability to recondition the vehicle. We will have a first version of that live by July and deployable we're saying, by Q4, so software being done in July. And we'll actually go -- this is kind of quick, but we're going to turn around and open up our first greenfield, we're saying, by Q4. What does that mean? We have a top 25 market where we've rented land. We'd have to go buy a company. We have a small reconditioning facility. We're paying rent. We have a limited amount of teammates there. So I think not a huge, huge team who are going to inspect vehicles and a few other roles. And whether it's a bank, a fleet company, rental car company, we have cars assigned to this location. And that's going to be a really big day for ACV because now we can not -- we don't have to buy a company to go into this commercial category. As we've told you all, we'd like to have 40 locations across the country to get to 80% of the population. We could go do that organically, which is really a big deal. And so we'll have 1 open by the end of this year. Our goal is to open up a second location by early next year. That's all part of our mindset. And if we can get these things breakeven between 12 months, we'll go to a certain velocity. We can get it to breakeven within 9 months, we'll go even faster. If we get them to breakeven within 6 months will go even faster. So based on whether or not it takes us 6, 9, 12 months to get to breakeven, that will -- sometime by early to mid next year, you'll all be asking, okay, how fast are you going to go? We're going to see how fast it takes us to get to breakeven. And that will help us to decide if we're doing a couple this year or we're doing more. But we're not going to do anything crazy until we have that proof. But I -- if you ask me a guess, I think that range I'm giving you is I think we'll get these things to break even between 6 and 12 months. And that will inform the model, and we'll move accordingly.

Understood. That's very clear. Since we have like 3, 4 minutes left, I just wanted to open it up to the audience. Anyone there? Go back.

Just on the guaranteed pricing, like what's -- is there a natural limit to the percent of your total volume that you think would -- that would be applicable for?

It would be -- it's typically going to be cars that -- great question. I don't know. I mean, at the end of the day, we really would be as a dealer being comfortable running a car on a no-reserve Tuesday, Thursday, and Saturday being guaranteed a percentage lower than the wholesale value but a good amount and just letting it go. And when you -- one of the questions earlier is, is anyone else in the world doing this. An example would be like Barrett-Jackson, when we're watching TV, like for $1 million cars, they're running on no-reserve, right? And so -- but for our industry, this whole car auction, it is kind of newer. It lives -- we think it's the best way to sell a car, like hands down. Our data shows it. We're willing to guarantee it. But there will -- there's an adoption this. We do got to get dealers to adopt it and realize you don't have to have somebody sit in there going, did I get 98% of wholesale value or 101% of wholesale value, and 103% in this car and rerun it? And I mean, some of these dealers move cars to 3 different auctions in 2 weeks, and they don't get the price and they move it again. Like some of these behaviors are old. And you're basically trying to get folks to know, let these things go and buyers will show up. So I don't know yet what the upper limits are. But it's just change management and changing perception of the old ways versus new ways. But our data is showing we're getting over wholesale average for these cars. So we're getting more than market on average because buyers love to show up. So I don't know how to answer your question yet, but I'll think about it.

Any other? [ Chris ]?

Yes. I'm just curious whether you think the bundling strategy of getting these new products to get adoption in exchange for kind of guaranteed or pseudo-guaranteed volume into your wholesale auction is the right end game structure if you really achieve kind of amazing product market fit or in kind of intermediary step to drive adoption and get the products out there?

I've been trying to think of good examples of sort of parlays of other companies. And so the one I've been using today is not a great example but I can't think of a better one, I'm sorry. But if you think about Amazon Prime, right, we pay a small fee to get a pretty valuable service. That unlocked an incredible experience. It's an experience that many of us were shopping anywhere else. We don't -- we compare every other e-commerce site, everything else we do to the Amazon experience. Our SaaS and data services, I mean, whether we're getting $500 a month or $1,000 a month, I mean the revenue is important. But also keep in mind, we're getting all the data. We're getting their sold transactions. We're getting their recon data. And then we're helping them buy more cars. We have some dealerships buying 3 cars a day off the curb. That's 3 more cars. That's 25 to 30 more cars a month, at least, in some cases, 40 more cars a month more than they were buying. That means they're going to retail 15 to 20 more cars a month. I mean, they're going to wholesale 15 to 20 more cars. So when you think about the role of that software and that data, it's really important to that dealer. It's making that dealer operate better. It's giving us more data, so it can help them more. And yes, there's also the SaaS revenue stream. So I don't really know how else to -- I need to, one of these days, think of, me or Rich, maybe will help us think of another company that has had a similar analogy of where, yes, the feed, whatever Amazon was charging for Amazon Prime was relevant then, and it's still relevant today. But the end experience was the key differentiator. And at the end of the day, that's really what we're delivering. I think we're going to deliver the best experience for sellers, the best experience for buyers that's broader than what any local auction company can do. I think that's really important.

Awesome. I think it's a great way to end. So thanks, George and Bill for doing this. And thanks, everyone, for joining.

Thanks.