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

All right. I think we're on the clock. So, welcome, everyone. Thanks for joining. I'm Ron Josey. I cover the Internet sector here at Citi. And I'm always happy to share the stage with George Chamoun, ACV's CEO; and Bill Zerella, ACVA's CFO. Lot to talk about. A lot going on. Welcome.

Thank you. Thanks for having us.

So I think most people know what ACVA is now. It's been a few years. We've gone through a few Analyst Days. But maybe, George, because we just had our Analyst Day back in March, we've had 2 quarters post that. Just level set us on sort of ACV's product and tech strategy because in our view, that is a key differentiator that what ACV offers to the market. So level set us on just product tech, maybe higher level, and then we'll dive a little deeper.

Yes, certainly. So when you look at the customer base we're going after, franchise dealers being a key customer base for supply in our wholesale platform, independent dealers, a key for demand in our platform. We've been able to broaden our products for both. On the supply, we've been able to broaden from not only helping them auction their cars faster, and we believe for more money, getting a national audience for buying these vehicles. But we brought out pricing tools. We brought out tools that help the franchise dealer and independent dealers buy cars from consumers. So a broader product set. In a way, we're helping every franchise dealer and every independent dealer compete against CarMax and Carvana. So that as the path for winning the consumer heightens with ACV, they can compete. And with that, we believe we'll win more and more wholesale at the end of the day as part of that journey. And then in addition to investing, which we can go deeper into on this product suite for franchise and independent dealers, we -- our value-added services like ACV Transportation, ACV Capital are really helping dealers buy vehicles, have them move, being confident in these moves, helping them fight against things like fraud with transportation. These are big important categories that help dealers feel more comfortable. And then in parallel to that, we are in the early days of going after commercial customers. So we've invested in software and technology, where you're still leverage -- we'll be leveraging the same AC Auctions platform. But in addition, it will allow us to have capabilities such as let's say, for example, if a bank needs to recondition these assets, we now can take an assignment, we can potentially recondition the assets. So it's still leveraging the same demand engine and capabilities, AC Auction, Transport, Capital, all those great things. But it's helping on the supply side because we're adding value-added services we didn't have before. So we can go deeper in any one of those, but we're definitely adding more value, whether it's on the supply or demand side.

Well, let's talk about the core wholesale market today and the core auction market because I think offering these new products and services just strengthens the overall opportunity set. And so talk to us about -- I would love to hear your thoughts on the broader market today, a, but then b, the go-to-market strategy. So when you're going to meet with the franchise dealers, we start with auctions, but now we have ClearCar. Now we have these other products that can help them compete with others in the market. So go-to-market strategy, but then maybe just broadly the wholesale market today.

Yes. The go-to-market strategy is both working dealers on a per store basis, there's a used car manager, there's a general manager who's responsible for making wholesale decisions. And then we also have a team going after the major accounts where you're dealing with, let's say, regional presidents and other sort of C-level type executives, and we have a team bringing our value proposition to the major groups at more of a corporate level. So we're approaching it sort of both at a store level and group level. The value proposition -- the core initial value proposition remains, which is instead of just selling your cars at physical auctions and getting a local buyer base we're going to bring larger demand for your vehicles. We're going to bring buyers outside your market. But that value-add moat has increased quite substantially to your point. Now we're helping them with new products like our no reserve guarantee auction. We're helping them get, in most cases, 3x more bidders per car. That's a big deal. And that's something we're out there offering to sellers where if they want the largest audience for their car, if they want to make the most money, you're not going to have more bid activity anywhere else in the country, any other auction, except for ACV, if you run at no reserve on our auction. So that's a new value add. The other value add you're mentioning -- actually, let me stay on that value add. The other great thing about that value add is the buyers love it. So now on Tuesdays, Wednesdays, Thursdays and Saturdays, buyers are lining up at noon till evening and bidding on these cars because they know they're for sale. It's not -- they're not wasting time with sellers who are asking for too much money. And so we've got 3x the bid activity. So that value add will -- that's sort of one of these value add, will be a gift that will keep giving for us. We'll take that pricing engine that pricing engine, this investment we made allows us to price cars to a consumer, helps the dealer win more cars. We're pricing the cars in a way where we know what they're going to sell for in our auction. So now the dealer can lean in and buy more cars out of their service drive. They can lean in and buy a higher percentage of the trades coming in. They can compete against the CarMax and Carvanas of the world effectively because they have the right pricing to do that. So as the local dealer buys more cars, then they can optimize their inventory. And they don't have to keep -- they don't have to start to retail some of these cars, they should be wholesaling. So that's a way to at least as quick as I can tell you this pricing engine we've built. It's helped us build ClearCar. It's helped us build this no reserve auction. Our next product, Project Viper, which we'll talk about a little bit today, it's helping us build that product. So this pricing engine is our single largest investment within our product and tech suite and it's sort of the heartbeat to all the other products.

And what -- tell us what goes into the pricing engine that allows you to do that heartbeat?

Yes. So it's quite complicated. I'll simplify it. The 1 million cars here we're inspecting. It's all that condition data, scratches, dense, engine sounds, all that data. Then the dealers we provide ACV Max for, which is somewhere around 6% or 7% of all retail data. We have all their retail data, what they took in for trades. We have all the recon data. And so that sample gives us what cars are retailing for and also what dealers are taking as trades. So that's a pure data set to know both how much a dealer paid for the car, how much they recon and how much they sold the car for. Then, of course, we license data from third parties, and we have others who scrape data. So when you look at that total data set, it's quite compelling. So -- and it's unique because you've got condition adjusted pricing plus all this other market data. We're now predicting price within $300 of what a car sells for retail within 30 days. Last month, we were even better than that.

We're now predicting price within $300.

So a car comes in, dealer decides I want a retail it or wholesale it. I've been saying within $300. Actually, last month, we were with $150. We were within $150 of what a car retailed for in the next 30 days, which is just incredible. And we're within $100 of what the car wholesales. So if you're a franchise dealer, and you want to compete, a simple way to look at this is CarMax and Carvana has nothing on a franchise dealer that partners with ACV. And that's a bold statement to say, like, there's no competitive edge. Now they still need to get in front of the consumer. They still need to market to the consumer. They need to get that consumer to show up, whether it's their service drive, whether it's the front of the store. But that's pretty compelling. And we now have 3 out of top 10 groups in the U.S. using this product one way or another, whether it's an API on their website, whether it's their service drive. So ACV in time could become the standard of how dealers use data to price cars. And that could be a really big deal. And then to your point, how this helps in wholesale, as we also not only provide the data, we start to backstop these cars. Then we're pricing the cars upstream. We're backstopping it. We ask for a certain percentage that it has to go to our wholesale channel, and it should help us grow more over the next few years.

So let's then talk about Project Viper. And I'm coming -- I'm trying to get this product set together because the product set is where everything else flows, right? Because end of the day, we want more rooftops. We want more adoption, which I think we did a good job at the Analyst Day highlighting. But when we hear about these products and the $150 or $100 on wholesale, that's pretty...

It's incredible prediction.

Yes. And so we have all this data. We're using it and leveraging it on the pricing. Talk to us about Project Viper what it is. And...

Project Viper has an exceptional opportunity to help us both on our dealer business and commercial business. So the great thing is it's one investment that will help us in both growth engines. And for franchise dealers, for those of you who don't know Project Viper, is it's these 2 towers that don't take up a lot of real estate and that underneath it is Virtual Lift 2.0, which is a scanning device. It takes us within a few hours of showing up at a dealership to have this set up. All we need to do is literally, it's all in a way, preassembled. It comes in a few boxes. We have it assembled within a few hours. That includes getting on the dealer's WiFi network, boom, you're up and running. So you drive through, it's got over 20 high-definition video cameras and also other technology over the years we've invented like listening to an engine and other capabilities that our inspectors have been using. So it's got multiple different ways to read signals from a car beyond just the video technology. Basically, you're driving through, we see scratches, dense. We see undercarriage. We see rust. We see all these things. And car literally driving several miles per hour, we can then predict the price for retail and wholesale, just having the car drive through. So number one is appraisal, helping the dealers buy more cars. And we're already piloting with a handful of dealers in upstate New York right now. And it feels like we're really honing in as appraisal capability. Second is this condition report will help the dealer upsell to their fixed ops group. So whether if a consumer has mismatch tires or tire alignment, other needs, where this having the standardized condition report will help the dealer upsell fixed ops in the dealer world, that's a big deal because over 1/3 of their revenues today are fixed ops. So that's a really important division. And then third is this can also act as a quick way to get retail photos online instead of just paying a local photographer or somebody like $15 to $25 a car, which their biggest issue is how quick they get these photos online. Within Project Viper just driving through, you can immediately get your shots. You can still have somebody come back and backfill interior and whatnot, but dealers can go get their pictures online. Okay. So those are 3 big things that the dealer will get out of this. What we can get out of this as well is Project Viper will help expedite and create more efficiency on our wholesale inspections. And so we're -- so having these towers in this undercarriage scan on a per location basis could really help us not only ask for more share, win more share, but it also can make us all more efficient. We'll still need our inspectors to help us get this go green inspection, which ACV has been known for. But our inspectors are going to be able to do more cars. And then for red light cars, we'll also be able to use a lot less of their time. So it will be a slightly different use case. And for those that don't know what greenlight is, it's when we go on the hook for assurance for the buyer. And -- but if the typical inspection today takes, let's say, 20, 25 minutes, with Project Viper, we could probably get our typical inspection in 5 minutes.

So as Viper '26 potential, '27 what are the -- like what's...

I think '26 we do hundreds of these. I don't want to put a number around how many hundreds yet. And I think we don't get ahead of our skis until we know we've got distribution and manufacturing support. We just -- we don't -- I think we can have a great year next year with or without Project Viper. So I feel really good that we've got -- if you look at how we're doing with no reserve right now, how we're doing these other products, we're growing well. We feel really good about it. This will be additive. And then in addition, we're launching Project Viper in our remarketing centers. So if you -- when you go to -- we're opening up this new one in Houston, where you show up, cars go in, they're going to go through Project Viper. It's going to allow us to have this condition report back to the commercial consignors faster. They can make their decisions faster. It's going to help us be more efficient at these locations to create our condition report. So I feel really good that we'll start using Project Viper at our locations next year at our remarketing centers. We'll get, I think, Project Viper out to hundreds of rooftops next year. And that will start to make a difference. And then we'll kind of go into the next year thinking, could we now do thousands? Hopefully, it's faster than what I'm saying today. But I'd rather set the expectations here until we prove it. But that's at least how we've been thinking about thus far.

That's -- I think that sets the stage for everything that ACV sort of stands for, which is data, product, improving dealer use cases. Let's talk about dealer adoption. So I think about 1/3 of franchise rooftops are transacting on the platform, 10-ish percent share of retail dealer wholesale market, I believe, are the numbers that I remember going through. So -- what I would love to hear, and we talked a little bit about this upfront. But with all these new products, how is the -- you talked about the go-to-market. How has it evolved over time? So we're not just talking to the wholesale guy. We're not talking to the service bay or the service team. We're talking to others. So I would love to know just as these product launches -- as these products launch, how the go-to-market has really sort of evolved?

Yes. We're -- I mean we've got share in some parts of the Northeast, where we're already like 30% market share, right? So we've been in a market for 9-ish years. We've built that brand. You can trust the ACV. And we've got markets out there, we've got low single digits total market share. So look at what these products will help us do is both take even more share in these markets where we've got 30-plus percent of the total dealer wholesale in that market, but it's also going to help us differentiate and break through some of the noise. I'll give you a couple of examples. There's a larger group that I can't say their name that wasn't doing a lot of wholesale with ACV. They had these 2 key auctions, physical auctions they worked with. They didn't have signed exclusivity, but it's basically an understood exclusivity. Now the cars coming in from their consumer acquisition are primarily going to go to us. And they wanted beta, Project Viper and what they've all said is anything that comes through this channel, we'll send to you. So it's allowed us to slice and dice the dealers who are still feeling some loyalty to the physical auctions, whether it's because they've been doing business for 50-plus years or whatever the reason is, it's allowed us to come in and take share even if it's only 10% or 20% of the share of that dealer's wallet share, it's helped us break in. And another thing is you're usually coming in with these products at either the owner or C-level or you're coming in through a different angle. Historically, we sold in through a used car manager. If some of you knew us during our IPO story, I would answer the question very simply. I would have said, it's usually the used car manager. Dealer principles tend to not get involved with wholesale. This just wasn't even a conversation for the owners. But now that you're coming in and solving bigger problems for the dealership than wholesale?

Meaning pricing.

Pricing, buying cars from consumers being more efficient. We're now at an ownership and C-level decision-making with these groups, and that's a big deal. So we're invited to their offsites. Where I mean, one next week. I don't want to say which one of them met next week, but I'm at one of these next week. They have a golf outing, they have this whole thing.

It sounds exciting.

Yes. And so you're now in the room participating on where how is digital helping automotive, not just helping wholesale. And we're getting the mind share. And then with that, we'll continue to take share away from the legacy auctions.

George, has this mix shift into the C-level ownership levels, et cetera? Has this happened this year, '25? Or this was a building '24 and then these new products are coming on and now at '25 or help us understand how quickly these conversations have shifted.

Yes. I mean I would say it's been building meaning last year, those conversations might have led to -- and I'm going to make up a number, 10% of our share gains last year of our share gain, right? And now it might be 30% of our overall share gains. So I would say we're still winning at some -- many rooftops across the country, let's call it, our traditional way, which is going to local used car manager and trying to convince that person, you shouldn't be selling all your cars at the local physical auction. But year-over-year, I mean we must be 3x to 5x of our growth coming from these other relationships. I need to track that a little better. So I can just say a number. And there's actually somebody in the audience who actually always asked me a similar question. But I don't have it on hand. I don't have what percentage is actually coming from these other services or else, I would just tell you.

We'll say that for next year or maybe 3Q.

Yes.

I don't know. Let's -- I want to -- we'll come back to this, but I do want to touch on -- I hear about it all the time, just the broader macro environment.

Sure.

And 2Q had some noise because in April, I think we saw conversion rates pull forward a little bit. Maybe they went down a little bit as the quarter went on. So maybe, Bill, I'll turn it to you. I think we saw -- was it 500 basis points unit growth headwind in 2Q? Maybe you can help unpack that a little bit more? And then what are we -- how has that sort of stabilized since then?

Yes. Sure. So what happened in Q2, and I think many people are aware of this, there was a large amount of consumer demand that was pulled early into the quarter. So consumers were trying to avoid tariff increases. So what we saw was really strong conversion rates, really strong unit growth. for us in the month of April. And then those conversion rates declined through the rest of the quarter, not just for us but for the industry. And what we talked about on our last earnings call was that we saw about a 300 bps increase or improvement going into July of this quarter. So the dynamic was in terms of what we saw in terms of our actual performance. We had assumed going into our Q2 -- Q1 earnings call in terms of Q2 guidance, we'd assumed that conversion rates were going to be stronger than they actually ended up being, which is why we landed at a place where based on that difference in conversion rates in terms of what we assumed in our model versus what the actuals were, we ended up being at the lower end of our guidance scale for the quarter in terms of revenue. So that was the dynamic that occurred in Q2. So it's kind of a very unusual quarter in terms of since we've gone public. We never saw such a big pull-through of demand early into the quarter and a pretty significant drop off through the balance of the quarter. The good news is we've seen a nice bounce back in terms of conversion rates on our platform in July.