ACV Auctions Inc. ($ACVA)

Okay. Great. Thanks, everyone, for joining. Very pleased to have with us the team from ACV Auctions, CEO, George Chamoun; CFO, Bill Zerella, and we also have Tim Fox from Investor Relations in the audience. My name is Rajat Gupta. I'm a member of the auto team at JPMorgan. We'll keep this format pretty informal. I'll go through some questions with the team, and we will open it up to the audience in between every few minutes. So with that, thanks, George and Bill for doing this.

Yes. Thank you, Rajat.

Yes. Thank you.

Let's get right into it. So just starting with the outlook for the year. you reduced your industry outlook versus the initial framework from February. Could you recap the drivers of your tempered view you now expect to be down mid-single digits year-over-year as opposed to the flattish guidance previously? And what does that mean for the pace of share gains at ACVA?

Yes, certainly. So, yes, we kind of came into the year, like most of us, we were looking at some of the sort of pros and cons going on, both from the retail and wholesale climate. Coming into the year, I think all of us had some enthusiasm to off-lease would bring back some supply, we would start to see -- we can look at interest rates potentially going down, retail year-over-year should start to go up, like that was part of our sentiment of thinking the sort of flattish wholesale. Obviously, with Q1, the data show that, that didn't happen. According to the industry data, wholesale was down in the mid-single digits that we said. So all we're forecasting for the rest of the year is that retail basically stays where it is. We're not really saying it's getting worse. We're not really saying wholesale is getting any worse. All we're really articulating is this climate of where we are. We don't really know. So we're not really trying to predict the market, trying to predict what could happen with interest rates or with consumer sentiment. It's obviously challenging. Many of you study this a lot. So all we're really doing in a way is not making a prediction by just saying the status quo continues.

Understood. Okay. That's fair enough. And in terms of share gains, there's not like any material like volatility we can expect. Given we march higher like good conversion for the industry, maybe like conversion, a conversion maybe take a step back, like we saw last year in June, is that top of mind as well and how you're managing things?

I mean conversion rates are always sensitive quarter each quarter, right? You always have at least historically, Q1 is our highest conversion rate, and then, it starts to tail down throughout the year. That's part of your modeling. And we're -- so that -- I would call that just normal. So you're always going to have some conversion rate sensitivities based on where we are. But I would say nothing that we really trying to express coming into the call or post call that we're yet very concerned about.

Understood. Maybe if I just -- let's discuss some of the growth investments that you're embarking upon this year. First, how should we think about the timing of the benefits from recent head count investments and inspectors and territory managers. When do they hit full productivity? As I think you've mentioned later this year, any more -- any update there on timing when we should start to see that reflect in your growth estimates?

Yes. We said most of this will start to help us in the back half of the year is what we've articulated. So it's both hiring, it's training, it's getting our teammates in the right spot across the country. We didn't have enough resources in several regions. So we were really going out there and hiring and training. And there are also some regions where we've upgraded some talent in some areas, where we really use this as an opportunity to bring in some additional folks. . So I would say we're really on plan. I believe I said in the earnings call, we had something north of 50 more folks to hire and train to get to our number. So I would say we came into the quarter about halfway there is. And we've got a little bit more work to do. But on pace for I would say the year where we wanted to be. I think we've kind of leveled that up a little bit. We just -- we were under hiring in some areas. And we owned it, going to take care of it. And while we did share that data, we also shared that in our regions where we have the most people, we're already at $230 or higher on EBIT dollars per unit. So the bottle works, where literally we have the most people. So look at this as it's just a game of making sure you armed yourself with getting the supply. And then, once you get that supply, the business model works. I don't know if you want to double down on that at all, but why we have conviction on hiring in our areas where we have less folks.

Yes, I would just say it's a proven model, right? And we have a lot of territories and regions around the country where we can obviously see how the unit economics work, and we can see it's tied directly to density and staffing. So we're really not guessing in terms of what works. We pretty much have plenty of proof points, and that's why we're -- we made the decision to lean in here for this year.

Understood. That makes sense. The next area of investment, you've talked about a lot recently is Viper. Maybe just help recap for the audience, what's the TAM for that product? Is this a product for every dealership? Or is it limited to certain dealerships or certain dealer groups or for a certain size and scale? Maybe just dig a little deeper into that TAM and opportunity.

Sure. Let me try to frame it this way. So our core dealer wholesale business thus far has relied on dealers, obviously, retailing, taking in trades. And then, we've gotten a certain percentage of these trades. And as dealer supply goes down, our supply went out, right, just to oversimplify it. Dealers have over 250 million cars a year going through their service drive. I'll say it again over 250 million cars a year going through the service drive. It's a massive, massive audience. . Last year, we started to see with dozens of rooftops, not thousands, with our early products, ClearCar, even before Viper, we were getting dealers to buy 5 or more out of 100 cars coming through the service. So we started to see if a dealer has the right tools and the right process, it becomes a very large number. And so these are consumers, if you just take 5% of all cars going through a service drive as a reasonable addressable market to go after. Dealers will be buying cars before a consumer decided they were going to trade it, before they were decided they were going to sell it peer-to-peer, or however, they were going to sell or trade that vehicle because these consumers are already interacting with the dealer. And we're not inventing a problem here. Dealers want to solve this problem, like they want this. We've tried it with ClearCar. We tried it with our first round of products, but that required people. They require them staffing $20 to $30 an hour folks in their service drive using our tools going around each car. We weren't able to so far get thousands of dealers to staff hourly people in their service drive doing this work. So we all know why this sort of AI movement is so meaningful for a lot of categories like automotive is if you can automate that process, and so if you just look at Viper is very simple. And it does more than what I'm articulated, but to oversimplify it. If you have 250 million cars a year going through a service drive, and dealers can automatically put a price in the car, know the condition, know the price, and then the consumer gets a report, and it says Rajat's car has the following issues, the following conditions and here's your price. And then, when you go to home at night, you get that condition. And a month later, we say, "Hey, Rajat, how are you doing"? Just remind you, we sent you that price. And by the way, 60 days later, just follow up with you. Over that next 90 days, we're seeing 5 out of 100 of lease cars. This is even before Viper. So that's the addressable market. It's really -- it's a very significant TAM. And it could not only help us on wholesale. They could help franchise dealers tremendously improve their business. So we love the category. We've got a great emerging product, albeit we're early. We've got like 18 of these out in the market right now. We're deploying every month right now, however, media, we're deploying a month like 5 to 15 a month right now. So we're really early. It's obviously hard to describe what this could mean for the company at these early stages. But maybe you can leave it a little bit more.

Sure. So first, just to follow up on what you said in terms of as we help dealers buy more cars from consumers, they will keep some of those cars and recondition them and retail them, and then, they'll wholesale the rest. So really, what the opportunity is, is to increase the amount of wholesale transactions at that particular dealership. But we have done a fair amount of modeling in terms of what the implications could be for our business. And I'll start with there are roughly 17,000 franchise rooftops in the United States. We currently do business with roughly about 6,000 of those. So some of the modeling that we've done has been if we assume, for example, that at some point in the next few years, we have half of our current rooftops, franchise rooftops with Viper, that would be 3,000 Vipers. And if we further assume that as a result of them buying more cars from consumers, we can generate more wholesale transactions. And let's assume further was 10 units more a month for each of those franchise dealerships, okay, the implications for us could be quite significant, right? If we do that math, that would basically result in roughly $450 million of incremental revenue for us between the wholesale transactions. And the subscription fees because we -- our intention is basically to not sell Viper outright, it would be a subscription model. So we would have some subscription revenue streams as well in addition to wholesale transactions. And the implications for us again, again, this is a modeling exercise, $450 million of incremental revenue and $150 million of incremental EBITDA. And that would augment otherwise what our organic growth would be plus our commercial business ramping, which we've talked about on the most recent earnings call. So our entire business model is based on density and volume in particular territories and regions. In our last earnings call, we talked about the fact that we have 2 regions in the country out of 20 in total, each region has between 7 and 8 territories. And those regions are already hitting north of $200 of EBITDA. Our midterm model is $230...

Per unit.

Per unit, sorry. 1 region is already there. One region is actually above that. So when we do this modeling, we look at what the implications would be across the United States for our business, at least 10 of our regions, so half of our regions in the United States, would be at that midterm target model of $200 million plus of EBITDA dollars per unit. So it has a lot of implications for us. Obviously, we have to, over time, kind of prove this model out since we're in the early stages of deploying these units at various dealerships. But that's the kind of potential opportunity that we see that exists for our business, which we're quite excited about. And through the rest of this year, we'll get more and more data points that will support kind of our point of view on this and what we would present to investors based on data and what we've experienced so far.

Maybe 1 more thing is I know probably going a bit long on it, but just obviously, I'm pretty excited, this framework bill is giving this 3,000 rooftops, that's just illustrative. I just say if we got half of the people working with us today to take it. It doesn't say what it could be, right? This -- what it could be is, however, many dealers want to automatically buy cars in their service drive. So everyone could ask -- go out and ask the dealers themselves, how many of you would want to automatically buy -- I mean that's the question asking your own research. If you could automatically put a number on a car and then see whether or not 3,000 or 17,000 is the right number or a much bigger number, okay? So that would be 1 framing to think about. And then the second thing to think about is that this 10 incremental is the way you kind of model these things, which is good. Those are good numbers, but I think this could be much bigger than that. But let me give you a framework of that would be like potentially an incremental. But if you had 20 to 28 wholesale units a month from that rooftop, you're also locking in, let's call it, the traditional organic. So look at that, yes, there's an incremental play, but then there's a lock in play. And so it could become, in my mind, look, long term, don't give me -- this is a $1 billion plus of like value creation type of opportunity, right, over time, give me enough years. It's that type of opportunity. We haven't improved yet, right? Albeit early, but that's sort of why you're seeing us -- and to get the feedback, which you all get in your own research is, dealers want this. They want to be able to automatically buy cars. They have the audience. They just need the tools to do it.

No, makes sense. That's well articulated. Let's go to the third area of investment. We talked about the headcount. We talked about Viper. The third one looks like commercial. We haven't heard about that in a while, but it looks like a lot of exciting announcements last earnings call. So congrats on all that progress. Could we take a step back and talk about what the early innings results will look like from a consignor standpoint? What has changed from a cycle time perspective, conversion rate, remarketing costs, just price realization, anything you can share on that front? And which commercial categories are having more success with this end-to-end online model?

Yes, certainly. I'll start there, and I'll work back to your first question. So as Rajat mentioned, there's a few areas within commercial. There's rental cars, there's repos, which are banks, obviously, there's off-lease in the fleet. And we're having -- we believe we're working with about 30% of the commercial consignors at 1 of our 10 locations today. So we don't have a national footprint on what we call downstream when cars need to be sent to a location as land. But we're starting to work with some of the commercial consignors. And what that does is it really by having some embedded relationships, you can really see what are their objectives. It's not like this is a new category. It's about 7-ish percent of our overall volume today. We're familiar with the category, and to your point on cycle times, how fast cars get sold and in living in that world, it's no longer a nascent for us. We're in the category. We're still small, right, of overall commercial share, but we're very familiar with what it takes to win. Then, in parallel, we just now are launching upstream commercial. Upstream commercial means, we take these integrations with auto IMS, which is this middleware, and we are able to take a vehicle and sell it upstream. So start to do some of the things you would have done downstream at a physical location. And we really just started launching this. We are in conversations, we said in the call with around a dozen or so fleet in rental car and other types of accounts, where they're starting to give us business both upstream and downstream, and that model allows, let's say, for example, a fleet company, do not have to send a car to a physical auction, but still operate with us as though they were operating with a physical auction, meaning does the car need any repairs or not? What is the condition? In a way, do all that integration virtually just through 1 of our inspectors who are at a lot for a fleet account. So we're just now starting to be able to operate that way. Our software, think about it, it was like 90-plus percent complete. We're almost 100%. It was enough to start doing some small sampling of vehicles with some of the large fleet accounts. One of them, for example, sold a few dozen cars with us. They're excited for us to finish our software build. There was still a little bit of manual work going on, just full disclosure in these first dozen cars, but we've almost got our software fully automated. So we could basically do what was happening for the last 50 years at a physical auction now more upstream. So that's at a really high level, then the next pit question is we've had more so far business traction with rental car and repos and fleet. And we're just getting started with off-lease, but look at the first 3 as where we've had more of our business thus far.

Understood. No, that's clear. Maybe going back to more near-term stuff, again, going back to the first quarter results. Could you give the audience a sense of your geographical exposure, which may have contributed to some volume headwinds in the first quarter due to just weather disruptions? And how do you see this changing with the ramp in some of the go-to-market investments?

Yes. I think what bringing up is really broadly the dealer wholesale market and retail were down in Q1. But I think there's been some reports, including your own, that mentioned that the Northeast dealers were affected more than the average across the country. So it is where we're the most dominant. It's where we have the most share is in the Northeast. So it definitely had a pretty significant impact on us, right, and the results we delivered because our dealers where we were the most dominant was affected. I think that's all I shared publicly thus far in that category. I don't know if there's really anything else to share.

Okay. And then moving on to arbitration, again, more near-term stuff. It was a big topic second half last year to really come up a lot on the first quarter call. Curious if you could give us the latest and greatest on frequency and expense. And just wondering if the spring used car pricing balance has only temporarily masked that headwind. And should we worry about this becoming an issue again like later in the quarter or the second half? With prices start to like, pull back, just give us an update on what's going on.

Yes. I'll put this into sort of 2 buckets. One, as you mentioned, arbitration does have a seasonal component to it, where Q1 is almost always our lowest. Q4 is always our most challenging. It's not ironic that dealers arbitrate more when they're struggling more, right? Like so there is that element in our business. We've been mentioning that all along, right? So there is truth to that, and you try to build that into your modeling as best as you can to know that there is some seasonality, okay? But if you take a step back on what are we doing about it, meaning not just like what's going on with dealers in general, we're maturing very quickly on how our sellers and buyers are treating us, so how are we treating them and how are they treating us. And my team is doing an incredible job as segmenting good sellers who are also good buyers, good sellers who tend to arbitrate more and also buyers who are great buyers who don't arbitrate barely at all and some buyers who arbitrate a lot. And that process, think about this as cohorts of activity going on, is allowing us to mature how we navigate through this. And so to answer your question simply is, yes, there's seasonality, yes, there's inputs and outlets. But as a company, when you go through some of these challenging moments, you dig a little deeper, you build a little bit more refinement in your core to understand your segments. And Bill and I looked at a segment at our management meeting earlier this week, and we had this segment of good sellers, good buyers that was costing us under $50 per unit. And if you look at it, it's the same exact inspection, same exact people across the company, same exact training in a way. And these customers over here, our business model works incredibly well. And then, we've got some segments that those buyers or sellers are costing us several hundred dollars per unit. So the average is the average, and -- but that sophistication allows you to build more and more robustness to know you can build more policies, not even any insurance company does and you get more and more sophisticated. So the quickest answer is, I feel good about arbitration. I feel like the company is maturing through this. And it will, over time, build more and more robustness. But to your point, at times have some pros and cons as it relates to seasonality.

Yes. But that, by the way, is taken into account when we look at our year-on-year trends, right? So -- in Q1, our costs were basically flat year-on-year with Q1 of the prior year. So yes, there is seasonality, but as long as you're comparing like-for-like in terms of the quarter of the year, then you get a true measure as to how things are going.

Okay. No. That's good to know. One more near term, just around pricing. Did you take price recently? Any recent price increases last few weeks? I think we picked up -- picked that up in some of our checks. Just give us a little update on pricing. And just more a broader pricing question. Are you a price taker or price maker in this current industry landscape? I recognize you're the largest D2D only player, so maybe gives you some latitude. But just wondering if the internal methodology is to just lead with price increases or perhaps just track along with Manheim or some of your other competitors.

Yes. So let's get some framing just for everyone to understand the overall revenue per unit. You've got overall revenue per unit here that's around $1,000, right, give or take. I'm trying to frame this where you have sell fees, you have buy fees, you have transportation, you have ACV Capital, which is the floor plan. So you've got this business model, where you've got, on average, approximately $1,000 of take. And when you think about framing the model that way, you could start to think about your revenue expansion. Where are fees gone up and where are fees gone down? And why Okay? So again, this is just a lecture bill can not on the exact numbers, I'll be very close, okay? But if you've got around $1,000 of ARPU, we've now got our supply side of our fees to be about 15% of those fees. Historically, those sell fees and go green fees were a higher percentage of our overall fees. Supply is where things get a bit more competitive, okay? We've said that on some of the calls. And we've gotten more competitive. We were the most -- when we started out as a company, we were the most expensive game in town, pretty much across the country, like our sell fees were the highest. We offered more value with go green and with assurance and a lot, but we had the highest fees. On the demand side, we had the lowest fees, right? So we had really, really low over here, really, really high over here. Our fees are now normalized. Our sell fees are competitive. Our demand fees are competitive. Our transportation fees are competitive. And our ACV Capital floor plan fees are competitive. So when you look at that, how the landscape of these -- of our overall ARPU has matured, yes, there were points in time where our pricing was way under market. And we've done some small iterative price increases each year. We never want to be a pig. We don't want -- most of the time, we're almost -- we're a national company, and we literally had a few dozen dealers compliant here and there about a few price increases. That's a sign of we're not a big, like we are extremely pragmatic about these small increases we do. We do them carefully. We do them thoughtfully. We want -- we care about our dealers. So we do this really well, but we've been able to do this in a way where we've been able to reshape how our ARPU comes together in a very competitive way. And you need to correct anything. I'm giving this at a high level, but Bill, if there's anything you want to tweak please.

Obviously, we are not a pig, but we're capitalist and we seek to maximize earnings, right? So -- but in terms of that math that George just took you through, were 15% of total fees that we earn are from the sell side. Doing that same math, about 45% of those fees are from the buy side. So -- and we've changed that pretty dramatically over the years. And that gives us more ability to price accordingly from a competitive standpoint on the sell side.

On recent increases, you have...

We always -- each -- we don't broadcast when we're doing fee increases, but we every year have small fee increases.

Yes, a small fee. Yes. Exactly.

Got it. Maybe just -- sorry, opening up with the audience here. Any questions here from the room? No. Okay. One of the other revenue items, ACV Capital. Obviously, you had that challenge second half of last year with tree color. Just curious what kind of changes you made to the underwriting process, any other process changes at ACV Capital? And just how should investors think about the growth cadence over the next 2 years? Has it changed -- as the outlook changed versus your internal expectations from maybe a couple of years ago?

Yes, certainly. So for those less familiar, ACV Capital is the floor plan business. So this is where you're providing anywhere between 1 week in, let's say, 3 months of short-term lending. So on average, it's 30 days, okay, of lending to an independent dealer to buy a car and then go retail it. The largest floor plan companies are the largest marketplace companies. Traditional banks basically don't lend money to independent dealers. So basically, marketplace companies become the private banks for independent dealers. So that's the background. We operated extremely well for a number of years. And literally, when we were a tiny nascent company, we launched a small division. We were within our risk tolerance. Our execution was extremely well. We took on a customer with that we shouldn't have taken on. And the analogy I've given folks is this was a black eye. Black eyes look bad. They don't kill you. But they look bad, right? And this one, that was an ugly black eye. Thankfully, JPMorgan was also one of those people that lost money on the deal and other very sophisticated banks. So we weren't the only 1 that got fooled by this tremendous fraud that took place, okay? Alleged fraud that took place just to correct what I just said. So we -- but you do learn, right? You do learn, you go, okay, what do you guys do? So we did take a step back. We slowed our -- we did slow down, which we've said publicly. We slowed down our forecast for ACV capital. We wanted to make sure we got it buy up. We took the org, and we have an incredible leader within ACV Capital. We have an incredible team, but we did create some checks and balances. Bill now has 1 of the leaders directly reporting to him from risk. Our legal team, led by Lean, has got much more tighter controls of how the agreements are put in place, and we've created an org structure that has a really strong sense of risk reward in how we are balancing this. So I'm proud to say, as of like literally this week, we're back hiring ACV Capital salespeople. We're back out there. We feel really good. And the team has done an incredible job going through. Bill and I just approved some hiring there. We've got a great product. We've learned through that challenge. We've got a great process. ACV Capital is a great product offering, and we got some great growth expectations. It's a great business to be in. And where we did slow things down there for a few months, we did in a way slow down our growth, double -- dot all the Is, cross all the Ts, which we feel really good about it. And now we're back at it. Bill, any more you want to add to that?

I would say we're stronger as a result. I mean, it was tough working through that. And I think actually, JPMorgan exposure is like $700 million. Okay. You guys are a little bigger than us. But nevertheless, for us, it was a very big deal. But all the things that George just described, I mean, we did an enormous deep dive and have made and have brought -- not only made some organizational changes, but we brought in some new talent, very, very strong talent. I would say we're just that much stronger for it now going forward in scaling this business.

Understood. No, that's all very clear. One last one, maybe like softball. We didn't really talk about the secular, your core business and the secular trends in D2D. We've seen this like -- I think since your IPO and like we've seen the steady 300 to 400 basis points of digital penetration in the dealer-to-dealer market. 15%, 18%, 22%, 25%, probably like 29% today, depending on how you define the denominator. It's still like 70% transactions happening at physical. Are we at a point where this just accelerates from here? Have you reached that tipping point? When do you think that happens? Just your thoughts there. Obviously, that's still the bread and butter of the business.

Yes. I think at the end of the day, across the country, to your point, still 70% are at physical. So we still have a long ways to go. But what's also sort of fascinating is there are some regions that are significantly worse than that. Like we have areas in the Northeast where we have some territories where we already have 40% or more share today. That's just us. That's without any of our competitors. So the 70-30 also tells you a story that there are some regions where us and our competitors have not yet even gotten to that 30% share yet. And it's just a matter of when, right? This is happening. And you will see the majority of dealer wholesale will go to digital. You -- and you're going to hear more and more dealers say, yes, if some of you did your homework 5 to 10 years ago, you might have heard, I don't know. But you will hear the majority of you are saying, that's where it's moving, but you're going to go ask somebody in 1 town across America, and they'll say, it doesn't happen a year yet. Well, it hasn't happened there yet in that town. So Rajat, I feel really good that we've got a core business here that has a lot of room to grow.

Understood. No, it's a great way to end. So thanks again, George and Bill and Tim as well.

Thanks.

Thanks, everyone, for joining.