ACV Auctions Inc. Q3 FY2021 Earnings Call

Good afternoon, everyone. Thank you for being here, and welcome to the ACV Third Quarter 2021 Conference Call. I will now hand the call over to Tim Fox, ACV's Vice President of Investor Relations. Please proceed.

Thank you, operator. Good afternoon, everyone, and thank you for joining ACV's conference call to discuss our third quarter 2021 financial results. With me on the call today are George Chamoun, Chief Executive Officer; and Bill Zerella, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of the risks and uncertainties related to our business is contained in our quarterly report on Form 10-Q for the 3 months ended September 30, 2021 that will be filed with the SEC following this earnings call. Also during this call, we may present both GAAP and non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release, which we issued a short time ago. The earnings release is available on the Investor Relations website that is included as an exhibit in the Form 8-K furnished to the SEC. And finally, we will be referencing our earnings presentation today, which you can find posted on our IR website. And with that, let me turn the call over to George.

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. Let me begin by thanking the ACV team for delivering another quarter of superior customer service to our growing dealer network and further differentiating ACV in the market with highly innovative products. As I will discuss in more detail later, the automotive industry is operating in unchartered territory with macro factors creating both tailwinds and headwinds for ACV's business. While navigating through these crosswinds, we have continued to deliver strong performance with our financial results again exceeding the guidance we provided to you last quarter. Moreover, in addition to gaining market share, we are investing aggressively to extend our geographic presence, expand our technology lead, and position ACV for sustainable long-term growth as the automotive market normalizes in coming quarters. Turning to Slide 3, I'll begin with highlights of our third quarter. As you can see, our momentum in the market continued in the third quarter where we transacted the second consecutive quarter with $2 billion of GMV. We sold 141,000 vehicles in our digital marketplace, a 19% increase year-over-year and an increase of over 100% on a 2-year basis. Revenue of $92 million was above the high end of guidance and represented 36% year-over-year growth. Our revenue outperformance can be attributed to three factors. First, we continue to execute on our proven playbook to grow market share by attracting new dealers into our ecosystem. Second, both ARPU and conversion rates after softening in late Q2 and early Q3 strengthened throughout the quarter. And third, attach rates of our value-added services were well above our expectations. Overall, we are very pleased with the strong execution by the ACV team and continued customer adoption of our growing suite of offerings. As Bill will discuss in more detail, we have again increased our outlook for the year. We are now expecting to deliver 65% revenue growth for the full year, a full 25 points higher than our outlook at the beginning of '21. To frame the rest of our discussion today, we will focus on the three top-level elements of our strategy to drive long-term shareholder value: marketplace growth, total addressable market, and product expansion, and operating scale. Let me begin with marketplace growth. On Slide 5, let's cover more details in the quarter. We transacted 141,000 units in Q3, which was 19% growth year-over-year and over 100% when compared with Q3 '19. Year-to-date, unit growth is up 46% compared to 2020. The positive market trends I referenced earlier related to vehicle values contributed to GMV growth of 79% year-over-year and consistent with trends in the first half of this year. Vehicle mix in our marketplace continued to move upmarket in Q3. In fact, since last year, the percentage of vehicles valued over $15,000 doubled to nearly 40% during the quarter. While elevated vehicle values will no doubt normalize over time, we believe this higher mix of frontline vehicles in ACV's marketplace is sustainable, resulting in a long-term tailwind for ARPU. Moving to Slide 6, we thought it would be helpful to provide context on the dealer wholesale market in relation to the broader automotive market. As I mentioned earlier, this is a case of competing crosswinds. The two charts on the top row highlight trends in the used vehicle market. Sales of used vehicles remain elevated, nearly 70% above pre-COVID levels, reflecting strong consumer demand and elevated retail values. The chart on the right shows how this demand environment has translated into historically high wholesale vehicle prices. Strong demand and pricing have been nice tailwinds for ACV, which you will see reflected in record level ARPU this year. The two charts in the bottom highlight the trends for new vehicles, which paint a very different picture. The well-documented semiconductor chip shortages in the automotive industry have resulted in a steep decline in new vehicle sales. The latest reading of around 12 million units is down one-third from pre-COVID levels. And days supply of light vehicles at franchise dealerships has contracted to around 22 days versus historical levels in the 60s. So why does this matter? Consumer trade-ins for new vehicle purchases are a critical input into the dealer wholesale market, historically representing a significant portion of the annual supply. With new vehicle inventories at such acute levels, the volume of trades entering the wholesale market has declined, resulting in a temporary contraction in the market we serve. I say a temporary contraction because the chip supply picture will no doubt improve in the coming quarters. And given the investments we’re making in both territory expansion and technology, ACV is very well positioned to benefit from the resulting recovery in the wholesale market. Turning to Slide 7, let me put a finer point on the supply dynamics in the market. Based on wholesale transactions from a sample of 1,000 ACV franchise dealer rooftops, we estimate that the dealer wholesale market contracted 10% quarter-over-quarter in Q3 and 15% from Q3 '19. This market contraction effectively mirrors the decline in listings per dealer that we observed in our marketplace in Q3. After increasing consistently through the first half of '21, this KPI decreased approximately 10% during the third quarter due to the market conditions. Had listings per dealer remained consistent with Q2 levels, we would have transacted approximately 150,000 units in Q3 or year-over-year growth of 32%. Simply put, supply headwinds cost us about 13 points of unit growth, all else being equal. Despite these transient supply headwinds, our marketplace continues to attract new dealers. We reached a record number of sellers in our platform in Q3, and the number of unique sellers increased by 34% year-over-year in the quarter. The takeaway here is that while our industry is facing temporary supply constraints, ACV is gaining market share, attracting new dealers at an impressive pace and delivering strong revenue growth, which bodes well for the eventual automotive recovery. Next, on Slide 8, we are pleased with the great progress our ACV team is making on territory expansion. Over the next 60 days, we’ll be opening the remaining territories to achieve our goal of 160 by year-end. Following each initial territory launch, we execute on our proven go-to-market playbook by investing in our inspection capacity, attracting dealers to the marketplace, creating the powerful network effect that we've repeated over 100 times across the country. By year-end, we'll increase our footprint by 30% and be positioned to engage with nearly all the franchise dealers in the U.S. Moving on to Slide 9, auction marketplace revenue growth was 22% year-over-year and greater than 200% growth versus Q3 '19. Note that the year-over-year comparison was against very strong Q3 '20 results, which benefited from pent-up demand created in the early months of the COVID pandemic. Turning now to Slide 10, last quarter, I highlighted our consumer sourcing offering, Live Appraisal, that has contributed to our strong unit growth this year. We are an early mover in this category, enabling our dealers to offer consumers an efficient and effective way to sell their vehicles on ACV's marketplace. Live Appraisal has gained significant traction this year with over 110% unit growth year-to-date, and it contributed a high single-digit percentage of our volume in Q3. This offering is being leveraged by dealers across the country today with Live Appraisal sales in 48 states this year, and we plan to expand our offerings in the coming quarters. So stay tuned for more on that front as we continue to penetrate this large market opportunity. Let me turn to the second element of our strategy to drive long-term shareholder value, total addressable market and product expansion. Moving to Slide 12, I will provide an update on our Private Marketplaces offerings that we launched in June. This private auction platform leverages ACV's marketplace technology to enable dealers to optimize trades within their dealer groups, maximizing both profit and speed. Private Marketplaces provides ACV with another avenue to engage with the largest dealer groups in the country, create new revenue streams, and generate a seamless downstream supply for ACV's open marketplace. Private Marketplaces also lays the technology foundation for a commercial offering we plan to launch in 2022. We are seeing strong initial demand with over 20 large dealer groups live today. We are especially excited about a recent partnership with one of the largest dealer groups in the country operating hundreds of rooftops. Following an extensive field test against the incumbent vendor, ACV was chosen to power their private trading network. We won this engagement based on the scalability and flexibility of our Private Marketplaces platform and the quality of our market-leading inspection capabilities. The initial phase of our partnership focused on supporting the dealer group's high-growth consumer sourcing business. We then expanded the scope to include other private network transactions like aged inventory. This key strategic win with a market leader is a testament to ACV's core strengths around technology, innovation, customer engagement, and inspection capabilities. We look forward to updating you on Private Marketplaces adoption in the coming quarters. Turning now to Slide 13, we are also very excited about the market traction of our programmatic buying offerings. It's the early days, but this innovative way of enabling dealers to engage with our marketplace already contributed a low single-digit percentage of units in Q3. Our buying API is live today with dealers who have technology platforms that integrate directly with ACV's real-time APIs to generate bids on our marketplace. We’re engaging with a diverse set of customers that include large dealers, rental car companies, and a leading specialty auto parts supplier. In addition, our programmatic buying user experience is in beta with eight dealers and will be launching by year-end. This offering will enable the rest of our dealer partners to participate in programmatic buying in our marketplace by creating inventory wish lists to automatically source their inventory needs. These programmatic buying capabilities, together with our nationwide inspection team, enable ACV to offer a highly efficient and trusted experience, which we believe will deliver superior results for our dealer partners. Moving to Slide 14, we are making great progress with our MAX Digital integration. The teams are fully engaged on the tech integration front while developing joint marketing and sales campaigns. MAX Digital's pricing guidance, merchandising, and inventory management products are a natural complement to ACV's current data services that together create exciting growth synergies. We look forward to sharing updates on ACV's vehicle intelligence strategy in the coming quarters as we launch our integrated offerings in early 2022. Turning to Slide 15, let me wrap up this section with an update on our value-added services. We are making significant investments in the technology and resources to scale ACV Transportation and ACV Capital. These investments are driving strong top-line growth by delivering highly differentiated services to the market while also creating efficiencies for both our partners and for ACV. ACV Transport continues to be a key enabler of attracting new buyers to the platform. Our growing carrier partner network and fast cycle times resulted in attach rates of around 50% in Q3. Recall that our initial plans assumed reaching a 50% transport attach rate within two years. The transport team achieved this milestone in just three quarters. ACV Capital continues to gain traction in the market, and like our transport business, is tracking ahead of the milestones built into our long-term targets. Capital attach rates reached the mid-single digits in Q3, with loan volume improving around 30% quarter-over-quarter. The new finance offerings we launched in June are translating into strong revenue per loan growth, which has increased over 15% since the beginning of the year. We continue to be excited about the revenue and margin opportunities for our capital business with expected revenue growth of nearly 300% in 2021. In summary, Q3 was another proof point that we have created exciting new avenues of long-term growth for ACV by leveraging our powerful data capabilities, expanding our features across our technology platform, and driving adoption across our growing suite of digital solutions. With that, let me hand over to Bill to take you through our financial results and also how we're driving growth at scale.

Thanks, George, and thank you, everyone, for joining us today. We are pleased with our Q3 financial performance, having again delivered upside to both our revenue and adjusted EBITDA guidance despite the challenging macro factors George outlined earlier on the call. Turning to Slide 17, I'll begin with a review of our third quarter results. Revenue of $92 million was above the high end of guidance and generated year-over-year growth of 36%. Adjusted EBITDA loss of $12 million or 13% of revenue was also very favorable relative to our Q3 guidance. This performance was driven by our solid revenue results in the quarter and underscores the inherent operating leverage in our business model. As expected, the cost of revenue as a percentage of revenue increased year-over-year and was modestly above our expectations. The year-over-year increase was driven primarily by the mix of ACV transport revenue, which increased approximately 600 basis points year-over-year and exceeded our expectations. Additionally, we incurred higher arbitration costs associated with customer assurance revenues in Q3. However, we expect these costs to normalize in Q4, consistent with historical norms. Total operating costs, excluding the cost of revenue as a percentage of revenue, increased by approximately 900 basis points year-over-year, less than expected. The year-over-year increase reflects our planned investments across our technology portfolio, operations, and go-to-market functions, investments we're making to fuel our long-term growth strategy. Turning to Slide 18, I will cover some additional detail on revenue. We have a diverse revenue mix with approximately 85% of revenue evenly split between Auction Marketplace and service revenue, with the balance in customer assurance. As expected, Auction Marketplace revenue declined modestly quarter-over-quarter, reflecting constrained wholesale supplies in the market but was above expectations, primarily due to improved conversion rates throughout the quarter. Year-to-date, Auction Marketplace revenue was up 63% versus 2020, reflecting strong dealership acquisition and continued penetration of the wholesale market. Profitability in our Auction Marketplace remained strong in the quarter and consistent with the high 80% historical rate. Our services business continued to outperform expectations with strong results in Transportation and Capital. Services revenue also reflects nearly a full quarter of MAX Digital. Moving to Slide 19, I would like to discuss the operating leverage in our business. Here, we're showing historical adjusted EBITDA margin along with our updated outlook for 2021. As I mentioned earlier, 2021 is a year of significant investment for ACV. And as you heard throughout our discussion today, we're delivering on our territory expansion plans, launching new offerings to drive additional market share, and investing in technology to scale our operations. These investments translate into a 57% year-over-year increase in operating expense, excluding cost of revenue. And despite this increase, our adjusted EBITDA margin is expected to be flat with 2020, again highlighting the underlying operating leverage in our business model. Now I'll turn to guidance on Slide 20. For the fourth quarter of 2021, we are expecting revenue in the range of $83 million to $86 million, a growth rate of 54% to 60% year-over-year and a meaningful acceleration over our third quarter growth rate. Adjusted EBITDA loss is expected to be in the range of $22 million to $26 million. For the full year 2021, we are again raising revenue guidance. We are now expecting revenue in the range of $341 million to $344 million, a growth rate of 64% to 65% year-over-year and an increase of $8 million at the midpoint from our previous guidance. Adjusted EBITDA loss of $51 million to $54 million is approximately $11 million lower than our previous guidance. Our guidance assumes that strong used vehicle demand will persist throughout the balance of 2021, creating a positive backdrop for vehicle values in the market. We're also assuming that automotive supply chain challenges will likely continue to constrain new vehicle sales and associated trade-in volumes, which in turn may pressure wholesale vehicle supplies in the near term. And finally, on guidance. To my earlier point about our investment plans, we are expecting total operating expenses, excluding cost of revenue, to grow approximately 57% for the full year 2021. To wrap up my comments, let me highlight our strong capital structure on Slide 21. We ended the quarter with $600 million in cash and equivalents, $152 million of which reflects the float in our auction business. Note that we generated $16 million of cash flow from operations during the quarter due to an increase in the float on our marketplace since June 30. The amount of float on our balance sheet can fluctuate meaningfully, driven by business trends in the final two weeks of each quarter. We ended Q3 with $500,000 of long-term debt associated with our ACV Capital business. Given our strong cash position, we continue to optimize our cost of capital, and at current levels are self-funding the ACV Capital business. And with that, let me turn it back to George.

Thanks, Bill. Before we take your questions, let me summarize. We are pleased with our execution in the third quarter while navigating through the short-term supply headwinds. We continue to gain market share by attracting new dealers to our marketplace and by gaining wallet share within our existing customer base, which positions ACV for strong customer growth going forward. We are executing our territory expansion plans. Our latest offerings are gaining traction in the market and see some very promising growth synergies emerging from our MAX Digital acquisition. We have a proven business model that can deliver scalable growth with attractive unit economics and structural operating leverage that we believe will drive significant shareholder value. With that, I'll turn the call over to the operator to begin the Q&A.

Our first question comes from John Colantuoni with Jefferies.

So I wanted to start with share gains. It looks like dealer wholesale was down 10% sequentially in Q3, which means ACV continued to gain share. Maybe you can talk about how dealer wholesale trended sequentially last quarter in the context of ACV's nearly 20% sequential increase in Q2 just to give us perspective on how the trajectory of your share gains has trended over the past couple of quarters. And I've got a follow-up.

Yes, certainly, John. I'll start, and then Bill and Tim can add their thoughts. Thank you for the question. As we mentioned, the dealer wholesale category, whether physical or digital, was down about 10%. Our units were down less than that, but we observed a decline in wholesale overall due to market changes we discussed. However, we experienced significant growth in new sellers, reaching record-breaking numbers as we launched our products and increased our market share. We're proud of our results and our ability to capture additional share. Bill, would you like to add anything?

No, I think the only thing I would add is that these are estimates to the best of our ability, trying to scope out and figure out what the market has done over the last few quarters and year-on-year, as well as the trends. So these are our best estimates based on the data that we can see on our side.

Great. And just wanted to ask a question about the programmatic buying tool. Maybe talk about how quickly you expect to ramp it in Q4 and how you'll be marrying it with the auction platform. And maybe you can talk about if you see it providing any gains to overall conversion rates on ACV.

Yes, absolutely. Conversion rates on ACV have been exceptionally strong, and we're pleased with how effectively the platform is performing in terms of conversion. Programmatic buying will enhance our capabilities, ensuring that our sellers receive appropriate value for their vehicles. Our programmatic buying has two phases: first, the API, which some of the largest dealers and buyers are already integrating with, and second, the user experience. Currently, a small percentage of our transactions are happening programmatically, which is fantastic because it means dealers are using the platform to buy cars automatically based on their preferences. The user experience is still in beta with a limited number of dealers, and the feedback has been very positive. It allows dealers without a tech team or an existing platform to utilize our programmatic user experience. Overall, things are progressing well, and while we anticipate this to have a more significant impact next year as we train more dealers and onboard them onto the system, we are already performing exceptionally well in terms of demand.

Can you discuss October, considering wholesale prices began to rise again in late August, and how this might affect conversion rates and unit sales since the end of Q3?

Yes. John, it's Bill. Yes. So just if we kind of look back over the last few months going to the beginning of Q3, as we talked about on our last call, we saw conversion rates declining in July through August on our platform as basically prices started coming down week over week. What we observed since then, though, was an increase in conversion rates in September. So we started seeing really a lot of strength on our platform in September. That continued through October and has continued through November so far. So we're certainly seeing a lot more stability in the market. Prices actually started moving back up a bit in September. And I think you've heard probably similar comments from other companies in the ecosystem. So we've observed the same kind of dynamics on our platform as well.

Our next question comes from Ali Faghri with Guggenheim.

So I guess on your fourth quarter guidance, can you help us better understand what that embeds maybe for volumes and then GMV per unit, perhaps relative to the third quarter? Even directional commentary would be helpful.

Yes. Ali, it's Bill. So first, on GMV, you can assume it's roughly similar to what we've seen in Q3. So no dramatic shifts in that regard on GMV. In terms of the other factors affecting guidance. As I mentioned earlier, we've really seen strength on our platform in October, an improvement in conversion rates, so more velocity on the platform. That's continued so far in November. That said, we know that Q4 has seasonal factors associated with it as we get towards the holidays. So we have assumed those dynamics this quarter as in previous years. Whether or not this year is different or not, who knows, but we've assumed it's kind of consistent with the same seasonal trends. So we baked that into our unit modeling. So you can expect potentially there is some modest decline in units quarter-on-quarter. But the counter dynamic that we had baked into our numbers is the new number of additional sellers that we have on our platform as well. So you've got kind of puts and takes. But that hopefully gives you some sense directionally.

That's helpful. And then as a follow-up here, on your transport attach rates of 50%. As you mentioned, you hit your midterm target in just three quarters. So where do you think transport attach rates can go from here?

I believe that between now and March, as we align with our long-term plan, we will offer more guidance in this area. Clearly, we need new targets since we are already achieving our long-term objectives. What’s particularly exciting is not just the metrics we’re achieving; the key performance indicators are performing well. We're beginning to generate some profit, and Transport is evolving into an outstanding business, even though we are still in the early stages. We recently launched our carrier app and established a dedicated tech team for Transport. We are improving the speed at which we turn around cars, and we're receiving overwhelmingly positive feedback from dealers, with comments like how they couldn’t believe their ordered car was shipped within 24 hours. So, looking at the bigger picture, achieving a 50% rate is a significant milestone, and we are starting to make a bit of profit, which we expect to increase. The key performance indicators are positive. Therefore, we are recognizing that while Transport was initially considered an added value, it is poised to become a major business segment. I hope this provides further clarity. However, as you mentioned, we will need updated goals and objectives since we have already surpassed our previous targets.

That's helpful, George. If I could ask one more question about the launch of the commercial private marketplace platform scheduled for 2022. Should we anticipate its release in the first half of the year or the second half? Initially, it seemed like the launch was planned for the end of this year, but it appears to have been delayed. Additionally, are you currently beta testing this product with any financial companies? Is it still under development, and do you expect to have customers ready by the time the product is launched?

Yes. Thanks, Ali, for bringing that up. On the private marketplace for dealers, it's going extremely well, probably going better, faster than we were even expecting. You probably saw as part of the updates already of 20 dealer groups, we're launching about a dealer group a week right now. We shifted a little bit of the resources to focus on capabilities these big dealer groups wanted this year, and that's why you're seeing us say, hey, we probably won't launch our commercial offering until probably now closer to Q2. As you know, whenever you're building these things, you really are prioritizing. But the work we're doing on the dealer group side is just incredible. And just remind you all why. You end up getting first look at their inventory. So the dealer groups will get a trade. They get a trade or have an aged inventory. It goes into our platform first. And with that, we end up getting a first look at the open marketplace. So we're still very excited about the commercial opportunity. It's also been a good time to probably double down in dealer. As you know, commercial as a segment is going to stay relatively low next year compared to prior years. So I think in the bigger picture of things, whether we end up launching it in late Q1 or early Q2, you're just seeing us prioritize what our dealer groups have needed this year, and that has worked out extremely well.

Our next question comes from Stephanie Moore with Truist.

I would like to follow up on the last question. I might be missing something, but regarding the new ACV private marketplace and the engagement of dealer groups, what advantage does it provide them to start on this private marketplace instead of the original ACV platform? I am not clear on the distinction and would appreciate some clarification on why they would choose one over the other.

Yes, certainly, Stephanie. So thank you. Our open marketplace is a fantastic way for dealers to sell their wholesale cars, right? So whether it's a fresh trade, whether it's an aged car, and to your point, we've had that for the last handful of years as a fantastic solution. What private marketplace solves is for dealers to have a platform to first sell cars within their group before letting those vehicles go into open marketplace, with ACV's or any other auction. So look at it as like the order of operations. Like what comes first? Dealers want to make sure they're wholesaling the right vehicles, and they're not wholesaling vehicles that belong to their group. So there's been a couple of, I would say, competing solutions historically that have tried to do this. So we weren't the first, I would say, to come up with the idea, but we were the first to execute extremely well in this category. And so what allows the dealer group to take, whether it be a fresh trade or an aged car, have their group in on it. Another use case that's come out of this is dealer groups are buying cars from consumers at a group level. And let's say they buy x 100 cars from consumers in a given month, they don't necessarily know where that car will land, whether it will land at their Ford store or their Chevy store. So what some of these groups are leveraging ACV for, again, as they're buying cars from consumers, it goes into ACV Private Marketplace first. And then if they decide not to keep it within their group, it gets wholesaled on ACV.

Absolutely, that's very helpful. You mentioned that this could also apply to off-lease vehicles that are traded in with these dealers, and we are giving them the first opportunity along with their other franchise dealers. Is that a fair point?

Yes, that's correct. And as Ali was mentioning, there's off lease. There's other categories within commercial, like fleet and other categories. What those companies need is a little bit more of a co-brand or a white-label solution, whereas our current platform is within the ACV Auctions proper. So we've got a little bit more work to do there to really have more of a white-label platform than sort of an embedded co-branded solution. I'm trying not to get too technical here, but there's just a little bit more requirement that we need to deliver on before we can really match what the commercial partners are looking for. And then they'll also get the other benefits of ACV, which is our inspection capabilities, more data per car. So think there are certain capabilities we still need, which we will deliver next year, and then they also get the benefit from our other sort of strong and differentiated capabilities.

Absolutely. And then my other question just relates to seeing obviously very impressive operating leverage despite the meaningful investments. Could you talk a little bit about maybe some of the scale benefits you're seeing in some of your older markets? Whether it's the scale from you're building up the sales team, maybe some improvements on the inspection teams, whether they're just being more efficient. And then also, I would love to hear your thoughts on, as you are expanding into new markets, what you're seeing from a labor standpoint being able to attract talent. So all that would be helpful.

Yes, I’ll start and then Bill can also contribute. Our mature markets are performing as expected. We have successfully hired the right talent in those markets and improved efficiency. We are utilizing significantly less capital this year than initially planned. The business is operating exceptionally well. Bill can provide additional insights. Alongside what's happening in the field, we are making great progress in updating our product and technology. Although we haven't provided updates on our inspection platform or other capabilities yet, we plan to do so in the next earnings call. We are doing an excellent job of enhancing our inspections platform, which contributes to our efficiency and superior outcomes. Overall, everything is going smoothly, and we are meeting our goals. Bill, would you like to add anything?

Yes. I guess what I would add, Stephanie, is, look, again, this has been an investment year for us. And we're investing, frankly, across the entire business in pretty much every way that we can, right? So we're basically investing in order to be able to scale this company as we get to much larger levels of volumes in a very efficient way. And I think you're starting to see some of that. I wouldn't say there's any one particular area that I would point out. It's kind of broad-based across everything that we do operationally in terms of running the business. So again, I think, over time, these benefits will get larger as we grow in scale. But you certainly are starting to see some of that flow through the P&L this year.

Our next question comes from Alex Potter with Piper Sandler.

Okay. Great. So I'm going to ask a question maybe that's a little unfair, but I'll ask anyway. You mentioned, obviously, you've got richer mix coming in. Clearly, the GMV per unit is super, super high right now, partially because of the market, but some of it is more structural in nature, more permanent in nature. So if you're in my seat, and you're trying to build sort of a long-term model, looking out past all of this COVID disruption to something that's more normalized, where do you think GMV per unit settles out?

That's a great question, and I appreciate you acknowledging that it may be a bit unfair. What did we project for the upcoming years? Yes, that's a great question. In the long-term model we shared, we only projected $12,500. It's impressive that we're starting to achieve metrics we anticipated would occur much sooner in our long-term model. We will need to establish updated goals as we progress. While it's a fair question, I don't think we are ready to provide an answer just yet.

Yes. The only other thing I would add, Alex, is that if you look at the 5-year model we provided for the IPO, we have already achieved our ARPU projection for 2025. In fact, it was 373 in Q3. According to our long-term model, we projected it to be 371 for Auction-only ARPU in 2025. Additionally, we have already surpassed the 5-year projection for GMV per unit. Some of this is a result of high prices for used cars, which will start to moderate over time. Overall, we are already exceeding the longer-term targets we set.

I think it's important to highlight that we're confident the ACV platform is being utilized across a wider range of vehicles. We're increasingly leaning into this and believe we'll see a more diverse product mix on ACV. This is due to our improved buying experience, enhanced programmatic APIs, and additional filters we've implemented over the last few quarters. The low arbitration rate and the simplicity of purchasing outstanding vehicles, including dealers acquiring consumer cars and reselling them on ACV, reinforce our belief that this mix will remain stable. While there may be some price fluctuations in the industry, we are excited about the enduring diversity in our offerings. Alex, we'll provide more updates soon on our revised goals and objectives.

Okay. Great. That's actually a really helpful answer. Maybe one last one then on ACV Transport. Obviously, the attach rates there are trending higher than expected. That's all good to see. That's all top line commentary. It looks like profitability of that business is doing okay. It's at least some non-zero number. Just any, I guess, commentary you can add on profitability in the most recent quarter and then looking forward for ACV Transport would be helpful.

I'll start, and Bill can add to it. To your point, efficiency across the business is exceeding our expectations, particularly in Transport. If you're wondering why, when we went public, we had only a few people on the tech team focused on Transport, but we now have over a dozen. We have been very transparent about our hiring and scaling efforts. Currently, there are over 300 people in our product and tech organization. We have the resources and are continuing to hire more. In Q4, we are planning to add additional tech resources. We are making significant strides in expanding that team, and Transport is one area benefitting from this. We are releasing new products that will help not only make this a profitable business but will also improve key performance indicators for our dealers, allowing them to receive cars faster. We are gaining more scale, and carriers are reporting positive feedback about ACV. There are carriers nationwide focused solely on fulfilling cars in ACV, as that is their main source of income. We are very proud of our progress, and I believe these tech investments and our expanded team will lead to even greater efficiency and scale. Bill, do you have anything to add?

No. I would just add, I believe we spoke about this last quarter, that we've actually created automation in terms of scheduling and arranging for transports. And last quarter, we talked about 20% of all transport transactions were effectively fully automated, right? So no human touch. And that will just increase over time. So yet another example of...

We were just shy of 25%, with around 24 percent of our dispatches in the past quarter being handled programmatically with a carrier on standby. This is yet another area where our team is excelling.

Our next question comes from Rajat Gupta with JPMorgan.

So just had like a broader question more around the competitive landscape. We have backlog numbers maybe flattish quarter-over-quarter, maybe slightly down more in the U.S. CarOffer last night talked about a sequential decline. So you mentioned the overall market, you outperformed the overall market. But just within the digital dealer-to-dealer landscape, how would you rate your performance versus some of the peers? And then just broadly on competition. Are you seeing some more pressures here as these other platforms start to invest more? EBlock is going to come soon more aggressively in the U.S. So just broadly thoughts on competition and just your performance relative to them in the third quarter. Any update on that would be helpful. And I have a follow-up.

Yes, it's George. Thanks for the question. My general response, without delving into specifics about our many competitors, is that we've faced competition from the very beginning. One competitor sells around 4 million cars annually, while another sells a few million. Collectively, the digital players represent a small portion of the market. However, to your point, the entire category is experiencing growth. Looking at the last quarter, wholesale was likely down for the category, including dealer wholesale, but we achieved a record number of new sellers. Others may claim the same. The segment is evolving. A crucial aspect of any business is determining where to invest. Are you focusing on technology? Do you have the resources to invest in tech that genuinely addresses dealer needs? We are excited about our roadmap and execution. Are you fostering the right culture and team? I have great confidence in my team and what we’re accomplishing. Are your dealers enthusiastic about your efforts? I believe we have that as well. Competition will always exist; we’ve dealt with it since day one, even when we had limited resources. Today, we have substantial capital at our disposal, strong momentum, and a well-scaled tech and field team. Overall, we're feeling optimistic.

Great. And just follow up to that. The OpEx pickup here in the fourth quarter, is that just more trying to get ahead of your investment curve, given like volumes are significantly down quarter-over-quarter? Just more...

I'll start, and Bill can add in. Yes, over half of that is related to our efforts to hire more staff. Bill can provide further details on this. We are looking to bring in many more technical personnel and a few additional field resources in sales. This is, as we've noted, a priority for investment, with over half of that effort focused on expanding our workforce. Bill, is there anything else we can elaborate on regarding this?

I would say that we are continuing to invest across the business as planned, although those investments have been lower than originally projected. While we expected our operational expenses to increase about 57% year-on-year this year, the actual dollar amount of investment is lower than we had initially modeled. We are executing across the business with a reduced level of spending on operational expenses, but we are still investing in growth as we consider not just the next quarter or two, but over the next several years in terms of bringing new products and technologies to market as well as operational efficiencies and improvements. However, we are spending less on the operational expenses side than we had previously estimated.

I understand. Just one last question regarding the competitive landscape. Are you concerned about maintaining discipline going forward as more competitors enter the market? There are many investing in this space. How do you plan to navigate that? You've mentioned programmatic buying, similar to what other competitors have discussed. Any insights on the economics related to that would also be appreciated.

Yes, our revenue per unit has been strong. To your point, there has always been a lot of competition. Our revenue per unit remains robust, and we are adding many sellers to the platform while using fewer operating resources than anticipated. If you consider our performance amidst all this competition and changes in the marketplace, we are doing extremely well. It's important to be aware of and respectful towards competitors, but my main focus is on our strategy—establishing relationships with thousands of dealers across the U.S. and developing excellent products and platforms for future growth. We are truly outperforming our plan, despite the presence of various competitors.

Got it. And on the programmatic buying economics versus like the traditional business, any quick thoughts on that?

Yes. There are two aspects to programmatic. I've primarily discussed the buying side, which has no notable difference in economics; it simply represents a different purchasing method. We haven't officially introduced any programmatic selling capabilities yet, and we've been relatively reserved on that front. However, I believe that these elements should be viewed as features. I don't foresee a decline in revenue from buying and selling. There may be future opportunities with some of these models, but I prefer not to create expectations just yet regarding potential improvements. Overall, regarding the new buying and selling capabilities, there is no sign of diminished confidence in our revenue per unit and execution efforts.

Our next question comes from Bob Labick with CJS Securities.

I wanted to go back to GMV per unit. Obviously, up materially year-over-year, and market has something to do with that. But it's also higher than a lot of your digital peers, and it also grew faster year-over-year this quarter than other digital peers. So you're obviously attracting a higher price point, I guess, and a higher mix. So maybe help us understand what you're doing differently that's enabling you to get this better mix and faster, better mix, if that kind of makes sense.

Yes, Bob. You've been observing this for at least a decade in the auction industry. We now have comprehensive coverage from a demand perspective. Everything starts with demand; if there's no right demand, buyers may try us only once and won't return. On the demand side, we have buyers for cars priced at $100,000, as well as for $75,000, $50,000, and $25,000 for clean cars with no CARFAX issues, and there's also demand for $40,000 cars with a poor CARFAX. Initially, we operated as a back-of-the-dealership auction for aged vehicles, but we've evolved into a full-service auction covering all segments. The reason for this development is the growing confidence and trust in our inspections and the ACV brand. We’ve established trust through our superior technology and personnel. Whether it’s buying cars from consumers or dealing with aged inventory, we now have buyers for every scenario and they want these vehicles. Increased demand leads to greater confidence from suppliers, enhancing the overall effectiveness of our platform.

That's all the time we have for questions. I'd like to turn the call back over to Tim Fox for closing remarks.

Great. Thanks, Michelle, and I would like to thank everybody for joining us on the call today. We're going to be participating in a number of virtual investor events over this next quarter, so please look for details on our investor website. We look forward to seeing you on the conference circuit in the coming months. And again, thank you for your interest in ACV, and have a great evening.

Thanks.

Thanks, everyone. Have a good night. Bye.

This concludes the conference. You may now disconnect.