ACV Auctions Inc. Q1 FY2022 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the ACV First Quarter Conference Call. Please note that today's comments include forward-looking statements, including statements regarding future financial guidance. A discussion of the risks and uncertainties related to our business can be found in our SEC filings and in today's press release, which can be found on our Investor Relations website. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's earnings materials, which can also be found on our Investor Relations website. And with that, let me turn the call over to George.

Good afternoon, everyone, and thank you for joining ACV's conference call to discuss our first quarter 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.

Thanks, Tim. Good afternoon, everyone. Thank you for joining us. ACV delivered solid top line results above our guidance range despite the persistent supply constraints weighing on the automotive industry and softening retail demand for used vehicles. We delivered EBITDA within our guidance range while continuing to invest in key growth, expansion, and technology initiatives. We continue to broaden and deepen our relationships with our dealer partners, who underpin our long-term growth opportunities. Automotive dealers faced the macro challenges I referenced earlier; they have proven to be resilient and are a critical part of the automotive ecosystem. Dealers have embraced digital transformation, and ACV is increasingly well positioned to enable them to improve their ability to source, manage, and sell vehicles with greater transparency and efficiency. Our market momentum continued in the first quarter with revenue of $103 million, growth of 49% year-over-year. We transacted $2.4 billion of GMV, growth of 83% year-over-year. Overall, we are very pleased with strong execution by the ACV team and continued customer adoption of our growing suite of services. To frame the rest of our discussion today, we will focus on the three pillars of our strategy to drive long-term shareholder value: growth, innovation, and scale. I will begin with growth. Given the continued headwinds facing the automotive industry, we are providing context on the dealer wholesale market in relation to the broader automotive retail market. First, to understand the demand side of our market, we provided data on overall used car transactions and wholesale pricing trends. Retail sales of used vehicles in Q1 experienced a seasonal sequential improvement over Q4, but was down about 10% year-over-year versus very strong performance in Q1 '21. Consumer demand for used vehicles is a key driver of wholesale demand and supply because consumers purchasing a used vehicle typically have a trade-in. New vehicle sales remained well below historical averages and were down about 16% year-over-year in Q1 due to ongoing supply challenges impacting vehicle production. While the exact timing for supply to return to historic metrics may be unclear, what is clear is that our ongoing investment in growth and differentiated products positions ACV to benefit from the resulting recovery in the wholesale market. We continue to access it, gain market share, and attract new dealers to our marketplace. Given our 9% year-over-year unit growth in Q1 and an estimated market contraction of 18%, this would imply ACV grew market share by 27% year-over-year.

Thanks, George, and thank you, everyone, for joining us today. We are pleased with our Q1 financial performance. We delivered upside to our revenue guidance with adjusted EBITDA within our guidance range despite the challenging macro factors George outlined earlier on the call. Revenue of $103 million was above the high end of guidance and generated year-over-year growth of 49% versus strong results in Q1 '21. Adjusted EBITDA loss of $18 million or 17.5% of revenue was within our guidance range, but as I will detail later, was negatively impacted by the cost of revenue headwinds. Cost of revenue as a percentage of revenue increased approximately 300 basis points year-over-year and was above our expectation. The increase was driven by two factors. First, due to the softening market conditions in Q1 that George described, we increased our incentives to help our dealer partners acquire vehicles while still delivering on our EBITDA guidance. While we obviously can't control inflationary pressures, we are taking steps to mitigate the overall impact on our business.

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 growth. We are executing on our territory expansion plans. Our marketplace offerings are gaining traction in the market and see some very promising growth synergies emerging from our SaaS and data-enabled services.

Our first question comes from Rajat Gupta with JPMorgan.

Just the first one on some of the recent developments in the industry. First, Carvana's acquisition of ADESA, we have seen many OEMs announce that they're looking to switch to other platforms. Some have already named Manheim. So could you give a sense of what you're seeing on the ground? Have you already started to capture some of these customers? And did it impact the first quarter results or the second quarter guide? And I have a follow-up.

Rajat, good to hear from you. Yes, our listings have grown tremendously. Our listings growth and our customer growth are coming from competitors. We're taking share. Amongst all these things going on, we're still out there taking share.

Got it. But did you see any change in the velocity of those interactions more recently? Or has it just been steady as you've seen in the past in terms of those increased customer engagement?

Yes, I don't think we're ready to speak specifically about where we're winning share from today. But more broadly, I think what we're trying to lean in on and suggest is that we're winning share from a number of competitors.

Got it. Great. And just maybe one follow-up in terms of your staffing levels, inspectors. Are you like pulling back a little bit versus what you maybe talked to earlier this year in terms of the staffing levels? Or are you just continuing to hire so as to position yourself for whenever the market recovers?

Rajat, we’re trying to hire a couple of months in advance. We have something like over 100 inspector roles open right now that we're recruiting for, which suggests that we see growth. We're managing this growth within our EBITDA guidance.

Our next question comes from line of Ali Faghri with Guggenheim.

So looking at the volume outlook into the second quarter, are you seeing any signs that the macro headwinds are normalizing? It seems like conversion is going to continue to be a sizable year-over-year headwind looking at the chart you provided. But are you seeing anything on the new car supply or used car demand side that should suggest your volumes will improve sequentially into the second quarter?

The quarter started stronger than Q1. We believe that with the current new car and used car total sales, dealers are going to be a little bit more careful. Dealers won't hang on to all their trades as they have been in the past.

We did see a solid start to Q2. Even though the supply environment is still very tight, we're seeing really strong growth in our marketplace. Coupled with higher ARPU going forward, we'll start to see some benefit there as well.

Yes, I think we're competitive right now. We're priced in an effective way to continue to take share for both sellers and buyers to feel like they're getting incredible value in ACV.

Our next question comes from the line of Naved Khan with Truist Securities.

Curious about your consumer sourcing initiative? And what's your go-to-market approach there?

We mentioned two parallel go-to-market efforts. One, we continue to leverage Live Appraisal, which is our dealers across the country who are doing events where consumers can auction their car. We're scheduling our inspectors throughout the week.

Our next comes from the line of Eric Sheridan with Goldman Sachs.

I wanted to come back at the Analyst Day a couple of months ago, you put on display a lot of the tech investments you're making and how that can improve efficiency and productivity on the platform over the medium to long term. Can you reframe and revisit some of the investments you see as mission critical in '22 and '23?

We developed a unified inspection platform to enhance transparency and trust, whether it involves a wholesale inspection or an internal Private Marketplace transaction.

Our next question comes from the line of Christopher Pierce with Needham.

Bill, you said you have levers to pull to hit the 2022 revenue guidance even if the macro stays unfriendly. Just to confirm, we're talking about marketplace services and SaaS and data services, and increased penetration there?

Yes, it's more the dynamic between supply and used car prices. The higher supply, the higher prices will remain. But with tight supply comes potentially lower units at the top of the funnel, offset by higher ARPU.

We've got a number of the products that help guide dealers on what vehicles to retain or wholesale. We are here to help improve and execute in this digital world.

Our next question comes from the line of John Colantuoni with Jefferies.

Wanted to start with conversion rates. Can you just talk about how conversion rates have trended in recent months and weeks? And how we should think about conversion rates for the cadence of the year?

Conversion rates have been coming down and are starting to look more normalized based on the trends that we're seeing.

Broadly speaking, our data can help inform the seller and price guidance and help both the supply side and demand side to improve conversion.

Our next question comes from the line of Robert Labick with CJS Securities.

You've previously identified the off-lease market as an area of incremental opportunity. But it's looking like there really won't be many off-lease vehicles for a pretty long time to come. Does this change your expansion priorities?

We don’t stop working on those efforts. We kept going on inspection, on data services in that area. We are launching new capabilities over the next couple of months.

Bill, I want to start on the balance sheet. Cash reserves still strong. Are there any specific capabilities you guys would want to deploy capital towards on the M&A side, or is there anything out there right now?

We are very committed to managing towards exiting next year to EBITDA breakeven, if not slightly profitable. That goalpost is not changing as far as we are concerned.

We've got a dedicated team who's always looking at assets. We're reviewing the market continuously for expansion opportunities.

Thank you, and thanks, everybody, for joining the call today. We will be on the road at several conferences over this next quarter. You can find all those details on our IR website. So we look forward to seeing you, if we do on the road. Thank you again for your interest in ACV. Have a great evening.

Thanks so much.

Thanks, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.