ACV Auctions Inc. Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and thank you for standing by. And welcome to the ACV Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. I would now like to turn the call over to Tim Fox, ACV's Vice President of Investor Relations. Please, go ahead.

Thank you, operator. Good afternoon, and thank you for joining ACV's conference call to discuss our second quarter 2022 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 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.

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. We are very pleased with our second quarter performance, with revenue and EBITDA, both exceeding guidance. The ACV team once again delivered strong results in a challenging macro environment for our dealer partners. With that, let me turn to second quarter highlights on slide four. Our market momentum continued in the second quarter, with record revenue of $115 million, year-over-year growth of 18% versus very strong results in Q2 2021. GMV of $2.7 billion also set a new record and increased 27% year-over-year. We sold 148,000 vehicles on our digital marketplace, a 6% sequential increase from Q1 and a modest decline versus record unit performance in Q2 2021. Overall, we are very pleased with our execution in Q2 and our progress on key strategic initiatives. We delivered strong results despite wholesale market conditions that softened in June, resulting from continued supply challenges, weakening retail demand and vehicle price depreciation. Market conditions have remained challenging in Q3. And in prudence, we have assumed that wholesale volumes will remain constrained in the back half of 2022. Our guidance now reflects this more cautious view of the macro factors impacting the dealer wholesale market. Our guidance also reflects our commitment to investing in growth, while ensuring we remain squarely focused on our path to profitability. As Bill will detail later, we have adjusted our operating expense plans to account for expected market headwinds. We are focused on improving our foundation to drive profitable growth when market headwinds turn into tailwinds for ACV. Turning to slide five. 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. Moving to slide seven. I'll again provide context on the dealer wholesale market in relation to the broader automotive retail market. First, to illustrate the demand side of our market, we've provided data on overall used car transactions and wholesale pricing trends. As you can see in the chart on the left, retail sales of used vehicles declined sequentially from Q1 and declined about 15% year-over-year versus strong performance in Q2 2021. As a reminder, consumer demand for used vehicles is a key driver of wholesale demand and supply because consumers purchasing a vehicle typically have a trade-in. The chart on the right illustrates how continued softening of consumer demand has impacted wholesale prices. After reaching historically high levels in 2021, wholesale prices declined during the first quarter, recovered in early Q2, but have been trending down since June. As we discussed last quarter, price deflation has contributed to conversion rate compression across the industry, as dealers have become more price-sensitive when buying vehicles in the wholesale market. Now turning to Slide 8. Let's look at the supply picture. New vehicle sales remained well below historical averages and were down about 21% year-over-year in Q2, due to the ongoing supply challenges impacting vehicle production. This is reflected in the chart on the right, which shows that supply of new vehicles remains historically low because consumer trade-ins for new purchases are a significant input into the wholesale market, and supply chain issues continue to weigh on the market we serve. While there have been a few positive signals from auto OEMs regarding production improvements later this year, we have not assumed this in our 2022 outlook. On Slide 9, we provided additional insight into our business that underpins our confidence in ACV's market position and long-term growth opportunities. The chart on the left shows quarterly listings in our marketplace, which is a measure of dealer growth and marketplace adoption. After moderating in the second half of 2021 as supply issues mounted, listing volume turned positive in Q1 and then increased again in Q2. For the first half of 2022, listings grew 27% year-over-year, reflecting strong execution on dealer penetration and wallet share growth. In fact, the number of listings dealers increased 30% year-over-year in Q2, which positions ACV for strong growth once wholesale volumes recover. In the figure on the right, we provided an updated view of the quarterly variance in marketplace conversion. As we discussed last quarter, pre-COVID conversion rates in our marketplace were in a pretty tight range, then increased significantly as pandemic-related supply demand and wholesale pricing factors drove very strong marketplace engagement. Then beginning in the first quarter this year, as vehicle prices and consumer demand moderated, cautious buying behavior resulted in conversion rates returning to normal pre-COVID levels. This trend continued in Q2 with conversion rates ticking down quarter-over-quarter. For context, the year-over-year change in conversion rate in Q2 resulted in a 30,000 unit headwind versus Q2 2021. We believe conversion rates in our platform will increase in the future when the macro environment normalizes and as we help dealers manage price expectations with new data-enabled solutions. However, based on the latest data showing weakening consumer sentiment and depreciating wholesale market prices, we believe it's prudent to assume conversion rates will remain at the lower end of the historical ranges for the balance of 2022. Turning to Slide 10. You can see that units grew sequentially from Q1 and declined modestly year-over-year compared to record high unit performance in Q2 2021. Unit growth was 68% on a two-year basis. GMV grew 27% year-over-year to a record $2.7 billion. About half of the year-over-year growth was driven by higher wholesale prices, with the other half reflecting a broader mix of vehicles on our marketplace. Moving to Slide 11. Based on our internal analysis, we estimate that the US dealer wholesale market remains well below normalized volumes, and contracted around 20% year-over-year in Q2. Despite this macro backdrop, we continue to execute, gain market share and attract new dealers to our marketplace. Given our 3% year-over-year unit decline in Q2 and an estimated market contraction of 20%, this implies that ACV grew market share by 17% year-over-year. Next, I would like to wrap up the growth section with highlights on our value-added services. Our investments in the technology and resources to scale ACV Transportation and ACV Capital are driving strong top-line growth while also creating efficiencies for both our partners and for ACV. On Slide 12, you can see that ACV Transportation continues to deliver strong results. Our growing carrier partner network and fast cycle times resulted in attach rates once again exceeding 50% in Q2, with transport revenue growing 20% year-over-year. In Q2, over 70% of our transports were automatically dispatched, an increase of 20 percentage points from Q1. The investment we are making in technologies like Auto Dispatch and our Carrier Transportation app are attracting new carriers to our marketplace and driving operating efficiencies. In fact, our transfer business had a key milestone in Q2, with positive revenue margins in the mid-single digits. As a reminder, our 2026 financial targets assume transport revenue margin of 15%. So hitting the mid-single digits in Q2 2022 puts us on a strong path to achieving this target. Turning now to Slide 13. We are very pleased with the execution in our ACV Capital business. Capital attach rates more than doubled year-over-year in Q2, resulting in over 100% loan volume growth. Our investment in technology to power our Capital business is paying dividends. ACV's Capital Portal launched in Q1, and adoption has been strong with 75% of active ACV Capital dealers now leveraging this value-added post-auction financing solution. We also ramped up our investment in ACV Capital sales capacity to drive adoption and dealer engagement, which will further enable ACV Capital to be an important growth and profit driver going forward. Turning to the second element of our strategy, to drive long-term shareholder value innovation. Turning now to Slide 15. I would like to highlight the innovations we're delivering to enable our dealer partners to drive consumer-sourced inventory. Live Appraisal was one of our first offerings in this category and provides a unique way for consumers to have their vehicles sold in ACV's marketplace by our dealer partners. Live Appraisal listings grew 30% year-over-year in Q2 highlighting the market traction this offering is gaining. In addition to Live Appraisal, we are developing a more comprehensive set of solutions for our dealers leveraging technology from Drivably, Monk, and MAX Digital. The initial market reception for Drivably has been very promising with the number of dealers launched doubling quarter-over-quarter in Q2. Dealers are now able to offer a seamless consumer buying experience powered by the ACV pricing engine and our condition-adjusted model for vehicle valuation. Looking ahead, we are working to leverage Monk's AI-driven imaging technology to enable consumers to do a self-inspection right from their own mobile device which will further inform the price dealers can offer consumers. We are in the early stages of launching dealers on these new offerings and are very excited about consumer sourcing because it offers attractive TAM expansion and strong unit economics for ACV by leveraging technology prior to incurring the cost of inspecting vehicles. Moving to slide 16, I am pleased to share an update to our advanced buyer solution SAM which was formally launched last month. As a reminder, SAM provides dealers with specific and relevant notifications and intelligent auto bidding capabilities. SAM not only enhances the buyer experience in our platform, it also creates persistent demand price realization and ultimately higher conversion for our sellers. Following the July launch dealer adoption has accelerated with over 800 new dealers leveraging SAM in Q2. We believe SAM will be a big growth driver for us as we expand its use cases and capabilities. On slide 17, I'll wrap-up on innovation with an update on APEX our next-generation data collection device that we introduced in March at our Analyst Day. APEX expands on ACV's existing AMS technology by incorporating upgraded audio capture capabilities and sensor detection including vibration displacement and ultrasonics. This more comprehensive data set leads to a better understanding of the operating condition of a vehicle's engine and powertrain which increases dealer confidence while buying online. APEX also increased its inspection efficiency for our teammates and provides a better quality audio experience in our marketplace. This wireless device is integrated with our single inspection application and is live in select markets today with broad deployment planned later this year. So to wrap up on innovation, we are very excited about our growing suite of data-enabled solutions and technology roadmap that expands our competitive model creates even more value for our dealer partners while improving margin to drive sustainable long-term growth. With that, let me hand it over to Bill and take you through our financial results and how we're driving growth at scale.

Thanks, George and thank you everyone for joining us today. We are pleased with our Q2 financial performance. We delivered upside to our revenue and adjusted EBITDA guidance despite the challenging macro factors George outlined earlier on the call. Turning to slide 19, I'll begin with a review of our second quarter results. Revenue of $115 million was above the high end of guidance and generated year-over-year growth of 18% versus strong results in Q2 2021. Adjusted EBITDA loss of $14 million or 12% of revenue beat our guidance range and EBITDA margin improved approximately 500 basis points sequentially versus Q1 2022. Turning to slide 20, I will cover some additional detail on revenue. Total revenue of $115 million represented a 60% CAGR since Q2 2020. Auction and assurance revenue, which was 57% of total revenue, grew 9% year-over-year versus very strong Q2 2021 growth of nearly 100%. Year-over-year growth in ARPU of 13% was driven by higher GMV due to the strong mix of vehicles sold on our platform and the biasing increase we instituted last December. Marketplace services revenue, which was 36% of total revenue, grew 23% year-over-year, reflecting the continued adoption of transport and capital that George outlined earlier. Our SaaS and data services products comprised 7% of total revenue and had very strong revenue growth of 127% year-over-year, primarily reflecting revenue from the MAX Digital acquisition. Turning now to slide 21. I will review costs in the quarter. Note that on this slide, I'm comparing Q2 results to Q1 2022 results. Q2 cost of revenue as a percentage of revenue decreased approximately 300 basis points quarter-over-quarter. The improvement was driven by three factors; first, recall that in Q1, we increased our incentives to help our dealers acquire vehicles as market conditions weaken. We successfully executed on pulling back on these incentives in Q2 as discussed in our Q1 earnings call. The second factor driving revenue margin improvement was lower arbitration costs resulting from improvements in training process and enabling technology. And the third factor was our transport business, which delivered a positive revenue margin. I'll reiterate George's comments earlier about this key milestone for transport. Our 2026 financial targets assume 15% revenue margins for transport. To achieve mid-single digits in Q2 2022 is a strong indicator of the long-term profitability of this business. Also a reminder our transport revenues are recorded on a gross basis. Therefore, margin improvement has an outsized impact on our overall blended margins. Operating costs excluding cost of revenue also trended positively in Q2 as we increased our leverage by approximately 300 basis points quarter-over-quarter. Moving to slide 22, let me provide context regarding our investment strategy, operating leverage and path to profitability. Given ACV's leading market position and large addressable market opportunity, we have remained focused on investing in growth and extending our competitive moat with differentiated technology. We have also remained equally focused on investing prudently to ensure a clear path to profitability. Given these commitments and our revised revenue outlook for the balance of 2022, we have taken steps to reprioritize our spending plans and accelerate operational efficiency. We're doing this while also preserving key go-to-market and technology investments to ensure ACV is in an even stronger position when market conditions improve. More specifically, we have reduced our 2022 year-over-year non-GAAP operating expense growth to 23%, a full 10 percentage points lower than our original 2022 guidance. Exiting Q4 this year, we're expecting our annualized OpEx run rate to be approximately $40 million below our initial 2022 guidance. This has the effect of lowering our revenue breakeven point heading into 2023 and better positioning ACV to achieve EBITDA breakeven. Next, I'll highlight our strong capital structure on slide 23. We ended Q2 with $512 million in cash and equivalents and marketable securities and $71 million of long-term debt to finance our rapidly growing ACV capital business. Note that our Q2 cash balance includes $124 million of float in our auction business. As we discussed previously, the amount of float on our balance sheet can fluctuate meaningfully based on business trends in the final two weeks of each quarter, and it has a corresponding impact on operating cash flow. For example, Q2 cash flow used in operations was $41 million, $27 million of which was driven by the sequential change in flow from Q1. Based on our current outlook for the back half of 2022, we are expecting flow to be flat to marginally increase along with lower expected EBITDA losses, expected cash used in operations to decline relative to the first half of 2022. Now I'll turn to guidance on slide 24. The third quarter of 2022, we are expecting revenue in the range of $104 million to $107 million, a growth rate of 13% to 17% year-over-year. On a two-year basis, our Q3 revenue growth is expected to be approximately 56%. Adjusted EBITDA is expected to be a loss in the range of $13 million to $15 million. For the full year 2022, we are lowering revenue guidance approximately 6% at the midpoint to reflect our more cautious view of the macro factors impacting wholesale volumes in our market. Revenue is now expected to be at a range of $427 million to $432 million, a growth rate of 19% to 21%. Despite this lower revenue outlook, our adjusted EBITDA loss is expected to increase just $3 million at the midpoint due to the cost reduction efforts I outlined earlier. Adjusted EBITDA is now expected to be a loss in the range of $57 million to $59 million or 13% to 14% of revenue. As it relates to our 2022 guidance, in addition to the macro factors impacting wholesale volumes, we are assuming that conversion rates remain at or below the lower end of our historical range, and therefore, current market conditions persist through the second half. Finally, we're now expecting non-GAAP operating expenses to grow approximately 23% year-over-year, which is below previous guidance and 10 percentage points below our guidance at the beginning of the year. Let me wrap up on slide 25 by reviewing our 2026 financial targets. We're very pleased with our execution in what has proven to be a very challenging macro environment and we remain confident in our ability to achieve $1.3 billion of revenue and $325 million of EBITDA in 2026. And with that, let me turn it back to George.

Thanks, Bill. Before we take your questions, let me summarize. We are very pleased with our continued strong execution while navigating through unprecedented times in our industry. And we are especially proud of our ACV team that has delivered these results. 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 when market conditions improve. We are executing on our territory penetration plans. Our marketplace offerings are gaining traction in the market. And we see some very promising growth synergies emerging from our SaaS and data-enabled services. We are delivering on an exciting product roadmap to further differentiate ACV and expand our addressable market. We are on track to generate over $1 billion in revenue with attractive margins through a proven business model that we believe will drive significant shareholder value. We remain committed to continuing to build a world-class team to deliver on our goals. With that, I'll turn the call over to the operator to begin the Q&A.

Thank you. Our first question comes from John Colantuoni with Jefferies. Please proceed.

Thanks for taking my questions. So, you had a big geographic ramp throughout most of last year. I think it would be helpful if you could just dimension how customer engagement and retention has trended in your older markets in comparison to your newer markets? And in addition, maybe you could just give us a sense for what units would have been in the second quarter if you excluded the geographies that you expanded into last year?

Hey John, it's George. Thanks for joining and asking your question. I don't have any significant updates on differences between new and existing markets. Overall, I would say our performance in early markets has remained strong across the country. We would like to have more listings and improved sell-through rates. There are certain areas where conversion has been better than in others. However, I don't have any substantial information to provide that differentiates early markets from new ones.

Okay, great. Just a quick follow-up. The second quarter exceeded your expectations, but you are tempering the full year outlook. This implies there has been a more recent deterioration in the operating environment. Could you discuss how the wholesale market has progressed over the past few months? Also, what key performance indicators or data points should we monitor to ensure that the industry backdrop isn't worsening further? Thanks.

Yes, certainly John. We were very pleased with our listing growth in the first half of the year, which was up 27% year-over-year. We are excited about the growth we have achieved in many territories. However, by the end of the quarter, we began to notice a weakening in consumer demand at dealerships. As you may have observed from the industry data, the year-over-year statistics and retail trends have shifted negatively. Therefore, as we approach the latter half of the year, we are being more cautious. Like everyone else, we are monitoring the economy and the overall retail and trade situation. Based on our assessments for the second half of the year, assuming no significant improvements, we have already noticed a decline in retail. This is our assumption given the current market conditions persist throughout the year. Bill, would you like to add anything?

No, I think that describes it. John, we're just assuming that what we're seeing so far through the third quarter kind of perpetuates the rest of the year.

Thanks so much.

Thank you.

One moment for our next question, please. Our next question is from Ali Faghri with Guggenheim Partners. Please proceed.

Hey, Ali.

Good day, everyone. Thanks for taking my question. Hey, George. So on the conversion headwinds you're citing, it seems like that's being driven by the recent price deflation we're seeing which probably continues for the foreseeable future. So what causes this headwind to normalize and get the buyer and seller expectations to convert yet?

Yes. When we look at consumer behavior and its impact on dealers, we’re noticing that consumers feel used car prices are too high. As a result, they are purchasing fewer cars. Consequently, dealers are becoming more cautious and less willing to pay what they perceive as inflated prices. To address your question on finding the clearing price, each vehicle has a value that dealers are ready to pay, and we are starting to observe a gradual decrease in gross merchandise value. As this decline occurs, we see some early indications that the conversion rate has at least stabilized, and there’s a possibility of modest improvement, although we can't make any predictions at this time. Prices are beginning to decrease, and it seems that dealers are starting to understand that their previous purchase prices are less relevant; this is the new market price. We are spotting emerging trends, though these trends do not necessarily reassure us that prices will significantly rise in the latter half of the year. However, they appear to have leveled off, and we need to see them begin to recover. Bill, would you like to add anything?

No.

Thanks, George. That makes sense. And then as a follow-up here, I appreciate you don't guide to volumes, but maybe you can help us understand what you're expecting for second half marketplace units. You mentioned that you're guiding assumes new car supply and conversion headwinds don't improve in the second half. Does that imply your internal model or assuming no quarter-over-quarter volume growth in the third and the fourth quarter?

Hey Ali. Yes. As you mentioned, we don’t provide guidance on units or ARPU. However, to give you some additional insights, we are anticipating that supply will remain low throughout the second half due to the ongoing weaknesses in consumer demand that we are all observing. We also believe that conversion rates will stay at the lower end of historical levels. Therefore, we are not expecting any improvement at this time, and that expectation is reflected in our guidance. When you examine the numbers, you will see that our unit outlook has decreased, which is factored into our revenue guidance for the second half. Regarding vehicle average selling prices, we predict they will also decrease in the latter half of the year, and we are already beginning to observe signs of this. This will likely exert some pressure on ARPU, depending on the mix. All of these factors are influenced by the supply of trades entering the wholesale market and the conversion rates. If any of these conditions change concerning new vehicle supply, it could lead to a difference from our guidance. But that is the approach we are taking, and I hope this provides you with more clarity.

That's helpful. If I could ask one more thing, can you provide more details on what is driving the reduced operating expense outlook and the cost reductions?

Yes, sure. So look I mean you've seen us so far this year be very diligent in terms of managing and balancing our OpEx spending and trying to align that with the macro conditions and our revenue outlook. So, our focus is to do this while we also maintain a certain level of service to all of our dealer partners while also preserving our growth investments. So, we're well positioned as the market improves going down the road. And we just continue to be very thoughtful about how we prioritize all of our spending across every aspect of the business. And we're continuing to look for ways to optimize which kind of again cuts across all functional groups in the company. So, we have a very clear focus on this and that's reflected in our revised OpEx guidance and George and I have committed to manage basically the bottom line and adjusted EBITDA margins.

Good. that’s helpful. Thanks.

Thanks so much.

One moment for our next question. Our next question comes from Ron Josey with Citi. Please go ahead.

Thanks for taking the question. I wanted to ask about the dealer adoption and knowing listings are up, but conversions are down and we got the units sold here. But wondering if you can talk to us if there has been any change or approach in terms of the sales process in terms of how it's evolved over the past several years, now that we're sort of in this new normal if you will as things normalize. So more just a question on the sales process, as you're going to dealers and getting them to sign up because I think the fact that listings are still up is pretty interesting? And then if you could just talk a little bit more about consumer sourcing and the progress here. There's a lot more competition out there for consumer sourcing. So, would love to hear how that's going? Thank you guys.

Yes, Ron. Thank you. We're very pleased that we increased dealer listings by 25% year-over-year. This shows that our customer acquisition strategies are effective, both in our emerging markets and in the more established markets. We're excited about expanding our dealer base, and I understand you’d like more insight into our different strategies. One key factor contributing to our growth is the addition of dealerships from large groups to our private marketplace. While we don't disclose specific percentages, we are experiencing faster growth in large groups compared to single-store operations. This has proven to be a valuable investment, with over 30 of the top 300 dealer groups in the country now utilizing ACV Private Marketplace to trade amongst themselves, which gives us a competitive advantage. With ongoing consolidation, we are consistently gaining stores whenever a large group acquires a new store, highlighting our progress compared to a few years ago. Additionally, our software products, Drivably and MAX, have been instrumental in helping us stand out to sellers. For example, a major dealer group that we previously didn't work with is now trialing MAX and Private Marketplace, showcasing our ability to win business on the auction side through our data offerings. I hope that sheds some light on how we are evolving. Regarding consumers, our primary offering, Live Appraisal, has also grown significantly, achieving around 30% growth year-over-year. This service involves auctioning consumers' cars, typically facilitated by our inspectors either on-site or at the consumer's home. We are excited about leveraging technology to enhance this process before vehicle inspection. Although we are in the early stages, we are looking forward to new products like Drivably and the upcoming release of Monk later this year. These innovations will enable consumers and dealers to inspect vehicles, allowing us to expand our valuation capabilities beyond our inspectors. We're committed to investing in both current initiatives and future growth, and we feel optimistic about our direction. Live Appraisal has been performing well, while the other products are still developing, and we anticipate making significant advancements in the upcoming quarters.

That's great. Thank you, George.

Thanks, Ron.

One moment for our next question, please. Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks so much for taking the question. Guys maybe just first a bigger picture question sort of zooming out, obviously you're dealing with elements of both the supply chain and demand in the current environment but you're still thinking about sort of longer term targets looking out over the next four years. Can you help investors better understand your confidence interval, what you're seeing to bridge for some of those longer term targets on both the revenue and the EBITDA side? And maybe just following up on some of the initiatives like Capital going a little bit deeper in terms of what some of those newer initiatives you're doing in terms of driving more unit economics to the platform? Thanks so much.

Eric, it's Bill. I'll start with the first question. When considering our long-term targets through 2026, the key growth drivers and margin levers remain strong. In fact, we feel even more positive about this than we did a few months ago due to our progress. Let me outline these drivers briefly. First, we established territories across the US, a significant initiative last year that allows us to target all 17,000 independent dealers nationwide. We've already accomplished that, and we believe it’s crucial for boosting our market share. Our territory penetration strategy is showing strong results, attracting new dealers to our marketplace. We are seeing nearly 30% year-on-year growth in listings, which is impressive in this challenging environment, indicating that we are gaining market share. We are also rolling out new solutions like SAM that are gaining popularity and investing in technology to enhance operations. We are making strides in margin improvements across various business areas. For instance, we expect mid-single-digit margins in Transport by Q2, surpassing our timeline goals, with a target of 15% by 2026. We are focusing on operational efficiency while maintaining our growth investments, which better positions us for operating leverage as volumes recover. These are the key elements of our long-term model shared during our Analyst Day in March, and they remain in place. The current market dynamics have changed, but we believe the market will eventually return to historical levels. While we can't predict exactly when that will happen, all our growth levers are still operational. We are a bit ahead of our targets compared to the timelines outlined in our five-year plan, which gives us confidence in meeting those targets. The path to reach them may vary since we are uncertain about when macroeconomic factors will normalize, but we remain optimistic about our long-term goals. George, would you like to add anything about Capital?

On ACV Capital, we are meeting our goals regarding attach rates and the success of ACV Capital, especially when considering transport as our two main value-added services as we look towards 2026. Over the past year, there were doubts about whether ACV could reach a certain attach rate and improve margins while managing other aspects. However, our execution has demonstrated significant success quarter over quarter in both attach rates and margin growth in transport. Despite facing some challenges, we have achieved overall margin improvement. As we think about 2026, we are confident in our plan to expand our territories nationwide, improve attach rates, and focus on our margin goals. I couldn't be prouder of our execution in recent quarters.

Appreciate all the color. Thanks guys.

One moment for our next question please. It’s from Chris Pierce with Needham & Company. Please go ahead.

Hi, Chris.

Good afternoon everyone. Could you explain the higher average price you achieved on units in the second quarter? We've noticed that while retail prices have generally decreased, this isn't necessarily the case for wholesale competitors. Is this due to dealers becoming more comfortable selling higher-priced units online? Are you introducing a new category of deals? Are you capturing market share at a higher price point? I'd appreciate more insight on this.

There are two parts to that. First, I can discuss the price. Our GMV per unit increased by 32% year-over-year in the second quarter, which was nearly evenly divided between higher average selling prices and a change in mix. This has generally been the trend for the past year, with both factors contributing equally. I'll stop there for now, and what was the second part of your question?

When considering our strategy to capture a larger share of higher-priced vehicles, tools like SAM enhance our conversion rates. They allow franchise dealers and others interested in buying these vehicles to tailor their profiles and engage in automatic bidding. Regardless of how SAM is utilized, it positively impacts this area. Looking ahead, we anticipate that while overall prices will likely decrease, we may still increase our presence in the higher-priced segment. The challenge lies in navigating this situation, as overall prices may drop even as we continue to target the more premium market. Thus, we predict a modest decline in overall GMV throughout the year, even as we gain more traction in the higher segment.

Okay, perfect. I have a question for my understanding. I've heard others mention that they use third-party inspectors, and you use VCI. I'm curious about the advantages that gives you. Do dealers have to sort through multiple condition reports from different third-party inspectors, or are they standardized by whatever platform those inspectors use? I'm interested in the advantage of the inspection report that you have.

I believe what you're referring to is we may have competitors who use third-parties versus employees. So I'm not exactly sure of the question. But if I assume that's the question, then the pros and cons of each of these models are once you get density in a geographic area, think like you start to get several hundred units in each geographic area. You can send your inspectors to a given customer more often to get more wallet share. And you can likely have a higher control of your quality from a CR arbitration. You saw for example, we mentioned in the last earnings call, we had some challenges as it's related to arbitration. Well, we made some technology changes, some process changes, some training and we really improved quarter-over-quarter in arbitration and goodwill in a market that got harder. So the market got harder and harder and we did better. So there are advantages of having your own team. The advantages to our competitors who have – they don't have employees is when you don't have as many sales in any given region, their cost structure is lower. So we're paying for inspectors across the country in dozens of territories where we have full-time inspectors where we don't have enough for those inspectors to be doing eight or nine or 10 or 12 inspections per day. We're still early. So in those markets our competitors would have a cost advantage, while you're growing at scale. So I think there are strengths to either one of these models. And obviously, we like our model. We like our model. We believe it gives us certain competitive advantages. Hopefully, that answers your question.

It does. Thank you.

Yes, certainly. Thanks, Chris.

One moment for our next question, please. From Bob Labick with CJS Securities.

Good morning.

Hi. Thank you. Thanks for taking my question. Obviously, given how much we've talked about conversion rates, it's an important topic and I'm sure you guys have studied it internally. So I was wondering if you could maybe tell us or share with us what you've learned about higher converting dealers versus lower converting dealers? And what practices you can take from higher conversion dealers and help the lower conversion guys with? And specifically, what tools you have right now to increase conversion? And how their toolbox is going to roll out over the next several quarters years to also increase conversion?

That's a great question, Bob. Even today, we have dealers achieving conversion rates of over 90%. You're absolutely correct. These dealers utilize the ACV Market Report to gauge the current trading values of cars compared to those from a few months ago when prices were higher. This is one way they benefit from the report. Another valuable tool is Live Appraisal, which helps them determine the actual cash value of a trade-in vehicle instead of relying on outdated data. This practice becomes crucial as the market changes. We're also advancing with our newer products, Drivably and MAX, which enable dealers to get structured answers more efficiently, especially when consumers visit their websites. One challenge for dealers is the variety of tools and brands they use online, which often leads to inconsistencies when valuing cars in person. We are pioneering condition-adjusted pricing, which highlights that the condition of a vehicle can result in significant valuation differences—potentially $4,000 to $5,000 on a $20,000 car. These advancements are designed to assist dealers in making informed decisions on trades. Currently, dealers are grappling with how to manage inventory purchased at higher prices months ago. In the coming months, they need to strategize not only on pricing new trades but also on the cars they acquired previously. They will need to decide whether to sell them at retail prices or adjust to new wholesale prices. I hope this answers your question, Bob. It’s a great topic to discuss.

No, that’s a great answer. There was a lot of helpful detail. Thank you. That’s all from me today. I know you have to address many other questions, so thank you again.

Thanks, Bob.

Thanks, Bob.

All right. One moment for our next question please. It's from Rajat Gupta with JPMorgan. Please proceed.

Great. Thanks for taking the questions.

Hi, Rajat.

I'm not sure if I missed this, but are you reiterating the second half EBITDA positive guidance today?

I'm sorry, say that again.

exiting last year.

With the second half EBITDA profitability target, are you reaffirming that today?

Yes. So, yes, we previously committed to exit next year at EBITDA breakeven. We're maintaining that commitment, albeit, we're actually entering into next year at a $40 million lower OpEx run rate. So that lowers our breakeven point and obviously puts us in a better position to achieve breakeven subject to whatever the market conditions are and our ability to grow the top line next year, of course.

Got it. And are there any more levers you could pull to get there even sooner if volumes do remain sluggish maybe some more cuts around discretionary spending or your tech spending? Just curious on your thoughts there.

All I would tell you is we're continually looking at our OpEx spend rates across the business and we're going to continue to optimize everywhere we can. We're making this level of commitment on the call today, but that doesn't mean we're going to stop looking for efficiencies and where we can optimize our operations. So, I'm not going to put out any numbers, but look we obviously have multiple levers at any point in time. What we're trying to do is preserve our ability to continue to grow and grab share. But George and I have committed to manage the bottom line and we're going to do everything we can to continue to execute against those commitments.

And an example of where we've been managing our resources more effectively than our original plan is our spend on tech. We have a great team in North America, folks here at Buffalo, and Toronto, and folks all over the country, but we were able to augment that team with some offshore development this year. We've been able to deliver an unbelievable product in tech roadmap with significantly less headcount in North America. That's an example of something my product and tech team did that I'm just so proud of them. You've probably heard a lot of companies talk about this. We did it. We are executing on a really incredible roadmap. And the folks here in North America are delivering and our folks in Paris, France are delivering, but then we've got other offshore development folks in other places that are helping us deliver great products at a lower cost. So, yes, I think what Bill is saying is we're doing it now. We are doing it and look at our overall cost infrastructure. We had initial cost basis in the business. And we're looking for ways to achieve our results in a more optimized way.

I would like to add one more point to what I mentioned earlier. You can observe our Q2 results, particularly the quarter-on-quarter increase in margins of 300 basis points, as a sign of our capability to execute effectively and generate results rapidly compared to Q1, for example. This reflects our ability to navigate challenges and aim for our target of breaking even by the end of next year. We are committed to reaching that goal and will do everything possible to achieve it sooner.

That’s helpful color. Maybe just on your volume numbers obviously, a tough market backdrop you're continuing to gain share and your growth was much better than one of your larger more sizable peers. Is there anything you would attribute that to in particular? I mean, did the ADESA acquisition have any impact in terms of just getting those incremental customers? Just curious on your thoughts there. Thanks.

I believe we outperformed many competitors in various metrics such as conversion rate and quarter-over-quarter performance. We asked ourselves why this is the case. One reason is that as the market softens, the demand side needs to trust the condition report. I've mentioned that when markets are hot, almost anyone can sell a wholesale car, and dealers tend to bid on almost anything. However, as markets become more challenging, which has been the trend for around 40 years, dealers must be more selective about their bids and purchases. Trust in the assets they're buying becomes crucial, and we have a significant distinction here. Secondly, products like Private Marketplaces are currently delivering strong results for us. We're expanding our reach without having to actively seek new introductions, especially as new general managers join dealer groups. This focus on dealer groups positions us advantageously, especially as consolidation increases. We hold a competitive edge with dealer groups compared to our rivals. On the supply side for larger groups, we also maintain a competitive advantage. There’s more to our success, but ultimately, it's our investments, field relationships, and technology that are yielding positive outcomes.

Got it. Great. Thanks for that color and good luck.

Thank you.

Thanks, Rajat.

Thank you. And this ends our Q&A session for today. I will turn the call back to Tim Fox for final remarks.

Thank you, Carmen. I'd like to thank everybody for joining us on the call today. Please note that ACV is going to be participating in a number of investor conferences this quarter. You can find all the details on our website. We look forward to seeing you on the road. And thanks again for your interest in ACV and have a great evening.

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