Thank you for joining us for the ACVA Third Quarter 2022 Earnings Call. All participants are currently in listen-only mode. Following the presentations, we will hold a question and answer session. I will now turn the call over to your host, Tim Fox. Please proceed.

Thank you, operator. Good afternoon, and thank you for joining ACV's conference call to discuss our third 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 today's press release, both of 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 third quarter performance, with revenue in line with guidance and EBITDA exceeding guidance on Slide 4. Our market momentum continued in the third quarter with revenue of $105 million, a year-over-year growth of 15% versus strong results in Q3 '21. Despite a modest year-over-year decline in units, GMV grew to $2.1 billion due to an increase in ARPU, which was driven by a strong vehicle mix and also wholesale price inflation. Overall, we are very pleased with our execution in Q3 and our progress in key strategic initiatives. We delivered strong results despite an automotive market facing continued supply constraints, weakening retail demand, and vehicle price appreciation. Because market conditions are expected to remain challenging in Q4, we have assumed that wholesale volumes and conversion rates will be compressed through the balance of the year. Our guidance reflects this more cautious view of current market conditions while also reflecting a balance between investing in growth and maintaining a clear path to profitability. Turning to Slide 5. 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'll begin with growth. Moving to Slide 7. I'll begin with a brief overview of the dealer wholesale market and the important role retail automotive plays as a wholesale supply source. The U.S. retail vehicle market is composed of 16,500 franchise dealers and 38,000 independent dealers. Together, they historically sold over 45 million new and used vehicles annually. These retail consumer transactions are typically accompanied by a trade that, in turn, is sold into the wholesale market. Dealers also rely on the wholesale market to dispose of aged vehicle inventory that has not sold retail after a few months. Together, trade and aged units produce an estimated 11 million dealer wholesale units a year. With this market structure as context, let's turn to Slide 8 to further illustrate the supply side trends in our market. The U.S. retail market continues to remain under pressure due to OEM supply challenges and more recently, consumer affordability issues stemming from increased borrowing costs. There are some early signs that automotive supply chains are improving, which bodes well for wholesale supply volumes longer term. But for now, cautious consumer behavior is clearly pricing new and used retail sellers. Now turning to Slide 9. Let's look at the demand picture in the wholesale market. The trials illustrate a renormalization of vehicle prices that is also reflecting softening consumer demand. After reaching historically high levels in 2021, wholesale prices declined during the first quarter this year, recovered modestly in early Q2 but have been decelerating consistently since that time. Wholesale price appreciation, especially when incurred quickly, typically leads to conversion rate compression across the auction industry as dealers become more price sensitive in the wholesale market. You can see this illustrated in the chart on the right, which shows industry conversion rates declining for the past five months. Next, on Slide 10. We provided additional insights about our business that underpins our confidence in ACV's long-term growth opportunities. The chart on the left shows quarterly listings in our marketplace, which is a measure of dealer penetration and marketplace adoption. After moderating in the second half of 2021 as OEM supply issues mounted, listing volumes turned positive at the beginning of 2022 and grew 19% year-over-year in Q3. Through Q3, listings have increased 24% year-over-year, reflecting our strong execution on dealer penetration and wallet share expansion. In fact, franchise penetration reached approximately 33% across the U.S., an increase of 500 basis points since Q4 '21. Of course, in many cases, our wallet share is limited today as we are in the early days of working with many new dealers. However, this expanding network builds a robust foundation for growth once wholesale volumes recover, and we continue to gain wallet share. The figure on the right is an updated view of the quarterly variance in ACV's conversion rates. As we highlighted over the past few quarters, pre-pandemic conversion rates in our marketplace were in a tight range, then increased significantly due to supply, demand, and wholesale pricing factors that drove very strong conversion rates. Beginning earlier this year, as vehicle prices and consumer demand moderated, cautious buying behavior in the wholesale market resulted in conversion rates returning to normal historical levels. This trend continued in Q2, with conversion rates ticking down quarter-over-quarter, then declined further in Q3, correlating with the Black Book data shown on the prior slide. We are confident that conversion rates will recover as the macro environment normalizes, which will serve to be a growth tailwind given our strong listing performance. Furthermore, we are currently in place with new pricing tools and a marketplace format aimed at increasing conversion rates. However, based on the latest market trends, we believe it's prudent to assume conversion rates will remain below the lower end of historical ranges for Q4. Turning to Slide 12. Based on our internal analysis, we estimate that the U.S. dealer wholesale market continues to remain well below normalized lines and contracted 21% year-over-year in Q3. Despite the macro backdrop, we are executing on key growth initiatives within our control, including gaining market share and attracting new dealers to our marketplace. Given our 5% year-over-year unit decline in Q3 and an estimated market contraction of 21%, this implies that ACV grew its market share by approximately 16% year-over-year. Next, we'd like to wrap up the growth section with highlights of 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 improving customer experience and creating efficiencies, both for our partners and ACV. On Slide 13, you can see that ACV Transportation continues to deliver strong results and is truly scaling into a great business. Our growing carrier partner and fast cycle times resulted in attach rates once again exceeding 50% in Q3, with newer technologies, such as our carrier app, gaining wider adoption. In Q3, over 60% of our transports were automatically dispatched, an increase of 20 percentage points from Q1. The investments we are making in transport technologies are attracting new carriers to our marketplace and driving operating efficiencies. In fact, our transport business hit another key milestone in Q3 with revenue margins in the low double digits, an increase from the mid-single digits in Q2. As a reminder, our 2026 financial targets assume a transport revenue margin of 15%. So our rapid progress this year is clearly putting us on a path to achieving this target. Turning now to Slide 14. Our ACV Capital team continues to deliver strong results in the market. Capital attach rates doubled year-over-year in Q3, resulting in over 75% loan volume growth. Our tech investments within our capital business are also paying dividends. ACV's capital portal launched in Q1, and adoption has been strong, with 75% of active ACV Capital dealers now leveraging this post-auction financing solution. Lastly, we have continued to ramp up our investments in ACV Capital sales capacity to drive adoption and dealer engagement to ensure the value-added service is 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 16. I would like to highlight a few examples of product innovation that will drive growth by enhancing the dealer buying experience on our marketplace and enabling ACV to engage with a broader range of large dealer groups. Let me begin with our advanced fire solution, SAM. This solution enhances the buyer experience through intelligent notifications and optional auto-bidding capabilities. SAM creates persistent demand in our marketplace, leading to better price realization for our sellers and ultimately, to higher conversion. We are still early, but with over 1,400 dealers leveraging SAM on our marketplace today, we believe it can be a big growth driver as we expand use cases and capabilities. Next, we're also enhancing our marketplace experience by testing a host of new formats, including varying auction duration, start pricing, and vehicle-specific merchandise. Our testing is showing promising conversion results and could increase higher seller success on our marketplace. Lastly, our private marketplace solution continues to gain market traction with some of the largest dealer groups in the country. This solution enables dealership groups to easily auction inventory within their network to maximize group profit. It's fully customizable to match each group's specific needs and seamlessly integrates with our open marketplace when a vehicle is not purchased in the private marketplace. On Slide 17, I'll wrap up the innovation section with examples of how we are scaling our operations while innovating to drive customer success and reduce costs with a focus on our market-leading data and inspection capabilities. First, our APEX launch has been going great, with adoption going across our nationwide inspection team. Recall that APEX is our next-gen data collection tool, with upgraded audio capture capabilities and sensor detection for vibration, displacement, and ultrasonics. The more comprehensive data set delivered by APEX drives significantly higher transparency in the vehicle operating condition while also increasing the inspection productivity of our teammates. Next, we are excited to leverage our vital data powered by AI. Starting on the left, we have developed a catalyst converter detection app. As you may be aware, there has been a huge spike in catalysts converted to gas due to a higher content of valuable precious metals. There are also very expensive devices to replace, so it's a critical element of our inspection process to ensure dealers can accurately derive vehicle apps. Our model can actually detect the presence or lack of a catalyst converter with 97% accuracy. And on the right, perhaps a bit less flashy, but still an important element of air conditioning is rust. Manual inspections can easily mistake surface rust for a deeper structural or penetrating rust, which materially changes the equation and the vehicle value. Our app uses AI technology to automatically detect rust classification and quantify the amount and the undercarriage, which again raises the bar in ACV's inspection transparency while reducing arbitration risks. Next, I'd like to introduce our newest innovation that we have in beta, a pre-inspection data capability we have dubbed internally 'copilot.' Copilot is a proprietary technology that leverages machine learning, predictive analytics, field team insights, and customer feedback, to inform our BCI on common vehicle-specific issues before conducting an infection. We are equipping our inspection team with valuable knowledge gained through millions of vehicle data points and inspections, which will be delivered in an easy-to-consume format specific to the vehicle they are standing in front of, all before they start the inspection. So to wrap up on innovation, I think it's clear that our team is delivering highly differentiated technology solutions to the market and to our own operations that expand our competitive moat and help drive profitable long-term growth. With that, let me hand it over to Bill to 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 Q3 financial performance. We delivered revenue in line with our guidance with upside to adjusted EBITDA despite the challenging macro factors George outlined earlier on the call. We also demonstrated the strength of our business model with revenue margin and adjusted EBITDA margin expansion versus Q3 '21. Turning to Slide 19, I'll begin with a review of our third-quarter results. Revenue of $105 million was at the midpoint of guidance, representing year-over-year growth of 15% versus strong results in Q3 '21. Adjusted EBITDA loss of $12 million or 11% of revenue beat our guidance range, and EBITDA margin improved approximately 200 basis points versus Q3 '21. Turning to Slide 20. I will cover some additional detail on revenue. Total revenue of $105 million represented a 25% CAGR since Q3 '20. Auction and insurance revenue, which was 53% of total revenue, grew 7% year-over-year versus solid results in Q3 '21. Year-over-year growth in auction and Assurance ARPU of 13% was driven by higher GMV due to the strong mix of vehicles sold on our platform and the price increase we instituted last December. Marketplace Services revenue, which was 38% of total revenue, grew 26% year-over-year, reflecting strong adoption of our ACV transportation and capital offerings. Our SaaS and data services products comprised 8% of total revenue and grew 20% year-over-year, driven primarily by growth in our MAX Digital business and the adoption of data-enabled inspection services. Now turning to Slide 21, I will review costs in the quarter. Q3 cost of revenue as a percentage of revenue decreased approximately 400 basis points versus Q3 '21. The improvement was driven primarily by our Transport business, which delivered a low double-digit revenue margin in the quarter. To reinforce George's earlier point about the scale we're delivering in transport, our 2026 targets assume a 15% revenue margin for this business. By having achieved low double-digit margins this soon is a strong indicator of the long-term profitability of this business. Also, a reminder, our transport revenues are recorded on a gross basis, so margin improvement has an outsized impact on our overall blended margins. Turning now to operating costs. The key takeaway here is that after significantly ramping OpEx in 2021 to support market expansion and technology initiatives, we have continued to invest this year but at a much lower rate of growth. This is a testament to the ACV team, who has done a great job identifying ways to optimize how we operate while still delivering superior customer service to our dealer partners. Moving to Slide 22, let me put a finer point on our investment strategy and path to profitability. Given ACV's leading market position and large addressable market opportunity, we continue to support both our growth and technology investments. At the same time, we have remained focused on investing prudently to ensure a clear path to profitability. As you can see, our focus this year on spending discipline and operational efficiency is expected to yield a material full-year decrease in OpEx growth. We're doing this while also preserving our key go-to-market and technology investments to ensure ACV is in an even stronger position when market conditions improve. As it relates to our EBITDA breakeven objective, we believe that despite the ongoing market and macro headwinds facing ACV, there are additional levers in our business to help us achieve this objective. Next, I will highlight our strong capital structure on Slide 23. We ended Q3 with $502 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 Q3 cash balance includes $138 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 leases of each quarter, and it has a corresponding impact on operating cash flow. In Q3, cash flow used in operations improved materially to just $3 million, with a sequential increase in flow contributing $13 million in positive cash flow. Based on our current outlook for the balance of 2022, we continue to expect cash used in operations to decline in the second half of '22 relative to the first half of the year. Now I'll turn to guidance on Slide 24. For the fourth quarter of 2022, we are expecting revenue in the range of $97 million to $100 million. Adjusted EBITDA is expected to be a loss in the range of $15 million to $17 million. For the full year 2022, revenue is now expected to be in the range of $421 million to $424 million. This range represents growth of 17% to 18% year-over-year and is modestly below our previous guidance to reflect our more cautious view of the macroeconomic factors impacting wholesale volumes and conversion rates in our market. Despite this lower revenue outlook, our adjusted EBITDA loss is expected to increase just $2 million at the midpoint of revised guidance; adjusted EBITDA is now expected to be a loss in the range of $59 million to $61 million or approximately 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, with current market conditions persisting through the balance of the year. Finally, we expect non-GAAP operating expenses to grow approximately 24% year-over-year. Let me wrap up on Slide 25 by reviewing our 2026 financial targets. We are very pleased with our execution which was proven to be in 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. Our confidence is reinforced by a number of factors, including strong dealer penetration and wallet share gains across our territories, resulting in sustained market share gains. Our broad technology platform enables durable long-term growth and operating efficiency, consistent improvement in revenue margins, and a commitment to balancing growth and investments as our business scales. 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 strong execution during these challenging 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 plan and our suite of marketplace offerings is gaining traction. We are innovative in delivering 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 will remain committed to continue 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.

Our first question comes from Vincent Cardell of Jefferies.

This is Vincent speaking on behalf of John Colantuoni at Jefferies. Can you discuss any developments you've observed in the fourth quarter or any challenges impacting wholesale conversion rates? Additionally, could you provide insight on where those challenges are most significant? How are these challenges affecting customer engagement and retention compared to the effect on your sales teams in their efforts to onboard new dealers?

Vincent, it's George. I'll begin, and Bill can add if he wishes. The recent Black Book data shows that conversion rates have continued to decline, but there are signs that they are starting to level off. In the last 24 hours, there's been a slight decrease. We won't elaborate much on Q4 aside from noting that our conversion data aligns quite consistently with the Black Book findings. In broad terms, it seems we may have addressed the trough in our conversion rates, which appear to be stabilizing. Regarding your second question, despite our ongoing growth in dealer acquisitions, our market expansion speaks to a few factors. Currently, one-third of franchise dealers nationwide are using ACV, though adoption varies. There is significant wallet share available, indicating that dealers are seeking alternative methods for wholesaling their vehicles. At the same time, listings per dealer have started to decrease, primarily due to the macroeconomic factors affecting vehicle sales, both new and used. Even though we have increased the number of listings by over 24% this year, we are noticing a decline in the number of wholesale vehicles available per dealer. These macro trends are noteworthy, but relative to the rest of the industry, we are performing well, successfully capturing market share and building stronger relationships, while also increasing our wallet share.

Yes. So what I would just add, then just based on what George took you through in terms of the context of our guidance, we are assuming essentially that conversion rates are basically flat with Q3 and, again, remain at this, call it, depressed level versus our historical conversion rates. But we have assumed that listings per liter, as we call it, does decline based on this macro environment that we're all kind of dealing with today. So that's kind of the underpinning for our guidance for Q4, essentially.

Our next question comes from Chris Pierce.

Just had a question on vehicle prices depreciate higher arbitration. I'm just kind of curious what you guys are seeing, what safeguards do you have in place? And is that something more of a growing pain, and you guys are somewhat past it with the caveat that you always have to be vigilant around it?

Yes, Chris, I'll begin with this. Thank you for the question. It's an important one. As you've likely noticed across the industry, there tends to be a risk of increased arbitration as prices fall. However, quarter-over-quarter, we actually made progress in a market where prices were declining, thanks to our investments in technology and our inspection platform, as well as the discipline in our operations. When we look at how we are managing the business, we have shown improvement, which is not easy in a challenging market. So, considering this, we have made significant investments in our inspection technology and built a national inspection team composed entirely of our employees who are diligently working and doing the right things. We are not depending on third parties. Our internal processes ensure we have responsible individuals on the platform. We maintain strong discipline in this area. While we still have opportunities for growth and have not met all our goals and objectives, perhaps Bill can add more to this.

Yes. What you'll see in the supplemental data is that we actually took our arbitration costs down quarter-on-quarter from $14.6 million to $12.2 million. And if you look at it on a per-unit basis, we were down almost 10% on a per-unit basis. So actually, we've made some great strides in terms of driving those costs down despite what's a pretty challenging environment today. So you'll see some of that in the math in terms of the data.

I have one more question. Bill, you talked about the fee increase last December. If I compare KAR's auction fees from 2019, you are still 10% to 12% lower. I'm not expecting you to commit to annual price increases, but I'm interested in your thoughts on how pricing might evolve on the platform as it continues to grow.

Yes, that's a good question. You're correct that we do have some capacity there. We implemented a slight increase in our buy fees this quarter, which helps mitigate any potential decrease in ARPU due to falling vehicle prices. We have some flexibility, and we'll evaluate our approach going forward regarding whether to continue increasing those fees over time. Additionally, we're all facing inflationary costs, not just us but also our competitors. We've been successful in passing some of these costs on, which helps us shield our ARPU from declines in the future.

Yes. And Chris, I'll provide a bit more insight on that. Our approach is not to make arbitrary picks. We have a chance to raise prices, and based on the small increases we've implemented over the last 14 months, we've received very limited feedback from dealers, with comments like they were surprised we didn't raise them more and that our prices are still extremely fair. So, to your point, we are currently charging fees that are lower than the markets where we should be. We plan to be thoughtful in our approach over the next few years. We believe we should gradually earn the market value for our services, but we'll proceed with caution, ensuring that dealers feel we are being fair throughout the process. So far, we have successfully increased average revenue per user in a market that has faced challenges with gross merchandise value.

Our next question comes from Naved Khan with Truist.

I have two questions. First, regarding the price increase you mentioned, can you confirm if that took place in the fourth quarter, or did you also see benefits from it in the third quarter? I'm trying to understand the timing. Second, on the innovations you highlighted, when should we expect to see improvements in efficiency in the inspection process as you begin to implement these changes?

Okay. This is Bill. So I'll take the first question, and then I'll pass it to George. Yes. So that buy fee increase actually was earlier this quarter. So it was literally just a few weeks ago. So we'll get the benefit for most of the quarter, but not all of it.

And your second question, I believe you're asking about sort of the efficiencies and gaining scale with our inspection team. Is that really what your question is around?

Yes. And even maybe leveraging some of the innovations here you highlighted, whether it's or other things that you can do to kind of make the process more efficient, faster, maybe.

We are continuing to invest in our processes, specifically in categories like APEX, along with other areas where we currently rely on more manual efforts during inspections. Each part of the inspection can take about four to seven minutes per application or device. Over the entire inspection, we could be spending anywhere from 20 to 40 minutes, and we aim to reduce this to under 20 minutes per vehicle. These investments are still in their early stages, so we don’t expect to see significant benefits in Q4 or Q1. However, looking towards the end of next year, I believe our investments in APEX and refining our inspection processes for different vehicle price points will pay off. We're developing a new product internally referred to as copilot, which will help identify specific inspection needs based on vehicle issues. While we’re excited about what we've built so far, we have clear internal objectives for next year. At ACV, we are committed to our plans and have created technology to improve our efficiency in vehicle inspections. However, it's important to balance efficiency with thorough data collection, as missing information can lead to issues later. We believe this focus on both efficiency and data accuracy puts us ahead of competitors in the market.

Our next question comes from Rajat Gupta with JPMorgan.

I have a related question about how you are managing your cost structure and operating expenses in light of your conversion rates and listings. You've provided guidance for the fourth quarter, but I am interested in your plans for 2023. Are you considering the fourth quarter as a low point for the business, or do you anticipate 2023 will be a year of recovery? Additionally, how do you plan to handle your expenses? Is your operating expense level sufficient to support growth based on your volume expectations for 2023, or do you foresee the need to implement further cuts? I would appreciate clarification on your budgeting approach for 2023. I also have a follow-up question.

It's Bill. Yes. So look, obviously, on our last call, we talked about the fact that we're exiting this year at a $40 million lower OpEx run rate than what we guided to when we entered into the year. That said, to answer your question more specifically, there are other opportunities for us to continue to optimize the business going into next year. And that's really across the company, but I'll just give you a few examples just to give you a flavor for this. So if you look at arbitration costs and our inspection costs together, right, this year, that's about $130 million, roughly evenly split between the two, okay? Arbitration costs, we answered that question earlier in terms of driving those costs down from Q2 to Q3. So there's already great strides that we're making in terms of reducing the frequency and the size of arbitration claims. But really going forward, there's the ability to continue to leverage a lot of the technology that George highlighted in his prepared remarks. So there's a lot more room for improvement. And I would argue in the context again of the environment that we're dealing with is particularly impressive when you consider this backdrop in terms of us being able to drive those costs down while you're seeing those costs going up in a lot of other cases. So that's number one. Number two, on the inspection front, obviously, we've got a big team out there on the inspection side. And we've been pretty focused on making sure we manage that as well as possible going forward, and we've made some adjustments to our cost structure in the last quarter. But even if you look at our current team out there, we're still averaging across the country six inspections per day versus our best territories that are roughly double that. So what that tells you is that we've got less mature territories that are still far below our average. And really, that gives us a lot more capacity to grow our units with really a relatively small increase in cost, right? That's just an opportunity as it exists today without us pretty much changing anything. And you can bet that we're going to continue to look at ways that we can continue to optimize that side of our cost structure. Another area just as one more example, it was offshoring. And we've already started establishing a beachhead offshore in terms of lower-cost engineering. But we're in the process of really leaning in even more going into next year and expanding that and basically bringing on lower-cost capacity to augment our existing team. So those are just a few examples, and there's a myriad array of other areas that we can optimize. So I would tell you that we're continuing to focus on everything we can in terms of optimizing going forward, and that will put us in a better position to deal with any other market turbulence as we look to hit our target of exiting next year at EBITDA breakeven. So I don’t know, George, if you want to add any more color to that.

I could go further into how we're thinking about 2023, or you could have a follow-up question, up to you.

Yes, maybe like any comments on like the fourth quarter trough and 2023 would be helpful.

We view 2023 in two ways. First, there are external factors beyond our control, such as OEM production, consumer borrowing, used car values, and overall market conditions. Second, we focus on what we can control. Between now and when we present our annual plan, we'll concentrate on market share. Currently, we have a small share at 7%, even though we are gaining the ability to work with more dealers, with a third of them collaborating with ACV. Our goal is to increase wallet share significantly next year, especially in mature territories, while accelerating dealer penetration in new markets. Additionally, we are committed to adding value through products like private marketplace, which are attracting dealers even in challenging market conditions. Our value-added approach is enhancing our performance. We are steadily focusing on scaling our operations, including our inspection technology and team. Although we haven't discussed consumer or commercial sectors much recently, we have been developing products, acquiring companies, and collaborating with rental tire firms. We anticipate launching an asset-light consumer offering that assists dealers in acquiring cars without us assuming risks. Furthermore, we will expand our commercial offerings, as we are already gaining traction with rental car companies and addressing the needs of repo companies for comprehensive services.

I got it. But are you like viewing fourth quarter as a trough for the industry? I don't know, like George, was that kind of implied in your answer for now?

None of us can predict what next year will bring. What I want to convey to you, Rajat, is how we plan to hold ourselves accountable. The market may worsen, and none of us can say for certain right now. There have been recent political predictions that haven't materialized, so it’s really about thinking ahead. We are committed to accountability in growth, which is more a mindset because the market could decline further. On a positive note, new car production is beginning to rebound, and we are starting to see some programs returning. Many of the prominent franchise dealer groups anticipate that next year will not see a decline, which is encouraging. Some of our biggest customers expect an increase in unit volume next year, which is also positive. I believe new car dealers will have a slight edge over used dealers next year due to attractive offers such as 0% interest and 1.9% financing. We even observed a couple of manufacturers introducing rebates recently, something we haven’t seen in almost two years. All of this suggests that next year might improve, but regardless of the market conditions, we are committed to increasing our market share.

Our next question comes from Eric Sheridan with Goldman Sachs.

I want to follow up on your previous answer because there was a lot to unpack. In terms of what you can control, what are the key execution elements you are focusing on that you believe will significantly influence your dealer share over the next year? You've already made some gains, but what specific actions are you taking to improve that share in the next 12 to 18 months? Additionally, regarding external factors, I understand there is volatility and uncertainty in the environment. Which of these factors do you believe is most crucial in driving the supply-demand dynamics that would benefit you? Are you more concerned about OEM supply or consumer demand related to interest rates? Which external factor do you think will lead to the most significant opportunity in the coming year?

Yes, Eric, thank you for the question. As we look ahead to next year, dealers will be seeking more guidance on asset values. We are providing a range of enhancements, including setting price expectations, advising on car launch timing, and determining the duration for which a car should be offered. Additionally, we’ll guide them on whether they should prioritize internal sales within their group or consider options like auctions. Our goal is to become the intelligence platform for dealers, and we are significantly ahead of the competition. Until recently, the ACV model relied on somewhat random 20-minute auctions, but we’ve invested in a substantial team of engineers to develop this further. The quarterly product rollouts should illustrate our commitment. We expect to see tangible results from these efforts, and I’m already noticing positive signs from our tests and opportunities. For instance, two of the largest dealer groups in the U.S. have emerged as major buyers on ACV following the launch of our private marketplace. This illustrates our execution strategy, where our product delivery to dealers adds value and consequently increases our market share. We are also maintaining discipline in revenue generation, focusing on aspects like arbitration and goodwill. It's essential to build a solid business rather than simply chasing unit numbers. While unit sales are crucial, our focus is on revenue and margin growth, and achieving profitability is a priority. We are not merely discussing unit numbers; we are actively creating product advantages and nurturing significant relationships. Our disciplined approach has already shown improvements quarter over quarter. Regarding our offerings, we are enhancing value through various products like transportation solutions and ACV Capital. We're seeing increased adoption of these services, which sets us apart in the market. As we assess our achievements in 2023, I am confident in how we allocate resources and the resulting benefits we are experiencing. On the uncontrollable external factors, the most critical element is the number of cars traded into dealers, whether new or used. This metric is central to the dealer wholesale market. With an uptick in new car production and recent OEM promotions, I expect franchise dealers to benefit, leading to increased trade-ins, which is promising for us. Franchised dealers are well-positioned heading into next year, and independent dealers are adept at adapting to market conditions, using their entrepreneurial skills to succeed. Thus, the top of the supply funnel relies on these trade-ins, and I believe OEM production will improve, benefiting our franchise partners.

Our next question comes from Daniel Imbro with Stephens.

We've had a lot of discussion of kind of the high level. So just a couple of kind of clarifies the financials. You talked about this internal kind of dealer offering a few times, George. Obviously, that's growing with the franchise groups. How is the profitability of that channel? Is that growing next year? Is that going to be a drag to revenue per unit or the big group gets better pricing? And then any kind of help on scaling like what percentage of volume is it this year? Where do you expect that to go next year as you grow that business?

So Daniel, looking at it, it’s not a negative impact; it’s roughly neutral. More importantly, I’ll share the goals and objectives of a dealer I spoke with this morning. Their aim is related to the trades coming in and the aged inventory. They are able to retain 15% of those cars, which would represent a successful outcome for them. This particular group wholesales 100,000 cars, including trades and aged vehicles, and keeping 15% would be ideal. Keep in mind, most cars end up at open auctions regardless. Their goals are quite realistic. These dealer groups are savvy; they prefer not to keep a vehicle that has significant issues because it doesn’t align with their brand. Most of them are quite reasonable. So Dan, consider this as a process where many cars are inspected for a nominal fee. This fits seamlessly into our existing model, where we charge them a small fee for inspections, and then we earn additional fees when we wholesale the vehicles. Overall, viewing this from our perspective, from inspection to them selling in the open market, it does not negatively affect our unit economics.

And then just you mentioned, Bill, in your comments, the transportation margin took a big step higher, kind of low double digits this quarter for mid-singles last quarter. Where can that go longer-term kind of what drove the improvement? Was it the decline in fuel prices? Was it just the scale of the business? And then could that keep take higher on transport, or is this kind of where it should be?

Yes, thanks for that question. So first, what drove the improvement? So number one, and this is something we kind of pivoted a few quarters ago, we started moving from just focusing on increasing the attach rate because we hit our targets at that point in time, several quarters ago to really focus on maximizing spread. So it was kind of just a conscious change in our orientation for the team in terms of what they need to focus on. But if we look at what some of the other drivers are, through technology and data intelligence, we basically deployed these capabilities to do auto dispatch, which was 70% of our transactions last quarter. So that's a huge percentage of our transactions that just happen automatically. We're matching loads also, which is requiring less human intervention, including improvements in how we price through different lanes. So that's number two. And then number three, we're also optimizing deliveries through better carrier management. So these kind of collectively are allowing us to drive those margins up a lot faster than we actually expected. The target transport margins are 15% by 2026. So we're kind of well ahead of schedule. Right now, we're pretty happy to be in the low double digits. We think that's certainly very sustainable as we go into next year. Whether we can continue to improve that next year, we'll see. But we're already within striking distance of our long-term target. So we're pretty happy. And again, that's been a nice tailwind to our overall margins for the business.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to Chamoun for any closing remarks.

Thanks, and I'd like to thank everybody for joining us on the call today. Please note that we'll be on the road at several investor conferences this quarter. You can find all the details on our Investor Relations website. So we do look forward to seeing you on the road, hopefully. And thank you again for your interest in ACV, and have a great evening.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.