ACV Auctions Inc. Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the ACV First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand a conference over to your speaker today, Tim Fox, Vice President of Investor Relations.

Thank you, operator. Good afternoon and thank you for joining ACV's conference call to discuss our first quarter 2023 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, 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 strong start to the year highlighted by a number of record achievements in the quarter. This includes: record revenue which was well above the high end of our guidance range; record ACV Capital attach rates; and record margins in ACV Transport. While we benefited from positive market tailwind from the quarter, it was continued execution by the ACV team that drove market share gains, while also delivering to the bottom line. Looking at the balance of 2023, we expect the industry headwinds experienced over the past two years to continue to moderate, while remaining focused on growing market share, expanding our technology moat and driving scale to deliver on our adjusted EBITDA target. With that, let's turn to a brief recap of first quarter 2023 results on slide 4. First quarter revenue of $120 million was $10 million above the high end of guidance resulting in 16% growth year-over-year. GMV of $2.4 billion was flat year over year with solid unit growth in the quarter offsetting an 8% decrease in GMV per unit as wholesale vehicle prices decreased from historical highs in the first half of 2022. We sold 152,000 vehicles on our marketplace, which was a 21% sequential growth from last quarter and 8% growth year-over-year, which exceeded our expectations due to continued market share gains and conversion rates improving from low levels we experienced in the back half of last year. On slide 5, I'll frame the rest of today's discussion around the three pillars of our strategy to drive long-term shareholder value: growth, innovation, and scale. I'll begin with growth. On slide 7, we're again providing context on the dealer wholesale market in relation to the broader automotive market. In Q1, new light vehicle SAAR increased 8% year-over-year, which is the third quarter in a row of growth. Of course, SAAR is still running about 12% below pre-pandemic levels. But inventories are slowly building, which is key to a more robust recovery in retail sales. Used vehicle retail sales increased quarter-over-quarter in Q1, but were down in the mid-single digits year-over-year as affordability issues impacted demand in segments of the used vehicle market. Combined new plus used retail sales increased modestly year-over-year, which is a positive sign for supply in the wholesale market. As I mentioned earlier, conversion rates bounced back in Q1 as wholesale price depreciation normalized. And we assume conversion rates will normalize throughout the year. On balance, I think it's fair to say that end market conditions are showing some early signs of improvement giving us confidence to raise our guidance for the year, which Bill will take you through later. Turning now to slide 8. We estimate that the US dealer wholesale market continues to remain below normalized volume, but showed a nice sequential improvement in the seasonally strong first quarter. We remain focused on executing against our key growth initiatives and gaining market share. Given our 8% year-over-year unit growth and an estimated market contraction of 11%, this implies that ACV grew market share by approximately 19% in Q1. Next, I would like to wrap up the growth section with highlights on our value-added services. On slide 9, I'm pleased to share that ACV Transportation delivered another impressive quarter and continues to scale ahead of schedule. Our strong carrier network and fast cycle times resulted in attach rates once again exceeding 50%. In fact, we achieved record cycle times again this quarter, benefiting both sellers and buyers on our marketplace. Over 80% of our transports were automatically dispatched in Q1, which is a great example of how our technology investments are driving growth and operating efficiencies. These efficiencies resulted in revenue margins in the mid-teens, which is impressive given that ACV Transport was breakeven a year ago. As a reminder, our current 2026 financial targets assume Transport revenue margins of 15%. So we managed to achieve this target three years ahead of plan. Turning to slide 10. Our ACV Capital team also delivered great Q1 results. Capital attach rates exceeded 10% for the first time, driving over 85% loan volume growth. Combined with RPU expansion resulted in over 100% revenue growth. We have continued to ramp our investments to drive dealer engagement and scale to ensure that ACV Capital is an important growth and profit driver going forward. Turning to the second element of our strategy to drive long-term shareholder value: innovation. On slide 12, I'd like to highlight a few of our growth-oriented product innovations that helped contribute to our strong Q1 results. Two areas of focus were dealer acquisition and conversion rates. On the dealer acquisition front, solutions like private marketplaces and consumer sourcing tools like Drivably and Monk were key to attracting new dealers to ACV's marketplace. This was especially true with large dealer groups, which continue to be an attractive source of new dealer partners. Next, we expanded several capabilities to enhance conversion rates, including new auction formats and pricing intelligence. As you know, ACV's traditional format is a 20-minute live auction, which has experienced broad market adoption. Based on dealer feedback, we began testing new formats, and the results were very encouraging, especially for higher-end vehicles. In just a few short quarters, we now have about half of our auctions running for two hours. And our strong Q1 conversion rates demonstrate this is working. We will continue to invest in testing enabling us to continuously optimize auction formats for different types of vehicles. Additional innovation enabling our growth is our pricing engine, powered by machine learning leveraging both our industry-leading vehicle condition data and a growing curated automotive dataset. This innovation is leading to better guidance for our dealer partners. For the past year, we've expanded the price point coverage, and its use cases creating a broader range of guidance for our dealer partners. The ACV pricing engine now powers several ACV products, including ACV Auctions Market Report, consumer tools such as Drivably and elements of MAX Digital. On slide 13 are examples of tech investments that extend into our operations, delivering customer success while reducing costs. In Q1, our costs of revenue declined year-over-year despite delivering 16% revenue growth. As I mentioned earlier, ACV Transport was a key contributor to these results. We also benefited from lower arbitration frequency, which reflects ACV's investment in technology and inspector training. Several innovations that are improving inspection accuracy and efficiency are Apex, Copilot and ArbGuard. Our next-gen collection device Apex delivers significantly higher transparency into vehicle operating conditions while also increasing the inspection productivity of our VCI teammates. More recent innovations like Copilot and ArbGuard utilize machine learning predictive analytics and sensor data to inform our VCIs on vehicle-specific issues before and after conducting an inspection again driving inspector accuracy and efficiency. To wrap up on innovation, I think you'll agree that our team is delivering industry-leading technologies to the market and our own operation. We have an exciting roadmap of innovation to drive both growth and scale, and we look forward to providing more detail at our Analyst Day in June. 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 very pleased with our Q1 financial performance. We delivered record revenue above our guidance range, with upside to adjusted EBITDA. We also demonstrated the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q1 2022. Turning to slide 15, I'll begin with a review of our first quarter results. Revenue of $120 million was above the high end of our business model, with meaningful revenue margin and adjusted EBITDA margin expansion versus Q1 2022. Turning to Slide 15, I'll begin with a review of our first quarter results. Revenue of $120 million was above the high end of our guidance range and grew 16% year over year compared to the strong results in Q1 2022. Adjusted EBITDA loss of $6 million also beat our guidance range, and EBITDA margin improved approximately 1,200 basis points versus Q1 2022 demonstrating the attractive operating leverage in our model. Next on Slide 16, I will cover additional revenue details. Total revenue of $120 million represented a 32% CAGR since Q1 2021. Auction and Assurance revenue, which was 57% of total revenue increased 17% year over year versus strong results in Q1 2022. This revenue performance reflects 8% year-over-year unit growth and record Auction and Assurance ARPU of $454, benefiting from our fee increase last October. Marketplace Services revenue, which was 36% of total revenue also increased 17% year over year. Results were driven by strong performance in both ACV Transport and ACV Capital. Our SaaS and Data Services products comprised 7% of total revenue and grew 2% year over year. As I mentioned last quarter, we are taking a more measured approach to customer acquisition while we make significant improvements to the MAX Digital platform, positioning ourselves for reacceleration of growth entering 2024. Turning now to Slide 17. I will review costs in the quarter. Q1 cost of revenue as a percentage of revenue decreased approximately 900 basis points, year over year. The improvement was driven by both strong Auction and Assurance results and by ACV Transport. As George mentioned, we achieved our 2026 Transport revenue margin target in Q1 three years ahead of schedule. Non-GAAP operating expense including cost of revenue increased 9% year over year in Q1 versus 42% year-over-year growth in Q1 2022. This reflects the significant investments we made in prior years to support market expansion and technology initiatives and reflects our continued focus on expense discipline, as we optimize and scale our business. Moving to Slide 18, let me frame our investment strategy and path to profitability. Our focus on spending discipline and operating efficiency is expected to result in a material decrease in OpEx growth in 2023. And as you've seen reflected in our Q1 results, we have accomplished this while preserving our go-to-market and technology investments, to ensure ACV is in a strong position as market conditions improve. Next, I will highlight our strong capital structure on Slide 19. We ended Q1 with $526 million in cash and equivalents and marketable securities and $96 million of long-term debt to finance the growth of ACV Capital. Note that our Q1 cash balance includes $188 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 has a corresponding impact on operating cash flow. In Q1 cash flow from operations was $43 million, driven by the sequential increase in float and was a significant improvement from the $31 million loss in Q1 2022. Now, we'll turn to guidance on Slide 20. For the second quarter of 2023, we are expecting revenue in the range of $117 million to $120 million. And adjusted EBITDA is expected to be a loss in the range of $8 million to $10 million. For the full year 2023, we are raising our expected revenue to a range of $468 million to $478 million, representing growth of 11% to 13% year over year. Adjusted EBITDA is expected to be a loss in the range of $27 million to $32 million, an improvement of nearly 50% versus 2022, and we remain committed to achieving adjusted EBITDA breakeven exiting this year. As it relates to our guidance, we are assuming that new vehicle supply remains constrained in the near-term, but improves as production and inventory continue to recover throughout the year. We're also assuming that conversion rates normalize throughout the year, as wholesale price depreciation moderates. Let me wrap up on Slide 21 by reviewing our 2026 financial target. We are very pleased with our execution in a challenging macroenvironment, and we remain confident in our ability to achieve $1.3 billion of revenue and $325 million of adjusted EBITDA in 2026, with a 25% adjusted EBITDA margin. Our confidence is reinforced by a number of factors, including strong dealer penetration and increased wallet share resulting in sustained market share gains; opportunities to expand our TAM into adjacent markets including commercial wholesale; our broad technology platform enabling durable long-term growth and operating efficiency; consistent improvement in revenue margin and a commitment to balancing growth and investment as our business scales. We look forward to providing you with the details on our long-term targets at our upcoming Analyst Day on June 1st. 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 in the first quarter. We are especially proud of our ACV teammates that delivered these results. We continue to gain market share by attracting new dealers to our marketplace and by gaining wallet share, which positions ACV for attractive growth as market conditions improve. We are executing on our territory penetration plan and gaining traction with an expanding suite of offerings. We are delivering an exciting product roadmap to further differentiate ACV and expand our addressable market. We are on track to achieve our near-term adjusted EBITDA targets and over the medium term generate over $1 billion in revenue with attractive margins that we believe will drive significant shareholder value. We are committed to achieving these results while building 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 Daniel Imbro with Stephens. You may proceed.

Hey good evening guys and congrats on the quarter.

Hey Daniel.

George, my first question I want to start on the volume growth. Up 8% market was down double-digits. When we look at that outperformance is that growth coming more from new dealerships added or are you making progress on that vehicles per rooftop metric you've talked about? And then what are you learning about the cost of growth in terms of incremental investment needed relative to your expectations as you scale?

Yes, sounds good. I'll answer the first two and I'll let Bill answer the third. When you look at our growth, obviously, to the overall market that contracted once again the market contracted 11% in the wholesale side of things we grew 8%. It was both a combination of new customer acquisitions so we saw a new listers have another impressive quarter for us of new listers. But we're also doing a great job within the wallet share itself meaning more listings from existing dealers. So, I would say instead of thinking one or the other it was really both. So, we had great success in the quarter. And I think moving forward between now and 2026 I think it'll be that same drumbeat. Just additional listers and additional wallet share and obviously between now and then the market itself is starting to come back meaning the size of the overall submarket. But I would say at a really high level, it was both customer acquisition and expanding wallet share. Bill if you want to jump on the other question.

Hey Daniel. To put this into perspective, there are two components to our go-to-market strategy. Regarding our field sales organization, we have effectively reached our staffing capacity nationwide, allowing us to continue increasing volume with our current team. The only additional expense is the hiring of inspectors as we add more listings to the marketplace. This represents our only variable cost. Otherwise, we are currently maintaining the cost structure necessary to support our growth for the remainder of the year.

Yes, that's great. It's a good update. And then I wanted to actually ask my follow-up on the cost takeout. As I think about Transportation initiatives and profitability is a good example of some of those tech savings you guys have generated. But can you maybe quantify where some of those efficiencies or cost savings have been so far and talk about maybe where the cost savings are relative to the 2026 timeline you guys laid out last year? Thanks.

Bill I'll start building, you can go ahead and chime in. If I had to enumerate just the big ones, our investments in our transportation technology and platform when we look at areas like pricing and intelligence, it allowed us to price our lanes more effectively. So, instead of just having to take historical data for pricing, we now have more and more real-time intelligence. And that's really important because while a dealer is bidding they want to know the cost of transportation while they're bidding. Two is scale as it relates to transport as an example. As you have more scale, you're able to get better pricing from your carrier. So, those two things are examples within the area of transport. When you look at areas like utilization of inspectors and our team becoming more efficient, investments in areas like auction format getting a higher conversion rate, it allows for us to have better utilization of our resources because increased conversion rate. And then I would also say generally one way to better have conversion is having better price guidance. So, when you think about for example where a technology helps you convert better as you're walking in and if you know the car is on its best day worth $20,000 and on its best day dealer is asking for $24,000, we know we're going to be wasting our time. So, we now have a pricing engine that can help inform our dealers what these assets are worth. So there's many more. Those are like the ones top of my tongue here that are areas where we're becoming more efficient. It's also an area of better title management. We haven't had to really scale up in areas of titles and other parts of our organization because that team has become much more efficient having new tools, leveraging AI where we can now scan these titles make a bunch of decisions just by scanning them. So there are many areas of business Daniel but those would be the ones top of mind.

Yeah, I would just add a couple of other points, Daniel. So first on transport 80% of our dispatches this past quarter were automated so no human intervention. That's just another example. We've talked about that in the past in terms of how we're using technology to basically become more efficient. The other big driver during the quarter actually were we were much more effective during the quarter in terms of our arbitration costs. The frequency was better managed by our team and it was material benefit to our overall margins for the quarter. So as we've talked about in the past, there's an ebb and flow to arbitration. But directionally, we're going to be talking about this more on June 1st at our Analyst Day in terms of driving towards our target model. But directionally over time, we believe we'll be able to more effectively manage our op costs and that will be accretive to margins?

Great. Appreciate all the color this evening and best of luck going forward.

Thank you.

Thanks.

Thank you. Our next question comes from John Colantuoni with Jefferies. You may proceed.

Hi. Thank you for taking my questions. I wanted to start with the conversion rate. In your comments, you mentioned that you expect the conversion rate to moderate throughout the year as wholesale depreciation begins to ease. However, when I look at the overall conversion rates, they were high in January and February but returned to 2019 levels in March and April. Are you indicating that you expect conversion rates to remain consistent with 2019 levels for the rest of the year? I would appreciate some clarification on that. My second question pertains to your revenue guidance, which suggests growth will decrease to low single-digits in the second quarter before accelerating to around 10% in the second half. Could you provide some insight into the growth trajectory of prices and units in the auction segment, as well as other revenue sources like capital and transportation? Thank you.

Sure. I'll begin, and then Bill can add on. Conversion rates were strong, and we also have to consider seasonality in the auction industry, where Q1 is usually the strongest quarter for conversion rates. As we anticipate a return to normalization over the next few years, we expect conversion rates to start higher in Q1 and then gradually decrease. We will have to see how global events affect this, but it's a reasonable assumption as we begin to return to normal. There are many factors that could influence whether we return to historical averages, but that's what we expect based on non-COVID years. Regarding Q2, the quarter has begun positively. I don’t want to overanalyze this since there are many variables in the industry, like the increase in new car volume and the higher used car volume. In Q1, used car retail sales were approximately 3% lower compared to last year but improved from the previous quarter. We're trying to be cautious as we navigate these moving parts, and now I'll hand it over to Bill.

Yeah I would just add to that John that again as George said so Q1 is typically the strongest quarter of the year. And Q2 is also a pretty strong quarter. The backdrop here though is what we've talked about is we're assuming in the second half of the year supply continues to improve and our TAM continues to recover. And that's the backdrop for our guidance at this point. But we're basically assuming Q2 is a good quarter, but it's going to be subject to supply chain issues and how quickly those resolve over time because that will affect the supply into the wholesale marketplace. So on balance for the year, again we're raising our overall guidance and growth targets. And at this point, we're still early of course in the year. So right now that's the way we think about it and hopefully that helps you understand the backdrop that we're using in terms of our assumptions for growth.

Thanks. Appreciate the details.

Thanks, John.

Thank you. Our next question comes from Rajat Gupta with JPMorgan. You may proceed.

Hey, Rajat.

Good evening, good afternoon. Thanks for taking the questions. Just to follow-up on like the previous question but maybe more from an EBITDA perspective. If I compare the prior implied guidance for the second to the fourth quarter, it would have equated to somewhere close to like a $20 million EBITDA loss at the midpoint. And the guidance today if I include 2Q guidance and the rest of the year it implies like a $24 million EBITDA loss at the midpoint. Obviously, smaller numbers in context of the bigger picture, but curious what's the driver there. Anything in the end market that has changed versus what you were thinking prior for the remainder of the year? I know you gave some color earlier, or maybe there's just more cushion you're adding in terms of more spending on some initiatives in the back half. And I have a follow-up. Thanks.

Yeah. Hey, Rajat it's Bill. So basically what we're passing through for the full year is we're increasing our full year revenue guidance by $8 million and we're increasing our EBITDA guidance by $3 million, right? So we are being a little cautious since it's so early in the year. Obviously we're still going to be pretty focused in terms of managing our expenses and operating efficiencies. We feel comfortable with this guidance at this point and we'll see how the year continues to unfold.

Got it, got it. But there's nothing that's changed in terms of how you thought about the industry in general for the full year versus like three months ago.

No not at all. I mean, we're giving ourselves a little bit of room to potentially make some other investment if we think there's a good ROI. And again as you would expect there's still a lot of puts and takes this early in the year. So we're giving ourselves a little bit of room at this point. But directionally we're passing the majority of the beat for Q1 through to the full year.

Got it. And then just on the non-GAAP OpEx guidance, previously your guidance was for it to grow at half the rate of revenue for the full year. Is that still the case with the new revenue guidance as well?

Yes it is.

Got it. All right. I'll jump back in the queue.

Rajat, just a clarification. Don't forget that excludes D&A.

Yes, excluding cost of revenue and D&A, right?

Correct.

All right. Thank you.

Thank you.

Thank you. Our next question comes from Chris Pierce with Needham & Company. Your may proceed.

I guess two. How are you doing? On the first one, I think I want to make sure I heard you right. Longer auction times are helping with higher priced vehicles. I'd like to get a sense of what the opportunity is in the higher priced vehicles, how do you guys see that opportunity and why that would be the case just out of curiosity.

We're gaining market share for higher priced vehicles in several ways. One method includes dealers who first attempt to sell their vehicles within their own group before turning to our open marketplace if they aren't successful. This illustrates our increased share in that category. Additionally, our tools for sourcing cars from consumers have also contributed to our success. Over the past couple of years, we've steadily improved our mix of higher priced vehicles. In terms of buyers for this segment, we see both independent and franchise dealers purchasing these vehicles. Now, a larger percentage of our sales come from franchise dealers compared to independents. The two-hour auction format has allowed for more participants in the higher ASP sectors, whereas lower priced cars haven't seen as much impact from the longer format. However, for higher-priced vehicles, this extra time has proven beneficial. We are constantly testing different auction formats, ranging from short to longer durations, trying to find the optimal length. I envision a future where there will be various auction lengths available, including one minute, 20 minutes, one hour, and two hours. The ideal duration remains a work in progress.

Is there a way...

Go ahead.

No. I was just saying, is there a way to frame where you think your market share is say at an industry average priced vehicle versus where it is at these higher-priced vehicle levels?

Not today. I don't think we have enough data to suggest what our market share is at one price point versus another just yet.

Okay. And then, just lastly, I've been hearing about banks pulling back on floor plans. I'm just curious what that does for the ACV Capital opportunity, if this is the right time to go harder in floor plan given macroeconomic conditions? And what makes a dealer that's not taking a floor plan probably right now a good candidate for the floor plan product?

Yeah. Hey. It's Bill. So what you're seeing is some of these regional banks have pulled back on the floor plan market they're mostly smaller players and they primarily service franchise dealerships. Frankly for our business, our prime competition is AFC and NextGear. Those are the two biggest players in our space. Look, this past quarter we grew our revenue again north of 100%. So we're continuing to invest and grow that business as aggressively as we can. That said we are being much more sensitive to risk obviously with the macroeconomic conditions. But even with that for example this past quarter we cut our bad debt expense in half quarter-on-quarter. So I think our team is doing a great job in terms of continuing to manage strong growth while also managing our risk. So we're pretty happy. And we're going to continue with that path through the rest of the year.

Okay. Thank you.

Thanks, Chris.

Thank you. Our next question comes from Bob Labick with CJS Securities. You may proceed.

Hi Bob.

HI. Congratulations on the great quarter, really good stuff. I wanted to talk a little bit about the auction formats, as we've been discussing a little here. You had a really nice sequential pickup in GMV per unit. It was roughly like double the Manheim sequential change in pricing I think if I did the math very quickly. So is that a result of better mix changes in auction formats? What would you attribute the sequential pickup in GMV per unit to beyond just used car values as kind of a starting point? Then, I have a follow-up also on auction format.

Thank you, Bob. To reiterate, our ability to secure inventory is crucial. In any market segment, the more we can source, the more we attract demand. We are beginning to secure some sourcing, utilizing tools like private marketplace to acquire assets. On the demand side, with major dealer groups using ACV for private marketplace vehicle bids, we actually see increased demand. These tools assist not only with sourcing but also facilitate access to the broader marketplace. Furthermore, I observe a significant industry trend where dealers are increasingly attentive to aged vehicles. Regardless of using Private Marketplace, dealers are focusing on maintaining the appropriate inventory levels. Supply remains limited, with current dealer lot inventories still 20% to 25% lower than in 2019. Consequently, many dealers are trimming older vehicles from their lots, which indicates a clear need for assistance in this area. Our diverse product offerings are facilitating connections between buyers and sellers, establishing our reputation in the category. I also want to emphasize the importance of inspections; our inspections are recognized as the best condition reports in the industry, especially valuable when purchasing high-end vehicles. We anticipate providing more insights on our initiatives as Analyst Day approaches. You mentioned you had a follow-up question.

No, that was great. And yeah for my follow-up it's really you talked about new auction formats from 20 minutes to two minutes and you said you can envision one minutes or 10 minutes or whatever. What about bid/ask marketplaces and how do you think about that? Because a couple of your competitors have multi-day or just bid/ask period out there. How do you think about that relative to the timed auctions and does one play better to higher level units higher-cost units GMV and lower or just give us a sense that might you ever experiment or dabble in just bid/ask for three days or something?

Yeah. So I don't know the exact number of private marketplaces we have today. So we have, let's say, at least 15 private marketplaces today. Each one of those are configured differently. So one of them might be three days, one might be two days, five and it's really fascinating. So we're probably supporting 15 different formats in the private marketplace. And you get to learn from that. And you get to learn, okay, what's working well. We also have other elements like we've got a run list capability that helps the dealer promote their vehicles before they go live. So look at it more like wherever the industry wants to go we're going to be able to support it. The idea of having the most flexible and robust technology platform is really the key. Not to get too techie here. We can actually change our formats without even doing a code change in our private marketplace meaning, we can change it from one day to two days to three days like we're that crazed about building the right tech. So look wherever the market is going we're ready. Now what we did find was we saw no benefit over two hours, which was interesting. If you were to make a bet on two hours versus 12 versus 24, you mentioned three days, we saw no benefit. We saw some benefit going from an hour to two hours, but I would say less material. So yes, going from 20 minutes to more was helpful but I think if I was a gambler right now, I wouldn't bet on two or three days. I don't think you need that much time. So I think it's probably somewhere between 20 minutes and an hour is all you really need. And for some vehicles, two minutes is fine.

Okay. That’s super. I appreciate all the detail. Thanks.

Thank you.

Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. You may proceed.

Thanks so much. Hey, everyone. Thanks for taking the questions. Maybe two on the costs and margin side of the equation. In terms of your broader goal of getting to where you want to get on EBITDA breakeven towards the end of this year, can you help us better understand what flex there is or how to think about torque in the business model for different outcomes on the top line versus base case versus how that might shift in a broader economic environment and how to continue to maybe achieve that goal within different bands of outcomes on the top line? And then the second part of the question and not to front-run Analyst Day but obviously, you've got this longer-term, profitability target out there. And when we think about the incremental margin, you'll be exiting the year about, can you help maybe investors get a better sense of how to think about the exit rate of incremental margin this year against your broader long-term goals on EBITDA? Thanks so much.

Eric, it's Bill. Yes, first I would start by saying, I think our Q1 performance reflects our ability to manage our cost structure and really improve our revenue margins over time. In fact, this is only the second time that we've reached 50% revenue margins with the previous time being before the company was public and when COVID hit and a significant amount of costs were taken out of the business. So that was a normal run rate environment if you will. But frankly, I think the team here has just done a phenomenal job both in driving our revenue margin profile and managing OpEx but not really just managing OpEx in terms of reducing costs but really optimizing the way we run the business, right? And we've talked in the past about a lot of the initiatives that we've undertaken. For example, opening up shop in a low-cost geography in India to ramp those resources much more, allows us that capacity much more cost effectively. We've talked about optimizing and lowering our arbitration costs. We've talked about how our go-to-market engine right now is basically fully staffed. So we'll be able to generate incremental revenue and margin without any change in that cost structure, whatsoever. A lot of the rest of our costs are more fixed in nature if you will. But even those costs are subject to really discretion in terms of whether or not we meter them up meter them down or maintain neutrality. So I would say we still feel really good about pushing more levers as we go through the year, and we'll talk a little more obviously about how we hit our long-term targets on June 1st, in terms of how we see more leverage just continuing to accrue over time as we scale and grow the top line. I think other examples, obviously, what you've seen we've hit our transport margin target, literally three years ahead of schedule in Q1. So what I guess we're trying to show investors is that we have strong command over our business in terms of our model, how we think about optimizing operations over time and literally every quarter it seems that we're layering another area of improvement that we're achieving our targets well in advance of what we committed to investors. So we feel really good. And again, I expect to go through this in a lot more detail at the Analyst Day. So hopefully that gives you a little bit of color and it helps you think about how we will hit those targets exiting this year especially.

Great. Really appreciate Bill and I look forward to June 1. Thanks.

Thank you.

Thank you. Our next question comes from Ron Josey with Citi. You may proceed.

Hi, Ron.

Thank you for taking my question. I wanted to follow up on something George mentioned earlier regarding the new dealers and listers joining the platform, which seems like an impressive quarter for you. You spoke about the factors driving the overall volume performance. Can you help us understand whether the increase in new listers is primarily due to an improving broader market that is attracting dealers, or is it because the team is now fully staffed and the sales strategy has improved? I suspect it might be a combination of both, but I'm trying to specifically identify what's driving the new listers in the marketplace. Is it simply greater adoption and the share gains we discussed? Additionally, Bill, you recently addressed Eric's question about where gross profits could go, especially in the marketplace and services business. Given the 55% gross profit margin in the core marketplace services segment, and the achievements of Transport reaching mid-teens ACV and Capital achieving a 10% attach rate, what do you think the future margins could be? Or should we wait for the Analyst Day since we are already achieving the targets discussed? Thank you.

Sounds good. Great questions, Ron. Regarding dealer acquisition, we have previously utilized a cohort method to aid your understanding of dealer acquisition and wallet share. In June, we will discuss market share, which will provide further insights into our dealer acquisition approach. Broadly speaking, we observe that in certain regions, our market share in terms of the number of dealers using the platform is low, while in other areas, we have a notable presence. This variation is primarily due to the length of time we've been active in these regions. Our annual contract value story has remained steady. For those who have been monitoring us over time, this isn't a sudden development; we have been consistently expanding wallet share and attracting new listers every quarter. This has been a regular pattern for us. We achieved another successful quarter in onboarding new dealers. Our range of tools and value-added services for attracting dealers has improved compared to a few years ago, yet our approach has remained consistent. We are continually encouraging dealers to buy and sell on the platform. I think that's all for today. We can move on to the next question.

Yes. So Ron I will tell you that what we will discuss June 1st is actually hitting the same target revenue margins of 60% by 2026 that we discussed last year except the path to get there is going to be a bit different. A few things have changed since last year and we've talked about some of those things, but I think you'll find pretty intriguing in terms of some of the new dynamics that we see that will allow us to hit that same target just in a little bit of a different way.

Okay. See you one June. Thank you.

Okay. Thanks, Ron.

Thank you. Our next question comes from Michael Graham with Canaccord. You may proceed.

Yes I will not ask the question about June 1, but I wanted to ask about two things. One is just on the territory expansion cadence that you expect here, what should we be looking at in terms of territory expansion? And then you mentioned in the prepared remarks I think Bill did about adjacent businesses being a potential contributor to those 2026 growth targets and you mentioned specifically commercial wholesale. So I just wondered if you might expand on that a little bit here as a preview.

Fair enough. You mentioned that you wouldn’t ask questions about what we'll discuss in June, but that's the plan. We are in a great position with our sales team. In terms of expenses, we're already investing in the territory managers needed to achieve most of our 2026 objectives. These teammates are actively building relationships with dealers in the field. Along with the territory managers, we have 21 regional sales directors overseeing the team, and several vice presidents managing them. Our major accounts team is ready, and we have a solid inside sales team that can already handle more units than we currently manage. We’ve made significant investments in building a world-class team to pursue this large total addressable market. While we may add a few more people, it won't be substantial. I anticipate sharing more about our efforts in the commercial segment during the June meeting, including potential new hires and leaders in that area. We're committed to growing our business in the commercial category before 2026.

All right. Thanks so much, guys.

Yeah. Thank you.

Thank you. Our next question comes from Nick Jones with JMP Securities. You may proceed.

Great. Thanks for taking the questions.

How is it going? George, Bill. If I refer back to the auction marketplace revenue per unit, it seems to have increased mid-single digits sequentially. So my first question is if there's anything to highlight regarding that. Secondly, do you have any updates on how you're approaching pricing on the platform? Thanks.

Yeah. Hey, Nick, so our Auction and Assurance ARPU basically went up about a little more than $10 quarter on quarter and was up about $35 or so year-on-year. So a lot of that benefit is associated with the fee increase that we did in Q4. Plus, we had pretty good mix on the marketplace and GMV per unit went up quarter-on-quarter slightly down year on year. But again that was offset by the fee increase. So we're in a pretty good place in terms of our fee structure and it's helped us drive really strong margins as well that combined with the arbitration frequency that I've mentioned and how well the team has been managing that.

I think one of the themes Bill said earlier he said more to come on how we get to the 2026 numbers. Again not to spoil our content but I would say you're seeing us confident in the higher ARPU range, right? That would be one of the areas as an example of how we get there being different. Not to mention specific like other people in the marketplace we look at some of like Copart's revenue per unit. We're still a lot lower than them. Having said that, I feel comfortable on our revenue per unit like this area we've been in I think between now and 2026 ARPU is an area that could grow. And that that's just one theme. It might be we'll see in any one back-to-back quarters we'll see as sometimes GMV is going down and we'll increase price again each year. When you look at it a bit broadly year over year we're pretty confident in ARPU.

Great. Thanks, George. Thanks, Bill.

Thank you.

Thank you.

Thank you. Our next question comes from Nat Schindler with Bank of America. You may proceed.

Hey, Nat.

Hey, guys. Hey, thanks. And partially related to the last question. If I look GMV was flat year-over-year and if you look at the Manheim Index it's averaging about down 7.5% so on pricing from an average of the previous year so that would be 8% rise in units. Makes perfect sense right? Dead flat. But revenue was up by 17% in the marketplace side. Obviously there were price increases. You've talked about that in dollar terms $35 on a year-over-year basis. Could you help me do that in percentages and bridge that number so that I can understand how much are you getting more because of just price increasing and how much are you getting because the 8% unit volume increase?

Hey, Nat, it's actually 8% unit growth and roughly 8% RPU growth, so split literally 50:50 between the two.

So pricing is primarily derived from the unit cost of the vehicle as well as the volume of vehicles being moved.

No, you were asking the question, I think about revenue.

Yes, the 8% unit growth is contributing 8% to the revenue growth, even though the GMV is flat.

Our GMV year-on-year is actually down. GMV, per unit. GMV per unit is flat in terms of dollars.

GMV per unit, yes.

GMV per unit has decreased. It remains stable in terms of dollars because our increase in revenue per unit offset the decline in total GMV dollars. This is why the dollar amount has remained flat compared to last year. Does that make sense?

Yes. What I was trying to get at is the 17% increase in marketplace revenue with GMV being flat, but units up 8%. I'm trying to determine how much of the revenue growth is related to GMV and how much is related to unit growth. Specifically, since you raised prices, that would contribute to the 17% growth, while the other part would relate to some fixed component of the unit growth.

Yes, I understand your question. There are two points I want to address, and we'll prepare a detailed response for you. At a high level, we mentioned in the past that the per unit cost was around $35. Additionally, we are indicating a 4% difference in the buy fee. This is a 4% differential on four of the eight units.

Yes, I think maybe what you're struggling Nat is understanding that our ARPU is only impacted partially in terms of GMV, in that GMV only affects our buy fees because our sell fees are fixed. So our buy fees are the only variable portion of our...

Yes. Okay.

But that's one part of it. The other part of it is mix on the marketplace. So our mix is going to impact what our RPU is, in terms of higher-priced vehicles versus lower-priced vehicles. But the other variable again is regardless of what the GMV is, the only variable part of our equation are buyer fees. So you get a muted impact either up or down, in terms of the RPU impact in any given quarter. And we can spend more time offline with you Nat on this and walk you through some actual numbers maybe that'll help.

I apologize for taking your content from June 1st.

All good. Thank you, Nat. Thanks.

Thank you. And this concludes the Q&A session. I'd now like to turn the call back over to Tim Fox, for any closing remarks.

Great. Thank you. I guess I don't need to remind everybody, that we have an Analyst Day on June 1st, but you can find registration details on our in today's press release and on our website. And we look forward to seeing those of you who are joining us then, and thanks again for your interest in ACV and have a great evening.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.