Good day and thank you for joining us. Welcome to the ACVA Second Quarter 2023 Earnings Call. I would now like to introduce your speaker today, Tim Fox, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good afternoon, and thank you for joining ACV's conference call to discuss our second 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 ACV's continued momentum in the second quarter, another record-breaking quarter in revenue that once again exceeded the high end of guidance, reflecting strong execution by the ACV team as we continue to gain market share. Demand for ACV Transport and ACV Capital was very strong, which contributed to both revenue growth and revenue margin expansion versus Q2 2022. And our continued focus on driving profitable growth resulted in adjusted EBITDA, also exceeding guidance, highlighting the leverage in our model. With that, let's turn to a brief recap of the quarter on Slide 4. Second quarter revenue of $124 million was $4 million above the high end of guidance, resulting in 8% growth year-over-year. GMV of $2.5 billion declined 10% year-over-year, reflecting continued moderation of wholesale market prices. Despite this price moderation, ARPU increased year-over-year, reflecting our price increase from last fall. We sold 153,000 vehicles in our marketplace, a sequential increase from strong results in Q1 and growth of 3% year-over-year. Year-over-year unit growth benefited from an increase in conversion rate, which benefited from a range of data-enabled marketplace innovation, focused on enhancing dealer engagement. On Slide 5, I will again frame the rest of today's discussion around the three pillars of our strategy to maximize long-term shareholder value; growth, innovation and scale. I'll begin with growth. On Slide 7, I'll begin by sharing observations about the broader automotive market as context for the trends we are seeing in the dealer wholesale market. In Q2, light vehicle retail volumes increased 2% quarter-over-quarter and increased 17% year-over-year from depressed levels. SAAR is still running about 10% below pre-pandemic levels, but inventories are slowly building, which is key to supporting the recovery in retail sales. Used vehicle retail sales were flat quarter-over-quarter and year-over-year as affordability issues continue to impact consumer demand. In fact, used retail volumes were about 15% below 2019 in the first half of this year. Combined, new and used retail units increased about 6% year-over-year, which is a positive sign for supply into the wholesale market. As we expected, wholesale prices and conversion rates declined quarter-over-quarter from seasonally high levels in Q1. However, we believe prices will follow a more normalized depreciation curve this year and conversion rates will also follow normal seasonal patterns. On balance, we continue to believe that end market conditions continue to show early signs of improvement, giving us confidence to again raise guidance for the year, which Bill will take you through later. Turning now to Slide 8; we estimate that the U.S. dealer wholesale market remained well below normalized volumes in Q2, but were in line with the seasonally strong first quarter. We remain confident that as the market continues to recover, our growth will benefit from both market expansion and market share gains. In Q2, given our 3% year-over-year unit growth and an estimated market contraction of 14%, this implies that ACV grew market share by approximately 17%. Next, I would like to wrap up the growth section with highlights on our value-added services. First, on Slide 9; the ACV Transportation team delivered another strong quarter and is scaling ahead of schedule. Our strong carrier network in record cycle times resulted in attach rates reaching the mid-50% range. Our technology investments in dispatching and pricing optimized by AI are driving both growth and operating efficiencies. These efficiencies resulted in revenue margins in the mid-teens, an increase of over 900 basis points year-over-year. As we discussed at our recent Analyst Day, our 2026 financial targets assume transport revenue margin in the high teens. So we are squarely on track to achieve that objective. Turning to Slide 10; our ACV Capital team also delivered strong results in Q2. After achieving 10% attach rates for the first time in Q1, ACV Capital maintained this level in Q2, resulting in 50% loan volume growth year-over-year and combined with a very strong ARPU expansion, delivered over 110% revenue growth. Along with our core floor plan offerings, we are investing in new ACV Capital products for our sellers, enabling the emerging consumer-to-dealer market. We remain confident that ACV Capital will be an important long-term growth and profit driver. Turning to the second element of our strategy, innovation; on Slide 12, I'd like to highlight how we're leveraging innovation to drive growth and in this case, our improving conversion rates. We have further expanded the rollout of our two-hour auction, complementing our traditional 20-minute live auction format. In just a few short quarters, we are running over half of our auctions for two hours. We're also testing new merchandising links where vehicle listings are segmented by a specific set of criteria to provide buyers with even more flexibility on searching for the right inventory. Our mantra for continuous improvement extends to our enhanced vehicle display page that makes vehicle condition data easier to digest, enabling faster buying decisions for our dealer partners. We are leveraging AI to enhance our inventory matching capability that feed alerts to dealers based on their historical buying patterns. Lastly, we continue to innovate on our pricing engine, which is powered by machine learning and leverages our industry-leading vehicle condition data along with the growing curated automotive data set. The goal here is to provide dealers with holistic pricing guidance to drive even higher success rates on our marketplace. The ACV pricing engine now powers several ACV products, including ACV Auctions market report, our Clear Car brand of consumer sourcing tools and upgrades we're making to MAX Digital. As I mentioned earlier, our conversion rate expanded over 150 basis points year-over-year and we believe innovation is a key element in driving these results. On Slide 13, we highlighted examples of tech investments that extend into our operations, delivering customer success while reducing costs; in this case, arbitration costs. As you know, minimizing arbitration has been a key focus for both customer satisfaction and optimizing margins. The key here is inspection accuracy. Several innovations are improving inspection accuracy and efficiency; our CoPilot, ArbGuard, Apex and our AI-powered imaging apps. CoPilot and ArbGuard leverage machine learning, predictive analytics and sensor data to inform our VCIs and vehicle-specific issues before and after conducting an inspection. Our next-gen collection device, Apex, delivers significantly higher transparency into vehicle operating conditions while also increasing the inspection productivity for our VCI teammates. Our imaging AI continues to improve. Virtual lists increase accuracy by identifying specific conditions like catalytic converters and rust. In Q2, these innovations helped drive an 8% reduction in arbitration costs year-over-year, which is great performance in the current market. To wrap up on innovation, I think you'll agree that our team is delivering industry-leading technology to our dealer partners and to our own operations. We have an exciting road map of innovation to drive both growth and scale, and we look forward to sharing more next quarter. With that, let me hand 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 Q2 financial performance, again delivering 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 Q2 '22. Turning to Slide 15. I'll begin with a recap of our second quarter results. Revenue of $124 million was above the high end of our guidance range and grew 8% year-over-year. Adjusted EBITDA loss of $4 million also beat our guidance range adjusted EBITDA margin improved approximately 900 basis points versus Q2 '22, demonstrating the attractive operating leverage in our model. Next, on Slide 16, I will cover additional revenue details. Auction and insurance revenue, which was 56% of total revenue, increased 6% year-over-year versus solid results in Q2 '22. This revenue performance reflects 3% year-over-year unit growth and auction and assurance ARPU of $453 which also grew 3% year-over-year. As George mentioned earlier, despite a decline in GMV per unit of 13% year-over-year, we were able to grow ARPU by 3% and reflecting our price increases last fall, and we believe we still have pricing headroom going forward. Marketplace Services revenue, which was 37% of total revenue, grew 12% year-over-year. Results were driven by record revenue for both ACV Transport and ACV Capital. Our SaaS and data service products comprised 7% of total revenue and grew 1% year-over-year. As we discussed over the last few quarters, we are making significant improvements to the MAX Digital platform while taking a more measured approach to customer acquisition in the near-term. We're confident these improvements position MAX for a reacceleration of growth entering 2024. Turning now to Slide 17. I will cover costs in the quarter. Q2 cost of revenue as a percentage of revenue decreased approximately 480 basis points year-over-year. The improvement was driven by both strong auction and assurance results and by ACV Transport. As George mentioned, we delivered mid-teens transport revenue margins in Q2, which is within striking distance of our 2026 target. We continue to focus on expense discipline as we optimize and scale our business. Non-GAAP operating expense, excluding cost of revenue, increased 2% year-over-year versus 36% year-over-year growth the prior year. This reflects the significant investments we made in prior years to support market expansion and technology initiatives. 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 this year, resulting in our adjusted EBITDA loss declining by over 50% year-over-year. And as you've seen reflected in our Q2 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 Q2 with $500 million in cash and equivalents and marketable securities and $105 million of long-term debt to finance the growth of ACV Capital. Note that our Q2 cash balance includes $168 million of float in our auction business. As we've discussed previously, the amount of float on our balance sheet can fluctuate meaningfully based on the business trends in the final two weeks of each quarter and has a corresponding impact on operating cash flow. For the first half of 2023, cash flow from operations was $23 million, a significant improvement from the $73 million loss in the first half of 2022. Now I'll turn to guidance on Slide 20. For the third quarter of 2023, we're expecting revenue in the range of $115 million to $119 million. 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 $474 million to $482 million, representing growth of 12% to 14% year-over-year. We are also reducing our expected adjusted EBITDA loss to a range of $23 million to $27 million, and we remain committed to achieving adjusted EBITDA breakeven by exiting this year. As it relates to our guidance, we are assuming that new and used vehicle supplies remain lower at historical levels in the near-term that improve as production and inventory continue to recover. We're also assuming that conversion rates follow normal seasonal patterns in the second half of the year and wholesale price depreciation continues. Let me wrap up on Slide 21 by reviewing our 2026 financial targets. We are very pleased with our execution in a challenging macro environment and 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. As we detailed at our Analyst Day in June, 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 long-term growth and operating efficiency, consistent improvement in revenue margins and a commitment to balancing growth and investment 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 in the second quarter and we are especially proud of our ACV teammates to deliver these results. We continue to gain market share by attracting new dealer and commercial partners to our marketplace and by gaining wallet share, which positions ACV for attractive growth as market conditions improve. We're executing our territory penetration plan and gaining traction in 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 target and over the medium-term, generate over $1 billion in revenue with attractive margins, and 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.

Our first question comes from Michael Graham with Canaccord.

Can you hear me okay?

We can.

I appreciate the question and congratulations on the execution. I wanted to ask a broader question about the dealer wholesale environment. You mentioned that new car sales are improving and inventory levels are getting healthier, which is beneficial for the used market. However, we are still dealing with high prices for used retail. Where do you think we stand in progressing towards a more normal used market? How long do you expect it to take to reach that point if the new vehicle market continues on its positive trend?

Yes, Michael, thank you for your question. We discussed this in detail during our Investor and Analyst Day. One key point is the steps we are taking towards returning to normal market conditions, particularly with new car production and sales gradually returning to normal levels. We're seeing significant progress, which is encouraging, as consumers are excited about purchasing new cars despite economic concerns. Many new products are being launched, and manufacturers are starting to offer incentives on these vehicles. The recovery in new car production is crucial, and it's already underway. We're also noticing a decline in used car values, which is critical because it's essential that used cars be priced lower than new cars for buyers. This will also support the used market once interest rates decrease. New car sales are moving in a favorable direction, and we anticipate that used car sales will pick up more significantly, leading to an increase in inventory on dealer lots in the coming quarters. As for the journey back to normalcy, we've indicated that this year would be the lowest point, aligning with our forecasts and expectations. We're optimistic that by next year, we will begin to see a return to normalcy, and by 2026, we expect conditions to be back to what we consider normal. For now, we recognize that this year marks the bottom, and we anticipate gradual improvement from here.

Our next question comes from the line of Nick Jones with JMP Securities.

Great. Thanks. I guess one on some of your expectations around depreciation for the rest of the year. I guess, what gives you confidence in kind of the trajectory of unit depreciation? And then I guess, in a scenario where there's more volatility, do you feel dealers are better prepared to bid on cars that are more volatile and maybe result in less arbitration if things do get more volatile?

Yes, Nick. Thanks for your question. As part of our planning for this year, we have observed that used car values are declining. We feel confident in how we've modeled this decline and its impact on average GMV. While we feel good about the situation, it's important to consider what this means for dealers. Ultimately, they need to determine a trade-in value for consumers who are bringing in vehicles, for example, one with 80,000 miles. As values decrease throughout the year, we are assisting dealers by providing them with high-quality, real-time data rather than relying on outdated averages. Our AI technology enhances this data to aid dealers with their pricing strategies. An increasing number of dealers are utilizing the ACV market report, and we're expanding our data access to help both dealers and consumers understand the revised trade-in values. If dealers price their vehicles correctly, they will find it easier to sell in the wholesale market. The combination of our real-time market data and vehicle condition assessments offers a unique advantage that supports dealers facing declining values. As long as they set appropriate prices for consumers, they will be successful, and we are here to support them.

Yes, Nick, I'll add a couple of points here. Our guidance includes an expectation that prices will decrease by double digits in the second half, which we have incorporated into our assumptions. Additionally, you'll see that our GMV per unit in Q2 increased compared to Q1, which was due to a better mix in our marketplace. However, we are not projecting this trend to continue; instead, we anticipate a steady decline in the second half.

Really helpful. Thanks George. Thanks Bill.

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

Thank you so much for taking the question. I want to come back to two themes from the Analyst Day that you touched upon in your prepared remarks today. Can you talk a little bit about conversion longer term? You've opened up sort of a gap vis-a-vis the industry. And I want to understand what you see as key to either maintaining that gap or even widening as we've talked about over the medium to long-term, when you think about conversion. And then also pricing. You took price last year. Any updated thoughts on elasticity over the long-term in terms of platform pricing and maybe those two concepts are sort of broadly fed into each other, but just wanted to get any updated longer-term thoughts?

Thank you, Eric. We allocate a significant portion of our resources to improving conversion rates and assisting both sellers and buyers. It's essential for both parties; sellers benefit by selling their inventory more quickly, and buyers avoid wasting time on cars that aren't selling well. This is crucial for our end customers. For sellers, we focus on various auction formats and different sales channels for distinct vehicles. We recognize that a one-size-fits-all approach won't work, so we're investing heavily in a merchandising strategy that presents each vehicle appropriately. We will elaborate on this over the next six to nine months as we develop our strategy further. Our goal is to ensure vehicles are adequately showcased so buyers can see them effectively, rather than having limited visibility for just a short time. We are also focusing on AI to align our merchandising efforts with the specific buyer’s needs. We are dedicating significant technology and resources to improve this matching process. Moreover, we aim to minimize friction, ensuring buyers are aware of the risks associated with the vehicles they are interested in, which is informed by condition reports and additional data. While this is an ongoing effort, we will always be discussing our investments in aligning sellers with the right buyers. Regarding pricing, we believe we still have room for adjustments. Our current offerings provide buyers with a level of assurance that can’t be directly compared to our competitors. Additionally, we plan to introduce more buyer assurance initiatives, with one product already available and more to come. We will share further details towards the end of the year, but for now, we acknowledge that there is more scope for growth in this area.

Operator, we're ready for the next question.

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

Thank you for taking my questions. I hope I didn't disrupt anything. I would like to start with guidance. Your outlook suggests a sequential acceleration in revenue growth over the next couple of quarters. Could you elaborate on your expectations for marketplace, assurance, services, and data? Specifically regarding marketplace and assurance, what factors have you included in your outlook concerning conversion rates and listings? What key elements could influence any differences from your expectations? Additionally, I would like to ask about gross margins for auction and transportation capital and other services, which have decreased slightly sequentially. I believe this is the first time we've seen this moderation in two years. Could you explain what caused that sequential moderation? Also, what are the opportunities for increasing the attachment rate for ACV capital over time? I apologize for covering a lot of ground.

John, it's Bill. So let me answer the second question first. So what we saw in Q2 was yet another improvement in our transport margins quarter-on-quarter, which we just continue to execute at a really high level in terms of our transport business. So we're pretty happy with that. So that was certainly part of it. Also on the capital side, keep in mind, in an increasing interest rate environment, we're passing through those rate increases to our customers. So as I would expect all of our competitors to do as well. And that's a tailwind also in terms of margins. So those are the two dynamics with respect to marketplace services, okay? In terms of our guidance, so what I would tell you is we're assuming that we continue to gain share this past quarter, based on our math, we gained share at the rate of 17% for Q2 which seems to be kind of the zone that we've been in for the last several quarters. So we're certainly extrapolating continued share gains. Obviously, in the second half, there's a seasonality factor as well. But there are a number of other initiatives that we just continue to drive internally that we think will allow us to execute at the level that we've baked into our guidance. That's probably all I would say at this point. I don't know if there's anything you want to add, George?

No. Obviously, a favorable compare. So just saying the obvious. But we're happy with the execution. And the end of the year just assumes we just keep executing the way we've met.

Our next question comes from the line of Naved Khan with B. Riley.

Yes hi. Thanks a lot. George, maybe I heard you correctly, but I just wanted to clarify this. Did you say that half of the auctions are running for up to two hours, is that right? And what are you hearing from dealers on that format? It looks like it self-inconversion, but any kind of commentary there would be helpful. And then anything you can share with respect to dealer count on the platform? Is it stable? Or is it growing? What are you seeing on that front?

Yes, you heard correctly about the two-hour auction. We primarily offer this option to our sellers with higher conversion rates, providing them more time on the platform, almost like offering them real estate. Currently, we mainly grant it to our top-performing sellers and also to new sellers who show potential. Sellers typically appreciate this option, although opinions vary among buyers. We're continuously making adjustments; in fact, we have some updates rolling out this week and next that will allow buyers to customize their notification preferences, such as receiving alerts only within 20 minutes. Overall, our goal is to match buyers and sellers effectively, which is improving our conversion rates and helping us stay ahead in the industry. The features we have are currently live, and our team is focused on enhancing control for both sellers and buyers to ensure satisfaction. We'll keep iterating on this.

Got it. And then on the dealer count, any color or commentary?

Yes, we discuss dealer count only once a year and not on a quarterly basis. Generally, we are a consistent company, and you can see that in our quarter-over-quarter performance, which has been stable. So I would say we are consistent.

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

You mentioned new car sales, and if we analyze them further, it's clear that rental cars are taking a significant share from OEM allocations. I'm interested in how you perceive the rental car market, especially considering your comments on rental car penetration during Analyst Day. When rental companies are acquiring vehicles and there’s a necessity for de-fleeting, what are your thoughts on this opportunity? Has it become a more immediate prospect due to the adjustments you’ve made and the allocations you're receiving from OEMs?

Yes, absolutely, Chris. It's a new opportunity for us. Historically, we've seen very low numbers, typically just a few hundred units a month. So this isn't entirely unfamiliar territory as we expand into this sector. When you look at the broader commercial total addressable market I mentioned, some commercial needs land while others do not as we grow. Rental is a prime example where we can increase our units nationwide, even in areas without land. This is one of the appealing aspects of rental. Currently, de-fleeting numbers remain quite low, so it's encouraging to see them starting to rise. To give you an overview, we expect to move from a few hundred units a month to a few thousand, which will gradually become more significant over time. In response to your question, that part of the ecosystem is beginning to recover. As I contemplate the industry's return to normalcy, looking ahead to 2026, this is one area that's showing positive movement, albeit still at very low levels compared to historical de-fleeting and wholesale volumes.

Okay, and lastly, you mentioned revamping MAX Digital and reintroducing it early next year. I'm curious about what you envision for the product going forward. What do you hope to achieve with its core features? Is it focused solely on pricing data, or is there a broader purpose behind it?

I'm going to express this in a way that doesn't lead to any premature press releases or news articles, which are scheduled for January or February. However, I'll provide some insights. The MAX Digital platform we acquired is instrumental for dealers in pricing their inventory, including trades and retail inventory. It also offers merchandising capabilities, such as optimizing online imagery and ensuring dealers present their cars effectively online. We are currently working on incorporating ACV assets, including self-inspection tools that help assess a vehicle's condition and relate it to pricing. Our goal is to debut this refreshed project at the NADA event, which we consider a key annual highlight. I keep mentioning the end of this year or early next year to emphasize our aim of presenting an updated product that empowers dealers to leverage a comprehensive ACV data set for self-inspection, asset valuation, and more. This is just a preview for now, and I anticipate sharing more details before early next year.

Our next question comes from the line of Ronald Josey with Citi.

Can you hear me okay?

Yes, certainly, Ron.

Maybe, George, just a quick follow-up to that. I understood you don't want to say too much about what might be coming, but I thought I heard you say on the call that more dealers are using ACV's market data to set prices and improve the auction experience. Can you tell us about what's available now as we think about what might be coming? Also, as we consider gaining wallet share, which was a major focus during Analyst Day, we just heard earlier about how friction is being reduced. Please talk to us about how these different tools can enhance the sales process and improve overall wallet shares. I have one quick follow-up.

Okay, great. So Ron, regarding your first question, the ACV pricing engine is found in various locations, with MAX being just one of them. In the auction, there's a self-service auction market report that allows bidders to access detailed insights for free, providing value to dealers who use the ACV auction. This enhances the matching process, as it was designed with a focus on buyers by offering extensive transactional and pricing data. Recently, we updated the pricing engine to assist sellers through the launch screen, enabling them to determine the value of their assets. For instance, if a seller initially valued a vehicle at $25,000 but our inspection revealed it should be priced at $23,000, they can adjust their reserve price. This shifts the focus of the pricing engine more towards assisting sellers while still remaining free of charge, unlike the subscription-based MAX service. MAX Digital, on the other hand, serves as a comprehensive imagery management tool that not only aids in pricing but also guides users in their workflows, whether they are considering trade-ins or retail versus wholesale decisions. It encompasses a wider set of functionalities beyond just determining wholesale value and incorporates lessons learned into a more extensive platform. Now, what was your second question?

I believe your question was about wallet share gains, and I think that's what we were discussing regarding those gains.

All right. Perfect. You had another one. Go ahead.

And that one was on Clear Car, just an announcement from the Analyst Day. We haven't heard about it.

Yes. To your point, that's where the pricing engine is. Thank you for helping me finish my thought. We're building this pricing engine on the same platform, leveraging AI and machine learning to assist us in pricing vehicles. We're really excited about our progress. We've quietly launched the Clear Car brand. If I were to use the restaurant analogy I've shared before, we've opened the restaurant, but we haven't had our grand opening yet. We're starting to introduce it to the market. Our goal is to make a formal announcement about Clear Car and promote it widely. We already have several hundred dealers using Clear Car and have seen a healthy influx of new dealers signing up over the past few months. We're feeling positive about this. Clear Car aids dealers in pricing vehicles by allowing consumers to begin their journey from home. When consumers want to determine the value of their vehicle, we can place Clear Car on the dealer's website or create a dedicated website, similar to a We Buy Car concept. Consumers answer a few questions on a dedicated webpage or within the dealer's site. The new version also utilizes the product we acquired, allowing consumers to take pictures, and we use AI to assess the vehicle's condition. From all this information, we provide a vehicle value estimate. We're very pleased with our progress. Dealers are responding positively. Using the restaurant analogy again, think of it as preparing for a grand opening. We prefer to release products into the market and gauge our scaling efforts before making any major announcements. We're excited about where we are now. Since Analyst Day, we have launched a website and added some content. We're making progress, and as I mentioned earlier, we'll be more aggressive in our efforts between now and the end of the year.

Our next question comes from the line of Bob Levick with CJS Securities.

Yes. Can you hear me? It's Pete Lukas for Bob. One of the biggest areas of focus has always been inspections. We've talked about that a bit in terms of the technology that you're looking to roll out. But can you tell us kind of expand on in terms of your 2026 numbers, remind us of inspections for VCI and efficiency built into those 2026 numbers?

Yes. It's Bill. So we're currently running around six inspections or so on average for inspector. And as we've talked about in the past, our best-performing inspectors are roughly double that. So we've got some inspectors obviously below the average in less mature territories. So what we've assumed is certainly greater efficiency by 2026, but not on average, at the maximum productivity of our best inspectors today. So assume high single digits up to inspections a day on average by 2026. So that directionally is what we baked into our modeling.

Extremely helpful. And then just one more. We know you're always innovating, and you talked a lot about that on the call, which was very helpful. But in terms of next up and the '26 goals, is there anything you need to add? Is it a build versus buy strategy? Is there a missing piece or something we should be thinking about there to get to those goals?

No. I think on the Analyst Day, we felt like we really laid out the plan, both on our expansion of our product vision, making the inspection better and better. And without giving everyone exactly we're up to, right, because you want to keep a little bit for our own patent protection and legally keeping ourselves protected on all the things we're building. I think we really leaned in to say this is the future where we're really leveraging AI to help us with vehicle condition and inspection. And I think it's an area we're way ahead of the industry. So I think just more us continuing our path I think anything you have to believe there, to answer your question is you believe we're going to keep executing like we've been. Territory expansion, just keep growing the way that we've been growing. On the commercial side, that would start to be a part of our TAM expansion. So that part, we started to also lay out.

Yes. Look, it's a continuation of share gains. And we quantify that it's leveraging some of our pricing power over time. It's the market recovering by 2026. Those are the biggest drivers. If you go back and look at the chart that we put together breaking out the different revenue components.

Our next question comes from the line of Daniel Imbro with Stephens.

Daniel from Stephens. I have a longer-term question followed by a quick follow-up. To start, when considering market share, you've mentioned various services and inspections you provide, but liquidity remains a crucial factor in long-term share. Are you still bringing buyers onto the platform? It seems that the number of sellers is fairly stable, but how do you assess your auction liquidity or seller returns in comparison to your large omnichannel competitors?

We are executing as planned. On the buyer side, we are significantly focused on bringing in new buyers. Recently, we experienced a notable internal record for the number of new buyers signed up in a single month, which we haven't seen in a long time. We are excited about this achievement. Although we broke an internal record, our acquisition and retention of new buyers have remained steady. We continue to bring on both sellers and buyers. However, in certain areas of the country, supply hasn't kept pace with demand, which aligns with what I have been sharing over the past few years. As we increase supply in targeted regions, we can further meet demand. Overall, I would describe our progress as consistent, with ongoing additions of sellers and buyers.

Great. That's helpful. And then Bill, maybe quick clarifiers to John's question earlier, industry conversion rates have picked up the last three, four weeks. Is that what's baking into the guidance? And I didn't see any comment on kind of your previous expectation to exit this year at a positive EBITDA run rate. Could you just discuss those two pieces of the outlook?

Yes, we expect conversion rates to moderate in the second half due to seasonality. There's nothing unusual about that. We had another strong quarter in Q2 regarding conversion rates, which were lower than Q1, but Q1 was significantly above historical averages. Our conversion rates are performing well, and we anticipate they will align with historical norms from before COVID, which are in the mid-50s range. That's all factored in. We're implementing several initiatives, such as two-hour auctions, to drive conversion rates higher, and we're pleased with the results so far. Additionally, I reiterated our commitment to finish this year at EBITDA breakeven.

Yes. When considering external factors, such as the increase in conversion rates, compared to our expectation of a typical seasonal pattern, much of the data you're observing is from recent weeks. We have the challenging task of predicting what might occur between now and the end of the year. It's essential to clarify these points. That's why we consistently suggest following seasonal patterns; it's a cautious approach.

Our next question comes from the line of Rajat Gupta with JPMorgan.

Thank you for the questions. I have a couple of quick ones. Regarding customer assurance, I noticed that gross margins decreased sequentially. Is there anything noteworthy about that? Did it involve an increase in arbitration costs? You also mentioned year-over-year improvements with the inspection party. I'm curious if there was anything specific in the second quarter, considering that the margin ended up lower than we anticipated. Additionally, it's encouraging to see operating expenses decrease sequentially during a seasonally stronger quarter. However, the guidance still indicates an increase in the second half compared to the first half, even in a typically slower second half. Can you provide any insights on that? Are you just preparing for next year? Any additional details would be appreciated. Thank you.

Hey Rajat. I'm trying to address all the parts of your question. The first was about margins for customer assurance. In Q1, we discussed our strong performance on the arbitration front, which resulted in overall blended gross margins of 50%. We indicated that we expected our costs to increase sequentially in Q2, which led to the margin reduction. We have also explained how the accounting influences margins reported based on actual performance each quarter. This was not unexpected for us. Ultimately, our overall revenue margin was 49%, which was slightly better than our internal projections. Moreover, with the operational efficiencies you mentioned, we achieved a strong bottom line performance with an EBITDA loss of $4 million. I know your third question was about OpEx, so I’ll address that before you remind me of your second question. Regarding OpEx for the second half, part of it relates to the timing of expenditures. We can't always predict our OpEx linearity exactly each quarter, but we incorporated a slight increase in OpEx spending for the second half into our guidance compared to the first half. We aim to exceed those projections. Overall, we are reducing our anticipated EBITDA losses for the full year based on our updated guidance. Now, remind me of your second question?

Yes, it was more on OpEx line, how was it down sequentially despite in a seasonally better quarter sequentially. So I was just curious like what drove the sequential reduction there.

Yes, good question. So actually, our single largest expense on the marketing side is the NADA trade show. which happens in Q1, and that's a 7-figure cost for us. So that obviously only occurs and hits our Q2 financials. So that is the primary driver in terms of the quarter-on-quarter decline.

Got it. Got it. So just to clarify on the arbitration because there was nothing like industry specific or anything to be concerned about from an arbitration perspective given the short period of why price declines are coming in the industry.

That's right. We exceeded our internal expectations. We always try to communicate this as much as possible. Q1 was exceptional. I mentioned not to expect exactly the same in the later quarter, but we came closer to our 2026 goals in Q1 of this year. So I don't anticipate a strictly linear progression quarter to quarter. But yes, we did surpass our goals, including hitting or exceeding our EBITDA guidance. We also exceeded our internal margin goals, so we performed better than we had planned. Regarding your second question, there are no issues with customers or arbitration; it was simply a comparison from quarter to quarter.

Yes, I would like to mention that in Q2, we added over 100 employees. The sequential decline I referred to earlier was primarily due to the trade show expenses in Q1. We are committed to maintaining discipline and prudence in our discretionary spending. Our focus remains on investing in technology and go-to-market strategies while also prioritizing operational efficiencies, which we will continue to strive for each quarter.

Our next question comes from the line of Gary Prestopino with Barrington Research.

Good. A couple of questions here. If you can answer this, George. I know you don't give out your exact conversion rate, but could you maybe directionally talk about how your conversion rates were in excess of what the industry conversion rates were in the quarter?

I would prefer not to discuss that specifically. It's a common misconception that all conversion rates are the same. However, I can say we're currently executing a conversion rate that is slightly ahead of schedule. This is positively impacting our unit sales and customer satisfaction. Compared to many of our competitors, we're likely performing better. While I can't provide a specific number for comparison, I can tell you that many of our sellers are very happy. Buyers feel their time is well spent bidding, as they are increasingly securing vehicles each week and month. When considering the overall industry, including the challenges with declining used car prices and other macro factors, we are making significant strides with our pricing guidance, merchandising, and assisting buyers in bidding for the appropriate vehicles. It's a collective effort on multiple fronts. Our competitive advantage lies in the resources we have in product development and technology, as well as our team in the field and on the phone, all working to bring sellers and buyers together effectively. We're quite optimistic about our progress, and while I can’t provide a numeric figure, we feel confident about what we are accomplishing.

That's okay. My second question is for those of you in the field, particularly regarding franchise dealers, especially the OEM franchise dealers. Since the supply of new cars is improving, are you noticing that dealers are more inclined to sell through your system rather than keeping inventory on their lots?

So first, Gary, I know we don't provide all this detailed information because it can be confusing. But yes, listings are starting to increase, which indicates a willingness to trade. That's a positive development for us. We are beginning to see more readiness as dealer lots start to fill up. It's important to note that most dealer lots are still 20% to 30% below their levels from 2019, and you're still seeing 20% to 30% of a dealer's lot with many empty spaces for vehicles. So, new car supply is step one; used car supply is like step two, which will take a little longer. However, even as step one begins to occur, we are noticing some early signs of willingness, but it's still early in the recovery process. There are some positive early indicators showing dealers' readiness to wholesale. Hopefully, by next year, I can report that dealers have improved wholesale for vehicles year-over-year. Until now, I have been stating the opposite.

That concludes today's question-and-answer session. I'd like to turn the call back to Tim Fox for closing remarks.

Great. Thanks, Liz. I'd like to thank everybody for joining us on the call today. Please note that we're going to be participating at Canaccord's Annual Golf Conference this Wednesday in Boston. So we look forward to hopefully seeing you there or at another conference over the quarter. Once again, thank you for your interest in ACV, and have a great evening.

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