ACV Auctions Inc. Q3 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the ACV Auctions Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's 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 the conference over to your speaker today, Tim Fox, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining ACV's conference call to discuss our third 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. ACV's momentum continued in the third quarter with revenue at the high end of guidance and adjusted EBITDA once again exceeding our guidance. Our performance reflects another quarter of strong execution by the ACV team as we gain market share and launch new innovations that expand our total addressable market and drive operating efficiencies. Strong demand for ACV Transport and ACV Capital contributed to revenue growth and revenue margin expansion and a continued focus on driving profitable growth resulted in our adjusted EBITDA margin expanding 800 basis points year-over-year. With that, let's turn to a brief recap of Q3 on slide four. Third quarter revenue of $119 million increased 13% year-over-year, with growth accelerating sequentially. We sold 150,000 vehicles in the quarter, resulting in 13% year-over-year growth, reflecting further adoption of our marketplace solutions targeting dealer engagement. GMV of $2.1 billion was flat year-over-year, reflecting continued moderation of wholesale market prices. Despite this price moderation, ARPU once again increased year-over-year, reflecting the strength of ACV's core value proposition. On slide five, 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 seven, I'll share our observations about the broader automotive market as context for factors impacting the dealer wholesale market. In Q3, new vehicle retail units declined sequentially but increased approximately 10% year-over-year from depressed levels. While volumes continue to lag pre-pandemic levels, inventories improved which is key to supporting a sustained recovery in retail sales, trade, and dealer wholesale supply. Used vehicle retail units modestly increased sequentially and year-over-year, but also remain well below historical levels as affordability issues continued to pressure consumer demand. In terms of vehicle sourcing, our data indicates that dealers retain a higher-than-normal percentage of trade for retail inventory, creating a near-term headwind for wholesale supply. We believe the retail wholesale mix will begin to normalize as inventory levels for both new and used vehicles recover. While supply remains muted, price depreciation and conversion rates across the industry have generally been following normal seasonal patterns and have marginally improved in recent months. This is in stark contrast to industry trends in the back half of 2022, which resulted in challenging operating conditions in the wholesale market. On balance. We believe that end markets are showing early signs of improvement, giving us confidence to again raise guidance for the year. Turning now to slide eight. We estimate that the US dealer wholesale market remained well below normalized volumes of Q3, but grew modestly quarter-over-quarter. Relative to Q3 '22, the market only declined about 2%, which was a significant improvement from the 14% year-over-year decline in Q2. As the market begins to recover, our growth will benefit both from market expansion and market share gains. In Q3, our 13% year-over-year unit growth and an estimated market contraction of 2% imply 15% market share growth for ACV. Next, I would like to wrap up the growth section with highlights on our value-added services. First, on slide nine, the ACV Transportation team delivered another strong quarter and continues to scale ahead of schedule. Our strong carrier network and improving cycle times resulted in an attach rate in the mid-50% range again this quarter. Our technology investments and expanded carrier coverage of AI-optimized pricing are driving both growth and operating efficiencies. This combination yielded record revenue margins in the high teens, an increase of approximately 500 basis points year-over-year. As a reminder, our 2026 financial targets assume transport revenue margin in the high teens. While margins may fluctuate modestly over time, the fact that we achieved our target last quarter speaks to the value we're delivering to our dealer partners and to the strong execution of our transport team. Turning to slide 10. Our ACV Capital team once again delivered strong results in Q3. Attach rates in the low double-digits resulted in 40% loan volume growth year-over-year and combined, the strong ARPU expansion delivered about 80% revenue growth year-over-year. In addition to our floor plan offerings, we are investing in new ACV Capital capabilities that will help our sellers source consumer vehicles, leveraging ClearCar. 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 touch on the formal launch of ClearCar, ACV's consumer sourcing solution that leverages AI and real-time market data to deliver highly accurate condition-based pricing. As a reminder, consumers looking to sell their vehicle is a very large market opportunity, including 10 million transactions that historically are sold peer-to-peer and, therefore, do not end up in a dealership. As I discussed earlier, the below normal supply of new and used inventory in the market, especially late model used vehicles, is a challenge for our dealer partners. ACV is addressing this challenge with ClearCar, which has experienced strong early adoption with hundreds of dealer rooftops. And based on dealer feedback, consumer conversion rates are significantly higher than competitive sourcing tools. This speaks to both the power of the offering and its effectiveness in driving quality leads. At its core, ClearCar helps decode how vehicle condition influences vehicle value, allowing ACV dealers and commercial clients to have more transparent conversations with consumers, and consumer benefits can have greater visibility into how their vehicle value is determined. The solution consists of ClearCar pricing and ClearCar Capture. ClearCar pricing is an estimation tool that resides on the dealer's website, providing consumers with precise value estimates for their vehicle. ClearCar Capture allows consumers to submit photos of their vehicles for further documentation of conditions through our AI imaging and self-inspection tool, which we acquired from Monk. ClearCar Capture digitally detects exterior damage during the photo capture process, enabling dealers to update their condition-enhanced pricing without an on-site inspection. We are very pleased with the early market momentum for this value-added solution and the opportunity to both expand our total addressable market and add another growth lever to our business. To wrap up on growth. We are also pleased with the early stages of our commercial market strategy. We are operating in a few markets where we have the services required by these customers. And even though it's early, we're very encouraged by our progress and believe we can scale and capture the market share outlined in our 2026 financial targets. On slide 13, we highlight examples of tech investments that expand into our operations, delivering customer success while reducing costs. As we discussed last quarter, reducing arbitration remains a key focus for both customer satisfaction and optimizing margins. One of the key drivers is inspection accuracy. Our field team is equipped with CoPilot, ArbGuard, Apex, and our AI-powered imaging apps to deliver high-quality inspections. CoPilot and ArbGuard leverage machine learning, predictive analytics, and sensor data to inform our VCI on vehicle-specific issues before and after conducting an inspection. Apex delivers significant transparency into vehicle operating conditions while also increasing the inspection productivity of our VCI teammates. We continue to expand our imaging AI capability to identify specific important conditions with the presence of damage and rust. Together, these innovations have contributed to a low double-digit reduction in arbitration unit costs this year, which is a great performance in the current market. Our technology investments are also driving efficiency in our model with OpEx leverage increasing by over 200 basis points in Q3. To wrap up on innovation. ACV remains committed to delivering industry-leading technology to our dealer partners and to our own operations, driving both growth and scale. We look forward to sharing more details with you next quarter. 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 Q3 financial performance with strong revenue growth and upside to adjusted EBITDA. We also continue to demonstrate the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q3'22. Turning to slide 15. I'll begin with a recap of our third quarter results. Revenue of $119 million was at the high end of our guidance range and grew 13% year-over-year. Adjusted EBITDA loss of $4 million beat our guidance range, and adjusted EBITDA margin improved approximately 800 basis points versus Q3'22. This demonstrates both the inherent operating leverage in our model and continued strong OpEx management. Next on slide 16, I will cover additional revenue details. Auction and assurance revenue, which was 55% of total revenue, increased 17% year-over-year. This revenue performance reflects 13% year-over-year unit growth and auction and assurance ARPU of $439, which grew 4% year-over-year. Note that ARPU grew year-over-year despite a 10% decline in GMV per unit, reflecting our price increases from last fall and this September, and we believe we still have pricing headroom going forward. Marketplace Services revenue, which was 38% of total revenue, grew 11% year-over-year. Results were driven by strong ACV Transport performance and another record revenue quarter for ACV Capital. Our SaaS and data services products comprised 7% of total revenue and declined 6% year-over-year. The decline was primarily related to our stand-alone inspection offerings, which continue to be impacted by the weak off-lease market. While MAX Digital revenue grew modestly year-over-year, recall that we continue to take a measured approach to customer acquisition while making significant improvements to the MAX Digital platform. We're confident these improvements position MAX for long-term growth. Turning now to slide 17, I will cover costs in the quarter. Q3 cost of revenue as a percentage of revenue decreased approximately 500 basis points year-over-year. The improvement was driven by both strong auction insurance results and by ACV Transport. As George mentioned, we delivered high teens transport revenue margins in Q3, which is in line with our 2026 target. We continue to focus on expense discipline as we optimize and scale our business. Non-GAAP operating expense, excluding the cost of revenue, increased 9% year-over-year in Q3 versus 18% year-over-year growth the prior year. This reflects a more measured approach to growing OpEx relative to our revenue and margin growth to deliver higher operating margins as we march toward profitability. 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 60% year-over-year. And as you've seen reflected in our Q3 results, we have delivered margin expansion 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 Q3 with $450 million in cash and equivalents and marketable securities and $105 million of debt on our revolver. Note that our cash balance includes $162 million of float in our auction business. The amount of float on our balance sheet will continue to fluctuate meaningfully based on business trends in the final two weeks of each quarter, which has a corresponding impact on operating cash flow. Year-to-date cash flow from operations was $9 million, a significant improvement from the $75 million outflow in the same period of 2022. Now I'll turn to guidance on slide 20. For the fourth quarter of 2023, we are expecting revenue in the range of $116 million to $120 million. Adjusted EBITDA is expected to be a loss in the range of $7 million to $9 million. The sequential increase in adjusted EBITDA loss in Q4 reflects targeted investments to drive continued revenue growth in 2024. For the full year 2023, we are raising our expected revenue to a range of $479 million to $483 million, representing growth of 14% to 15% year-over-year. We are also reducing our expected adjusted EBITDA loss to a range of $20 million to $22 million and remain committed to achieving adjusted EBITDA breakeven exiting this year, setting us up to deliver a full quarter of profitability in Q1'24. As it relates to our guidance, we are assuming that new and used vehicle supplies remain lower than historical levels in the near term that improve as production and inventory continue to recover. We are also assuming that conversion rates and wholesale price depreciation follow normal seasonal patterns for the balance of the year. Let me wrap up on slide 21 by reviewing our 2026 financial targets. We are very pleased with our continued execution in a challenging macro environment and remain committed to achieving $1.3 billion of revenue and $325 million of adjusted EBITDA in 2026 with 25% adjusted EBITDA margins. Our targets are underpinned by a number of factors, including sustained market share gains, dealer wholesale market recovery to historical volumes, TAM expansion into adjacent markets, technology innovation to drive growth and operating efficiency, 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, I will summarize. We are very pleased with our strong execution in the third quarter. We are especially proud of our ACV teammates for delivering 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 are executing on our territory penetration plans and gaining traction with our expanding suite of offerings. We're delivering on 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.

Thank you. Our first question comes from Chris Pierce of Needham & Company.

Hey, good afternoon, everybody.

Hey, Chris.

Hey, Chris.

Can you discuss your unit growth compared to the used units we observe year-over-year at the publicly traded dealer groups? While I realize you may not have that information readily available, they averaged a decline of about 5% year-over-year in their Q3, whereas you reported a growth of 13%. I believe this may be due to your relationships with independent dealers, but I would like to hear your thoughts on how you are able to grow while they are facing a decline. Additionally, how do you differentiate yourself in general?

Yes, Chris, thanks. So there's a couple of factors of why our units grew even though, to your point, the used car retail market shrunk. So one is that we did see new car sales, which is where our supplies come from. So one is we are starting to see some of the health of the market come back, which is positive. Two, we are continually not only growing sellers, but getting more wallet share. So we're expanding our capabilities and growth within our footprint. So look at the two main reasons why being both customer wins, customer wallet share, and also the fact that new car sales is starting to come back, and new car sales coming back is helping us have trades coming into dealerships, which then creates the wholesale opportunity. Now granted, we didn't see dealer wholesale grow year-over-year, but we are seeing the market at least incrementally get healthy, especially compared to last quarter.

Can you explain what gives you the confidence to discuss normal seasonal depreciation at the year-end, particularly in light of last year's situation? Is it because dealer inventories were high last year and are tighter this year, or is there another reason?

Yes. Chris, the normalcy we are discussing relates to both listings and the sell-through or conversion rate. We are observing a sense of normalcy in these areas, and so far, we feel positive about it. Additionally, regarding your point about used car values, we do anticipate a decline in those values as part of our plan. We expect moderate month-over-month reductions in GMV throughout the quarter. When considering all the trends in listings, conversion rates, and our expectations for GMV to decrease, we are confident in the plan we have outlined.

Okay. Thank you.

Thank you. One moment for our next question. And our next question comes from Eric Sheridan of Goldman Sachs.

Thanks so much for taking the question. Hope everyone on the call is well. Maybe two, if I could. First, longer-term question about pricing. When you think about your long-term plan and where you are relative to competitors today, how should we be thinking about pricing as a lever to either gain more market share versus gather more unit economics and compound more revenue growth? So that would be number one, just a refresh on pricing versus competition. And then second, just in terms of the adjusted EBITDA guide for Q4. Just want to make sure that is maybe year-end one-time type technology investments as opposed to maybe a new run rate or thought we should be taking in on incremental margins going into next year. I know it's a little early to talk about 2024, but just want to understand the context around those investments that have some of the margin reversal in Q4. Thanks.

Yes, certainly, Eric. Thanks. This is George. I'll go first and then I'll let Bill address your second question. Regarding your first question, our long-term target for at least the 2026 model is about $500 in combined buy/sell fees. We've been averaging around $450 this year, which is only about $50 more. We believe we have the capacity to manage this, even with potential declines in GMV. The gap between our fees and some competitors is larger than that $50. Currently, we're confident in our model leading up to 2026, especially considering that the buy and sell fees in traditional auctions are significantly higher than ours, easily over $100. Now, Bill, do you want to take the second question?

Yes. Eric, so in terms of your second question, the short answer is there's really no change in terms of our operating model going forward. But to give you a little bit of context, so even with the Q4 guidance, we're reducing our OpEx guidance for the year by about $2 million. So if anything, we're actually in a better position in terms of heading into next year to achieve our EBITDA breakeven, if not EBITDA profitability in Q1. But there is an opportunity for us to make some targeted investments to drive growth next year, and we're taking an opportunity to bake that into our Q4 OpEx. So again, these are pretty targeted. We still have a lot of growth opportunities ahead of us, not just in dealer wholesale but commercial peer-to-peer. And our focus is basically setting ourselves up as best we can for next year's targets while still, again, lowering our total OpEx for the year by about $2 million. So hopefully, that gives you a little bit of context, but there certainly isn't anything beyond that or anything you should adjust your models to reflect.

Helpful on both fronts. Thanks.

Thank you, Eric.

Thank you. One moment for our next question. And our next question comes from Nick Jones of JMP Securities.

Great. Thanks for taking the questions. I guess just maybe back on the normalization or timeline to normalization. I think back at the Analyst Day, you said 2025, give or take, you expect kind of the industry to normalize. How are you guys monitoring what can kind of dislocate or change that timeline as we see various data points come out, whether it be industry-specific or maybe more particularly kind of a for your consumer challenges may be causing an overcorrection and supply starts to build as consumers struggle to afford auto? So any color on kind of, I guess, to boil it down, are there any changes in your timeline to normalization from here? And then the kind of the second question is how are you thinking about consumer challenges, auto affordability playing into that? Thanks.

Thanks, Nick. The way to approach this is by considering that we expect the market to return by 2026. Although it's late in 2023, we still have time for things to evolve. For example, dealer wholesale units have shown fluctuations over the past few years, with over 10% in 2021, likely over 8% in 2022, and potentially under 8% this year. Despite these changes, we're confident that improvements will appear in the next couple of years. A key reason for this optimism is that new car sales are now accompanied by incentives, which enhance affordability. We're observing these incentives across nearly all OEMs, which benefits us. Additionally, as our primary source of supply, franchise dealers are increasing new sales, leading to more trade-ins. Another point is that dealers are currently cautious about their inventory. As we discussed earlier, dealer wholesale numbers contracted because sales declined and dealers retained a larger percentage of vehicles. However, as used car inventory accumulates, we expect dealers to start wholesaling a higher percentage again, moving back toward normal levels. Given these factors, we believe we should see improvements in the upcoming years. While I have until February to firm up my thoughts for next year, I feel encouraged by the positive signals we're noticing. Even a slight quarter-over-quarter improvement in dealer wholesale, though minor, is a promising sign. We seem to be at the bottom, and even if interest rates remain high and consumer affordability is a challenge for used cars next year, we anticipate new car incentives will increase as OEMs try to reduce their inventory. This will lead to more trade-ins, and franchise dealers will likely be cautious with their inventory. I wanted to provide a detailed response because I believe this is an important topic.

Great. Thanks, George.

Thank you. One moment for our next question. And our next question comes from Ron Josey of Citi.

Great. Thanks for taking the question. George, I want to ask about conversion rates. I think you said we're seeing a sense of normalcy here. And I'm wondering if conversion rates are getting back to, call it, the '21 levels or before. And if that's the case, maybe talk to us on what are the drivers here in the past. We talked about new auction format to two-hour auctions, et cetera. And I have a quick follow-up.

Yes, certainly. We believe our conversion rates are slightly better than the market. There are a few entities that provide data on conversion rates, and I would say we are marginally ahead of the market, which is a positive outcome. There are probably two main reasons for this. First, we are benefiting from several innovations we've implemented, including product enhancements, improvements to auction timing, and updates to our condition reports. These changes have helped us manage seasonality effectively. As usual, we anticipate that conversion rates will decrease slightly as we enter the fourth quarter, which happens every year, but we’ve done well in Q3 and that performance reflects our efforts. Second, this year, we approached the market more cautiously, encouraging our sales team and inspectors to be more selective with listings and customers to improve conversion rates as part of our overall strategy. As we grow and interact with more sellers and listings, it's important to be prudent; we are more careful with sellers who have very low conversion rates. So, those are the two reasons why we are performing well in terms of conversion rates: our product improvements and a more cautious operating policy regarding low-performing sellers.

Got it. That's very helpful and conversion rates, I just wanted to clarify maybe something you said on the call now that we're seeing the units reaccelerate growth, and I understand your point on incentives and supply. Just can you repeat or talk just a little bit more on pricing? We've seen high singles, low doubles down this year. And do you expect that to continue as supply improves? Thank you.

Yes. When discussing pricing, you're referring to the Gross Merchandise Value, which indicates what is selling on our platform. We are planning for low single-digit growth, similar to what we experienced in 2019, around 1 to 2 percent per month, as part of our strategy. We are entering the quarter with this expectation, and it seems to be a sensible approach since it's something we anticipated. So far, I am confident in the team's ability to forecast our expectations, and we feel good about the plan we've put in place.

Yes, I think it's Bill. Just to provide a bit more context, last quarter, our GMV per unit decreased by 10% year-on-year and 11% quarter-on-quarter. However, we achieved a 4% year-on-year increase in our ARPU, although it was down about 3% quarter-on-quarter. One of our strategies, which we've mentioned before, involves leveraging our pricing power. As prices rise, which we anticipate based on our forward-looking models, we believe we can mitigate the downside related to our buy fees. So far, we've successfully managed this. To add some clarity, approximately half of the decline in our GMV per unit can be attributed to a modest shift towards less expensive vehicles due to consumer affordability issues, while the remainder is linked to the overall market decline in prices. Several factors are at play here, but ultimately, we've managed to safeguard our financial model from the volatility experienced.

Very helpful. Thank you, guys.

Certainly.

One moment for our next question. And our next question comes from John Colantuoni of Jefferies.

Thank you for the question. I have two inquiries. First, regarding the September price increase, could you explain its impact on Q3 and how it is expected to affect Q4 revenue? Secondly, about your 2026 revenue target, your outlook seems to anticipate a 17% outperformance compared to the market, which is slightly higher than the 15% you experienced last quarter. This previous figure was lower than in recent quarters despite the benefits from longer auction formats. Could you discuss what factors will support the improvement in market share trends over time? Thank you.

Hey, John, it's George. I'll address your second question first, and then Bill can tackle your first one. Looking at our last six quarters, we've consistently averaged between 16% and 17%. Therefore, 15% aligns well with that range. It’s important to recognize that this is not a perfect calculation. If you take some time to research the competitive landscape, you'll find that 15% is actually a strong performance. So, compared to our competitors, we've done exceptionally well, and I believe this is consistent with our 16% to 17% performance over the last six quarters. Overall, I’m very satisfied that, quarter after quarter, we've been landing in the 15% to 17% range. So no changes there. Bill, do you want to address the first question?

Yes. So John, in terms of Q3 and the price increase, it was roughly about $25 in terms of sizing. So also relatively small, similar to the price adjustments we passed through last year. And that was only for one month in the quarter. So roughly 1/3, about $8 worth of impact on our auction ARPU. And then obviously, we will get the full quarter benefit of that in Q4. That's all other things being equal. Obviously, what ultimately impacts ARPU are other factors, including average car prices, right? So that's the biggest variable. But if you just want to isolate the price increase by itself, those would be the numbers, that would be the math.

Very helpful. Thanks so much.

Yeah. Thank you.

Thank you. One moment for our next question. And our next question comes from Bob Labick of CJS Securities.

I wanted to start with the engaging discussion earlier on ClearCar and self-inspection and perhaps elaborate a bit on its uses. Is it currently only for dealers focused on consumer sourcing, or is there potential for this self-inspection to assist some more remote dealerships that a VCI can't reach efficiently, allowing dealers to inspect their own cars and upload them to the network? How is it being utilized right now, and what opportunities do you see for this self-inspection that you're leading?

Yes, absolutely, Bob. What we've discussed so far revolves around the primary issue of dealer sourcing more consumer cars. This is crucial as it addresses the largest concern voiced by dealers who are in need of more inventory, particularly late model vehicles that they typically retain. They require assistance because they are holding onto cars they would usually wholesale since they lack the right inventory. We believe that by enabling them to source more consumer cars, we can actually increase our wholesale numbers. Consequently, our focus is on this area. Regarding your second question, dealers do perform self-inspections on some vehicles, albeit at a low rate currently, represented by a single-digit percentage of our inventory. Dealers are inspecting and selling, with first ACV conducting inspections. The new tools we are implementing will facilitate this process, although we’re not ready to provide more details until around Q2 or Q3 of next year. However, we already support dealers who want to inspect a car and launch it. The key request from dealers is for us to make this process more efficient and user-friendly. This is a significant aspect of our discussions, but I would prefer to delve deeper into it during the first half of next year.

Okay. Very fair. Please remind me to ask you how much that will increase your TAM at some point in the first half of next year. And so just for my other question then. If you could give us an update on your penetration into the large dealer groups. Obviously, that's another driver of your units and your opportunity and your growth. And just kind of where you stand now and where you want to be.

Yes. No, it's a great question. I don't think we've been giving any data about our growth rate there. But what I will say this is our growth rate with the major dealer groups has been materially higher when you compare that compared to the growth rate we share with you all. The growth rate with the major groups is a higher percentage. So it's going well. We continue to focus on adding more value, whether it be ACV private marketplace, whether it be products like ClearCar. One of the large dealer groups out there want to top three or four, I would say, at least the only top five is using us. Private marketplace. They're using us for MAX Digital. Now they're using us or ClearCar. So this is a top five dealer group using us literally all of our value-added services, and we're starting to have a material piece of their overall wholesale share. So feeling really good. The strategy we're doing is working, where our value-added service strategy is working and we're able to build a relationship with several of these dealer groups.

Super. Thanks so much.

Thank you, Bob.

Thank you. One moment for our next question. And our next question comes from Michael Graham of Canaccord.

Hey, thank you. I just wanted to ask two. The first one was on the transport attach rate in margin, which is going great. Do you have any updated thoughts on like terminally where that transport margin can get to? And I just wanted to ask, as we inch a little closer to the new year here, when you think about achieving your 2026 targets, any updated thoughts on whether over the course of like 2024, 2025, and 2026, any updated thoughts on whether you think that expansion on the margin side is expected to be linear or back-end loaded? Or just any high-level thoughts you could share would be great.

Yes, Michael. We are very pleased with the progress of ACV Transport, both in terms of take rate and margin. It's performing exceptionally well. We prefer to manage expectations for a few reasons. First, the addressable market is 70%. Achieving the take rates we have in such a large market is impressive, considering there will always be some dealers who can pick up the car locally. Therefore, we would like to maintain reasonable expectations regarding our overall take rate for transport. Even if we exceed our targets in any given quarter, we believe it’s best to keep expectations stable. As for margins, we are doing exceptionally well. Until we scale up our higher-end units significantly, we will continue to present a blended margin profile that includes both mature and less mature markets. Rather than digress, I think it’s important to keep expectations steady for the next few years. This stability allows us to invest wisely in the areas we choose and still generate the revenue and margin we desire elsewhere. This is our perspective moving forward. Until 2026, we prefer to keep expectations as they are and reevaluate from there.

Yes, I think I would add just one of your questions was, will the growth in EBITDA margins to be linear. The answer to that question is no, I would not expect them to be linear. Obviously, we haven't provided 2024 guidance yet. We'll do that on our next call. But I think in terms of the leverage of our model, which is very significant. And as we start to accelerate our growth due to continued share gains, market recovery over time over the next several years, penetrating commercial, continuing to expand our ARPU, there will be a lot of leverage that will flow through to the bottom line in the out years, right? So I think kind of acceleration through '25 and potentially significant acceleration through '26 as we get the benefit of that leverage. So again, we didn't, at our Analyst Day, break down what it would look like each year, obviously. But that's the overall concept and the reason why we're confident that we can execute on that path assuming we can drive the top line revenue growth that we articulated a few months ago at the Analyst Day.

Okay, thanks. Those are helpful answers. Thank you both.

Thank you. One moment for our next question. And our next question comes from Rajat Gupta of JPMorgan Chase.

Thank you for taking my question and congratulations on your performance this quarter. I wanted to ask about the supply challenges you mentioned, which seem to be improving. You talked about dealers reducing trades in preparation for next year. I’m curious about the potential challenges from off-lease supply starting to impact us in the middle of next year due to low penetration in 2021. How do you plan to navigate that in relation to your market expectations? More specifically, what do you anticipate for used car retail industry volumes next year that gives you confidence in a market recovery? I have a follow-up as well. Thank you.

Yes, certainly, Rajat. I mentioned some of this earlier, so I won't be too repetitive. Our primary supply currently comes from franchise dealers, and while we are developing new channels that we discussed at Investor Day, I'll first address your question about our primary channel. Today, I would predict that new car sales should improve at least slightly year-over-year, if not better than that. Predicting for next year is similar to what we all do when trying to understand ongoing macro trends. Fortunately, the OEMs are no longer facing significant challenges in vehicle production, so those issues are mostly resolved. We're starting to see incentives emerge again, and expectations from the OEMs seem to be improving. We're not hearing concerns about whether OEMs will ever offer incentives again; those questions have faded away. It’s clear that consumers will have incentives to buy new cars, and with vehicles aging, drivers are operating the oldest cars on record. This situation is not favorable for consumers, as repairs are becoming increasingly expensive. Many are sharing stories about costly repairs, leading them to prefer lower monthly payments or leases instead. Recently, I observed Chevy promoting new vehicles priced between $25,000 and $30,000, which signals that there are options available for consumers, even if they aren't their top choices. Looking ahead to next year, I believe new cars will regain popularity, and consumers with the financial means and credit will be able to purchase them. As a result, dealers will likely become selective about which used cars they keep, focusing only on the ones expected to be profitable. They will approach the year with a more pragmatic mindset, recognizing that not every used car they acquired over the past couple of years will be a success. This shift in attitude may lead to some older trends returning, with vehicles being sold to independent dealers or others who can repair them at lower labor costs than franchise dealers. Overall, while I can't definitively say whether next year will be only marginally better or substantially improved compared to this year, I do believe we should see a year-over-year improvement based on my current assessment.

Got it. That's helpful. And then maybe just a quick one on the price increases. The September price increase a little faster than we had expected. Last year it was December. Should we expect you to continue to do this at a higher frequency or was it just more of a timing shift this year, and we need to go back to like once a year next year? Just maybe any thoughts on that would be helpful. And that's all I had. Thanks.

Yes. I mean our main goal is to hit the objectives we've shown you all in ourselves that get up to about $500 and buy and sell these between now and '26. The rate will always be determining how fast we do that. But our look at it as the same goal we've been outlining $500 in '26, again, will be lower than our typical traditional competitors are today. So there's room here for us to increase fees incrementally, and we'll decide when the right time is between now and then. But as Bill told you, this last one was about $25-ish box. We'll just keep incrementally getting there until we have our pricing be competitive because today, it's really a little bit lower than it should be.

Got it. Thank you so much.

Yeah, certainly. Thank you.

Thank you. One moment for our next question. And our next question comes from Daniel Imbro of Stephens Incorporated.

Hey, good evening, everybody. Thanks for taking our question.

Certainly, Daniel.

Maybe one on the volume backdrop haircut. I'm just curious with floor plan rates this high for your dealer customers, are you seeing dealers be more disciplined about moving aged inventory off the lot? And I think some of your peers maybe have tools to help with this, but do you have specific tools to maybe help dealers not only source cars but determine, okay, like this is how long to hold this car for and this car should be wholesaled now? How is that adoption going just as floor plan rates are 7%, 8% now, not the 1% to 3% we saw a few years ago?

Yes, Daniel, great question. Dealers are becoming increasingly disciplined, particularly among larger groups. We're observing a return to discipline in the ecosystem. Over the past couple of years, dealers largely paused their aging policies. For those unfamiliar with this concept, historically, vehicles on a dealer's lot for over 90 days would be pushed to wholesale by the dealership owners or operators, marking them as aged. This is the aspect Daniel referred to. Those policies are now being reintroduced. Some dealers are starting off with extended timelines, like 120 days, but aim to revert to 90 days by year-end. Certain groups have promptly resumed their disciplined approaches. Regarding the second part of your question, yes, we offer tools. Our MAX Digital platform provides dealers insights into their optimal inventory management and helps them identify which cars are performing well and which should be wholesaled. That intelligence is part of our MAX offering, and we're consistently exploring ways to share these insights with our dealers. Currently, we provide these services to around 1,000 rooftops. So, to summarize, we are indeed seeing a rise in discipline among dealers.

Great. And then maybe just one follow-up on Rajat's question about pricing. I'm curious how your competitors have responded. Over the last 18 months, it seems your large peers have raised their fees, but each time fees have increased, how have you seen the market react to your fee hikes?

Yes, I believe we have treated our end customers fairly regarding our fee increases. Honestly, I can't say if we're matching everyone else. If you look at traditional physical auctions, fees have significantly risen across the country. Our buyers perceive us as fair, and we've received minimal negative feedback, with positive reactions nearly balancing out the negative concerning the buy fee increase. Our current goal is not to be greedy. Although our fees are low, we aim to raise them gradually over time in a manner that is fair to our buyers. Everyone is trying to build their businesses and face their own challenges. So, while our fees are low, our approach is incremental to ensure fairness. The team's recommendations have been on point, and the planning has been very effective. I'm proud of how consistently we conduct market intelligence to gauge our position. You can gauge success in these matters by the feedback from our customers, who indicate we are managing it well. I'm truly proud of what the team has achieved so far.

Great. Appreciate all the color. Best of luck.

Thank you.

Thanks.

Thank you. One moment for our next question. And our next question comes from Rajat Gupta of JPMorgan Chase.

Thank you for the question and congratulations on the strong performance this quarter. I wanted to ask about the supply challenges you've mentioned easing a bit. You noted that dealers are reducing trades more than they currently are as we move into next year. With off-lease supply challenges expected to impact the market starting in the middle of next year due to low penetration in 2021, how do you plan to address this in light of your market expectations? Alternatively, can you share your expectations for used car retail industry volumes improving next year that would give you confidence in the recovery of your market? I have a follow-up question as well. Thank you.

Yes, Rajat, I touched on this earlier, so I’ll try not to be overly repetitive. Regarding our main supply channel, which primarily comes from franchise dealers, we are also developing new channels as mentioned on Investor Day. Focusing on your first question about our primary channel, I would predict that new car sales should improve at least slightly year-over-year. It's like making predictions for next year in a challenging macro environment. The original equipment manufacturers (OEMs) no longer face the significant hurdles in vehicle production that they once did, and most of those issues are now behind us. We are beginning to see incentives re-emerge, and OEMs have more positive expectations. The questions around whether OEMs will ever offer incentives again have disappeared. We all recognize that incentives will return, encouraging consumers to purchase new cars. Meanwhile, the average age of vehicles on the road is at a record high, and this trend is worsening. For consumers, this situation is becoming increasingly challenging as repair costs rise. Many people you know are likely sharing stories of high repair bills, making it difficult to manage expenses. Instead of facing repairs costing $1,500 or $2,500, consumers would prefer a more manageable $400 or $500 payment or a lease. Recently, I noticed a Chevrolet commercial promoting new vehicles priced between $25,000 and $30,000, underscoring the availability of new cars for consumers. They may not be the preferred choices, but options exist. Looking ahead to next year, I believe new cars will regain popularity, and consumers with the financial means will be ready to purchase. This shift will also affect the used cars being traded in; dealers will keep only those they expect to profit from. They will adopt a more practical approach this year, unlike the previous couple of years, as they recognize that not all used vehicles will perform like those purchased before. This could lead to those trades ending up with independent dealers, who can repair them for less than franchise dealers. I believe we may see a return to some previous trends. Thank you for this important question; it's worth spending more time on.

Got it. That's helpful. And then maybe just a quick one on the price increases. The September price increase a little faster than we had expected. Last year it was December. Should we expect you to continue to do this at a higher frequency or was it just more of a timing shift this year? Just maybe any thoughts on that would be helpful. And that's all I had. Thanks.

Yes. I mean our main goal is to hit the objectives we've shown you all in ourselves that get up to about $500 and buy and sell these between now and '26. The rate will always be determining how fast we do that. But our look at it as same goal we've been outlining $500 in '26, again, will be lower than our typical traditional competitors are today. So there's room here for us to increase fees incrementally, and we'll decide when the right time is between now and then. But as Bill told you, this last one was about $25-ish box. We'll just keep incrementally getting there until we have our pricing be competitive because today, it's really a little bit lower than it should be.

Got it. Thank you so much.

Yeah, certainly. Thank you.

Thank you. One moment for our next question. And our next question comes from Daniel Imbro of Stephens Incorporated.

Hey, good evening, everybody. Thanks for taking our question.

Certainly, Daniel.

Maybe one on the volume backdrop haircut. I'm just curious with floor plan rates this high for your dealer customers, are you seeing dealers be more disciplined about moving aged inventory off the lot? And I think some of your peers maybe have tools to help with this, but do you have specific tools to maybe help dealers not only source cars but determine, okay, like this is how long to hold this car for and this car should be wholesaled now? How is that adoption going just as floor plan rates are 7%, 8% now, not the 1% to 3% we saw a few years ago?

Yes, Daniel, that's a great question. Dealers are becoming increasingly disciplined, especially among the larger groups. We're definitely noticing a return to discipline in the ecosystem. In the past couple of years, dealers put their aging policies on hold. Historically, if a car remained on a dealer's lot for over 90 days, dealership owners or operators would encourage the dealer to sell the vehicle wholesale, categorizing it as aged. This is the issue Daniel is referring to. Now, those policies are starting to return. Some dealers have added provisions, saying they would allow cars to remain for 120 days initially but plan to revert to 90 days by year's end. Some dealer groups have already resumed strict practices. Regarding your second question, yes, we have tools available. Our MAX Digital offering includes a product that helps dealers understand their ideal inventory and manage which cars are performing well and which should be wholesaled. That intelligence is part of our MAX offering, and we continuously brainstorm ways to make this available to all our dealers incrementally. Currently, we provide these services to around 1,000 rooftops. So yes, these are excellent questions, and we are starting to see a resurgence in discipline.

Great. Could you provide a follow-up regarding Rajat's question on pricing? I'm interested in how your competitors have responded. Over the past 18 months, it seems your larger peers have increased their fees. Each time this has happened, how has the market reacted to your fee increases?

Yes, from what I can see, we've been fair with our customers regarding our fee increases. I'm not sure how we compare to everyone else, honestly. If you look at traditional physical auctions, their fees have significantly increased across the country. Our buyers perceive our fees as fair, and we've received very little negative feedback, with positive reactions weighing just as much as any negativity regarding the buy fee increase. Our current goal is not to be greedy. While our fees are low, we're aiming to raise them gradually over time in a way that's fair to our buyers. They are all trying to build their businesses and face their own challenges. We want to implement these increases slowly to ensure fairness. So far, the team's recommendations have been well thought out, and the planning has been excellent. I'm extremely proud of how we consistently analyze the market and assess our position. You can tell when you're handling these matters well because our customers often express their satisfaction with how we manage things. I'm really proud of the team's performance in this regard so far.

Great. Appreciate all the color. Best of luck.

Thank you.

Thanks.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Tim Fox for closing remarks.

Thanks, Tim. I'd like to thank everyone for joining us on the call today. Please note that we will be participating in several investor conferences in November here. You can find all the details on our IR website. We look forward to seeing you on the conference circuit, hopefully, this quarter. And again, thank you for your interest in ACV, and have a great evening.

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