Earnings Call Transcript - ACVA Q4 2024

Operator, Operator

Greetings and welcome to the ACV Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host Tim Fox, Vice President of Investor Relations. Thank you, you may begin.

Tim Fox, Vice President of Investor Relations

Good afternoon and thank you for joining ACV's conference call to discuss our fourth quarter and full year 2024 financial results. With me on the call 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.

George Chamoun, CEO

Thanks Tim. Good afternoon, everyone and thank you for joining us. We are very pleased with our fourth quarter performance, which capped off another strong year of execution by the ACV team. Q4 revenue and adjusted EBITDA exceeded the high end of guidance, resulting in 32% full year revenue growth and we delivered our first full year of adjusted EBITDA profitability. Our 2024 results were driven by three key factors. First, strong execution in our dealer wholesale business. We continue to gain market share and expand our dealer-partner network with over half of dealers in the U.S. transacting on our marketplace. Second, we had record performance in ACV Transport and ACV Capital, along with market traction of our growing suite of dealer solutions. And third, we executed on an exciting product roadmap to grow our competitive moat and expand our total addressable market, while delivering significant margin expansion. As we turn to 2025, ACV is focused on delivering strong top line growth despite a muted outlook for the dealer-wholesale market. We are also focused on driving meaningful adjusted EBITDA expansion, while continuing to invest in exciting long-term growth objectives. We're confident that executing on this profitable growth strategy will create significant long-term shareholder value. With that, let's turn to a recap of our results on Slide 4. Q4 revenue of $160 million was above our guidance range, resulting in full year revenue growth of 32%. GMV increased year-over-year in Q4 and the full year with nearly $10 billion of GMV transacted in 2024. We sold 183,000 vehicles in Q4 and 743,000 in 2024, growth of 24%. Unit growth was driven by continued market share gains and solid execution across our remarketing centers. Next, on Slide 5. Today's discussion will focus on the three pillars of our strategy to maximize long-term shareholder value; growth, innovation, and scale. I will begin with growth. Turning to Slide 7, I'll start with observations about the automotive market as context for dealer wholesale volumes. On the retail front, new vehicle sales increased 2% year-over-year in 2024, benefiting from solid 7% growth in Q4. With new vehicle sales back to historical levels, along with more attractive OEM incentives, retail sales should continue to recover to normalized levels. However, the used vehicle market continues to tread water. According to NADA, sales declined modestly year-over-year in Q4 and for the full year. Consumer affordability has remained the primary headwind to our retail volume recovery. Used vehicle inventory is about 25% below normal and off-lease returns are still bottoming. We have yet to see a sustained improvement in the trade to wholesale mix. This resulted in flat dealer wholesale volumes in 2024. In terms of our outlook for 2025, we're encouraged by pockets of improvement in the broader automotive market. But we believe it's prudent to assume dealer wholesale volumes will be approximately flat year-over-year. Moving to Slide 8. Let's cover highlights of our value-added services, beginning with ACV Transportation. The Transportation team delivered another strong quarter, resulting in over 30% revenue growth and 410,000 deliveries in 2024. By leveraging AI, the team has optimized pricing across nearly the entire ACV Transportation network, resulting in both strong growth and operating efficiency. Revenue margin expanded 300 basis points in 2024, exceeding our midterm target margin target of high teens. Lastly, our off-platform transportation service continued to gain traction with our dealer partners in Q4. We're excited to deliver these new value-added services that accelerate network densities and create additional long-term growth vectors. Turning to Slide 9. The ACV Capital team delivered strong results with accelerated year-over-year revenue growth in Q4 and full year revenue growth of 26%. As we discussed in recent quarters, our ACV Capital team has been balancing growth and risk in an environment that has been challenging for independent dealers. Going forward, we are confident that we can accelerate ACV Capital growth while continuing to manage risk. In addition to our core floor plan offerings, we are excited about the early adoption of new value-added offerings we began piloting in 2024. Recall that these include dealer financing for consumer-sourced vehicles and dealer trade-ins that are sold retail or wholesale on ACV's marketplace. This bundled ClearCar ACV Capital offering supports dealer sourcing strategies and creates another long-term growth lever for our Capital business. Next, I will address the second element of our strategy to drive long-term shareholder value, innovation. Turning to Slide 11, I'll frame our tech investment around a core differentiator that underpins our products, services, and operations, ACV AI. It's not lost on us that investors are hearing a lot about AI these days. Technologies like machine learning and large language models are advancing at a rapid pace and ACV is uniquely positioned to transform how decisions are made in automotive. Within our digital marketplace, we leverage AI together with our proprietary data to deliver condition-enhanced pricing intelligence and to generate tailored buying experiences based on historical buying patterns and available inventory. We just released new features in ACV MAX powered by ACV AI that predicts prices with incredible accuracy. We can now predict what a retail vehicle will sell for within a few hundred dollars, and within $100 of its wholesale value. This pricing capability, informed by specific vehicle and local market dynamics, is used to guide sellers on vehicle listing price. We are seeing sellers and buyers adopt our prices increasingly, driving higher conversion on our marketplace. ACV AI is foundational within our inspection platform, delivering the most transparent and accurate condition reports in the industry. Before our Vehicle Condition Inspectors or dealers touch a vehicle, we flag known condition risks and guide them through the inspection process. These disclosures are added to condition reports based on insights from our vehicle data model. This model contains structured data from millions of inspections, augmented with third-party data, and we believe represents one of the most comprehensive vehicle condition databases in the industry. We're incorporating advanced technology into our merge and commercial platforms as we expand into this adjacent market. ACV AI powers our consumer-facing solutions like ClearCar and our trade-in Solution for auto e-commerce partners. Dealer partners are piloting our new AI-enhanced applications to reform their own inspections for a number of use cases, and we've received incredible feedback, which has informed our product roadmap. To wrap up, as you know, innovation has been one of ACV's guiding principles since inception and a key driver of our marketplace success. We're only getting started, and we look forward to sharing some more exciting new AI-enabled products and services at our upcoming Analyst Day in March. With that, let me hand over to Bill to take you through our financial results and how we're driving growth at scale.

Bill Zerella, CFO

Thanks George and thank you for joining us today. We are very pleased with our Q4 financial performance. Along with strong revenue growth, we delivered meaningful margin expansion and adjusted EBITDA growth, demonstrating the strength of our business model. On Slide 13, let's begin with a recap of fourth quarter results. Revenue of $160 million was above the high end of our guidance range, representing 35% year-over-year growth. Q4 revenue from our 2024 acquisitions was in line with expectations. So, the overperformance was again driven by strong organic growth of approximately 20% year-over-year. Adjusted EBITDA of $6 million exceeded the high end of guidance, with adjusted EBITDA margin improving 900 basis points year-over-year. The upside was driven by strong high-margin auction and assurance revenues and by operating leverage. Finally, non-GAAP net income was also above the high end of guidance, with margin increasing approximately 400 basis points year-over-year. Next on Slide 14, let's review additional revenue details. Auction and assurance revenue was 58% of total revenue and grew 40% year-over-year. This performance reflects 27% year-over-year unit growth and auction and assurance ARPU of $500, which grew 10% year-over-year. Marketplace services revenue was 37% of total revenue and grew 31% year-over-year, reflecting strong revenue for ACV Transport and record revenue for ACV Capital. Our SaaS and data services products comprised 5% of total revenue, with growth accelerating to 10% year-over-year. Next, I'll review Q4 costs on Slide 15. Non-GAAP cost of revenue as a percentage of revenue decreased approximately 400 basis points year-over-year. The improvement was driven by auction assurance results and by ACV Transport. Non-GAAP operating expense, excluding cost of revenue, as a percentage of revenue, decreased 400 basis points year-over-year. These results reflect our focus on expense discipline as we optimize and scale our business. Moving to Slide 16, I'll frame our investment strategy as we drive profitable growth. Our focus on spending discipline and operating efficiency resulted in a decrease in OpEx growth in 2023, yielding a significant improvement in adjusted EBITDA. In 2024, as expected, OpEx growth increased to support our marketing center strategy and commercial platform investments. Even with these growth investments, adjusted EBITDA margin increased by approximately 800 basis points year-over-year. Next, I will highlight our strong capital structure on Slide 17. We ended Q4 with $270 million in cash and cash equivalents and marketable securities, and $123 million of debt. Note that our Q4 cash balance includes $167 million of float in our Auction business. In the figure on the right, we highlight our strong full year operating cash flow of $65 million. This significant improvement reflects our transition to positive adjusted EBITDA and strong margin expansion. Now, turning to 2025 guidance on Slide 18. For the first quarter, we are expecting revenue in the range of $180 million to $185 million, growth of 24% to 27% year-over-year. Adjusted EBITDA is expected to be in the range of $9 million to $11 million, reflecting growth of approximately 135% year-over-year at the midpoint of guidance. For the full year, we are expecting revenue in the range of $765 million to $785 million, growth of 20% to 23% year-over-year. Adjusted EBITDA is expected to be in the range of $65 million to $75 million, reflecting growth of approximately 150% year-over-year at the midpoint of guidance. As it relates to guidance, we're assuming that dealer wholesale volumes will be approximately flat year-over-year for 2025. We expect conversion rates and wholesale price depreciation to follow normal seasonal patterns. We also continue to expect revenue growth to exceed non-GAAP OpEx growth, excluding cost of revenue and depreciation and amortization by approximately 500 basis points. And finally, moving to Slide 19, we're updating key assumptions in our midterm target model. The model continues to assume 1.5 million total units and we now expect approximately 15% of the mix to come from commercial wholesale. Our targets also continue to be underpinned by sustaining market share gains and expanding margins through revenue mix and scale, which we've clearly demonstrated in our performance. We're also factoring in higher auction and assurance ARPU based on the pricing power we've demonstrated in recent years by delivering value to our dealer partners. As such, our new targets are revenue of $1.4 billion and adjusted EBITDA of $350 million. We look forward to taking you through a deep dive on our updated targets at our March Analyst Day. And with that, let me turn it back to George.

George Chamoun, CEO

Thanks Bill. Before we take your questions, I will summarize. We are very pleased with our strong execution in 2024. We are especially proud of our ACV teammates that delivered these results. We continue to gain market share by attracting new dealer and commercial partners to our marketplace while expanding our addressable market, which positions ACV for attractive growth as market conditions improve. We are delivering on an exciting product roadmap powered by ACV AI to further differentiate ACV and drive operating efficiencies. We are focused on achieving substantial adjusted EBITDA growth in 2025 and delivering on our updated midterm targets that we believe will drive significant shareholder value. We are committed to achieving these results while building a world-class team to deliver on our goals. With that, I'll turn the call over to the operator to begin the Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Eric Sheridan with Goldman Sachs. Please go ahead with your question.

Eric Sheridan, Analyst

Thanks so much for taking the questions and great to talk to you. In terms of the market share gains that are embedded in your forward forecast, maybe talk a little bit George about some of the underlying assumptions you're making with respect to sort of same-store dynamics, new initiative dynamics, elements of yield or return on some of the investments you've made in the platform over the last couple of years is sort of driving those market share gains, just so we can understand a little bit better some of the underlying assumptions. And with the one year out EBITDA forecast, I just want to refresh on how you're thinking about either hitting that kind of forecast versus outperforming it and the balance between achieving the EBITDA number versus finding ways to invest in the business even if you do produce some extra incremental profit as we go through the year? Just to understand the philosophy behind it. Thank you.

George Chamoun, CEO

Yes, certainly, Eric. First, regarding our thoughts on the market this year, we are assuming that our market share gains will continue at the same pace. We anticipate a relatively flat wholesale market this year. Given the various factors at play, including interest rates and other market conditions and concerns in the automotive sector, we believe the overall wholesale market will remain flat while we continue to capture market share consistently. So, there is no change in our approach to gaining market share. Additionally, with our new value-added services, there's potential for faster growth, but for now, we maintain the same message: consistent execution, steady market share gains, and a flat dealer wholesale market year-over-year. Does that address your first question, Eric?

Eric Sheridan, Analyst

That is helpful. Thanks.

George Chamoun, CEO

Yes. To answer the second question, I will start and Bill can add later. We are continuing to invest and have an exciting lineup of products and technologies. In a rapidly changing world driven by AI, we see our unique advantage in demonstrating strong overall health benefits. Our year-over-year EBITDA improvements are around 150%.

William Zerella, CFO

It's actually 150%.

George Chamoun, CEO

150%, thank you. 150% year-over-year improvement. So, while doing that, an incredible improvement overall. Eric, to your point, you'll see some of the things I highlighted today, we'll be showing quite a bit of this on Analyst Day as well. We've got a really incredible product roadmap. So, when you look at the strength in our current products, our product roadmap shows that we continue to improve our overall path of EBIT expansion, but also invest in the core. Bill, I don't know if you want to add any more to that?

William Zerella, CFO

Yes, I would say, Eric, I mean it's always a question of how you balance investment versus driving earnings growth. So, when you take a step back, we're driving 150% improvement in adjusted EBITDA on 22% revenue growth, right? In the past, in terms of overperformance, we've tended to pass some portion of that through in terms of overperforming, which is what happened last year. But we're always kind of thinking at the same time, how do we continue to drive future growth. So, that's always the balance, and those are the calls that we make. So far, we've been able to overperform and still invest at a rate we think is important to drive future growth. So, we feel pretty good about the balance, at least for the initial guidance for the year. And like every year, we'll see how things kind of play out over time, especially with respect to market conditions.

Eric Sheridan, Analyst

Really appreciate it. Thank you.

George Chamoun, CEO

Thank you, Eric.

Operator, Operator

Thank you. Our next question comes from the line of Chris Pierce with Needham & Company. Please proceed with your question.

Chris Pierce, Analyst

Hey everybody. I just wanted to hit on flat market volumes. There are articles out there from the National Auto Auction Association showing low double-digit growth in dealer volumes in January and similar in commercial. So, is it that you think maybe tax refund season was pull forward? So, I just want to get a sense of the market's been strong, but you guys are saying flat in 2025. I just want to kind of understand where you're coming from?

George Chamoun, CEO

Thank you for the question. It's important to have a range in our expectations to consider various scenarios. We need to think about what happens if the market remains flat, or if it performs slightly better or worse, which is why we present a range. There is mixed data regarding retail forecasts this year, and we realize the need to be cautious. January was a strong month for us at ACV, and if the entire year mirrors that performance, it would be excellent. However, we cannot rely solely on that. February’s outlook suggests that retail sales might decline compared to last year. This is specific to retail and not wholesale. Several factors, including weather and interest rates, could influence retail performance in February, and these challenges may be temporary. Considering all these variables, we believe it is wise to take a middle-ground approach, predicting a flat market. We don't feel it's prudent to assume everything will improve given the varying signals out there. Nevertheless, there is potential for wholesale to increase, as indicated in January. However, it's crucial to understand that January's wholesale performance comes from December's activities, with a natural delay in reporting. We will wait for more data to assess how retail performed year-over-year in January. Overall, we believe that staying conservative in our projections serves the best interests of our company and shareholders, and that’s why we have provided a range.

Chris Pierce, Analyst

Can you discuss the changes you're observing from power wholesalers like CarMax and Carvana as they update their buyer-facing technology? Do you think these changes will impact your volumes in any way? How do you perceive the market's shift towards more tech-forward solutions?

George Chamoun, CEO

Yes, I mean at the end of the day, I think we've been very consistent on competition, right? The questions we've gotten from our IPO to now, we've always had a lot of competition up there. There's hundreds of regional auctions. We've always had competition. We respect our competition. But I think there were other marketplace things that have come up for the last couple of years that draw some questions out there that some of the things you all saw from other marketplace companies. You're hearing a very consistent message. We've got an incredible value proposition for dealers. We have marketplace offerings. We've got transportation. We've got capital. We've got pricing tools. We've got a broader value-added offering than we believe anyone else in the world. And we feel really good about that. So, there will always be competition. We respect that competition, but we really love the position we're in.

Chris Pierce, Analyst

Okay, got it. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Pete Lukas, Analyst

Yes, good afternoon. It's Pete Lukas for Bob. Just on your recon network, as you build out to 40-plus locations, what are the key advantages that this gives you other than more storage space for repos? And what are you doing differently than the incumbent players with your space and commercial offerings?

George Chamoun, CEO

Two great questions. To help everyone else understand, having the land for repossession and other categories allows us to expand our total addressable market, which is exciting. The right locations are important, and ACV’s unique offering is twofold. First, our data service offerings enable us to auction vehicles every day instead of just once a week, assisting our commercial partners in making informed decisions based on vehicle condition. This condition data is utilized even upstream; we have a re-marketer in the rental car sector using our data to better gauge the value of their wholesale cars before they decide on re-marketing. Once we reach the physical location, we believe there is healthy disruption taking place, which we will reveal at Analyst Day. We've developed incredible technology for when the vehicle arrives, improving our efficiency and accuracy regarding the car's condition and speeding up processes. Lastly, the size and reach of our marketplace is significant. As one of the fastest-growing marketplace companies, we have a broader audience compared to traditional local auctions. There are buyers nationwide who appreciate the ACV Condition Report and would be eager to purchase every used car listed, allowing us to utilize our dealership wholesale network and scale to attract these buyers in the commercial vehicle sector.

Pete Lukas, Analyst

Very helpful. Thanks. And then, I guess, just staying on that topic, just how many acquisitions are you looking at this year in terms of how many would be greenfields? And what are you seeing in the market overall? Is it getting easier or harder to acquire locations?

George Chamoun, CEO

Yes, this is going to be a really exciting year for ACV because we will end the year with our first greenfield location. Our software and technology services will be ready for the back half of the year. And we'll be ready to break ground, very exciting for ACHIEVE. There could still be M&A this year or next year, we're not banking on it. Of course, we're talking to folks whether something happens or not, but we're going to assume moving forward that if we want to be in a market and there isn't someone to acquire, we're just going to go ahead and open up a greenfield. When we look at the cost for rent, the rent costs are really manageable for what we need. So, all we need to do is basically rent the location, put up the right reconditioning facilities, bring the tech that we have, and we're up and running. And we're really excited to have at least one up and running by the end of this year.

William Zerella, CFO

Hey Bob, and I would add, obviously, if we're successful with greenfield rollout, that could and should dramatically reduce our capital requirements from an M&A perspective. So, we're kind of anxious to move forward. And as George said, by the end of the year, we have our first greenfield up and running. And then we'll also better be able to gauge what our capital requirements really will be since a lot of investors have asked us that question. And it really depends upon the mix between M&A and greenfield. But having our first greenfield up and running will give us a little more clarity in that regard.

Pete Lukas, Analyst

Very helpful. Thanks. I'll jump back in the queue.

Operator, Operator

Thank you. Our next question comes from the line of Nick Jones with JMP Securities. Please proceed with your question.

Nick Jones, Analyst

Thanks for taking the questions. Can you just remind us how you are thinking about pricing in the business? Is that still a lever you could pull on? How are you thinking about it kind of strategically? And how are competitors behaving today?

George Chamoun, CEO

Yes, thank you, Nick. That's a great question. Our fees are still slightly lower than our competitors, which gives us some flexibility for this year. We're considering that as part of our strategy at this moment. However, for competitive reasons, I prefer not to disclose too many details on this call, but we do have some room to maneuver this year.

William Zerella, CFO

Yes, I would just add, Nick, I mean, if you look at the numbers for last year, our marketplace ARPU was up 9%, right, as a result of some of the price increases that we were able to pass through. So, we're certainly assuming a lower percentage of increase in our model for this year.

Nick Jones, Analyst

Got it. If I could, I think you mentioned that about half of dealers are using the platform. You usually update those figures in the annual report, so we can wait for that unless you can share them now. Can you discuss the retention of businesses using the marketplace? What should we consider regarding churn and the general behavior of the users? It seems like churn is very low, possibly negligible, and it primarily focuses on shifting wallet share. Can you help us understand how you plan to gain market share and how users are responding to the platform as time goes on?

George Chamoun, CEO

Yes, Nick, when we consider our retention, it's important to look at the Northeast markets where we've been established the longest. We've gained significant market share there. Our market presence in these early markets is quite strong, and it's encouraging to see that even after eight or nine years, we're still growing our share. Continuous growth in share indicates that we are successfully retaining our initial customers. I want to emphasize that, along with what will be detailed in the 8-K and during Analyst Day, where we will present slides illustrating our growth in these markets. This will highlight the fact that we are not just attracting new users; we are also increasing our share and revenue from our existing customers.

Nick Jones, Analyst

Great. Thanks George. Thanks Bill.

George Chamoun, CEO

Thank you, Nick.

Operator, Operator

Thank you. Our next question comes from the line of John Colantuoni with Jefferies. Please proceed with your question.

John Colantuoni, Analyst

Great. Thanks for taking my questions. Just doing some back of the envelope math suggests full year outlook embeds something like mid-teens organic unit growth given you're expecting the wholesale market to be flat next year. I'm wondering if that mid-teens growth is the right way to think about ACV's normalized level of growth? And as part of that, I'm wondering if you could talk to the key growth vectors that could unlock incremental growth over time? Thanks. And I have a follow-up.

William Zerella, CFO

Hey John, I'll start and then I'll let George add in. So, you're correct. We are assuming mid-teens unit growth, which is basically market share gains. That's very consistent with what we've seen last year and frankly, on average the last few years. So, that is an embedded assumption. So, that's correct. And that's pretty consistent with what we've been saying, I think, for quite some time now. I don't know, George, if you want to add to that?

George Chamoun, CEO

I think if we consider how the year began in January compared to February, it's interesting to see two different environments. January was very strong for us due to our continued market share gains and a slight increase in dealer wholesale, which was encouraging. If we experience positive market conditions and reduced concerns about affordability, leading consumers to return to car purchasing like we observed in parts of the fourth quarter, that would be beneficial for us. We will assume our execution and that the market remains stable. However, we anticipate that some market conditions might improve, which would certainly help. Another factor beyond our control is our new value-added services that assist dealers with pricing, trades, and appraisals. We will share more about these on Analyst Day. We have developed new tools to help dealers purchase vehicles in their service drives and are beginning to attract wholesale customers due to these innovations. The bundle we've been discussing for some time is becoming very promising. With our ACV MAX product, we can now predict a car's retail price within a few hundred dollars and its wholesale price within a hundred dollars. When we present this to dealers, they often find it hard to believe. With traditional tools, our competitors cannot offer these predictions. We are confident in our approach. However, these tools are still new, and our bundled services are in the early stages of adoption. While I am optimistic about our future and the transformative potential of AI in the automotive space, we must remember that humans are involved in decision-making and must adapt. We will see how quickly dealers transition from outdated tools to modern solutions. To highlight two significant ways we can improve, either a better market or a faster adoption rate for our expanded value-added services could create an even more exciting year for us.

John Colantuoni, Analyst

Great. And I was curious to just get your perspective on what you're seeing on the competitive front? And as part of that, maybe just give us your perspective on Carvana's plans to expand ADESA Clear? Thanks.

George Chamoun, CEO

I think it's important for you to do your own research. I don't believe most dealers will adopt some of these products as others suggest. We've discussed many aspects of this industry, so I won't delve into specifics. However, we are confident in our approach. We operate as a neutral and independent entity, gathering extensive data from our dealer partners. We're introducing a wider range of value-added services and are beginning to see wholesale commitments from dealers, which is a new development due to our comprehensive offerings. There will always be competitors, as you've mentioned. The key question for dealers and investors is who they should partner with. We believe we are in an excellent position to be that ideal partner for both dealers and commercial affiliates, thanks to our diverse range of services we are bringing to market.

John Colantuoni, Analyst

Thanks so much.

George Chamoun, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

Rajat Gupta, Analyst

Great. Thanks for taking the question. Just wondering if there is an update you could provide us on ACV MAX and the ClearCar combo? And just in terms of adoption and just go-forward plans to scale? Clearly, when you were at the NADA show, it looked like ACV MAX in particular, was definitely like a significant improvement in mind share. So, just curious if you're starting to see any inflection there in adoption, just contribution? And then how integral are these products to your midterm targets? And I have a quick follow-up. Thanks.

George Chamoun, CEO

Thank you for the question. It's clear you've done your research. We are becoming recognized as a brand by dealers and a viable option for these data services. There are established players, and we are the newcomers in this space with ACV MAX and ClearCar. The response has been fantastic. Recently, we partnered with a regional dealer group that has over 30 locations, which is a big win for us. While this won't significantly impact our annual revenue, it enhances our monthly subscription income as we're aiding them in pricing their wholesale and retail cuts. We're helping them progress into the AI era with ACV AI. Each dealership holds far more value to us than the $1,000 to $2,000 monthly subscription fee. If we can facilitate the sale of 20 or more wholesale cars a month, it becomes a vital relationship, and they recognize that. They see the substantial value we provide at a low subscription cost. Our data services are reasonably priced; we're not aiming for a massive SaaS revenue at this point, at least not in the short term. What this enables is a strong partnership, and their commitment at wholesale reflects that. This partnership gives us access to their annual and quarterly meetings, where I've been invited to engage with their GMs and used car managers, highlighting our close relationship. Other vendors do not have that level of connection. In summary, we are pleased with our current position and do not have high revenue expectations from the SaaS side. As Bill and I discussed, we view this as a means to build partnerships, and we feel positive about where we stand.

Rajat Gupta, Analyst

Got it, that's helpful. And then just like a couple of levers in the form of off-platform financing and transportation services, any appetite to incrementally lean into these verticals in 2025 or will it be more gradual in terms of contribution there?

George Chamoun, CEO

It's another great question. We believe we can accelerate the growth of ACV Transportation. Currently, we have just one person tasked with selling ACV Transport off-network, and that doesn’t require significant go-to-market spending. Our priority was to ensure the product was fully ready, which is why we typically spend considerable time in beta periods to make sure everything is right. We haven't actively sought transfers or sold outside our closed market; our growth has largely come from within ACV Auctions, and word of mouth has been positive. This year or next, we may consider increasing our sales team for off-network offerings. We are confident in our ability to grow this area, especially since our margin profile is healthy. I've even had a dealer approach me at NADA to express how impressed he is with ACV Transport, sharing how he's using it for transporting retail cars between locations in Ohio and Pennsylvania. Regarding ACV Capital, we've just begun to expand our efforts there as well, and I've confirmed we've added a few more sales personnel. We're optimistic about our new platform in Capital, as we balance risk with growth, though we remain somewhat cautious and still deny more dealers than we accept. However, we feel that this year presents an opportunity to increase Capital's growth rate. Bill?

William Zerella, CFO

Yes, I would just add on ACV Capital, Rajat, that we've talked about the investments we've made over the last couple of years in terms of our platform and our loan management system and infrastructure. So, we're now in a position where we also have a really good team in terms of managing risk. The team has done an excellent job. So, we feel really good about being able to ramp ACV Capital faster this year, and we're certainly baking into our OpEx growth, making sure we have the right go-to-market team in place to support that.

Rajat Gupta, Analyst

Got it. Great. Thanks for all the color good luck.

George Chamoun, CEO

Thank you, Rajat.

Operator, Operator

Thank you. Our next question comes from the line of Naved Khan with B. Riley. Please proceed with your question.

Naved Khan, Analyst

Great. Thank you very much. George, maybe you can talk about conversion rate in the fourth quarter, how that trended year-on-year and sequentially and the drivers for that? And the other question I have is on transportation margin. It looks like it was a pretty strong fourth quarter because you had a pretty nice year-on-year uptake for the full year. I think you said you're above the target of high teens, so fair to assume you're close to 20%, and you can maybe sustain those levels? Just thoughts there. Thanks.

George Chamoun, CEO

Yes, Naved, on your first question, that's correct. Q4 conversion rates showed a slight increase, which was a positive for us. A higher conversion rate than expected is beneficial for our business. Regarding your second question about costs, one reason why our transport margins are improving is our focus on bundling. We're still in the early stages of this bundling approach, but the idea is to move multiple cars when we already have a truck heading in that direction, which helps reduce transport costs. We've been able to pass these savings onto our dealers in ACV Transport while simultaneously improving our margins. Although we’re still early in this bundling phase, we can see its growth in our numbers. ACV Transport is gaining traction, not only within our closed network but also beyond it. As we expand our transport services, the opportunities for bundling will also increase. This process won’t happen overnight—it will likely take us about two years to make bundling a significant part of our operations—but it has great potential. This situation benefits both the dealers, who experience lower costs, and us, as our margins improve.

William Zerella, CFO

Yes, Naved, we will speak a bit about kind of an updated view in terms of margin expectations for the Transport business at our Analyst Day in March. So, stay tuned for that.

Naved Khan, Analyst

Great. I look forward to it. Thank you guys.

George Chamoun, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Curtis Nagle with Bank of America. Please proceed with your question.

Curtis Nagle, Analyst

Great. Thanks very much for taking the question. Just one on I guess the shape of margins for the year. So, I guess why would Q1 margins be lower than the full year rate by, I think, almost half, maybe not quite, when the revenue growth is a decent bit higher than Q1 than full year? Is this just maybe reflecting kind of basic seasonality? I think mid-year is typically stronger or perhaps the arc of investments? Just any help on that would be great.

William Zerella, CFO

Yes, this is Bill. First, Q1 is when we have our largest trade show of the year, NADA, which is a major industry event. This does have an impact on our operating expenses. Additionally, it’s related to the timing of our investments. We increased our spending in Q4 to support this year’s growth, which could start to show results in Q1. There’s some distortion because of that. However, I wouldn’t place too much emphasis on the differences between quarters, as they are not significant. According to our guidance, we expect adjusted EBITDA to grow 130% year-over-year in Q1 compared to 150% for the entire year. The 20% difference isn’t a large dollar amount, so I wouldn’t worry too much about it.

Curtis Nagle, Analyst

Okay, fair enough. And then just maybe going back to the point on wholesale volumes flat, it sounds like a bunch of scenarios that are being contemplated. But I guess anything in terms of kind of how you're thinking about, again, kind of the shape of the year right? Start negative, turn positive? Or just sort of, I guess, generally assuming the industry is kind of flat within some range for the year as a whole?

George Chamoun, CEO

Yes, I previously mentioned some of this, but I'll provide a bit more detail. January was very strong, giving us a glimpse of what a more optimistic year might look like if we consider the upper end of our range, which would be fantastic if the entire year resembled January. However, February was a bit of a challenge, influenced by weather and some other factors. Weather likely played a significant role, but there are additional influences at work. Conversations with dealers reveal that they suspect it’s not solely about the weather, as there are concerns regarding consumer behavior as well. Given the current global situation, we decided it wouldn’t be prudent to make predictions beyond what is within our control. Our approach is to take a balanced view. It’s somewhat ironic that the year began with such a strong January, yet a mixed February, which has led us to the conclusion that we should provide our investors with information that reflects our current understanding. We aim to focus on what we can manage and minimize the impact of external market conditions as much as possible.

Curtis Nagle, Analyst

Okay, fair enough. Thank you.

George Chamoun, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Josh Beck with Raymond James. Please proceed with your question.

Josh Beck, Analyst

Yes, thanks for taking the question. Maybe a two-parter. So, on the inventory, I think you said it was kind of 25% below pre-COVID levels. Is it likely to kind of remain in that zone for the year? And then maybe in 2026 and beyond, we start to see that improve? But just curious there. And then I know this is probably a little unfair just because there's so many scenarios going around. But if we were to get some heavy new auto tariffs, would it widen that affordability gap versus used cars and be helpful? I mean, you could obviously argue that in a lot of ways. But any scenario analysis you can just help us think through tariff scenarios would be helpful as well? Thank you.

George Chamoun, CEO

Yes, certainly. Regarding your first question, let's imagine there are no tariff discussions. Without tariffs, I would have expected steady improvement throughout the year, perhaps finishing the year at around 10% to 15% improvement, and continuing into the next year, although we are all speculating. I anticipated steady progress, with dealers gradually acquiring more used cars. Behind the scenes, we are working more closely with companies like ACV to help dealers buy. So, I would have thought there would have been a slight improvement throughout the year, rather than a dramatic change. It would likely be a month-by-month increase. For your second question, many industries are trying to assess the implications of tariffs. The first consideration is how original equipment manufacturers (OEMs) will react. Historically, they have often passed the full cost onto dealers and consumers, especially when affordability is already a concern. However, some OEMs still enjoy healthy margins and might choose not to pass on the entire cost. The new car inventory levels at dealers have returned to historical figures, and in some cases, are even higher than usual. If tariffs are implemented, OEMs will need to be innovative. We might see changes in lease payments and assumptions about residual values, as they cannot just push additional cars onto dealer lots while imposing high floor plan fees. This situation requires careful consideration, starting with OEMs before moving on to dealers or consumers. If tariffs are meaningfully passed to consumers, new retail sales could be impacted, particularly for higher-priced brands, though lower-priced brands may face less of an effect. There are many uncertainties here, making it a challenging topic. On the other hand, dealers may need to retain more trade-ins, which could be a downside. However, our platform's marketplace conversion tends to improve if dealers hold onto more trades, potentially leading to greater efficiency. If supply is significantly affected, we could suddenly become more effective, similar to the elevated conversion rates we observed during COVID. These scenarios involve a lot of variables, and given the global situation, some analysts had projected substantial market recovery this year based on earlier ACV model assumptions. We suggest people reconsider their previous assumptions with everything happening, including tariff concerns and other factors. It's wise to assume a flat market and focus on what we can control, and I believe we will be in a good position.

Josh Beck, Analyst

Super helpful. Thank you for confirming that.

George Chamoun, CEO

Thank you.

Operator, Operator

Thank you. And we have reached the end of the question-and-answer session. I will now turn the call back over to Tim Fox for closing remarks.

Tim Fox, Vice President of Investor Relations

Great. Thank you and thanks, everybody, for joining us on the call today. We look forward to seeing those of you who can join us live in New York on March 11th, and if not, obviously, we'll have a webcast available. And once again, thank you for your interest in ACV and have a great evening.

Operator, Operator

And ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.