ACV Auctions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the ACV First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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.

Speaker 1

Thank you, operator. Good afternoon and thank you for joining ACV's conference call to discuss our Q1 2023 financial results.

Speaker 2

With me

Speaker 1

on the call today are George Shimone, Chief Executive Officer and Bill Zarela, 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.

Speaker 1

A reconciliation of GAAP to non GAAP financial measures is provided in today's earnings materials, which can also be found in our Investor Relations website. And with that, let me turn the call over to George.

Speaker 2

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. We are very pleased with our strong start to the year, highlighted by a number of record achievements in the quarter. This includes record revenue, which was well above the high end of our guidance range, record ACV capital attach rates And record margins in ACV Transport. While we benefited from positive market tailwinds in the quarter, It was continued execution by the ACV team that drove market share gains while also delivering to the bottom line.

Speaker 2

Looking at the balance of 2023, we expect the industry headwinds experienced over the past 2 years to continue to moderate, while remaining focused on growing market share, expanding our technology mode and driving scale to deliver on our adjusted EBITDA targets. With that, let's turn to a brief recap of Q1 2023 results On Slide 4, 1st quarter revenue of $120,000,000 was $10,000,000 above the high end of guidance, resulting in 16% growth year over year. GMV of $2,400,000,000 was flat year over year with solid unit growth in the quarter offsetting an 8% decrease in GMV per unit. As wholesale vehicle prices decreased from historical highs in the first half of twenty twenty two. We sold 152,000 vehicles in our marketplace, which was 21% sequential growth from last quarter an 8% growth year over year, which exceeded our expectations due to continued market share gains and conversion rates improving from low levels we experienced in the back half of last year.

Speaker 2

On Slide 5, I'll frame the rest of today's discussion around the 3 pillars of our strategy to drive long term shareholder value: Growth, innovation and scale. I'll begin with growth. On Slide 7, we're again providing context on the dealer wholesale market in relation to the broader automotive market. In Q1, new light vehicle SAAR increased 8% year over year, which is the 3rd quarter in a row of growth. Of course, SAAR is still running about 12% below pre pandemic levels.

Speaker 2

But inventories are slowly building, which is key to a more robust recovery in retail sales. Used vehicle retail sales increased quarter over quarter in Q1, but were down in the mid single digits year over year As affordability issues impacted demand in segments of the used vehicle market. Combined, New plus used retail sales increased modestly year over year, which is a positive sign for supply in the wholesale market. As I mentioned earlier, conversion rates bounced back in Q1 as wholesale price depreciation normalized, and we assume conversion rates will normalize throughout the year. On balance, I think it's fair to say The end market conditions are showing some early signs of improvement, giving us confidence to raise guidance for the year, which Bill will take you through later.

Speaker 2

Turning now to Slide 8. We estimate that the U. S. Dealer wholesale market continues to remain below normalized volumes, We showed a nice sequential improvement in the seasonally strong Q1. We remain focused on executing against our key growth initiatives and gaining market share.

Speaker 2

Given our 8% year over year unit growth and an estimated market contraction of 11%, This implies that ACV grew market share by approximately 19% in Q1. Next, I'd like to wrap up the growth section with highlights on our value added services. On Slide 9, I'm pleased to share that ACME Transportation delivered another impressive quarter and continues to scale ahead of schedule. Our strong carrier network and fast cycle times resulted in attach rates once again exceeding 50%. In fact, we achieved record cycle times again this quarter, benefiting both sellers and buyers on our marketplace.

Speaker 2

Over 80% of our transports were automatically dispatched in Q1, which is a great example of how Our technology investments are driving growth and operating efficiencies. These efficiencies resulted in revenue margins in the mid teens, which is impressive given that ACV Transport was breakeven a year ago. As a reminder, our current 2026 financial targets assumes transport revenue margins of 15%. So we managed to achieve this target 3 years ahead of plan. Turning to Slide 10.

Speaker 2

Our ACV Capital team also delivered great Q1 results. Capital attach rates exceeded 10% for the first time, Driving over 85 percent loan volume growth and combined with our ARPU expansion resulted in over 100% revenue growth. We have continued to ramp our investments to drive dealer engagement and scale to ensure that AEC Capital Innovation. On Slide 12, I'd like to highlight a few of our growth oriented product innovations that help contribute to our strong Q1 results. Two areas of focus were dealer acquisition and conversion rates.

Speaker 2

On the dealer acquisition front, solutions like private marketplaces and consumer sourcing tools like DriveMD among We're key to attracting new dealers to ACV's marketplace. This is especially true with large dealer groups, which continue to be an attractive source of new dealer partners. Next, we expanded several capabilities to enhance conversion rates, including new auction formats and pricing intelligence. As you know, ACV's traditional format is a 20 minute live auction, which has experienced broad market adoption. Based on dealer feedback, we began testing new formats and the results were very encouraging, especially on higher end vehicles.

Speaker 2

In just a few short quarters, we now have about half of our auctions running for 2 hours. And our strong Q1 conversion rates demonstrate this is working. We will continue to invest in testing, enabling us to continuously optimize auction formats for different types of vehicles. Additional innovation enabling our growth is our pricing engine, powered by machine learning, leveraging both our industry leading vehicle condition data and a growing curated automotive dataset. This innovation is leading to better guidance for our dealer partners.

Speaker 2

For the past year, we've expanded the price point coverage and its use cases, creating a broader range of guidance for our dealer partners. The ACV pricing engine now powers several ACV products, including ACV Auctions market report, Consumer tools such as Driveably and Element of Max Digital. On Slide 13 are examples of tech investments that extend into our operations, delivering customer success while reducing costs. In Q1, Our cost of revenue declined year over year despite delivering 16% revenue growth. As I mentioned earlier, ACV Transport was a key contributor to these results.

Speaker 2

We also benefited from lower arbitration frequency, which reflects ACV's investment in technology and inspector training. Several innovations that are improving inspection accuracy And efficiency are Apex, Copilot and ArbGuard. Our next gen collection device, Apex, deliver significantly higher transparency into vehicle operating condition, while also increasing the inspection productivity of our BCI teammates. More recent innovations like CoPilot and ArbGuard leverage machine learning, Predictive analytics and sensor data can form our BCIs on vehicle specific issues before and after conducting an inspection. Again, driving inspector accuracy and efficiency.

Speaker 2

To wrap up on innovation, I think you'll agree that our team is delivering industry leading technologies to the market and our own operations. We have an exciting roadmap of innovation to drive both growth and scale. And we look forward to providing more detail at our Analyst Day in June. With that, let me hand over to Bill to take you through our financial results and how we're driving growth at scale.

Speaker 3

Thanks, George, and thank you everyone for joining us today. We are very pleased with our Q1 financial performance. We delivered record revenue above our guidance range with upside to adjusted EBITDA. We also demonstrated the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q1 2022. Turning to Slide 15, I'll begin with a review of our Q1 results.

Speaker 3

Revenue of $120,000,000 was above the high end of our guidance range and grew 16% year over year compared to the strong results in Q1 2022. Adjusted EBITDA loss of 6,000,000 Also viewed our guidance range and EBITDA margin improved approximately 1200 basis points versus Q1 'twenty two, demonstrating the attractive operating leverage in our model. Next on Slide 16, I will cover additional revenue details. Total revenue of $120,000,000 represented a 32% CAGR since Q1 2021. Auction and assurance revenue, which was 57% of total revenue, increased 17% year over year versus strong results in Q1 2022.

Speaker 3

This revenue performance reflects 8% year over year unit growth And record auction at Assurance ARPU of $4.54 benefiting from our fee increase last October. Marketplace services revenue, which was 36% of total revenue, also increased 17% year over year. Results were driven by strong performance in both ACV Transport and ACV Capital. Our SaaS and data services products comprise 7% of total revenue and grew 2% year over year. As I mentioned last quarter, we are taking a more measured approach to customer acquisition, while we make significant improvements to the MAX digital platform, positioning ourselves for reacceleration of growth entering 2024.

Speaker 3

Turning now to Slide 17, I will review costs in the quarter. June 1 cost of revenue as a percentage of revenue decreased approximately 900 basis points year over year. The improvement was driven by both strong auction and insurance results and by ACV Transport. As George mentioned, we achieved our 2026 transport revenue margin target in Q1, 3 years ahead of schedule. Non GAAP operating expense, including cost of revenue, increased 9% year over year in Q1 versus 42% year over year growth in Q1 2022.

Speaker 3

This reflects the significant investments we made in prior years to support market expansion and technology initiatives and reflects our continued focus on expense discipline as we optimize and scale our business. Moving to Slide 18, let me frame our investment strategy and path to profitability. Our focus on spending discipline and operating efficiency This is expected to result in a material decrease in OpEx growth in 2023. And as you've seen reflected in our Q1 results, We have accomplished this while preserving our go to market and technology investments to ensure ACV is in a strong position as market conditions improve. Next, I will highlight our strong capital structure on Slide 19.

Speaker 3

We ended Q1 with $526,000,000 in cash and equivalents And $96,000,000 of long term debt to finance the growth of ACV Capital. Note that our Q1 cash balance includes $188,000,000 of float in our auction business. As we discussed previously, the amount of float on our balance sheet can fluctuate meaningfully based on business trends in the final 2 weeks of each quarter and has a corresponding impact on operating cash flow. In Q1, cash flow from operations was $43,000,000 driven by the sequential increase in float and was a significant improvement from the $31,000,000 loss in Q1 2022. Now, I'll turn to guidance on Slide 20.

Speaker 3

For the Q2 of 2023, we are expecting revenue in the range of $117,000,000 to 120,000,000 And adjusted EBITDA is expected to be a loss in the range of $8,000,000 to $10,000,000 For the full year 2023, we are raising our We expect revenue to a range of $468,000,000 to $478,000,000 representing growth of 11% to 13% year over year. Adjusted EBITDA is expected to be a loss in the range of $27,000,000 to $32,000,000 an improvement on nearly 50% versus 2022. And we remain committed to achieving adjusted EBITDA breakeven exiting this year. As it relates to our guidance, we are assuming that new vehicle supply remain constrained in the near term that improves as production and inventory continue to recover throughout the year. We are also assuming that conversion rates normalize Let me wrap up on Slide 21 by reviewing our 2026 financial targets.

Speaker 3

We are very pleased with our execution in a challenging macro environment and we remain confident in our ability to achieve $1,300,000,000 of revenue and $325,000,000 of adjusted EBITDA in 2026 with 25 percent adjusted EBITDA margin. Our confidence is reinforced by a number of factors, including strong dealer penetration and increased wallet share, resulting in sustained market share gains Opportunities to expand our TAM into adjacent markets, including commercial wholesale our broad technology platform, enabling durable long term growth and operating efficiency, consistent improvement in revenue margin and a commitment to balancing growth and investment as our business scales. We look forward to providing you with the details on our long term targets at our upcoming Analyst Day on June 1. And with that, let me turn it back to George.

Speaker 2

Thanks, Bill. Before we take your questions, let me summarize. We are very pleased with our strong execution in the Q1. We are especially proud of our ACV teammates that delivered these results. We continue to gain market share By attracting new dealers to our marketplace and by gaining wallet share, which positions ACE for attractive growth as market conditions improve.

Speaker 2

We are executing on our territory penetration plan and gaining traction with an expanding suite of offerings. We are delivering an exciting product roadmap to further differentiate ACV and expand our addressable market. We are on track to achieve our near term adjusted EBITDA target and over the medium term Generate over $1,000,000,000 in revenue with attractive margins that we believe will drive significant shareholder value. We are committed to achieving these results, while building a world class team to deliver on our goals. With that, I'll turn the call over to the operator to begin the Q and A.

Speaker 3

Thank

Speaker 4

you.

Operator

Our first question comes from Daniel Imbro with Stephens. You may proceed.

Speaker 5

Hey, good evening guys and congrats on the quarter.

Speaker 1

Hey, Daniel.

Speaker 4

George, the first question,

Speaker 5

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

Speaker 2

Yes. Sounds good, Daniel. I'll answer the first two and I'll let Bill kind of answer the 3rd. When you look at our growth, obviously, to the overall market that contracted once again, the market contracted 11% And so we saw new listeners have another impressive quarter for us of new listeners. But we're also doing a great job within the wallet share itself, meaning More listings from existing dealers.

Speaker 2

So I would say, instead of thinking 1 or the other, it was really both. So we had great success in the quarter. And I think moving forward between now and 2026, I think that we'd have same drumbeat. It'll be just additional listers and additional wallet share. And obviously, between now and then, the market itself is Starting to come back, maybe the size of the submarket.

Speaker 2

But I would say, in a really high level, it was both customer acquisition And expanding wallet share. Bill, if you want to jump on the second part of the question.

Speaker 3

Hey, Daniel. So I would say that the way

Speaker 1

to think about this is kind of there's 2 pieces on the go to market side.

Speaker 3

So in terms of our field sales organization, We're essentially fully staffed across the country. So we can continue to generate more volume there with the existing staff. Really, the only incremental cost is us adding inspectors as we continue to kind of add the number of listings on the marketplace. So that's the only variable cost. Otherwise, essentially, we're already kind of incurring the cost structure to support our future growth for the rest of the year.

Speaker 5

Yes, that's great. It's a good update. Thank you. And then I wanted to actually ask my follow-up on the cost takeout side. I think about transportation Initiatives and profitability is a good example of some of those tech savings you guys have generated.

Speaker 5

But can you maybe quantify where some of those efficiencies or cost savings have So far and talk about maybe where the cost savings are relative to the 2026 timeline you guys laid out last year? Thanks.

Speaker 2

I'll start, Bill, then you can go ahead and chime in. I just started to enumerate just the big ones. Our investments In our transportation technology and platform, we look at areas like pricing and intelligence. It allowed us to price our lanes more effectively. So instead of just having to take historical data For pricing, we now have more and more real time intelligence.

Speaker 2

And that's really important because while a dealer is bidding, they want to know The transportation while they're bidding. 2 is scale as it relates to transport as an example. As you have more scale, You're able to get better pricing from your carrier. So those two things are examples within the Area of transport, when you look at areas like utilization of inspectors and our team becoming more efficient, Investments in areas like auction format, getting a higher conversion rate, it allowed for us to have better utilization of our resources because increased conversion rate. And then I would also say generally one way to better have Conversion is having better price guidance.

Speaker 2

So when you think about, for example, where technology helps you convert better as you're walking in and If a car if you know the car is at its best day worth $20,000 and that's on its best day and the dealer is asking for $24,000 We know we're going to be wasting our time. So we now have a pricing engine that can help inform our dealers what these assets are. So there's many more. Those are like the ones on Half of my tongue here, that are areas where we're becoming more efficient. It's also in areas of better title management.

Speaker 2

We haven't had to really scale up And areas of titles and other parts of our org because that team has become much more efficient, having new tools, leveraging AI, where we can now scan these titles, make a bunch of decisions just by scanning them. And So it's many areas of this, Daniel, but those will be the ones sort of top of mind.

Speaker 3

Yes. I would just add a couple of other points, Daniel. So first on transport, 80% of our dispatches this past quarter were automated. So, no human intervention. That's just another example.

Speaker 3

We've thought about that in the past in During the quarter in terms of our arbitration costs, the frequency was better managed by our team And it was material benefit to our overall margins for the quarter. So, As we've talked about the passives and ebb and flow to arbitration, but directionally, we're going to be talking about this more on June 1st at our Analyst Day in terms of driving towards our target model that directionally over time we believe we'll be able to more effectively manage our op costs And that will be accretive to margins.

Speaker 5

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

Speaker 2

Thank you. Thanks.

Operator

Thank you. Our next question comes from John Colantoni with Jefferies, you may

Speaker 2

proceed. Hey, John. Great.

Speaker 1

Hey, thanks for taking my questions. Wanted to start with conversion rate. In your prepared remarks, you talked about your expectation is For conversion rate to moderate throughout the year as wholesale depreciation begins to moderate. But When I look at overall conversion rates, it looks like they were elevated in January February and sort of trended back for the remainder of the year. Just some clarity on that.

Speaker 1

And then second question is based on your revenue guidance, looks like Growth is expected to moderate to low single digits in the second quarter before accelerating to around 10% in the second half. Can you give us can you sort of help us with the growth cadence of prices and units in the auction segment along with other revenue sources like capital and transportation. Thanks.

Speaker 2

Yes. Certainly, John. I'll start and Bill Go ahead and fill in. So we're conversion rates were strong and obviously there's also a seasonality Part of the auction industry, meaning Q1 is typically your strongest quarter When you look at conversion rates, so when you think about our return to normalization over the next few years, At least from a forecasting perspective, we'd like to forecast that conversion rates start out higher in Q1 and moderate down. And then we'll see all these world events, see if that actually is true or not.

Speaker 2

But I think that's a prudent thing to assume. And as we start to return to normal, obviously, there's a lot of factors, whether or not we'll see it go All the way back down to like a historical average rent activity, but that's at least to be prudent what we're expecting. And that's at least what we would expect in the non COVID years. The second question was about Q2. Where The quarter, it started off in a positive way.

Speaker 2

I really want to read into this too much. Either way, it's more of there's so many moving parts right now in the industry, right, across Volume, new car volume being higher, used car volume looking at Q1 used car sales, retail sales were about 3% lower sort of year over year, obviously up quarter over quarter. If you look at all the moving parts, we're just trying to be prudent, not knowing how all the moving parts are all going to come together.

Speaker 3

Yes. I would just add to that John that again as George said, so Q1 is typically the strongest quarter of the year. And Q2 is also a pretty strong quarter. Backdrops here though is that what we've talked about is we're assuming in the second half of the year Supply continues to improve and our market and our TAM continues to recover. And that's kind of the backdrop for our guidance at this point.

Speaker 3

We're basically assuming Q2 is a good quarter, but it's going to be subject to Supply chain issues and how quickly those resolve over time, because that will affect the supply into the wholesale marketplace. So on balance for the year, again, we're raising our overall guidance and growth targets. And at this point, we're still early of course in the year. So right now that's kind of the way we think about it. And hopefully that helps you understand the backdrop that we're using in terms of our assumptions for growth.

Speaker 1

Thanks. Appreciate the details. Thanks, Sean.

Operator

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

Speaker 1

Hey, Rajeev.

Speaker 6

Thanks for taking the hey, good evening, good afternoon. Thanks for taking the questions. Just to follow-up on like the previous question, But maybe more from an EBITDA perspective, if I compare the prior implied guidance for the second to the 4th quarter, It would have equated to somewhere close to like a $20,000,000 EBITDA loss at the midpoint. And the guidance today, I think your 2Q guidance and the rest of the year implies like a $24,000,000 EBITDA loss at the midpoint. Obviously, like smaller numbers in context of the bigger picture, But curious what's the driver there, anything in the end market that has changed versus what you were thinking prior for the remainder of the year?

Speaker 6

I know you gave And or maybe like there's just more cushion you're adding in terms of more spending on some initiatives in the back half? And I have a follow-up. Thanks.

Speaker 3

Yes. Hey, Erita, it's Bill. So basically, what we're passing through for the full year is we're increasing our full year revenue guidance by $8,000,000 and we're increasing our EBITDA guidance by $3,000,000 right? So we are Being a little cautious since it's so early in the year, obviously, we're still going to be pretty focused in terms of managing our expenses and Operating efficiencies, we feel comfortable with this guidance at this point, and we'll see how the year kind of continues to unfold.

Speaker 6

Got it. Got it. But nothing has changed in terms of like how you thought about the industry in general for the full year versus like About 3 months ago.

Speaker 3

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

Speaker 6

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

Speaker 3

Yes. Yes, it is.

Speaker 4

Got it. Great. I'll jump back in. Hey,

Speaker 3

Rajat, Just a clarification, don't forget that excludes D and A.

Speaker 6

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

Speaker 3

Correct.

Speaker 6

Thank

Speaker 2

you. Thank you.

Operator

Thank you. Our next question comes from Chris Pierce with Needham and Company. You may proceed.

Speaker 4

Hey, Chris. Hi,

Speaker 1

Chris. How are you doing? On the first one, I think

Speaker 6

I just want to make sure I heard

Speaker 1

you right. Longer auction times are helping with Higher priced vehicles, I'd like to get a sense of what the opportunity is in the higher priced vehicles, how you guys see that opportunity and why that would be the case,

Speaker 3

Yes. Hey, Chris.

Speaker 2

There's we're winning Market share for higher priced vehicles in several ways. One category would be dealers that use us for private marketplace. They first Try to sell their vehicle to stores within their own group. And then if If it's not successful and they launch in our open marketplace, that'd be an example of why we're winning more share in that category. And then also our consumer sourcing tools, when a dealer is sourcing a car from a consumer and it's not the right fit for them, Those are examples of areas where we're starting to win, and it helps in our just basically our mix of units on ACV.

Speaker 2

So over the last like 2 ish years, we've continued to increase The mix of higher priced vehicles and it's really the core of your question. There's different types of buyers for that segment. You've got some independent dealers who buy those vehicles and you also have franchise dealers buying those vehicles. And we now have a significant Percentage of our vehicles being purchased by franchise dealers in addition to independents. So that 2 hour format, 1st to 20 minute format Allow for more participants in the higher ASP sectors, where the lower priced cars, let's say, a car that was Between $3,000 $15,000 the larger time really didn't make a material difference.

Speaker 2

It might have helped on the fringes, but not material. The higher priced vehicles that additional time has made a difference. And Look at it, we're still testing. I mean, we tried a 24 hour auction model. We tried a 4 hour auction.

Speaker 2

For right now, there's a sweet spot around the 2 hours. Maybe the 2 hours goes down to 1 hour as an example. So don't look at these as like Yes, a perfect science. We are testing a lot. You'll see us keep tweaking.

Speaker 2

And I can imagine A future where there'll be a 1 minute auction, there'll be a 20 minute auction, and there'll be a 1 hour auction, and a 2 hour type auction. I don't know if you'll ever need more time than that or not. But you'll basically have in go ahead.

Speaker 4

I was going to say,

Speaker 1

is there a way to frame where you think your market share is, say, at an industry average price vehicle versus where it is at these higher priced vehicle levels?

Speaker 2

Not today. I don't think we have if I had it, I would share it. I don't think we have enough data To suggest what our market share is at one ASP versus another just yet.

Speaker 1

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

Speaker 3

Hey, it's Bill. So, what you've seen is some of these regional banks have pulled back on the floor plan market. They're mostly smaller players and they primarily service franchise dealerships. Frankly, for our business, our prime competition is AFC and NextGear. Those are the 2 biggest players in our space.

Speaker 3

Look, this past quarter, we grew our revenue again north of 100%. So we're continuing to invest and grow that business as aggressively as we can. That said, we are being much more sensitive to risk obviously with the macroeconomic conditions. But even with that, for example, this past quarter, Yes, we cut our bad debt expense in half quarter on quarter. So I think our team is doing a great job in terms of continuing to manage strong growth, while also managing our risk.

Speaker 3

So we're pretty happy and we're going to continue with that path through the rest of the year.

Speaker 7

Okay. Thank you.

Speaker 1

Thanks, Chris.

Operator

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

Speaker 4

Hey, Bob. Thanks and Hi. Congratulations on a great quarter. Really good stuff. I wanted to talk a little bit about the auction formats as we've been discussing a little here.

Speaker 4

And you had a really nice sequential pickup in GMV per unit, it was roughly like double the Manheim sequential change in pricing, I think, if I did the math right quickly. So is that a result of better mix, changes in auction formats? What would you attribute The sequential pickup in GMV per Unit 2 beyond just used car values, Yes, kind of a starting point, then I have a follow-up also on auction formats.

Speaker 2

Yes, sure. Thanks, Bob. So Not to repeat myself, but one is our ability to secure these units. Yes. Like in any segment, the more you can serve secure from a sourcing, in a way more supply, The more attention you get from demand.

Speaker 2

So one is we're starting to secure some of the sourcing. I mentioned some of the tools like Private Marketplace and other products helping us secure actually get these assets. Number 2 is related to demand side. Now that Several of the large dealer groups use ACV internally for private marketplace to bid on vehicles. It actually brings demand.

Speaker 2

So those tools not only help on supply, but when you're going to these when you go to our product like HP Private Marketplace to buy Cars within a group, they're now there to buy cars in the open marketplace. So that's an example where that one product helps us get supply, helps us. If you look at areas of just generally what I would say themes in the industry is dealers are going to pay more attention to So whether they're using private marketplace or not, you're going to see dealers pay attention to do I have the right Inventory on my lot. Generally, there's still not enough supply, I would say. We're still down about Last quarter, overall supply in dealers loss was still 20% to 25% lower than 2019 levels.

Speaker 2

So we're still missing supply and dealers loss. Having said that, you may have many dealers will start to age out in any one given vehicle, whether it's Certain ASP class or certain types of vehicles. So several reasons, Bob, not one that dealers need help in this category. Our product mix has helped us get buyers and sellers, and we're starting to really Become more well known in the category. And I could double down a little bit on inspections as well.

Speaker 2

When you think about the value of an inspection like ours, When you're buying an expensive car, I would say that our inspection being known as the best Condition reporting industry is very helpful. So probably more to come between now and Analyst Day. We'll probably go a little bit deeper in some of the things we're doing, but Hopefully, those are some good things to say. You said you had a follow-up question.

Speaker 4

Yes. No, that was great. And yes, for my follow-up, it's really you talked about new auction formats From 20 to 2 and you said you can envision 1 or 10 or whatever. What about bidask marketplaces and how do you think about That, because a couple of your competitors have multi day or just bid ask period out there. How do you think about that relative to the timed auctions?

Speaker 4

And does one play better Higher level units, higher cost units, GMV and lower? Or just give us a sense there, might you ever experiment or dabble And just bid ask for 3 days or something.

Speaker 2

Yes. So we I don't know the exact number Private marketplaces we have today, so we have, let's say, at least 15 At least 15 private marketplaces today, each one of those are configured differently. So one of them might be 3 days, one might be 2 days, Bob, and we it's really fascinating. So we're probably supporting 15 different formats in the private marketplace. And you get to learn from that and you get to learn, okay, what's working well.

Speaker 2

We also have other elements like We've got a run list capability that helps a dealer Promote their vehicles before they go live. So I look at it more like wherever the industry wants to go, We're going to be able to support it. The idea of having the most flexible and robust Technology platform is really the key. Not to get too techie here, we can actually change our formats Without even doing a code change in our private marketplace, meaning we can change it from one day, 2 days, 3 days, like we're that crazy about building the right deck. So Look at wherever the market is going, we're ready.

Speaker 2

Now what we did find was we saw no benefit over 2 hours, which was interesting. If you were to Make a bet on 2 hours versus 12 versus 24, you mentioned 3 days. We saw no benefit. We saw some benefit going from an hour to 2 hours, but I would say less material. So yes, going from 20 minutes to more was But I think if I was a gambler right now, I wouldn't bet on 2 or 3 days.

Speaker 2

I don't think you need that much time. So I think It's probably somewhere between 20 minutes and an hour is all you really need. And for some vehicles, 2 minutes is fine.

Speaker 4

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

Speaker 2

Thank you.

Operator

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

Speaker 8

Thanks so much for taking the question. Hey, everyone. Thanks for taking the questions. Maybe 2 on the costs and margin side of the equation. In terms of your broader goal of getting to where you want to get on EBITDA breakeven towards the end of this year, Can you help us better understand what flex there is or how to think about torque in the business model for different outcomes on the top line versus base within different bands of outcomes on the top line.

Speaker 8

And then the second part of the question and that's a front run Analyst Day, but obviously you've got this longer term Profitability target out there and when we think about the incremental margin you'll be exiting the year about, can you help Maybe investors get a better sense of how to think about the exit rate of incremental margin this year against your broader long term goals on EBITDA. Thanks so much.

Speaker 3

Hey, Eric. It's Bill. Yes, first I would start by saying, I think our Q1 performance It kind of reflects our ability to manage our cost structure and really improve our revenue margins over time. In fact, this is only the 2nd time that we've reached 50% revenue margins. With the previous time being Before the company was public and when COVID hit and a significant amount of costs were taken out of the business.

Speaker 3

So that was kind of a normal run rate environment, if you will. But frankly, I think the team here has just done a phenomenal job, both in driving our revenue margin profile and managing OpEx, but not really just managing OpEx A lot of the initiatives that we've undertaken, for example, opening up shop in the low cost geography in India And sorry to ramp those resources much more allows us to add capacity much more cost effectively. We've talked about Kind of optimizing and lowering our arbitration costs. We've talked about how our go to market engine right now is basically fully staffed. So we'll be able to generate incremental revenue and margin without any change in that cost structure whatsoever.

Speaker 3

A lot of the rest of our costs are kind of more fixed in nature, if you will. But even those costs are subject to really discretion In terms of whether or not we meter them up, meter them down or maintain kind of neutrality. So I would say we still feel really good about Kind of pushing more levers as we go through the year. And we'll talk a little more obviously about How we hit our long term targets on June 1st in terms of how we see kind of more leverage just continuing to accrue over time as we scale and grow the top line. I think other examples obviously what you've seen, we've hit our transport margin target Literally 3 years ahead of schedule in Q1.

Speaker 3

So what I guess we're trying to show investors is that We have strong command over our business in terms of our model, how we think about optimizing operations over time. And literally every quarter, it seems that we're kind of layering another The area of improvement that we're achieving our targets well in advance of what we committed to investors. So We feel really good. And again, I expect to go through this in a lot more detail at the Analyst Day. So hopefully that gives you a little bit of color and it helps you kind of think about how we will kind of hit those targets exiting this year especially.

Speaker 8

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

Speaker 3

Okay. Thank you.

Operator

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

Speaker 7

Great. Thanks for taking the question, guys. Hey, guys. I wanted to ask a little bit more. George, you mentioned earlier on the call just new listers, New dealers, new listeners joining the platform, an impressive quarter, I think, for you all.

Speaker 7

And you talked about sort of what's driving overall volume outperformance. But For these new listeners, can you just help us understand, these new listeners join the platform, is that just broader market improving, Just driving a tailwind that dealers coming on the site or is this the team is now fully staffed, the sales approach has improved? And I know the answer is probably a little bit of both, but I'm trying to And specifically, like what's driving new listers on the marketplace on the marketplace? Is it just broader greater adoption of the share gains that we talked about. That's point number 1.

Speaker 7

And then, Bill, I know you just commented to Eric's question on where gross profits could go from here, particularly in the marketplace and services business. But when we look at that 55% or so gross profit margin within the core marketplace services business, we talked about transport achieving mid teens, ACV capital, getting to a 10% attach rate. Where do you think these margins can go? Or is this a wait for the Analyst Day because we're already achieving what we talked about? Thanks guys.

Speaker 2

Sounds good. Always good questions, Ron. So on the dealer acquisition, What you've seen us do to help you all think about dealer acquisition and wallet share. In the past, we used a cohort method. In June, not to like spoil some of my content, Tim is going to kick me in a second, but in June, we're going to talk about market share, Ron, that will be helpful for you all.

Speaker 2

It will be another way for us to think about Our dealer acquisition and at a high level think about it how there's some regions where we have lower single digit market share of number of dealers using the platform. And then some dealers, we have significant double digit dealers. And This is simply a matter of how long we're in these regions. The ACV story here, I would say, has been consistent. Those of you who have been following us, whether for months or for years, this isn't like we woke up this quarter and we're winning wallet share Or new listers.

Speaker 2

It's been a very it's just a machine here. Every quarter, we're bringing on new listers. Every quarter, we're out there winning more wallet share. That's really what we're representing today. It was another great quarter of bringing on new dealers.

Speaker 2

We do have a broader array of tools and value added services to win over our dealer today than maybe a handful of years ago. But I would say it's been consistent. We consistently are driving dealers to both sell and buy in the platform. So I think that's for today. I think I will leave it there.

Speaker 2

Maybe Bill, we go to the second question.

Speaker 3

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

Speaker 7

Okay. We'll see you all in June. Thank you.

Speaker 4

Okay. Thanks, Matt.

Operator

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

Speaker 9

I will not ask a question about June 1, but I wanted to add Two things. One is just on the territory expansion cadence that you expect here. What should we be looking at in terms of territory expansion? And then, you mentioned in the prepared remarks, I think Bill did about adjacent businesses being a potential contributor to those 2026 growth targets. And You mentioned specifically commercial wholesale.

Speaker 9

So I just wondered if you might expand on that a little bit here as a preview.

Speaker 2

Terry, you said you weren't going to ask any questions that were in October in June, then you That's the fun. That's the fun of all of it. So yes, we're really in a great spot as it relates to The sales team we have out there, when you look at it from an expense profile, we're already spending the money And all the territory of managers we need out there in the field to hit the majority of our 2026 objectives. So they look at this as These are my teammates who are out there, going out and building the relationships with dealers on the field. In addition to those territory managers, We also have 21 regional sales directors that manage that team.

Speaker 2

So we're sat there. We have several Vice Presidents that then are mentioning that team. We have a major accounts All these teammates are already on staff here, ready to keep growing our relationships. We have another team of inside sales that's a pretty good sized team already today That could we could be doing a lot more units than we have today with the current inside sales team. So we've invested, Mike.

Speaker 2

We weren't shy About building a world class team, to go after this really large TAM. So, yes, there'll be a few more folks, but I would say not material. I'm adding a handful of few more folks As it relates to, I would generally call sales, I would say, we will talk a little bit more about us going after the commercial segment in the June meeting. We you might hear about a little bit more hiring in that specific area. You might hear about some new leaders in that area.

Speaker 2

Yes. That's an area where we're focused a little bit more on. I don't want to spoil our great content, but We will we do have intentions of between now and 26, growing the amount of business we're getting in the commercial category.

Speaker 9

All right. Thanks so much, guys.

Speaker 2

Yes. Thank you. Thank you.

Operator

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

Speaker 2

Great. Thanks for taking my questions. Hey, how's it going? George, Bill. If I kind of back in I don't know if it was in the release, but if I kind of back in to auction marketplace Revenue per unit, it looks like it stepped up mid single digits sequentially.

Speaker 2

So I guess kind of question 1, anything to call out there? And then question 2, just any update on how

Speaker 3

And Assurance ARPU basically went up about a little more than $10 quarter on quarter and was up About $35 or so year on year. So a lot of that benefit is associated with the fee increase that we did in Q4. Plus we had pretty good mix on the marketplace. Well, and GMV per unit went up quarter on quarter, slightly down year on year. But again, that was offset by the fee increase.

Speaker 3

So we're in a pretty good place In terms of our fee structure and it's helped us drive really strong margins as well that combined Yes, with the arbitration frequency that I mentioned and how both teams have been managing that.

Speaker 2

Yes, I think one of the themes Bill said earlier is that more to come and how we get to the 26 numbers, again, not to spoil our content, but I would say you're seeing us confident in the higher ARPU range, right? That would be one of the areas as an example of how we get there being different. Not to mention specific like other people in the Marketplace, if you look at some of the Copart's revenue per unit, we're still a lot lower than them. Having said that, I feel comfortable about our revenue per unit, like This area we've been in, I think between now and 26, ARPU is an area that could grow. And that's just one theme.

Speaker 2

It might be we'll In any one back to back quarters, we'll see as sometimes GMV is going down and we'll increase price again each year. When you look at it broadly year over year, We're pretty confident in ARPU. Great. Thanks, George. Thanks, Bill.

Speaker 2

Thank you.

Operator

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

Speaker 1

Hey, Matt.

Speaker 10

Hey, guys. Hey, thanks. And partially related to the last question, If

Speaker 2

I look, GMV was flat year over year. And if you look at

Speaker 10

the Manheim Index, it's averaging about down 7 point So on pricing from an average of the previous year, so that would be 8 Obviously, there were price increases. You talked about that in dollar terms, dollars 35 on a year over year basis. Could you help me do that in percentages And kind of bridge that number so that I can understand how much of you are you getting more because of just price increasing and how much are you getting because The 8% unit volume increase.

Speaker 3

Yes. Hey, Nat. It's actually 8% unit growth and roughly 8

Speaker 10

So, I mean, so pricing is pretty Your price on a unit basis is about half you're getting from the cost of the vehicle and half you're getting from the fact that you're Just moving the vehicle, this unit?

Speaker 3

No. You're asking a question I think about revenue growth.

Speaker 10

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

Speaker 3

Our GMV year on year is actually down. GMV per unit. GMV per unit. Okay. It's flat in terms

Speaker 10

of GMV per unit, yes.

Speaker 3

Yes. So GMV per unit is down. It's flat in terms of dollars because basically our ARPU Increase, right. I'm sorry, a unit increase offset the reduction in GMV dollars in total. So the 2 offset each other?

Speaker 2

In other words, we 17%.

Speaker 3

Yes. So, Nat, let me restate it so it's clear. Okay. So, we grew our units 8%. Okay.

Speaker 3

GMV was flat. Okay. Because we basically offset what was an 8% decline roughly In GMV per unit with more units. So we sold more units, right, and offset the dollar That's why the dollars were flat year on year. That makes sense?

Speaker 10

Yes. No, this is not what I was trying to get at is 17% increase in marketplace revenue with GMV being flat, but units up 8%. What I'm trying to get at is how much of revenue growth is GMV related and how much of revenue growth is unit related? And very specifically, because obviously you raised price, so price would be part of the 17% growth And the other part would be some fixed component of the GM of the unit growth.

Speaker 3

Yes, well, yes, again. So it's non GA related.

Speaker 10

It would be is it just half and half?

Speaker 3

Yes, it's you're in talking about revenue, Okay. First, it was driven by the unit growth, right, of 8%, but those units We carried a higher ARPU, which was also roughly up about 8% year on year, right. So, we sold 8% more units at roughly an 8% higher price per unit.

Speaker 10

Revenue per unit, even though

Speaker 3

Revenue per unit, yes. Yes.

Speaker 2

With that average, we're still being in a lower. Yes.

Speaker 10

Yes. So what I'm trying to get at is, as the year over year You're right. If you look last quarter, it was about an 8% hit on the Manheim price index for pricing versus this Q1 2022 versus 2023 versus 2022. This quarter, Things today like April, it looks like 5%. So ARPU grow as not ARPU, As GMV grows because of sale price of the car, how much does that translate to ARPU?

Speaker 2

Yes, I think I hear I think your question. I think so here's 2 things and I think we'll prepare for you answer. I think at a high level, the idea that per unit, it was about $35 is what we said in the past. And I think from a percentage, The buy fee has about, Mike, a 4% difference is what we're saying, 4% differential on

Speaker 3

4 of the 8. Yes. I think maybe where you're struggling, Nat, is Understanding that our ARPU is only impacted partially in terms of GMV In that GMV only affects our buy fees, right, because our sell fees are fixed. So our buy fees are the only variable portion of that. Yes, so.

Speaker 3

Right. So that's one part of it. The other part of it is mix on the marketplace, right. So our mix is going to impact what our ARPU is in terms of higher priced vehicles versus lower priced vehicles. But the other variable again is regardless what the GMV is, the only variable part of our equation are biases.

Speaker 3

So you get a muted impact either up or down in terms of the ARPU impact at any given quarter. And we can spend more time offline with you, Matt on this and walk you through some actual numbers maybe

Speaker 1

that'll help.

Speaker 7

I'm just

Speaker 3

going to

Speaker 10

be like everybody else.

Speaker 4

Sorry, I'm taking the first question from

Speaker 10

June 1st. I didn't mean to.

Speaker 2

All good. All good. Thank you.

Speaker 3

All right.

Speaker 1

Thank you, Matt.

Speaker 3

Thanks. Okay.

Operator

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

Speaker 5

Great. Thank you. I guess

Speaker 1

I don't need to remind everybody that we have an Analyst Day on June. You can find registration details on our in today's press release and on our website and we look forward to seeing those of you who are joining us then and

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ACV Auctions Q1 2023
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