Ladies and gentlemen, greetings and welcome to the ACV Q2 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference has been recorded. It is now my pleasure to introduce your host, Tim Fox. Please go ahead.

Good afternoon, and thank you for joining ACV’s conference call to discuss our second quarter 2024 financial results. With me on the call today are George Chamoun, Chief Executive Officer; and Bill Zerella, Chief Financial Officer. Before we get started, please note that today’s comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of the risks and uncertainties related to our business can be found in our SEC filings and in today’s press release, both of which can be found on our Investor Relations website. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today’s earnings materials, which can also be found on our Investor Relations website. And with that, let me turn the call over to George.

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. We are pleased with our second quarter performance. We delivered another quarter of record revenue that was above the high-end of guidance, despite market headwinds related to the CDK software outage in June. We also hit a new milestone in the quarter, with half of our regional markets achieving 30% franchise dealer penetration. Adjusted EBITDA increased 65% sequentially, resulting in a 700 basis point year-over-year improvement in adjusted EBITDA margin. Along with our momentum in dealer wholesale, we are very pleased with the market adoption of ACV’s consumer sourcing solution, ClearCar, and with our ongoing technology initiatives to address the commercial wholesale market. As we pivot to the back half of 2024, we are encouraged by our strong performance in July and remain focused on driving top-line growth, expanding margins, and delivering our first year of adjusted EBITDA profitability. We’re confident that executing on this profitable growth strategy will result in creating long-term shareholder value. With that, let’s turn to a recap of second quarter results on Slide 4. Second quarter revenue grew 29% year-over-year to $161 million. We sold 187,000 vehicles, a year-over-year increase of 22%, reflecting strong listings growth, strong conversion rates, and execution across many ACV teammates. GMV declined modestly year-over-year, driven by a 19% decrease in GMV per unit, as quoted prices and vehicle mix compressed relative to Q2 2023. However, ARPU increased 9% year-over-year, highlighting the value ACV is delivering to the market. 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 share our observations about the automotive market as context for dealer wholesale volumes. New retail sales got…

Thanks, George. And thank you, everyone, for joining us today. We are very pleased with our Q2 financial performance. Along with accelerated revenue growth, we delivered meaningful margin expansion and strong sequential adjusted EBITDA growth, demonstrating the strength of our business model. On Slide 15, let’s begin with a recap of our second quarter results. Revenue of $161 million was above the high-end of our guidance range and grew 29% year-over-year. Adjusted EBITDA of $7 million was at the midpoint of our guidance range and adjusted EBITDA margin improved approximately 700 basis points versus Q2 2023. We were pleased to achieve record adjusted EBITDA in Q2. It’s worth noting that results would have exceeded the high-end of our guidance were not for transient factors impacting revenue margin in the quarter. As George mentioned earlier, price depreciation was above normal during Q2, which pressured GMV per unit and ARPU relative to our forecasts. We also had an increase in arbitration cases early in the quarter as dealers were digesting market price declines. I refer to these factors as transient, because GMV per unit and arbitration rates have stabilized and we are expecting price depreciation to follow normal seasonal patterns for the balance of the year. Finally, non-GAAP net income was at the midpoint of our guidance range with margin increasing approximately 300 basis points year-over-year. Next on Slide 16, I would like to highlight additional revenue details. Auction and assurance revenue was 57% of total revenue and grew 33% year-over-year. This performance reflects 22% year-over-year unit growth, and auction and assurance ARPU of $493, which grew 9% year-over-year. Marketplace services revenue was 38% of total revenue and grew 30% year-over-year. Results were driven by strong ACV Transport performance and another record revenue quarter for ACV Capital. Our SaaS and data services…

Thanks Bill. Before we take your questions, I will summarize. We are very pleased with our strong execution in Q2 and 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 to further differentiate ACV and drive operating efficiencies. We are on track to achieve our 2024 adjusted EBITDA targets and deliver on our mid-term 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.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Michael Graham with Canaccord Genuity. Please go ahead.

Hi. Thanks very much. Congrats on the continued momentum. I had two questions. The first was, you talked about the market still being a little bit muted, but seeing some signs of progress as we point towards the second half, could you just maybe elaborate on what those signs of progress are, and could you just remind us what the market looks like when you are able to say that it has recovered like what are the kind of key metrics that you’re focused on there?

Yeah. Thanks, Michael. I appreciate it. This is George. When we look at the positive signals out there, new vehicle inventory has continued to normalize. We mentioned in the first part of the quarter here, the first few months of the quarter prior to the CDK outage, we saw that really go in the right direction. We believe the only reason why new was flat was because of the CDK outage. So that was new going in the right direction, very positive. We’re all seeing more and more incentives out there. We’re seeing OEMs already, even with a high cost of capital, putting the incentives out there for new cars. That’s fantastic. Back half of the year with lower interest rates, we may even see even more incentives going on when you think about what they could do with leases and other sort of products. So that’s positive. Well, one of the things we point to as far as trends that help us see the dealer wholesale market returning back to 2019 is the trade to wholesale mix. This is okay when a consumer comes in, trades in a vehicle, does the dealer keep it and retail it or wholesale it? And they’ve been keeping more vehicles from 2019 to now, really just because there was a lack of inventory and there was obviously first lack of new and there was a lack of use. And use is still 20% below the 2019 level. So we’re working our way back towards normalcy here. But we did start to see a slight uptick in that sort of dealers willing to wholesale a vehicle first retail, which says, okay, cars are starting to add up on their lots, still not back to where it was, but they’re starting to add it back on their lots. As we start to see that, we will start to see dealers wholesale more vehicles. So Michael, hopefully that’s helpful.

Yeah. Thanks a lot, George. I appreciate it.

Yeah. Thank you.

Thank you. The next question is from Bob Labick with CJS Securities. Please go ahead.

Yes. Hi. Good afternoon. It’s Pete Lukas for Bob. Can you talk about the commercial opportunity ahead and what is the landscape for acquisitions in the physical reconditioning auction space?

Yeah. Thank you. We’re still really good about where we’re at with commercial. We’ve got really two parts of the strategy here. One is getting our product offerings back in support to be able to really support commercial through leveraging AutoIMS in the use cases where the commercial partners don’t need reconditioning. And as I mentioned in the past, AutoIMS is the middle where commercial partners use, now that we’re included as a methodology for commercial consigners. We’re doing well. We’re progressing on that integration and looking to have that ready to collide before the end of the year. So very happy about the progress there on that integration. So that use case specifically would be a vehicle that doesn’t need to get moved or it doesn’t need to be recon, examples like that and we need that integration in place to really support wherever the vehicle is. Then, second market which you mentioned is a large part of the commercial category, vehicles need minor recon. We say minor recon, a lot of times it’s just they need to put on a tire or change, it needs the key within the repo category, that’s in a category where there’s some reconditioning. We now have 10 locations and we’re very excited that we’re on our way, I think 25% of the way of what we said of at least 40 locations to get over 80% of the population. So very happy with our progress on that journey of having locations across the country to help us go after the commercial space.

And as you mentioned, across the country in terms of those locations, how do you look at the expansion? Is it prioritizing one area over the other or wherever the opportunity presents itself or kind of across there and then the timetable to get to that full footprint that you’re looking for?

Yeah. On locations, there’s really two parts of locations. One would be if we’re going to go in via an acquisition, which you’ve seen thus far, the majorities have been small acquisitions. Yeah, so really, if it’s an acquisition, there’s a viable business in that location we’re going after, then the acquisition path would be a path we can go down. There are some markets in the country where there won’t be a target for us to acquire. In those markets, we’ll just rent some land, decide whether or not we’re going to outsource the reconditioning and/or do it in-house based on the market. In many of these markets, you could just outsource the reconditioning. And so either way, we’re going to bring the offering really for all the markets we want across the country, whether or not there was a small acquisition or we go ahead and just rent the land we need to go-to-market.

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

Yeah. Thank you.

Thank you. The next question is from Rajat Gupta with JPMorgan. Please go ahead.

Great. Thanks for taking my questions. I missed like the initial part of the call. I was curious like did you quantify any impact from CDK to the business either on revenue or EBITDA? I just had that one clarification. I have a quick follow-up. Thanks.

Yes. Certainly, Rajat. I’ll start, then Bill if you want to chime in. We didn’t really say, Rajat, what was the impact earlier in the call? All we did as mention that we did see, as you know, you cover the space pretty broadly, that new was going off at a really good spot and CDK really slowed down the new car sales and used cars sales towards the end of the quarter. Our impact, it’s really tough to put an exact number on it. It was definitely over $600,000 of EBITDA and definitely over $1 million of revenue. The exact number, we don’t really know. But it was an impact, obviously, we still had a fantastic quarter, but that would be an approximate range of what the impact was for us.

Got it. That’s helpful. And then just on a related topic, I mean, given the experience a lot of the dealers ran through with CDK and we have worked from other dealers trying to explore redundancies and other options, you obviously are getting closer and closer to the dealer and getting more integrated with their systems, with ACV Max, and just all the other products. I’m curious like how do you see this event as an opportunity for ACV to maybe work more closely with the dealer, I don’t know, maybe at some stage get into the management system side of things. I was curious like how you think about that opportunity. Thanks.

Yeah, Rajat, I think it’s a great question. I was on the phone with a top, let’s call it, a top 5 or maybe a top 10 dealer group, a senior person recently on this topic. And it was fun because it was somebody that doesn’t work with us a lot today. And it was really interesting listening to how he thought about the category and how he wanted to make sure he had more options. So I think you said it well, you kind of answered the question while you stated the question. It’s a category where dealers are going to probably be more careful about these all-in-one systems is what I’m hearing. There’s a couple of different software vendors are trying to put everything into one stack. And, I think, they’re going to be a little bit more careful about that. I think they’re going to be careful to make sure they got best of breed. So, I think those signals could be good signals for us. I don’t know if it’ll change our trajectory for ACV Max or these products like in the next quarter or two like they took off. I don’t want to say they’re like, okay, it’ll go. We’re going to start selling this so much faster than we are today. But to your point, it definitely can’t hurt. It can only help the fact that we’re here, we’ve got great products, we’ve got a real tech team, we’ve got nearly 400 people between product and technology and IT and incredible teammates in this area. And we can help dealers sort of diversify and sort of create strength to their back-end systems. So, I think that’s all probably today on that, but I think it’s also a great question.

Got it. No, I do think it’s a great opportunity, but thanks for taking the questions and good luck.

Thank you, Rajat.

Thank you. The next question comes from Naved Khan with B. Riley Securities. Please go ahead.

Yeah, thank you very much. I think in your prepared remarks talked about 50% of the market achieving 30% penetration of franchise dealers. Is that just a count of the dealers or is that wallet share? How should I think about that part [ph] that you just shared? And then I have a follow-up.

Yeah, that’s just a count of those working with us. A good point of clarification. Thank you so much. I mean, it’s not full wallet share yet. So we’d be selling a lot more cars to your point if we had 50% of their wallet share. So that’s right. It means we’re thinking about it as the first flag of your sort of when you think about in your path to success, you’re just celebrating each part of that victory. The first part of the victory is they’re working with us. And the second part of that victory is we start to gain more wallet share.

Okay. Great. And then just on the ACV Capital, what’s the attach rate there? Is there any movement on that front? And you also spoke of potential sort of new opportunities beyond the core, maybe off platform financing. Maybe talk about that a little bit, how big can that be over time?

Yeah, certainly. So, yeah, we’re very pleased with our team’s execution at ACV Capital. We did mention on the last few calls that we will continue to grow, but we obviously signaled to you all we weren’t intending to grow this year as fast. Much of that is purposeful. We all saw the risk as it related to independent dealers with the higher interest rates and both for the consumer and their ability to compete. So our team has done a fantastic job of both growing, but also managing bad debt and actually improving year-over-year on our bad debt expense. Pretty meaningful improvement while growing in a tougher environment. So I’m just really thrilled with the team’s execution of growing in a market there, I think independent dealers will get healthy. There’s a little bit of technical piece of this for independent dealers, interest rates come down, we can see the independent dealer being a lot healthier kind of going into next year. And you also see franchise dealers stop selling some of the junkier cars. So, I think that will be another talent for the independent dealer next year. So fantastic job on the team’s execution for ACV Capital. The new product that we are just very early stage. I’m really excited about it. I wanted to – one of the reasons I mentioned is I’m just you got some of these products that I’m just super excited about. But whenever you could bundle two of your products together to add tremendous value, and that’s bundling ClearCar with ACV Capital to help dealers buy cars from consumers. And this will be well-franchised. It’ll be independent. It’ll be others in the marketplace that just buy cars. And we’re really excited about this, it’s an area where we believe we have a competitive advantage. Because we – if you think about each time when you’re extending credit in a way, you’re doing it based on our wholesale volumes based on our ability to price that vehicle. So we’re in a very unique position to basically fund this consumer acquisition. Having said that, we’re very early like I think first few dealers have gone live. It won’t really wrap until next year. This was just – I was just excited that we got live with it and we launched our first work. We’re technically not actually live, we’re technically a pilot, but I’m happy to announce that at least it started.

Great. Thank you.

Yeah. Thank you.

Thank you. The next question is from Chris Pierce with Needham & Company. Please go ahead.

Hey, good afternoon, everyone. Has anyone asked on competitive intensity yet?

Hey, Chris. Do we have competitors? I’m just joking.

Well, just from talking to customers and investors. I appreciate that, by the way. CarMax can do ramping up Max offer, co-part [ph] is making noise in wholesale. And then on the physical side, America’s auto auctions has bought a couple local physical auction houses. So I just want to get a sense of how you think about the competitors broadly. Are they coming to this market because it’s a gross market or are they trying to defend share? Like, how do you think about competitive intensity from some of these newer players?

Yeah, I mean, Chris, if you look back, there’s been physical auctions, whether it be owned by the group you mentioned or somebody else. There’s been hundreds of physical auctions across the country from day one when we started this journey. So whether company A or company B owns that auction really doesn’t change the competitive nature. Even some of the other folks who are in the salvage category you mentioned, they’ve been on and off in this category for a long time. You can go back and look at the press release, it’s how long? So there’s really been no change in my mind on the competitive nature. I think even when you look at our other direct competitors, I think you’re going to see we’ve done better quarter-over-quarter. So I would say the simple quickest answer would be you respect your competitors. We’ve got very strong competitors, one really big one, I think we are doing a great job as well, but we’ve got some competitors in every market we’re in. It’s been that way since I started this journey in 2016. So a short answer would be nothing has changed.

Okay. Perfect. And then what would you say, if I kind of posited a theory of second half strength in used car macro given the CDK disruption and the easy comps we have on 2022 and 2023 in the second half of the year. And these are durable goods and interest rate cuts are coming. I know you guys don’t like to make macro predictions, but does it line up for a stronger second half than we normally see in the used car industry?

I think that’s Bill question, if you would. We believe things will – let me say it this way, we are planning for it to moderately improve. Bill might need to chime in here in a second. Okay. But we’re not baking on a huge improvement. And actually, Bill, I’ll be safe for here. You go.

Sure, sure. Hey, Chris. So, I think if you take a step back and let’s start with our guidance, right? We raised the lower-end of our revenue guidance. So we moved the midpoint up, right, to a full year revenue growth of 28% to 30%, which is a pretty good growth rate concerning the current macro environment. That said, we mentioned in our prepared remarks that we’ve seen a strong start to Q3. And that’s certainly with the case in July. It’s carrying over so far into August. However, we’re really not extrapolating that growth rate yet, even though our Q3 guide is basically 33% to 36% revenue growth. So the caveat here is the dealer wholesale market improved modestly in Q2, but it still declined based on auction that data, roughly 3% year-on-year. Okay. So we still believe dealer wholesale is going to recover, but it’s unclear how much of a tailwind that’s going to provide in the second half. And you’ve got all these macro cross-currents at play, right? So the net for us is we feel like we’re guiding to a really strong revenue growth in the second half. We certainly see a nice start to Q3, but we’re just a little cautious here because we’re a week away from only halfway through the quarter, right? But, certainly, these are positive trends that we’re seeing so far. So that’s hopefully gives you a little more context.

Yeah, I appreciate the time. Thanks and good luck.

Okay.

Thank you. [Operator Instructions] The next question is from Curtis Nagle with Bank of America. Please go ahead.

Hi, guys. This is Steven McDermott on for Curtis Nagel. You talked more about kind of your profitable investment philosophy in the prepared remarks. Do you mind just expanding kind of what investments are still needed to reach your targets? And as well, kind of what would margin expansion look like if you were to exclude those investments? Yeah, thank you. And then I have another one after.

Bill, punch you out.

Yeah, so the way we think about this is how much incremental even it will regenerate for every given incremental dollar of revenue, right, which is net of any investments that we’re making. So let’s start there. And last year, we had significant incremental EBITDA margin, because we were really tightly managing OpEx. This year as we pursue the commercial strategy through M&A, that obviously has an impact in terms of how much incremental margin we deliver. EBITDA margin we deliver for every incremental dollar since we’re bringing on additional OpEx as part of that strategy. So, all the modeling that we’re doing going forward, basically gets us to a place where when we take into account that commercial strategy in those investments. We expect to deliver about 40% of every incremental dollar of revenue down to EBITDA, right, which we feel is a pretty good track to execute on going forward. Assuming we can drive good growth on the top-line, we can really build a really nice improvement in EBITDA margin over the course of the next few years, right, as we can towards our mid-term targets. So that’s the kind of way we think about it in terms of the model. If we weren’t making these investments, I mean, frankly, that would be kind of hard to discern, because if we weren’t making those investments, that would impact our revenue growth, right? So it’s not easily easy to parse that out, because if we don’t make those investments, we’ve got less revenue generation and margin generation as well. So that’s not the way we think about it.

Got it. Yeah, it makes sense. And then, I think, typically or at least historically, you’ve raised prices in 3Q. I was just wondering this time around, if you’re thinking kind of along the same line, then is that across the board? Or is that more targeted towards a certain product, a certain service, et cetera? Thank you.

Yeah, certainly, we did have a small raise in price for some of our fees. And so that was part of our plan for this year. We were always looking at the timing based on market conditions and other factors. We didn’t see, obviously, used car values start to decline quicker in Q2. So we decided to make a small change there. And when you look at our target that we’ve told you all, we’re targeting $500. If you take the buy fees, the sell fees, the assurance product, we call it, Go Green, you put all those fees together. We are $493 in Q2. And our mid-term model is $500. So, look at there’ll be puts and takes any one quarter based on what’s going on. But between now and over the next few years, we’ve got a target with the last quarter being $493 and everything else going forward, so very confident about our goal, $500. And then the second part of your question, beyond doing these small fee increases, we do have the opportunity to expand other value-added services. So think about value-added services, products that could either offer, either more assurance to the buyer, as one example. So we’re always trialing these additional value-added services. So I think your second question was also a great question in that, in time, it doesn’t have to be just these small fee increases. It could be we start to see some opportunity in any one of the products we’re trialing that relates to these value-added services.

Awesome. Thank you. I appreciate the time.

Yeah, Steven, thank you.

Thank you. Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Tim Fox for closing remarks.

Thank you. And I’d like to thank everybody for joining us on the call today. We look forward to seeing you on the conference circuit this quarter. You can check out our website with all the different conferences we’ll be attending over the next month or so. And, again, thank you for your interest in ACV and have a great evening.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.