Q2 2021 ACV Auctions Inc Earnings Call

[music].

Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the H C. V. First quarter 2021 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation. The call will be opened for questions I would now like to turn the call over to Tim Fox.

C V's Vice President of Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone and thank you for joining <unk> conference call to discuss our second quarter 2021 financial results.

Me on the call today are George Sherman, Chief Executive Officer, and Bill as you rollout 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 is contained in our quarterly report on Form 10-Q for the three months ended June 32021.

It will be filed with the SEC. Following this earnings call also during this call. We may present, both GAAP and non-GAAP financial measures.

Reconciliations to the most direct comparable GAAP financial measures are available in our earnings release, which we issued a short time ago.

The earnings release is available on the Investor Relations page of our website and is included as an exhibit in the form 8-K furnished to the SEC.

Finally, we will be referencing our earnings presentation today, which you can find posted on our IR website.

And with that let me turn the call over to George.

Thanks, Tim.

Good afternoon, everyone and thank you for joining us.

Let me begin by thanking the ACD team for continuing to deliver superior value to our growing dealer network, which resulted in record second quarter results.

I would also like to welcome our newest team members from Max Digital are excited to have you on board and look forward to working together as we deliver best in class data and digital technology to the dealer community.

Turning to slide three.

I'll begin with highlights of our second quarter, then share some perspective on the automotive market.

As you can see our momentum continued in the second quarter, where we transacted $2.1 billion of DMV and over 150000 vehicles sold on our digital marketplace, both of which were records for HCV in fact re transacted more.

<unk> in Q2 than we did during all of 2019.

And we delivered very strong revenue of $97 million.

Representing a 117% year over year growth.

Our strong topline performance can be attributed to three factors first we continued to execute on our proven playbook to grow market share by attracting new dealers into our ecosystem and by capturing additional wallet share within our existing dealership network.

Second historically high used vehicle values, along with historically low retail inventories resulted in record quarterly GMB and ARPA.

And also drove elevated conversion on our marketplace.

And third adoption of our value added services accelerated quarter over quarter and was well above our expectations.

Simply put <unk>.

<unk> execution by the ATV team, along with continued customer adoption of ACB suite of offerings.

And favorable market conditions yielded truly impressive financial results.

Turning now to the broader market backdrop, we have clearly been operating in unchartered territory over the past year on both the demand side and supply side of the automotive market.

And these market dynamics contributed to record financial performance in the second quarter for HCV.

As a reminder, in our first quarter earnings call. We provided an outlook for the balance of 2021 that assumed a more normalized environment.

Particularly around used vehicle values.

I think it's fair to say that our timing was off by a few months.

But the market is indeed, turning wholesale vehicle prices after peaking in early June started to decline in July and continue to soften.

Which has been well documented by the industry data providers.

The other half of the equation of supply.

Last quarter, we also discussed how the lack of new car inventory due to chip shortages and other supply chain headwinds could factor in our 2021 performance in the second half of the year.

In Q2 automotive franchise dealers generally had enough supply to support strong retail performance. However, there is an emerging view that the third quarter or perhaps fourth quarter could be the low watermark for retail supply.

Of course these market dynamics are transient in fact, most industry participants see the new vehicle supply challenge recovering in early 2022.

Which would be a tailwind for trading volumes and benefit our wholesale supply.

Ultimately this is great news for ACB.

More normalized pricing environment allows buyers and sellers expectations to converge.

More supply coming into the market feeds the top of the funnel, which in turn drives higher volumes in our marketplace.

It will take a few quarters for these market dislocations that settle out but in the meantime, we continue to execute on our plan and take market share.

As Bill will discuss in more detail, we have again increased our outlook for the year and are now expecting to deliver approximately 60% revenue growth for the full year.

For context.

This is a full 20 points higher than our outlook at the beginning of 2021.

To frame the rest of our discussion today, we will focus on the three top level elements of our strategy to drive long term shareholder value.

Marketplace growth cabinet product expansion and operating scale.

Let me begin with marketplace growth.

Turning to slide five.

We transacted 153000 units in Q2.

Which was 74% growth year over year, and 19% growth quarter over quarter.

Due to the impact of COVID-19 on our Q2.2020 financial results. We included a comparison to Q2.2019, which.

Which as you can see was very strong at 174% growth.

As I mentioned earlier, our unit growth was driven by continued market share gains.

As measured by the number of new dealers transacting on our marketplace and by increased wallet share from existing dealers.

In fact, we added more sellers to our platform in the first half of 2021 than all of 2020.

Unit growth also benefited from very strong customer conversion on our marketplace.

This was driven by the low supply environment I spoke about earlier.

As expected we did see conversion begin to normalize in July as market participants began to adjust to declining wholesale values.

The record <unk> transacted in Q2 was a tailwind for ARPA, reaching a new high <unk> per unit of 13900 increased around 90% year over year.

Which reflects both higher vehicle values and an increased mix of frontline vehicles transacting on our marketplace.

While elevated vehicle values are transient a sustained mix of frontline vehicles on our marketplace could be a nice long term tailwind for Arco.

Moving on to slide six we continue to make great progress towards our territory coverage goal of 160 by year end.

This will be about a 30% increase in our footprint since the beginning of the year and will position us to engage with nearly all the franchise dealers in the U S.

We are continue to attract great talent across our organization with some pretty ambitious 2021 goals.

To put this in perspective, we ended Q2 with nearly 2700 ATV teammates effectively doubling our size over the past two years.

Turning to slide seven one of our largest teams at ACB is our vehicle inspectors. This team has grown threefold over the past two years supporting Acb's hyper growth, while delivering highly differentiated services to our dealer network.

And with increased territory density along with new technology investments, we're beginning to scale this business.

Which is a key element of driving long term operating leverage in our model.

Moving on to slide eight you can see that our strong unit growth and increased arco yielded nearly 100% our auction marketplace revenue growth.

And greater than 270% growth versus Q2.2019.

Turning to slide nine.

I'd like to highlight one of our offerings contributing to the strong unit growth.

In this case through consumer sourcing.

<unk> been hearing a lot lately about direct consumer sourcing in automotive.

ACD was an early mover in the category with our live appraisal offering we enable our dealers to offer consumers, an efficient and effective way to sell their vehicles and Suvs marketplace. We.

We expect these vehicles at dealer locations or in a consumer's driveway and deliver a real time market based offer based on what dealers are willing to pay.

Five appraisals has grown significantly in recent quarters and Q2 year over year unit volume grew more than 150% and accounted for high single digit percentage of our total volume.

And we plan to expand our offerings to help our dealers compete for consumer source inventory.

Let me pivot to our second element of our strategy to drive long term shareholder value.

Tam and product expansion.

Moving to slide 11, I would like to highlight another feature ACB launched that enable highly efficient vehicle sourcing for our dealers through programmatic buying.

We have invested in two flavors of programmatic buying.

Our buying API enables dealers, who have their own technology platform or centralized buying centers to integrate into our real time API to bid on vehicles on our marketplace.

Based on their inventory wishlist.

All without human intervention.

Our second offering currently in beta as are buying matrix, which enables dealers, who don't have their own automatic bidding capabilities to create inventory wishlist within atvs user experience, including vehicle type condition pricing and location parameters to fill their.

Needs automatically.

Marrying these programmatic buying capabilities with our nationwide inspection team enables us to offer both highly efficient.

And trusted experience, which we believe will deliver better results for our dealer partners.

Turning to slide 12, I would like to remind you about how our marketplace.

Data and technology combined to power significant network effects.

As more marketplace participants join our platform, we can provide greater liquidity and a better experience leading to greater scale.

This in turn enables us to collect more vehicle and market data, bringing.

Bringing greater efficiency and more products.

These reinforcing filofax continuously improve our digital marketplace and improve our data services for our customers.

Ultimately this drives greater liquidity greater scale and greater efficiency, which is demonstrated in our attractive unit economics.

An exciting New addition to our data and technology capabilities as our acquisition of Max digital.

Moving to slide 13.

I'd like to touch on some key points about the Max digital acquisition.

Core to ACP submission is our ability to provide automotive dealers with technology platforms and solutions to compete in a market that is rapidly shifting to digital.

Max digital is a leading provider of SaaS based automotive data and software solutions that provides dealers with unparalleled capabilities to source and sell wholesale and retail vehicles.

Max digital pricing guidance merchandising and inventory management products create data driven insights that complement <unk> current data services, resulting in exciting growth synergies.

These synergies include cross selling Max Digital's products into <unk> customer base.

And driving additional marketplace volume by army dealers with tools to price and sell their wholesale and retail inventory more effectively.

For example, Acd's pricing engine.

We'll be tied directly into max's tools, helping dealers more effectively buy and sell used vehicles.

This is just one example.

Of many exciting opportunities our teams are exploring and we look forward to sharing updates going forward.

Moving to slide 14, let me wrap up this section with an update on our value added services, we had an excellent quarter for both ACB transportation and <unk> capital.

Our transport business has expanded significantly over the past year and has been a key enabler of attracting new buyers to the platform.

Our expanded carrier partner network and fast cycle times resulted in attach rates of around 45% in Q2.

Well above the mid 30% attach rates achieved in 2020.

The number of transfer it's more than doubled year over year to around 70000 in Q2.

ACB capital, which is still in its early days has been gaining a lot of momentum in the market.

Attach rates approach the mid single digits in Q2 with.

With loan volume, improving greater than 30% quarter over quarter.

We also saw a material increase in revenue per loan following the launch of our new finance offerings in early June.

It should be noted that ACB transport, an ACB capital are tracking ahead of our milestones and achieving our long term targets.

In summary, as it relates to our Tam and product expansion strategy I think it's clear that we have created some exciting new avenues of long term growth for HIV by leveraging our powerful data capabilities expanding features across our technology platform and driving adoption across our growing.

We of digital solutions.

With that let me hand, it over to Bill to take you through our financial results and how we're driving growth at scale.

Thanks, George and thank you everyone for joining us today.

Two was a record quarter for <unk> across many key financial metrics and we made significant progress on our long term strategic objectives.

On slide 16, I'll begin with a review of our second quarter results.

We delivered very strong top and bottom line results with revenue of $97 million, which generated year over year growth of 117% and was well above the high end of our guidance range.

Adjusted EBITDA loss of $4 million or 4% of revenue was nearly flat versus Q1, 'twenty and was also very favorable relative to our Q2 guidance.

This performance was driven by our strong revenue results in the quarter and underscores the inherent operating leverage in our business model.

As expected cost of revenue as a percentage of revenue increased year over year and was in line with our expectations.

The year over year increase was driven primarily by the mix of HCV transport revenue.

Which grew 10 percentage points year over year and exceeded our expectations.

Total operating costs, excluding cost of revenue as a percentage of revenue improved by approximately 1100 basis points.

And we delivered this improvement despite growing total operating costs, excluding cost of revenue by 76% year over year once again, highlighting the leverage in our business model.

Turning to slide 17, I will cover some additional detail on revenue.

We have a diverse mix of products and services.

Our auction marketplace revenue comprises about half of our revenue today with.

With our customer assurance offerings, and our value added services, making up the other half of revenue.

We had very strong broad based performance across our portfolio in Q2, most notably within our services business that is noted benefit from Pi transport attach rates.

And in our auction marketplace business, which grew 98% year over year profitability remained strong.

Moving to slide 18, I would like to discuss the operating leverage in our business.

Here, we're showing historical adjusted EBITDA margin, along with our updated outlook for 2021.

As discussed with you last quarter 2021 is a year of significant investment for ACB.

And as you've seen throughout our discussion today, we are delivering on territory expansion with nationwide coverage expected by year end.

We're launching a host of new offerings to drive additional market share and adoption of our value added services and we're investing in technology to scale our operations.

These investments translate into a 66% year over year increase in operating expenses, excluding cost of revenue.

And despite this increase our adjusted EBITDA margin is down just 400 basis points year over year again, highlighting the underlying operating leverage in our business model.

Lastly on operating leverage note that we have absorbed Max Digital's expense base without impacting 2021, opex guidance, excluding cost of revenue.

Now I will turn to guidance on slide 19.

For the third quarter of 2021, we're expecting revenue in the range of $82 million to $85 million a growth rate of 22% to 26% year over year and an adjusted EBITDA loss in the range of 20% to $22 million.

As a reminder, Q3 'twenty was a very strong quarter for ACB with a year over year revenue growth of 112% as our business recovered from the Covid impacted second quarter of last year.

As such we've included the two year growth comparison, which yields approximately 160% growth relative to Q3 dollars 19.

For the full year 2021, we're expecting revenue in the range of 332 to 338 million a growth rate of 59% to 62% year over year, and an increase of $25 million from our previous guidance.

Adjusted EBITDA loss is now expected to improve by approximately $17 million to a range of $62 million to $65 million.

As George discussed earlier and consistent with our commentary from last quarter. We believe it is prudent to assume that the favorable market dynamics driving elevated conversion on our marketplace.

Lower unit prices and supply headwinds for dealers will continue to normalize in the back half of 2021.

And finally on guidance to my earlier point about our investment plans. We are expecting total operating expenses, excluding cost of revenue to grow approximately 66% for the full year 2021.

To wrap up my comments, let me highlight our strong capital structure on slide 20.

We ended the second quarter with $664 million in cash and equivalents of $124 million of which reflects the float in our auction business.

Note that we generated $27 million of cash flow from operations during the quarter due to an increase in the float of our marketplace. Since March 31.2021.

The amount of float on our balance sheet can fluctuate meaningfully driven by the business trends in the final two weeks of each quarter.

We ended Q2 with $500000 of long term debt associated with our HCV capital business.

From $7 million in Q1.

Given our strong cash position, we optimize our cost of capital by paying down the revolving credit facility and our current levels self funded the ACB capital business, reducing interest expense.

And with that let me turn it back to George.

Thanks, Bill before we take your questions, let me summarize.

We are extremely pleased with our execution in the second quarter.

Which illustrates the momentum we're seeing in the market for our leading digital platform.

We continue to gain market share by attracting new dealers to our marketplace and by growing wallet share within our existing customer base. We are executing on our territory expansion plans, we're launching exciting new offerings that further differentiate us in the market.

And we strengthened our data services and digital platform with the acquisition of Max digital.

We have a proven business model that can deliver scalable growth with attractive unit economics, and structural operating leverage that we believe will drive significant shareholder value.

With that I'll turn the call over to the operator to begin the Q&A.

As a reminder to ask a question you will need to press star one on your telephone.

Sorry, Your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Ali Agha wrong from Guggenheim. Your line is now open.

Hi, everyone. Thanks for taking my questions.

So can you help me better understand the assumptions embedded in your second half outlook in particular, I'm wondering about what type of volume growth in <unk> per unit Youre, assuming it <unk>.

Yeah Ali it's Phil.

So I guess a couple of thoughts first right just kind of keep in mind first.

That.

Full year guidance reflects about 60% revenue growth and thats substantially up from our initial modeling of the year of 40%, so pretty pretty big upward revision there.

That said similar to what other companies in the automotive space have signaled right. We're seeing a contraction in conversion rates due to pricing normalization, that's happening as the market adjusts and we've taken that into account in our guidance. Okay. So we're effectively leaning a bit more conservative on organic growth in the second half until we see the market reach.

Equilibrium.

I guess with that and might also a few other thoughts here. So keep in mind also that the second half of the year is seasonally weaker than the first half and Q2 is typically the strongest quarter, which of course was turbocharged as a result of the market dynamics in the quarter.

That all said right, we're going to continue to execute against the playbook, we have in terms of.

Adding sellers and buyers to the platform expanding our footprint Brian on the go to market side investing in tech.

With the thought that we're going to come out the other end of this market adjustment being that much stronger. So we did we did assume obviously that the market's adjusting and that's going to drive.

Some of these metrics the other way in terms of conversion rates and <unk>.

Got it that's helpful and so.

Just digging in further I mean is the expectation that volumes can still grow quarter over quarter in the back half.

So we don't we don't really guide.

So unit growth right I mean, there is always puts and takes between units and <unk> right. So we try to focus everybody in terms of what the.

The revenue.

Output will be so we don't get to that level of fidelity typically right and again its going to be very much driven by market conditions at the end of the day, we keep gaining market share in Q2.

Kind of reflected that really strongly in terms of adding sellers to the platform and buyers. So at the end of day, we're going to keep doing the same thing and then however, this plays out it's in part going to be dictated by how the market adjusts this quarter.

Great Great. That's helpful. Bill and then just one more quickly on your comments about conversion starting to normalize here as used car prices.

I'll also start to normalize Shouldnt that also drive just more trade and supply making its way to auction. So one thing we had heard about us, but with new car supply constrained a lot of dealers were just keeping a lot of these trade ins to sell at retail versus potentially wholesaling them and so while used car prices moderating could have a negative impact on <unk>.

Hershey rates Couldnt and help just the overall supply of cars that are.

Being sent to wholesale auction.

Hey, Ali, it's George I hope, you're well and thanks for that question.

Right now we are being prudent and we're assuming that based on what we're hearing from dealers.

Inventory is going to stay.

Very short for Q3.

We also mentioned that you heard in the call. We said Q3, and Q4 could be sort of that leveling out.

And I think as we're going into 2022. This will all be noise right from our perspective, and I think right now we're assuming as dealers are going to still be in the same.

Predicament.

And some are even assuming right now in Q3, it actually might be the toughest.

Say.

Phase of this lack of inventory.

So I think that's really at least how we're thinking about the forecast right now and the lack of inventory and to your point does that mean dealers, maybe keeping cars that they would have historically wholesale I think yes, I think thats already happening we have to assume that for now.

Fast forward.

As these new cars.

Come back.

As the factories start to come.

Correct with a ratio that would be chips or other.

Constraints they have.

Our new car dealers will have more cars will go back to selling the cars that their brand is.

Really aims to be selling and local impact to be wholesaling. The types of vehicles are historically the wholesale is that helpful. Just to give you a little more of that color.

It is very helpful. Thank you George and thanks, Bill for taking my questions.

Yes sure.

Thank you. Our next question comes from the line of Nat Schindler from Bank of America. Your line is now open.

Yes, hi, guys. Thank you for this so.

One.

Is there any revenue associated in the second half with Max digital.

Hey, it's Phil so there is but it's not material.

So we haven't broken it out.

So relatively small but.

It's just not material enough for us to break out.

Totally understand.

I get your answer from last question about being conservative on the change to what's going on in the market on the pricing side.

Wouldn't that.

The problem in the market as a lack of supply which is driving the price up because there was a demand equation with.

For used cars, so wouldn't have the pricing sourcing normalize we get more supply are you are you taking any indication that supply is going to come back in which case.

Is that overly conservative.

Hey, Matt.

Well again, thank you.

A really conservative I don't know.

But.

We're.

When you look at the correction thats happening as the prices started to decline.

Really sort of two thirds into the quarter right. We started to see used car values did.

Decline. So that's one trend happening so that's something we're being conservative and it's starting to happen. So therefore, <unk> and other factors will also imply lower GMB okay.

So that is in fact, the other fact is dealers are getting to historical lows right now in inventory.

How quickly.

That's going to change Youre seeing a lot of folks in the automotive market predict.

We didn't want to predict really anything more.

Sort of weak felt like we can control. So we're predicting to your point as we're modeling that our new car dealers, which is where the majority of our supply comes from our guidance.

I'm going to have a low amount of supply and therefore, a low amount of trains.

So that is sort of what we're predicting that is sort of what we're hearing from our new car dealers.

There are many factors going on.

But yes. So we are predicting both is that helpful.

If you look at I believe.

Bob.

Yes.

Let me add one more piece of the puzzle here to.

Just to be clear so.

So when prices are declining.

Okay. There is basically lower conversion rates on the marketplace right because buyers are more hesitant.

To commit right. So these prices with the exposure of that by time, they sell the car the price might be even lower.

And in.

It takes time for sellers to adjust to the new reality in terms of what their inventory is worth right. So what it does it kind of has the opposite effect of what's happened in Q2.

And in Q2 when prices go up right because theres a theres a lot of very high conversion because buyers know theyre going to flip that car and probably sell it for more than they even thought because because prices are going up when prices are going down you have the opposite effect right until you get to this normalization equilibrium, where it's kind of a more of a normal marketplace. So while it's adjust.

And your conversion rates go down.

And I think thats consistent with what you would hear from other other.

Players in the industry.

That makes perfect sense, but I was also wondering if.

On the other side when the Manheim index was approaching two we're going north of two and pricing was growing crazy.

I would think that dealers would just simply not shoulder car into the auction because the longer but keep the car I'm a lot the more valuable it was.

Yeah.

We had a great quarter.

Yes.

Okay.

Yes.

Gaining a lot of salaries, we also mentioned.

That we had more net new sellers.

This year added this first half of the area than we did all of last year. So.

We're gaining interest in the platform. These other trends are important I would say.

We're all looking at this quarter to quarter trends, we are just trying to.

As you know our style, we're always prudently.

We do believe there is going to be dealers are going to have a lack of inventory this quarter.

And so how do we.

How do we.

Forecast is obviously what you see.

Okay, great. Thank you.

Yes, certainly.

Thank you. Our next question comes from the line of John Collins, Tony from Jefferies. Your line is now open.

Hi, Thanks for taking my questions.

Good to see the faster than expected progress.

Penetration rates for ACB transportation capital talk about if there was any benefit to adoption from the unique inventory environment that we saw and if you would consider the increased engagement to be sticky once the inventory cycle begins to normalize in the second half.

I have a follow up.

Okay.

Transportation first.

I think one of the reasons why transportation adoption increase is.

The.

We are getting battery.

So when you think about pricing your lane just to kind of give it one example.

We're now to the point where.

<unk> for 20% of the moves in transportation.

We have Ah programmatically.

Leading not needing R. R <unk> transportation load board to have a price.

<unk>.

From a carrier and where does that mean that means that because we are starting to invest in technology from certain invest in our network.

But to really optimize our lane pricing for transport allows.

It allows us to have predictability and the more we invest both in our technology for transport.

And we invest in our network of carriers. It allows us to get stronger as the price of the lanes appropriately and ultimately if we've got the right pricing the right service for our dealer partners, they're going to choose ACB transportation. So I would say very proud of.

Of.

What we've done with <unk> hundred translation. In addition, I would say there is also just more density right. So density and scale, obviously also helps and getting better pricing from our from our carriers.

And ACP capital, we did announce that we had some product mix additions.

Recently.

We are listening to our dealer partners.

It's also the first time, we're just now starting to market our product in our App.

Think this was an early product we mentioned during the IPO.

We mentioned, whereas during the IPO profit.

It was nascent at the time were just starting to market. The product. We're just starting to add additional staff, but really with both initiatives. We're investing in technology investing in great people, who are absolutely excited about the progress and the progress is at or exceeding in both cases, what we.

Set out to do this year.

Great that's helpful and.

Now that you've developed capabilities.

Consumer sourcing what you mentioned in the prepared remarks.

Could you at some point start to leverage the connection you've now made between dealerships and consumers.

To become an online marketplace or platform for dealerships to begin selling retail ready cars to consumers.

Yes.

Thanks, Sean.

As of right now we're not.

Planning or broadcasting to help helping dealers sell cars to consumers beyond our tools. So for example, the Mac within the Max digital products.

We have the industry, leading way to merchandise car by car and some of the largest dealer groups in the country use this platform and these are data tools. It helps.

Really market. This one specific for $1.50 and and.

Exactly why this 450 should be priced at $35000 has all of its value. So we've got these unbelievable tools.

Now help dealers.

Enrich their data enrich their experience.

As of right now on that I would say as it relates to E. Commerce that is at least for today and all of our broadcasting and helping dealers, where you are seeing us lean in and start to open up a little bit more on our strategy.

Is dealers buying cars from consumers.

And dealers, taking in trades and competing in this digital world.

Youre going to CSP.

And we mentioned this in our IPO that this will be coming we're starting to lean in there. We do think peer to peer will shrink over the coming years. We think dealers are very well positioned to buy these cars from consumers and we're here to help dealers compete in it.

In the digital world of helping them take more of these cars, whether theyre going to take them as a trade, whether theyre going to turnaround and wholesale it.

We're here to help dealers.

Thank you I appreciate the questions.

Thank you. Our next question comes from the line of Ron Josey from JMP Securities. Your line is now open.

Great. Thanks for taking the question and lots of unpack here another great quarter, but I wanted to maybe follow up on that call on that question just now on HCV capital and George you mentioned.

Capital is now available in the App and that drove awareness.

Getting to mid single digit attach rates can you talk a little bit more just about how you plan to ramp awareness. Besides just putting in the app.

Talk about the drivers here to ramp awareness and really where you think that can get to over time from that when we say mid single digit attach rates from low single digits. Prior do you think this gets to mid single digit talk to us a little bit more about the strategy with capital and I have a quick follow up.

Certainly.

We are right now currently doubling the size of the sales team is all in the model right.

We now felt comfortable and ready.

<unk> to increase that the specific.

<unk> team and think about.

When ACP starts to have these let's call them product sales teams the product sales team.

Leverage the lead the relationship from the other account managers.

So we're already on the phone with.

And thousands of dealers a month.

And.

These specialized teams whether it would be ACP capital or Max digital et cetera. These teams now are leveraging the fact that we have these relationships. We are doubling the size of the dedicated product sales team are really excited about that our expectations are in line.

With what we have for your second question our expectations are in line with what we outlined in our law.

During the Roadshow Bill do you want to give a little bit more of our expectations, where where HCV capital should be in the next handful of years.

Yeah, Hey, Ron so yeah.

Yes, if you remember.

On the road show, we talked about really getting to a 20% attach rate.

Over five years, so I would say, we're making really good progress this year.

We'll most likely kind of update update you and the investors on that kind of longer term path and whether or not we're getting there faster. We're certainly we're certainly getting to our milestones a lot quicker on the transport side.

But we're really happy with the progress that we're making on capital and by the way. We're also not just investing in sales we're investing on the tech side as well right. So we're dedicating more resources.

So just continue to make our offering more compelling.

Our competitive in the marketplace. So yes, I would just what I would just say at this point as we're making great progress we're going to be looking at most.

Most likely on the order of Forex prior year revenue from from capital Brexit It was small last year, but.

Over over the next few years certainly become more meaningful.

And.

Whether we'll get there faster than five years I don't want to comment at this point I would just say that we're making really great progress and obviously as the new as you and the other investors know this is a very high margin business for us so it will be accretive to margins over time.

Perfect. That's Super helpful. And then one quick follow up I think George you mentioned you added more I think dealers on the network in the first half in all of last year as we get to normalization in the market whenever that is maybe in the first half of next year or the first quarter. Just talk about if you think that it will be easier to add sell.

Then or is the environment going to be the same in terms of adding sellers and I think you also said vehicle inspection inspectors were up three action last three years, so youre seeing progress with feet on the street. So just talk to us about adding more sellers.

As things normalize and whether it might get easier or not thank you.

Yes, certainly so so.

It seems obviously between our brand increasing our network increasing territory managers getting out into the field.

It could be also going public and all of these factors right. The ACD brand is out there we're growing sellers and a very successful way. So we're very excited.

Maybe a way to answer your question incentives.

<unk> growth even faster next year.

Is our mix is also changing so we think about selection of assets on the ACD platform.

Youre also youre noticing our GMB has gone up.

And really some part of that is yes vehicles.

<unk> right now are higher but part of this is the mix in selection has increased so think.

We will get we think a broader.

Selection of vehicles as we grow so that'd be part of the trend, we think can happen going into next year.

Our product mix is growing.

So as we're adding on new dealers and were successful from growing from one product to multiple products.

You've heard me talk about <unk>.

Prior cough up private marketplace. As an example, we've been adding just as an example about one dealer group a week.

Coming onto a private marketplace, which has been exciting so think yes, we'll keep adding more and more sellers.

Don't want to predict it growing even faster at this point, but really excited about what's going on here and so far the momentum and the scale is helping.

And I believe the product mix is also helping so when you look at the sort of broad strategy. We've outlined to you a few months ago is we're both our marketplace and data story.

Youre seeing that become true.

Right. We didn't say we are just the marketplace company, we had the station we're executing on this mission.

He is very focused on executing on both sides marketplace and data.

And I think it's in that mix, we add tremendous value back to our dealer partners.

Tremendous back your dealer partners not only helps with retention and helps us to grow more with are continuing to do an ACD hopefully that's helpful.

It does thank you George Thank you Bill.

Yes.

Yes.

Thank you. Our next question comes from the line of Bob Levine from C. J F Securities. Your line is now open.

Good afternoon. This is stefanos crist, calling in for Bob Congrats on the quarter.

Thanks Evan.

So can you discuss your goal of expansion to a 160 territories can you discuss the tight labor market and how if at all impacting your ability to fill those.

Sure first of all on the territory manager side. We are slightly ahead of schedule. So we are on plan, we will come back over the next few quarters and I am very confident to say, we will have reached sort of full full coverage sort of coast to coast that we have the territory managers out there.

In the field to reach out to all of the franchise dealers from a supply perspective and these other products. The other part of I would say maybe also related to your labor question is.

Writing vehicle condition and sectors.

We're just looking at some data.

Earlier on this and this was helpful.

To be sure.

Right now our average time from hosting a vehicle condition and sector TMA.

And this is average obviously, some higher some lower but the average from posting a <unk>.

To selecting one is 16 days Thats average.

And it's about a month from start date, meaning when they start being trained to be an inspector teammate.

So.

That's pretty strong right.

When you think about that.

Ill.

There's a lot going on in this world right now.

And I don't want to.

Underestimate our under signaling that you asked I would say labor challenges are a challenge I think for all companies. These days.

But for I would say those two rolls out in the field right now.

We are executing our goals and and it's going well.

That's great color. Thank you.

Thank you. Our next question comes from the line of Rajat Gupta from Jpmorgan. Your line is now open.

Hi, good afternoon. Good evening, thanks for taking the questions.

A lot of questions around that conversion second half but.

Just had a bit of a longer term question.

Did the second quarter market dynamics.

Accelerated.

The value of your offering or.

Does it allow you to.

Penetrate into more customers than you would have.

Obviously, maybe at the time of the IPO and.

Yes that is the case.

Do you expect those customers to be sticky and.

Would that then imply that.

Versus March versus today.

No.

Moving away from the near term dynamics on the market, Let's say 2000.22023.

Does that automatically imply.

More units just because you were able to accelerate your customer base in the second quarter.

Just any color around that would be helpful. I'm not sure. If my question was super clear, but.

I can go over again.

Sure.

Thank you. Thank you for the questions and I'll.

Let me try to answer that I think theres, a few questions with them within that so.

I would say, we accomplish our goals for the first half.

We've been at this now for a little over five years, we've got a model we go out there executing our model.

And I would generally say, bringing on salaries.

In the first half.

We were very successful.

I would say the part that's different.

Is most sellers have less inventory than in prior let's say last year, let's say in 2019, okay. So.

So part of what's been going on and this is within the mix already there might've been a dealer partner, who had 220 cars a wholesale deal with us they might only have 150, <unk> hundred 60, whether they're keeping them or whether it because they just don't have enough are there because they have less overall retail whatever those reasons.

You really are seeing a signal I would read into this less about I would say keeping more about dealers have less cars.

And and.

We hear this everyday dealers will reinforce I'm, giving you all my wholesale and more and more of them signaling that we're getting a lot of other vehicles, but it is going to be there are going to be some dynamics that are short term right now we all read about it every single day.

And.

That's really all we're really broadcasting there as it relates to the supply as we think dealers and have less cars on the lot level, which room, which also means less retailing likely less conversions to wholesale.

As it relates to stickiness.

I don't have any data to.

Really sort of give you on thickness or attention, but I will say that we.

We believe our strategy is working extremely well we believe this idea of not only of being a great marketplace by having this end to end platform of services.

Is going extremely well.

We believe offering more and more capabilities.

Investing in these partnerships. These dealer partners is going well investing our team is going well, so I would say no.

Really no change on our belief of how any of these market dynamics are going to change retention.

I think the other party who made a third part of your question would be could it accelerate our growth even more.

<unk>.

And I don't know how to answer that bill.

If you want to answer it but I think at the end of the day.

We are growing extremely well.

And all of these dynamics could could could mean accelerated growth, but obviously.

We can't speak to that.

What I would add is that.

Look we've been as George said, we've been really successful in adding a lot of sellers on the platform and obviously they've had a chance to see how we perform as a marketplace right.

And the mix has changed as well so were more broad based at least right now.

To the extent.

We come out the other end of this adjustment in the market.

And those and those sellers.

Feel good about the value add from ACD, then we should benefit.

Whether it's whether it's more accelerated than what have been prior it's kind of hard to say all we can say is we feel really good about.

Our penetration and market share gains.

Got it.

Okay great.

Helpful color I'll jump back in queue.

Thanks, John.

Thank you. Our next question comes from the line of Alex Potter from Piper Sandler. Your line is now open.

Great.

Thanks, Thanks for the question great quarter guys.

So I wanted to go back to a question that was asked earlier about how I mean, obviously there is limited supply.

Prices are high so all else equal the dealer.

If I can should just sell the inventory they have to retail and not go to wholesale in.

And your response was we just put up a great quarter, which is obviously I think indisputable at this point, but generally market wide.

That dynamic is accurate right theres been a disincentive to push vehicles to wholesale.

Which implies that you guys are basically just running away with the market and I don't think Thats a secret anymore. So the question that I have is to you.

Experience a change in the competitive response of some of these other platforms when you're out talking to dealers trying to pick share sell as.

<unk> do you find yourself pitching yourselves again digital platforms more often than you used to.

My only question.

Yes, Thanks, Alex.

Yes.

Remember, we had and I hate these names, but one of the large auction companies had a digital company.

Right away. So when we started this journey there is already digital competitors. So I would say this entire time theres been digital competitors and theres been physical.

Competitors.

If you look.

In fairness.

When you look at that.

Let's call it eight to 9 million cars that were sold at physical auction last year.

And we're very proud of the number of cars.

We sold.

Percentage basis, we're still small.

We're growing.

But I think the majority.

I think if you added up most of the digital.

Other digital competitors collectively.

I believe we still just be a fraction of our size.

So I think the majority of the competition of where these vehicles are going is still a physical auction along really trying to paint.

And and yes, there are other digital companies.

But this whole category.

Growth.

And again, we believe we're the leader and we will remain the leader in the category.

But still the majority of the cars have been going.

Through let's say the physical auction lanes and we've got some room to grow to grow this category I think the broadening of our services.

And youre seeing now with broader mix.

Different types of vehicles that we started the journey with just the lower priced vehicles.

Typical three to $5000 a car.

It was 120000 miles on it never want our retail franchise. So we never run a recap we're still getting a lot of those units, we're seeing the type of inventory on ATV grow.

Which is fantastic because we are really becoming a broader marketplace.

<unk> are becoming buyers buyers are becoming sellers.

It's in that mix and then offer these other data services that we believe we can really not only becomes a dominant marketplace in time, but add more value to our dealer partners.

Okay.

Very good thanks, Thanks, a lot nice quarter.

Thank you.

Thank you. Our next question comes from the line of Nick Bacchus from Raymond James Your line is now open.

Hey, guys. Thanks for taking the question and congrats on a great quarter.

Just on cohort behavior, maybe you could just talk about any.

Learnings or changes in dealer behaviour and.

Newer cohorts.

Your territories.

In terms of number of vehicles transacted for dealer or any other important metrics you look at versus past cohorts in the earlier stages.

Yes, Nick we really arent sharing any cohort data.

Sure something.

Ill share with you is.

Power going into these new markets.

Starting to broaden.

Where.

Looking at.

One of the themes, we're looking at right now, we're just getting into markets within the northwest and we are just opening up some of the markets.

The West Coast.

How we're going in we're looking at for example, there is dealers for the first time ever being introduced.

<unk> through our private marketplace, because theyre part of a dealer group that will be different.

We wouldn't have had that entry we'd rather wait until we got that first dollar of that first buyer. If that makes sense. So are our broader product selection will be helpful.

The first time, you are sort of hearing about HCV may not be.

The day, we hire a territory manager they go through training and we go into the market. So I would say that we will start to be different that's a new theme I would just say over the last.

At 60 days or so.

But that would be like the newest thing and if theres anything else Bill we can share from a cohort basis because.

Not really okay.

Hopefully that's helpful. Nick.

Got it thanks very much and then just real quick on the <unk> line.

Just maybe just.

A little bit more about this new offering and the launch in fourth quarter.

The meaningful kind of incremental driver or is it more of a complementary type.

Ted feature.

Sure. So there's two parts of our programmatic buying product strategies.

The first part is live and we've got.

Some dealers who are already integrated with ACD, the dealers, who integrate with us for our buying API.

Tend to be larger dilutive type groups that have a technology department.

Ken.

And have what's called the internal technical resources to integrate with our API. So that product is live and we're starting to <unk>.

Integrate with additional dealer groups with that product allows us.

A large dealer who has the technical.

<unk>.

We will automatically putting bids on ACD without any human intervention.

And not only picking the types of vehicles.

But in addition to the types of vehicles.

Its condition and other factors, so think basically what acumen would do.

And picking inventory.

We're ingesting or condition report into the buying process.

Their their machines in our machines can help them at the end of the day by the vehicle so that slide.

And we're very excited to get that lie we were working on this part of our platform for for a while and we're so happy to get some dealer partners now using it and the feedback has been tremendous.

It's still early days, but we're actually seeing for example arbitration rates.

<unk> lower than our averages.

For dealers buying without having any human intervention, which is awesome third product one that's the buying API and I believe I am not sure I believe we're the first in the industry to do programmatic buying via an API.

At least as far as I know.

On the second.

Is we've started to build.

A buying matrix approach where dealers can via.

Interface.

Select the types of vehicles they'd like to buy as well as condition.

And so it basically emulating what our API does.

But it's an interface of the dealers. They don't have the engineering team to integrate with US right. So we're going to have both options I think whether they have an engineering team and ability to integrate or if they are.

We're going to use our user experience at the end of the day. They do the same thing that product in beta that one's not lie we only have a few dealers using it today.

Because I'm getting such positive feedback I felt why not announce it I usually wafer products are fully live.

But the feedback we're getting is tremendous so far.

So we'll be looking to launch that.

And.

And really what does it do to your second part of your question.

It adds the persistent demand into the platform for the for the vehicle segment that we have.

Where whether it be one of our API buyers for one of our.

The preferences on the buyer matrix.

We have this persistent demand and persistent demands helpful and think about persistent demand plus the ACB marketplace demand.

<unk> gather.

Is extremely unique.

Because there are some vehicle types, you really want an auction format.

You really want that competitive bids and these the API and our buying matrix actually.

It's not a separate thing it actually delivers results into our 20 minute auction. So yes as you can probably tell we're very excited about this I can't wait to roll this out even further.

Sounds exciting thanks for thanks for the time.

Yes, Thanks, Mike.

Thank you. Our next question comes from the line of Daniel Enbrel from Stephens, Inc. Your line is now open.

Hey, good afternoon, guys. Thanks for taking my questions and squeezing me in here at the end.

Correct.

Just on how the industry should change in supply demand normalizes, maybe first so as conversion rates begin to tick down and it takes longer to tell the vehicle.

Capability of having land help you or hurt you win share I mean, obviously dealers right now have plenty of excess capacity, but it has lots begin to fill up are you seeing more dealers ask you to start moving.

Inventory off their lots and if so bill can you talk about your ability to flex your land capacity through either partnership or buying land to service that demand.

Yes, certainly so we'll all go through both of those for you. So.

It doesn't seem like at least this year.

Land will be much of a problem for franchise dealers not driven by any lately.

But there aren't many cars of these lines.

So.

I would say digital I believe this is my opinion is an advantage because at least you can try to sell at wholesale while it is still on your lot you can debate between wholesale retail.

So I believe upstream and digital for this environment is beneficial.

Not a detriment I don't believe land, if maybe historically, let's say, 10% to 15% of dealers historically had a land challenge as it relates to wholesale whatever the right percentages you can guess 10 to 15 or 20% of dealers had land challenges right now, it's an even lesser percentage.

The second part of your question.

If we needed land there is a lot of land out there in this country.

So.

We're not worried about if we ever need land.

There is noise, we have a few very few.

<unk> is going on in small parts of the country that we don't usually broadcast that if we really need it we would just stand it up.

Atlanta is generally cheaper these days.

And.

It's really just not a problem if we need it we can just go and rented from somebody we need it for but right now it's by far not even in the top three things that are usually come up is like why they would go with it for nacco with US land is not even in the top three at this point great.

Great. That's helpful. And then one just following up I think earlier, you mentioned, helping dealers maybe sourced directly from consumers can you talk a little bit more about that.

How differentiated it is maybe from some of your other peers offer and then longer term.

As you help dealers source inventory, maybe outside the auction channel how do you balance.

That longer term risks to them finding ways to buy outside of your digital auctions and maybe directly from consumers just.

Just how do you balance that long term impact.

Yes, certainly so.

Our dealer partners right now looking at for our current products.

One of our current products, it's called live appraisal. So what does that mean that means our dealer markets to their consumers.

They will pay more for the cars than others.

Those who aren't using our libra appraisal.

Some might use ACB brand in their marketing.

It may not use our brand, it's really up to them of whether or not they're going to use our brand, but the marketing would say something like this.

Why why have a local dealer our national dealer.

Give you a price in your car when you can have.

We have the largest digital auction.

Having dealers across the country bid on your car get transparency know what your hardware things like that so our dealers are marketing to consumers that they're going to pay more.

Cause they partnered with ACP basically now that might be an event and the dealers lot, where there's like a tan and imagine like coffee and I could go there and it's like an event or it might be is going to consumer's driveway and actually doing a 20 minute inspection and a 20 minute option.

So.

That was sort of I think that's our first product and and our dealers are enjoying this product because theres differentiation there not just everyone's going to say, we're going to pay the most of your car right.

Those can become noise I'm going to pay the most of your car youre going to pay the most of that just kind of like but why how right. So at least they have got something to market.

Our dealer partners and Thats expanded.

Quite a bit this year, we mentioned earlier, how much labor Craigslist ground. In addition.

Youre seeing thats build tech and data.

And pricing capabilities.

That will help our dealers for the <unk>.

More and more.

We're alluding to that.

The Max products will help because they are behind the scenes doing appraisals, even when it doesn't go to currently are our marketplace.

Additional products were alluding to that will be coming.

As part of our product roadmap that will help dealers compete for consumer cars. So we love the category.

We think our dealer partners are very well positioned.

Buy more cars from consumers.

And you could sort of think about <unk>, so the shopify type of role.

For all of these dealer partners they need someone that has the scale the nation's largest inspection network the technology the data.

And Thats, what we provide for our dealer partners.

Thanks, So much guys. Good luck.

Yes. Thank you.

Thank you at this time I'm showing no further questions I would like to turn the call back over to Tim Fox for closing remarks.

Great. Thanks.

Thanks, everybody for joining the call today, so we're going to be on the road.

<unk> participating in a couple of conferences coming up here, albeit the Canaccord Genuity conference Tomorrow all the.

Details are on our website. So we look forward to seeing you on the conference circuit in the coming months and again. Thank you for your interest in HCV I Hope you have a great evening.

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

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