Q2 2022 ACV Auctions Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to the a C V second quarter 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.
H T V's Vice President of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and thank you for joining <unk> conference call to discuss our second quarter 2022 financial results with me on the call today are George Simone Chief Executive Officer, and Bill Zarrella 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.
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, 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 very pleased with our second quarter performance with revenue and EBITDA both exceeding guidance.
The team once again delivered strong results in a challenging macro environment for our dealer partners.
With that let me turn to second quarter highlights on slide four.
Our market momentum continued in the second quarter.
With record revenue of $115 million year over year growth of 18% versus very strong results in Q2 'twenty one.
GMB of $2 7 billion.
Also set a new record and increased 27% year over year.
We sold 148000 vehicles in our digital marketplace.
6% sequential increase from Q1, and a modest decline versus record unit performance in Q2 'twenty one.
Overall, we are very pleased that our execution in Q2, and our progress on key strategic initiatives.
We delivered strong results despite wholesale market conditions have softened in June .
Our resulting from continued supply challenges weakening.
Weakening retail demand.
And vehicle price depreciation.
Market conditions have remained challenging in Q3.
Andy prudent we have assume that wholesale volumes will remain constrained in the back half of 'twenty.
Our guidance now reflects this more cautious view of the macro factors impacting the dealer wholesale market.
Our guidance also reflects our commitment to investing in growth, while ensuring we remain squarely focused on our path to profitability.
As Bill will detail later, we have adjusted our operating expense plans to account for expected market headwinds.
We are focused on improving our foundation to drive profitable growth and market headwinds turn into a tailwind for HCV.
Turning to slide five.
The rest of our discussion today, we will focus on the three pillars of our strategy to drive long term shareholder value.
Both innovation and scale.
I'll begin with growth.
Moving to slide seven.
I will again provide context and the dealer wholesale market in relation to the broader automotive retail market.
First to illustrate the demand side of our market, we provided data and overall used car transactions and wholesale pricing trends.
As you can see in the chart on the left retail sales of used vehicles declined sequentially from Q1 and.
And declined about 15% year over year versus strong performance in Q2 'twenty one.
As a reminder, consumer demand for used vehicles is a key driver of wholesale demand and supply I.
Because consumers purchasing a vehicle typically have a trade it.
Chart on the right illustrates how continued softening of consumer demand has impacted wholesale prices.
After reaching historically high levels in 'twenty, one wholesale prices declined during the first quarter.
Recovered in early Q2, but have been trending down since June .
As we discussed last quarter price deflation has contributed to a conversion rate compression across the industry as dealers have become more price sensitive when buying vehicles in the wholesale market.
Now turning to slide eight let's look at the supply picture New vehicle sales remained well below historical averages and we're down about 21% year over year in Q2.
Due to the ongoing supply challenges impacting vehicle production.
This is reflected in the chart on the right, which shows that supply of new vehicles remains historically low.
Because consumer trade ins for new purchases are a significant input into the wholesale market the supply chain issues continue to weigh on the market we serve.
While there have been a few positive signals from auto Oems regarding production improvements later this year, we have not assumed that in our 2022 outlook.
On slide nine we provided additional insight into our business that underpins our confidence in HCV market position and long term growth opportunity.
The chart on the left shows quarterly listings on our marketplace.
Which is a measure of dealer growth and marketplace adoption.
After all moderating the second half of 'twenty, one as supply issues mounted listing volume turned positive in Q1, and then increase again in Q2.
For the first half of 2022 listings grew 27% year over year.
Reflecting strong execution on dealer penetration and wallet share growth.
In fact.
The number of listings dealers increased 30% year over year in Q2.
Which positions ACB for strong growth once wholesale volumes recover.
In the figure on the right. We provided an updated view of the quarterly variance in marketplace conversion.
As we discussed last quarter pre COVID-19 conversion rate on our marketplace, we're in a pretty tight range.
Then increased significantly as pandemic related supply demand and wholesale pricing factors drove very strong marketplace engagement.
Then beginning in the first quarter this year as vehicle prices you consumer demand moderated cautious buying behavior resulted in conversion rates returning to normal pre COVID-19 levels.
This trend continued in Q2.
With conversion rates ticking down quarter over quarter.
For context, the year over year change in conversion rate in Q2 resulted in a 30000 unit headwind versus Q2 'twenty one.
We believe conversion rates in our platform will increase in the future.
When the macro environment normalizes and as we help dealers manage price expectations with new data enabled solutions.
However, based on the latest data showing weakening consumer sentiment and depreciating wholesale market prices.
We believe it's prudent to assume conversion rates will remain at the lower end of the historical ranges for the balance of 2010.
Turning to slide 10.
You can see that units grew sequentially from Q1 <unk>.
<unk> declined modestly year over year.
Compared to record high unit performance in Q2 'twenty one.
Unit growth was 68% on a two year basis.
GMB grew 27% year over year to a record $2 7 billion.
About half of the year over year growth was driven by higher wholesale prices with the other half, reflecting a broader mix of vehicles on our marketplace.
Moving to slide 11.
Based on our internal analysis, we estimate that the U S dealer wholesale market remains well below normalized volume.
And contracted around 20% year over year in Q2.
Despite this macro backdrop, we continue to execute.
Gain market share and attract new dealers for our marketplace.
Given our 3% year over year unit decline in Q2.
And an estimated market contraction of 20%.
This implies the ACB grew market share by 17% year over year.
Next I would like to wrap up the growth section with highlights in our value added services.
Our investments in the technology and resources to scale ACB transportation and <unk> III capital are driving strong top line growth.
Also creating efficiencies for both our partners and for ACB.
On slide 12.
You can see the ACB transportation continues to deliver strong results.
Our growing carrier partner network and fast cycle times resulted in attach rates once again exceeding 50% in Q2.
With transport revenue growing 20% year over year.
In Q2 over 70% of our transports were automatically dispatched an increase of 20 percentage points from Q1.
The investment we are making in technologies like auto dispatch.
And our carrier Transportation Act.
Our attracting new carriers to our marketplace and driving operating efficiencies.
In fact, our transfer our business at a key milestone in Q2 with positive revenue margins in the mid single digits.
As a reminder, our 2026 financial targets assume transport revenue margin of 15%.
So hitting the mid single digits in Q2, 'twenty two puts us on a strong path to achieving this target.
Turning now to slide 13.
We are very pleased with the execution in our ACB capital business capped.
Capital attach rates more than doubled year over year in Q2.
Resulting in over over a 100% loan volume growth.
Our investment in technology to power our capital business.
Paying dividend.
Acb's capital portal launched in Q1 and adoption has been strong with 75% of active ACB capital dealers now leveraging this value added post auction financing solution.
We also ramped up our investment in ACP capital sales capacity to drive adoption and dealer engagement.
Which will further enable ACM capital to be an important growth and profit driver going forward.
Turning to the second element of our strategy to drive long term shareholder value innovation.
Turning now to slide 15.
I would like to highlight the innovation, we're delivering to enable our dealer partners to drive consumer source inventory.
Labour appraisal was one of our first offerings in this category.
And provides a unique way for consumers to have their vehicles sold in acp's marketplace by our dealer partners.
Libra appraisal listings grew 30% year over year in Q2, highlighting the market traction offering is gaining.
In addition to Libra appraisal, we are developing a more comprehensive set of solutions for our dealers leveraging technology from driver Lee monk and Max.
The initial market reception for a drive of late has been very promising with a number of dealers launched doubling quarter over quarter in Q2.
Users are now able to offer a seamless consumer buying experience powered by the AC pricing engine, our condition adjusted model for vehicle valuation.
Looking ahead, we are working to leverage amongst AI, driven imaging technology to enable consumers to a self inspection right from their own mobile device.
Which will further inform the price dealers can offer consumers.
We are in the early stages of launching dealers in these new offerings and are very excited about consumer sourcing.
It offers attractive Tam expansion and strong unit economics for ACB.
Leveraging technology prior to incurring the cost of in fact the vehicles.
Moving to slide 16.
I am pleased to share an update to our advanced buyer solution Sam.
Which was formally launched last month.
As a reminder, sand provides dealers with specific and relevant notifications.
And intelligent auto bidding capabilities.
Sam not only enhances the buyer experience and our platform.
It also creates persistent demand.
Price realizations and ultimately higher conversion for ourselves.
Following the July launch dealer adoption has accelerated with over 800, new dealers leveraging Sam in Q2.
We believe Sam will be a big growth driver for us as we expand its use cases and capabilities.
On slide 17, I'll wrap up on innovation with an update on apex. Our next generation data collection device that we introduced in March at our analyst day.
Apex expanse on ACB as existing Amp technology by incorporating upgraded audio capture capabilities and sensor detection, including vibration displacement and ultrasonics.
This more comprehensive dataset leads to a better understanding of the operating condition of vehicles engine and powertrain.
Which increases dealer confidence while buying online.
Apex also increased inspection efficiency for our teammates and provides a better quality audio experience in our marketplace.
This wireless device integrated with our single inspection application.
And is live in select markets today, the broad deployment planned later this year.
So to wrap up on innovation, we are very excited about our growing suite of data enabled solutions and technology roadmap that expands our competitive model creates even more value for our dealer partners.
While improving margin to drive sustainable long term growth.
With that let me hand, it over to Bill to take you through our financial results and how we are driving growth at scale.
Thanks, George and thank you everyone for joining us today.
We are pleased with our Q2 financial performance, we delivered upside to our revenue and adjusted EBITDA guidance. Despite the challenging macro factors George outlined earlier on the call.
Turning to slide 19, I will begin with a review of our second quarter results.
Revenue of $115 million was above the high end of guidance and.
And generated year over year growth of 18% versus strong results in Q2 'twenty one.
Adjusted EBITDA loss of $14 million or 12% of revenue beat our guidance range and EBIT margin improved approximately 500 basis points sequentially versus Q1 'twenty two.
Turning to slide 20, I will cover some additional detail on revenue.
Total revenue of $115 million represented a 60% CAGR since Q2 'twenty.
Auction and assurance revenue, which was 57% of total revenue grew 9% year over year versus very strong Q2, 'twenty one growth of nearly 100%.
Year over year growth in our COO of 13% was driven by higher <unk> due to the strong mix of vehicles sold on our platform and the biopsy increase we instituted last December .
Marketplace services revenue, which was 36% of total revenue grew 23% year over year, reflecting the continued adoption of transport that capital that George outlined earlier.
Our SaaS data services products comprised 7% of total revenue and had very strong revenue growth of 127% year over year, primarily reflecting revenue from the Max digital acquisition.
Turning now to slide 21, I will review costs for the quarter.
Note that on this slide I'm, comparing Q2 results to Q1 'twenty two results.
Q2 cost of revenue as a percentage of revenue decreased approximately 300 basis points quarter over quarter.
The improvement was driven by three factors.
First recall that in Q1, we increased our incentives to help our dealers acquire vehicles as market conditions weakened.
We successfully executed on pulling back on leasing incentives in Q2 as discussed on our Q1 earnings call.
The second factor driving revenue margin improvement was lower arbitration costs, resulting from improvements in trading process and enabling technology.
And the third factor was our transport business, which delivered positive revenue margin.
I'll reiterate George's comments earlier about this key milestone for transport.
Our 2026 financial targets assume 15% revenue margins for transport.
To achieve mid single digits in Q2, 'twenty two is a strong indicator of the long term profitability of this business.
Also a reminder, our transport revenues are recorded on a gross basis.
Therefore, our margin improvement has an outsized impact on our overall blended margins.
Operating costs, excluding cost of revenue also trended positively in Q2, as we increased our leverage by approximately 300 basis points quarter over quarter.
Moving to slide 22, let me provide context regarding our investment strategy operating leverage and path to profitability.
Given the <unk>, leading market position in large addressable market opportunity. We have remained focused on investing in growth and extending our competitive moat with differentiated technology.
We have also remained equally focused on investing prudently to ensure a clear path to profitability.
Given these commitments and our revised revenue outlook for the balance of 2022, we have taken steps to re prioritize our spending plans and accelerate operational efficiency.
We're doing this while also preserving key go to market and technology investments to ensure <unk> is in an even stronger position when market conditions improve.
More specifically, we have reduced our 2022 year over year non-GAAP operating expense growth to 23%.
Full 10 percentage points lower than our original 2022 guidance.
Exiting Q4 this year, we're expecting our annualized opex run rate to be approximately $40 million below our initial 2022 guidance.
This has the effect of lowering our revenue breakeven point heading into 2023 and better positioning HCV to achieve EBITDA breakeven.
Next I'll highlight our strong capital structure on slide 23, we.
We ended Q2 with $512 million in cash and equivalents and marketable securities at $71 million of long term debt to finance, our rapidly growing ACB capital business.
Note that our Q2 cash balance includes $124 million of float in our auction business as.
As we discussed previously the amount of float on our balance sheet can fluctuate meaningfully based on business trends in the final two weeks of each quarter and it has a corresponding impact on operating cash flow.
For example, Q2 cash flow used in operations was 41 million $27 million of which was driven by the sequential change in flowed from tier one based.
Based on our current outlook for the back half of 2022, we are expecting float to be flat to marginally increase.
And along with lower expected EBITDA losses expect cash used in operations to decline relative to the first half of 2022.
Now I will turn to guidance on slide 24.
For the third quarter of 2022, we are expecting revenue in the range of $104 million to $107 million or <unk>.
Both rate of 13% to 17% year over year.
For a two year basis, our Q3 revenue growth is expected to be approximately 56%.
Adjusted EBIT is expected to be a loss in the range of $13 million to $15 million.
For the full year of 2022, we are lowering revenue guidance approximately 6% at the midpoint to reflect a more cautious view of the macro factors impacting wholesale volumes in our market.
Revenue is now expected to be at a range of 427% to $432 million.
Growth rate of 19% to 21%.
Despite this lower revenue outlook, our adjusted EBITDA loss is expected to increase just $3 million at the midpoint due to the cost reduction efforts I outlined earlier.
Adjusted EBITDA is now expected to be a loss in the range of $57 million to $59 million or 13% to 14% of revenue.
As it relates to our 2022 guidance. In addition to the macro factors impacting wholesale volumes, we are assuming that conversion rates remain at or below the lower end of our historical range and therefore current market conditions persist through the second half.
Finally, we are now expecting non-GAAP operating expenses to grow approximately 23% year over year, which is below previous guidance at a 10 percentage points below our guidance at the beginning of the year.
Let me wrap up on slide 25 by reviewing our 2026 financial targets.
We're very pleased with our execution of what is proven to be a very challenging macro environment and we remain confident in our ability to achieve $1 3 billion of revenue and $325 million of EBITDA in 2026.
And with that let me turn it back to George.
Thanks, Bill before we take your questions, let me summarize.
We are very pleased with our continued strong execution.
While navigating through unprecedented times in our industry.
And we are especially proud of our ACD team has delivered these results.
We continue to gain market share by attracting new dealers for our marketplace and by gaining wallet share within our existing customer base, which positions the ACB for strong growth when market conditions improve.
We are executing on our territory penetration plans our marketplace offerings are gaining traction in the market and we see some very promising growth synergies emerging from our SaaS and data enabled services.
We are delivering an exciting product roadmap to further differentiate ACB and expand our addressable market.
We are on track to generate over $1 billion in revenue with attractive margins. There a proven business model that we believe will drive significant shareholder value.
We remain committed to continuing to build 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 Sir reminder, to ask a question simply press star one on your telephone.
While we compile the Q&A roster.
Okay.
Our first question comes from the line of John <unk> with Jefferies. Please proceed.
Hey, John .
Thanks for taking my questions.
So you had a big geographic ramp.
Throughout most of last year I think it would be helpful. If you could just dimension, how customer engagement and retention has trended in your older markets in comparison to your newer markets and in addition, maybe you could just give us a sense for what units would have been in the second quarter.
If you excluded the geographies that you expanded into last year.
Hey, John It's George.
For coming on board in asking the question so.
I don't think we have anything notable to report on differences between new markets.
And existing markets so.
Prepared to really report on anything like that any standout data.
But in general.
What I would say is.
They are.
We are our strength in our early markets have remained strong.
So it remains strong.
Cross the country, we would love to have more of listings and higher sell through.
We do have pockets of areas across the country, where conversion has remained stronger than other areas. So there are some pockets.
But in general I don't really have anything substantial.
To answer there that is differential.
Sure.
I would say early markets for cider markets.
Okay, Great and just a quick follow up.
So the second quarter exceeded your expectations, but you're tempering, our full year outlook. So that's sort of implies there has been a more recent deterioration in the operating environment. Maybe you could just talk to how the wholesale market has progressed over the past.
Two months and what Kpis or data points, we should be looking for to get comfort that the industry backdrop isn't worsening further thanks.
Yes sure John So yeah, we were very pleased with our listing growth in the first half of the year up 27% year over year.
We've been very excited about the growth we've been able to penetrate across many of these territories.
However, at the end of the quarter, we did start to see consumer demand at dealerships. We can I'm sure you've been following a lot of the data across the industry sort of.
As we've seen sort of the year over year data.
Hi.
On retail shift more negatively.
So so what we are.
As we are being more prudent on the back half of this year we.
We like everyone else right now is trying to keep our eye on the economy, we're trying to keep our eye on overall retail and trades.
And based on.
We really thought about the back half of this year, assuming things do not improve materially.
We are already starting to see retail go down.
And Thats really sort of our assumption is the current market conditions persist throughout the year Bill anywhere you want to add to that no I think I think that describes it John .
We're just assuming.
What we're seeing so far through the through the third quarter.
Kind of perpetuates through the rest of the year.
Great. Thanks, so much.
In Q.
One moment for our next question please.
Next question is from Ali <unk>.
With Guggenheim Partners. Please proceed.
Hey, everyone. Thanks for taking my questions.
Hey, George so on the conversion headwinds, you're citing it seems like that's being driven by the recent price deflation, we're seeing which probably continues for the foreseeable future. So what causes this headwind to normalize and get the buyer and seller expectations to converge again.
Yes, I think.
As the when you follow this back to the consumer and then work your way back to dealers.
Really what we're seeing is consumers are saying.
Used car prices are too high.
And we're starting to see.
NSE consumers buy less cards right. So now then dealers start to be more careful.
They're not going to lean in.
Pay what they believe.
Our overpriced and then you start to look at the holiday to get the core of your question.
How do you end up getting to that clearing price.
Every car has a price at dealers are willing to pay.
It's just really what does that values, we're starting to see the slow decline.
Which we've also mentioned in the call I was starting to slow decline in GMP.
And as that the client is happening we are starting to see some small signs that conversion rate.
Has at least leveled out.
Maybe we will see modest improvement, we can't predict that yet, but we're starting to see prices starting to come down.
<unk>.
And.
And we're starting to see the behaviors at least I think dealers are starting to really realize okay.
Whenever they bought the car almost doesn't matter. This is the new price.
We're starting to see trends not trends that yes Ali make us.
I would say comfortable that it's going to go up materially the back half of the year I think at least we've gotten to the point.
Where are they leveled off.
And now we have to start to see them come back up Bill anymore, you want to add to that.
Yes.
Okay.
Thanks, George that makes sense and then as a follow up here I am.
Appreciate you don't guide to volumes, but maybe you could help us understand.
What youre expecting for second half marketplace unit that you mentioned that your guidance assumes new car supply and convergent headwinds don't improve in the second half does that imply your internal model is assuming no quarter over quarter volume growth in the third and fourth quarter.
Hey Ali.
As you mentioned we don't.
Obviously to units or <unk> for that matter, but just to give you a little more color. So yes, we are assuming the supply remains muted.
Through the second half due to the weaknesses.
Now that we've seen in that we're all seeing and consumer demands.
We're also assuming as we just discussed that conversion rates are at the lower end of the historical ranges.
So we're not expecting.
<unk> any improvement at this point and that's what we've baked into our guidance.
But when you look at when you look at the numbers, obviously and do the math our unit outlook has has declined.
And that's what's implicit.
And our revenue guidance for the second half.
In terms of vehicle Asps.
We're expecting those to moderate as well in the back half we're already starting to see some of that right. So that will put some pressure on <unk>, depending upon what the mix is.
And again.
All of this is driven by the supply of trades that come into the wholesale market.
Conversion rates right. So.
If any of these dynamics change in terms of new vehicle supply et cetera.
And then obviously that that could create a variance versus what we've baked into our guidance, but that's that's kind of the methodology and that hopefully gives you a little more color.
Yes.
That's helpful Bill and if I could just squeeze one more in here on the reduced operating expense outlook can you give some more specific color on what exactly is driving that.
Cost reductions.
Yes sure so.
Look I mean, you've seen us so far this year.
Very diligent.
In terms of managing and balancing our opex spending right and trying to align that with the macro conditions on our revenue outlook.
So our focus is to do this while we also maintain a certain level of service to all of our dealer partners.
While also preserving our growth investments right. So we're well positioned.
As the market improves going down the road.
And we just continue to be very thoughtful about how we prioritize all of our spending across every aspect of the business.
And we're continuing to look for ways to optimize which kind of again cuts across all functional groups in the company. So we have a very clear focus on this and thats reflected in our <unk>.
Our revised Opex guidance.
In Georgia is commitment.
To manage basically the bottom line and adjusted EBITDA margins.
Great. That's helpful. Thanks, Bill Thanks George.
Okay. Thanks Ali.
One moment for our next question.
Okay.
Our next question comes from Ron Josey with Citi. Please go ahead.
Great. Thanks for taking the question I wanted to ask about the dealer adoption and knowing listings are up but conversions are down and we got the units sold here, but wondering if you can talk to us if theres been any change or or approach in terms of the sales process in terms of how it's evolved over the past several years now now that we're sort of.
In this new normal if you will as things normalize, though so more just a question on the sales process is youre going to dealers and getting them to sign up because I think the fact that listings are still up is pretty interesting.
And then if you could just talk a little bit more about consumer sourcing and the progress here.
There is a lot more.
Competition out there for consumer sourcing so would love to hear how thats going Thank you guys.
Yes, certainly thank you.
We're very pleased with the fact that we increased dealers listing 25% year over year.
So it's really showing that our customer acquisition strategies are working.
In our emerging markets.
As well as.
The markets we've been in for a while so very very.
Very happy about.
The.
Growing growing the dealer base I think youre looking for a little bit more color on maybe the things we're doing different.
If I had to pick some areas of difference.
Maybe some of the reasons why we are growing so well there.
Private marketplace has added dealerships from large groups.
I don't think we give out the percentages and are prepared for the second but we have been growing rooftops and large groups.
Higher pace than the single stores out there so that's been a great investment.
We are somewhere in the nature of 30.
Plus of the top 300 dealer groups in the country now using <unk> private marketplace to trade among themselves.
Which gives us a competitive advantage with large groups and as you know with the consolidation going on out there. We ended up winning stores every month simply when one of our large groups buys a store.
So that would be one.
Difference.
And then from a few years ago.
Driver <unk> and Max are two great software short data products have helped us differentiate <unk>.
Two when sellers out there.
We just for example.
Example, theres a dealer group out there thats in trial, a large dealer group on Max and then private marketplace and dealer group, we werent working with as much previously and now because of our data products and whatnot, where we're starting to win there on the auction side of things so.
That's an example.
Hopefully that.
I wasn't prepared on that answer hopefully that gives you a little color on the things that are different and the second one was really consumer and I think somewhat related.
Our primary consumer offering as you know has been live appraisal.
In light of appraisal has grown so libra appraisal just remind everybody that when we auction the consumer's car typically done with our inspector on site, where iron Spectre at our.
At a consumer's home.
It's grown.
Year over year.
Remember correctly, 30%, 30% growth year over year, so growing nicely.
Where we're going with consumer is.
To really leverage technology prior to having inspect the vehicle.
We're still early in this but very excited so products like drive a Blake and then once we released months later. This year. These are products that allow for a consumer to inspect or a dealer to inspect the vehicle allows.
It allows us to get our valuation engine out there too.
Outside of our sectors.
So we're very excited about the investment those investments in the technology and the plan are also in this sort of modest investment plans.
Still investing in these areas.
So so far labor peso is going well as the other products are still a little.
Young right and where we're going to make them material over the next few quarters, but a part of this is investing.
Investing in the now and investing in the future, which we feel great about.
That's great. Thank you George.
Fair enough. Thanks, a lot.
One moment for our next question please.
Next question is from Eric Sheridan with Goldman Sachs. Please go ahead.
Thanks, so much for taking the questions you guys. Maybe just first a bigger picture question sort of zooming out obviously, you're dealing with elements of both the supply chain and demand in the current environment, but you are still thinking about sort of longer term targets looking out over the next four years. So could you help investors better understand your confidence interval.
What youre seeing to bid for some of those longer term targets on both the revenue and the EBITDA side and maybe just following up on some of the initiatives like capital go into a little bit deeper in terms of what some of those newer initiatives youre doing in terms of driving more unit economics for the platform. Thanks, so much.
Yes.
Eric It's bill so.
I'll start with the first question.
Yes, so <unk>, if you think about our long term targets going out to 2026.
The fundamental growth drivers in the margin levers are still very much intact.
Anything actually were feeling a little better about this than we were even a few months ago based on the progress that we're making so maybe I should just rifle through what those are.
Kind of hit on each of those from a high level.
So first yes as you know we established territories across the U S and that was a very big initiative last year.
That enables us to target.
All 17000 franchise dealers for example, and of course, all the independents across the country. So we've already kind of check that box.
Last year, and we believe that's that's a key lever in terms of driving market share growth over time.
So so you're already seeing in terms of our territory.
Penetration strategy, it's yielding strong results by attracting new dealers to our marketplace. So that's all intact.
Youre seeing us grow listings nearly 30% year on year in what is a really tough environment.
Which shows that we're also gaining market share so.
And wallet share rather so all of these drivers continue to be intact. We're.
We're delivering now a bunch of new solutions like Sam right that are rapidly gaining traction.
Investing in a bunch of other tech to improve operations.
We're driving margin improvements now in various parts of the business, we talked about transport.
And getting to mid single digit margins in Q2, frankly, which is way ahead of plan because as a reminder, our targets by 2026 are 15%. So frankly were call it a little less than halfway there.
Only a few months after we talked about these targets back in March.
On the Opex side, we're getting much more focused on operational efficiency.
While also again preserving our growth investments, so that frankly, even better positions us for operating leverage as.
Volumes recover right. So these are kind of some of the key tenants behind our long term model that we articulated at the analyst day in March and all of those are intact. Obviously, what's what's changed right now is the market that we're operating with it.
But we believe over time the market will normalize right this market.
At some point, we will return to more historical levels I don't think any of us know exactly when that will be but all of these levers and.
<unk> kind of growth drivers are intact from our perspective and again, it's not if anything we're a bit ahead of target.
Or timelines that we have identified when we built our five year model.
So we still feel great about achieving achieving those targets now the road might be a little bit different to get there again.
Again, because we're not sure when these macro.
Drivers kind of normalize.
But when we take a step back and think about the long term, we feel really great about achieving these targets.
Capital George do you want to did you want to touch base on anything there on ACP capital. So at the end of the day.
We're achieving our goals both on attach rate.
And success of ACB capital as well as when I think about transport our two primary value added services that as all.
As all of you look at 2026.
Over the last year.
<unk> there was.
You have to really believe <unk> get to a certain attach rate.
Could we improve our margins.
And still do all the other things when you look at our execution of over quarter over quarter, we've showed incredible.
Incredible success and attach rates incredible success of increasing margin and transport.
We also had other headwind as you remember a quarter ago day to day things, we're taking care of where overall helped us.
We went to overall margin improvement so really when you think about how do I believe in 2026.
You are believing we're going to scale out our territories across the country, which we continue to date.
<unk> that we're going to get the attach rate in <unk>.
Focus on our margin objectives.
And I couldnt be more proud of the quarter over quarter execution.
Okay.
I appreciate all the color thanks, guys.
Okay.
One moment for our next question please.
Is from Chris <unk> with Needham <unk> Company. Please go ahead.
Hey, Chris Hey, good afternoon pills, how are you can.
Can you talk about the average price you guys realize on units.
In the second quarter, especially where we've seen retail.
And then just a closer competitive we've seen average price come down is it dealers getting more comfortable selling higher priced units digitally is it a new subset of deals that youre, adding a taking share from someone at a higher price point I just wanted to hear more about it.
There's probably two parts to that.
Yes, first and talk about price sure. So so in terms of price I mean, our <unk> per unit increased 32% year on year in Q2.
And that was basically evenly almost exactly evenly split.
Between higher Asps.
And a change in mix so that's pretty much been the story for the last year or so that it's been half and half asps.
And mix.
So I'll pause. There then the second was the second part of your question. Yes. So when you think of what are we doing to win more share of higher asps.
Vehicles, so products like Sam help us on the conversion rate as it relates to that.
Higher priced vehicles, because what it is this franchise dealers and others, who want to buy these vehicles came out.
Either just get better a better filter based on them setting up their profile and are automatically betting. So however, they decide to you Stan.
It does help on in that area. So.
At a really high level, what will see between now and the back half of the <unk> prices will likely come down.
Overall, we will see prices come down.
But we may still gained more share than that.
Higher asps.
And so how that comes together right.
Is the tricky part so because it is overall prices are coming down.
We will we will.
We will remain kind of going up market.
So I think we're really signaling is.
Yes, we believe the overall <unk> will go down modestly throughout the year.
Even though we will be gaining more share in the higher segment.
Okay, Perfect and then just kind of an education question for me.
We'll talk about Hey, we use third party inspectors and you guys. Obviously used the vcs are there.
I'm just kind of curious what sort of advantage that gives you in the sense that are there are six of their condition reports that dealers have to Wade through six other different yes.
Third party.
Inspectors or are they standardized platform using those third party inspectors and just kind of curious about that.
And the inspection report advantage you guys have.
Yes.
I believe what youre, referring.
Are you referring to.
It may have competitors, who use third parties for employees.
So I'm not exactly sure of the question, but if I if I assume that the question.
Then the pros and cons of each of these models are once you get density in a geographic area.
I think like you start to get several hundred units geographic area.
You can send your inspectors to a given customer more often to get more wallet share.
And you can.
Likely have a higher <unk>.
Troll of your quality from a CR arbitration you saw for example, we mentioned in last earnings call. We had some challenges as it related to arbitration well, we made some technology changes and process changes some training and we really improved quarter over quarter in arbitration and goodwill.
And in a market that got harder alright, so the market got harder harder than we did better. So there are advantages to having your own team.
Advantages to our competitors who have had.
Don't have employees.
You don't have.
When you don't have as many sales in any given reach their cost structure is lower.
So, we're where we're paying for inspectors across the country.
And dozens of territories, where we have full time in sectors, where we don't have enough.
For those inspectors to be doing.
Eight or nine or 10 or 12 inspections per day, we are still early.
And those markets our competitors would have.
Our cost advantage right. While you are growing at scale, so think their strengths and.
To either one of these models.
And obviously, we like our model.
And we believe it gives us certain competitive advantages.
Hopefully that answers your question.
It does thank you.
Yes, certainly thanks, Chris.
One moment for our next question please.
From Bob <unk> with.
C J S Securities.
Hey, Bob.
Great Alright.
Thank you thanks for taking my question.
Obviously, given how much we've talked about conversion rates.
An important topic and I'm sure you guys have studied it internally. So I was wondering if you could maybe tell us or share with us what you've learned about higher converting dealers versus lower converting dealers and what practices you can take from a higher conversion dealers and helped to lower commercial guys with and specifically what tools.
You have right now to increase conversion.
How near Toolbox is going to rollout over the next several quarters years to also increase conversion.
Yes. Thank you, yes, it's a great question.
No.
To your point, we even today, we have dealers, who had 90 plus percent conversion.
So that.
You're right on.
And those dealers, we will leverage the HCV market report to help them understand where cars are trading now compared to.
If they were trading a couple thousand dollars more several months ago. So that's one area, where they can use the ACP marker apart.
Another product that helps them understand the value of trade is live appraisal. So when they take in the car instead of gassing the value.
As you run a live appraisal because.
Live appraisal gives you the actual cash value the ACB in the car.
Whatever the data set it was worth a month or two months ago.
Where we're going with.
With driver, Billy and Max and our newer products. So the first two we've tried to scale well to all of our customers and some take our advice some don't.
The other two the two I would say more Newark, the newer products, we drive lean Max allow them to get to more structured answers quickly.
Whether it's the consumer on the dealer's website.
When you think about one of the problems dealers have.
Is they've got all these different widget things on their websites with all these different brands I won't name them and then when the consumer shows up at the dealership they valued a different way the only thing ignore how they're doing it on their website.
And we're really the first one in the market to come with a condition adjusted pricing because any given car when the cargo traded in and any make or model it could be four to $5000 difference.
Between a low and a high let's say on a 20000 dollar car it could be 15, it could be $25000 based on the condition.
So these tools that we've been developing and making good strides will help dealers make the right decision that trade now we are.
We are in the midst of dealers having to decide what they do on inventory they bought months ago.
So just think like right now for the next X months.
It's not just about the new trades, which have to be priced. It's also about the trades and our cars that were trying to retail as they bought several months ago and much higher pricing.
That just goes to realizations.
That you are either going to have the retailer for a higher amount or do you want a wholesale it it's the new wholesale price. So so Bob hope that gets us to that so what you are looking at it from a question, but great question.
Super that's.
That's terrific answer a lot of color there I appreciate it.
For me today.
Yes answered a bunch of the other questions. So thank you.
Thanks, Bob Thanks, Bob.
Alright, one moment for our next question. Please.
From Rajat Gupta with Jpmorgan. Please proceed.
Alright, great. Thanks for taking the question.
I'm not sure if I missed this but.
Are you reiterating the second half EBITDA positive guidance.
Okay.
I'm, sorry, say that again exiting.
The second half EBITDA profitability target are you reiterating that today.
Oh sure Tony you.
You mean for 2023, yes, yes, so yes.
We previously committed to exit next year EBITDA breakeven, we're maintaining that commitment, albeit we're actually entering into next year at a $40 million lower opex run rate, so that lowers our breakeven point and obviously puts us in a better position to achieve breakeven.
Yes subject to whatever the market conditions are and our ability to grow the topline next year of course.
Got it and are there any any more levers you could pull to get there even sooner.
If volumes do remain sluggish.
Maybe.
Some more cuts around discretionary spending or your tech spending.
Just curious on the call.
It's there.
But all I would tell you is we're continually look at looking at our opex spend rates across the business.
Going to continue to optimize everywhere we can.
We're making this level of commitment on the call today, but that doesn't mean, we're going to stop looking for efficiencies.
Where we can optimize our operations so.
Yes, im not going to put out any numbers, but look.
We obviously have multiple levers at any point in time, what we're trying to do is preserve our ability to continue to grow and grab share.
But.
George and I are committed to manage the bottom line and we're going to do everything we can to continue to execute against those those commitments and an example of where we've been managing our resources more effectively than our original plan.
Is our spend on tech.
We have a great team in North America folks here in Buffalo in Toronto, and folks all over the country, but we were able to augment that team with some offshore development this year.
We've been able to deliver an unbelievable product intact roadmap.
With significantly less head count in North America.
That's an example of something my product and tech team that.
And I'm, just so proud of them.
You've probably heard a lot of companies talk about this we did it.
We are executing on a on a really incredible roadmap.
And the folks here in North America.
Our are delivering.
And our folks in Paris, France are delivering but then we've got other offshore development folks and other places that are helping us deliver great products at a lower cost so yes.
What bill is saying is we're doing it now we are doing it and look at our overall cost infrastructure.
<unk> initial cost basis in the business and we're looking for ways.
<unk> results.
In a more optimized way.
One more data point that I would just add.
What I discussed earlier is I think you could look at the Q2 results, especially our quarter on quarter increase in <unk>.
And margins.
300 basis points as an indication.
Of our ability to execute on kind of pulling those levers and generating results in this case very very quickly.
Versus Q1 for example, so that's I think that's just a reflection of our ability to continue to steer the ship and kind.
Kind of achieve that target of exiting next year at breakeven and.
And obviously, we would try to get there earlier.
We'll do everything we can to do that but.
Right now Thats, our commitment we're standing by it.
Got it that's helpful color, maybe just on your volume numbers.
Obviously, a tough market backdrop.
<unk> gained share.
And your growth was.
Much better than.
One of your larger more sizable peers.
Is there anything you would attribute that to.
In particular, I mean did the ADESA.
Acquisition have any impact in terms of just getting those incremental customers just curious on your thoughts there. Thanks.
Yes, I think we I believe we outperformed many of our competitors.
Everything from conversion rate to quarter over quarter with a one of the other ones I think we outperformed several competitors we ask me okay why.
One is that as the market gets a little softer.
The demand side, it's a trust the conditioner part.
You've heard me say some markets are hot almost anybody can sell a wholesale car.
Alright and.
And many of you heard me say this for last few quarters when markets are hot when prices are going up dealers will bid on almost anything from anybody.
When markets start to get more difficult, which is the way it was for like 40 years.
You always have to be more careful on what they are bidding and buy so you need to trust.
The asset Youre buying that's a really key thing that we've got a massive differentiator number two.
Products like private marketplace are really paying off for us right now.
We are growing more rooftops.
We're growing rooftops without even having to go out.
<unk>.
By just getting introduced to a new general manager because they became part of a dealer group that's key by focusing on dealer groups, there's going be more and more consolidation we have a competitive advantage with dealer groups over our competitors. So when you look at the demand side, we have a competitive advantage.
On the supply side for larger groups, we have a competitive advantage and there's more here.
At the end of the day.
Investments in our team the relationships out there in the field and our technology mix is paying off.
Got it great. Thanks, Thanks for the color and good luck.
Thank you guys. Thanks.
Thank you and this ends our Q&A session for today I will turn the call back to Tim Fox for final remarks.
Thank you Carmen I'd like to thank everybody for joining us on the call today.
Please note that the ECB is going to be participating in a number of investor conferences. This.
This quarter you can find all the details on our IR website, and we look forward to seeing you on the road and thanks again for your interest in ACB and have a great evening.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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