Q3 2022 ACV Auctions Inc Earnings Call

November 9, 2022

Yeah.

The conference will begin shortly to raise your hand during Q1.

Ladies and gentlemen, thank you for standing by and welcome to the <unk> third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session on the depressed star one on your telephone I would now like to turn the call over to your host Tim Fox you may begin.

Thank you operator, good afternoon, and thank you for joining Acb's conference call to discuss our third quarter 2022 financial results with me on the call today are John <unk>, Chief Executive Officer, and builds a 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 can be found in our SEC filings.

Today's press release, both of which can be found on our Investor Relations website.

During this call we will discuss both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP financial measures is provided in today's earnings materials, which can also be found on our investor Relations website.

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 third quarter performance with revenue in line with guidance and EBITDA exceeding guidance.

The team once again delivered impressive results, while navigating through a very challenging macro environment.

With that let me turn to third quarter highlights on slide four.

Our market momentum continued in the third quarter with.

With revenue of $105 million.

Our year over year growth of 15%.

<unk> strong results in Q3 21.

Despite a modest year over year decline in units.

<unk> grew to $2 1 billion.

Due to an increase in ARPA, which was driven by strong vehicle mix and also wholesale price inflation.

Overall, we are very pleased with our execution in Q3.

Our progress in key strategic initiatives.

We delivered strong results, despite an automotive market and continued supply constraints.

Beaconing retail demand and vehicle price depreciation.

Because market conditions are expected to remain challenging in Q4, we have assume that wholesale volume and conversion rates will be compressed through the balance of the year.

Our guidance reflects this more cautious view of current market conditions.

Also reflecting a balance between investing in growth and maintaining a clear path to profitability.

Turning to slide five.

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

Growth innovation.

I'll begin with growth.

Moving to slide seven.

I'll begin with a brief overview of the dealer wholesale market and the <unk>.

Core enroll retail automotive players as a wholesale supply source.

U S retail vehicle market is composed of 16500 franchise dealers and $38.

Dependent.

And together, they've historically sold over 45 million, new and used vehicles annually.

These retail consumer transactions are typically accompanied by a trade it and in turn are sold into the wholesale market.

Dealers also rely on the wholesale market to dispose of aged vehicle inventory.

<unk> sold retail after a few months.

Together trade and <unk> units produced an estimated $11 million dealer wholesale unit a year.

With this market structure as context, let's turn to slide eight to further illustrate the supply side trends in armor.

The U S retail market continues to remain under pressure due to OEM supply challenges.

And more recently consumer affordability issues stemming from increased borrowing costs.

There are some early signs that automotive supply chains are improving which bodes well for wholesale supply volumes longer term.

But for now.

Consumer behavior is clearly pressuring new and used retail settings.

Now turning to slide nine.

Let's look at the demand picture in the wholesale market.

The chart illustrates a renormalization of vehicle prices. It is also reflecting softening consumer demand.

After reaching historically high levels in 2021 wholesale prices declined during the first quarter of this year.

Recovered modestly in early Q2.

But had been decelerating consistently since that time.

Wholesale price depreciation.

Specially when it occurs quickly.

Typically lead to conversion rate compression across the auction industry.

As dealers become more price sensitive in the wholesale market.

You can see this illustrated in the chart on the right, which shows industry conversion rates declining for the past five months.

Next on slide 10, we provided.

Additional insights of our business that underpins our confidence in <unk> long term growth opportunities.

The chart on left shows quarterly listings on our marketplace.

Which is a measure of dealer penetration and marketplace adoption.

After moderating in the second half of 2021.

And supply is mounted listing volume turn positive at the beginning of 2022.

<unk> grew 19% year over year Q3.

Through Q3 listings have increased 24% year over year, reflecting our strong execution on dealer penetration and wallet share expense.

In fact franchise dealer penetration reached approximately 33% across the U S.

And increased 500 basis points since Q4 'twenty one.

Of course in many cases, our wallet share is limited today.

As we are in the early days of working with many new dealers.

However, this expanding network built a robust foundation for growth once wholesale volumes recover and we continue to gain more wallet share.

The figure on the right is an updated view of the quarterly variances and Acd's conversion rate.

As we've highlighted over the past few quarters prepaid.

Pre pandemic conversion rates in our marketplace, we are in a tight range.

<unk> increased significantly as supply demand and wholesale pricing factors drove very strong conversion rate.

Beginning earlier this year as vehicle prices and consumer demand moderated cautious buying behavior in the wholesale market resulted in the conversion rates returning to normal historical levels.

This trend continued in Q2 with conversion rates ticking down quarter over quarter.

Then declined further in Q3.

Correlating with the Black book data shown on the prior slide.

We are confident that conversion rate will recover as the macro environment normalizes.

Which will serve to be a growth tailwind given our strong listing performance.

Furthermore, we are currently in place with new pricing tools and marketplace format aimed at increasing conversion rates. However.

However, based on the latest market trends, we believe it's prudent to assume conversion rates will remain below the lower end of historical ranges for Q4.

Turning to slide 11.

You can see that conversion had a material impact on unit volume in Q3.

More specifically the year over year change in conversion rate with a greater than 30000 unit headwinds.

Negatively impacted unit growth around 20%.

Despite the modest year over year unit decline.

<unk> grew 6% to $2 1 billion.

With growth driven by strong ARPA.

Turning now to slide 12.

Based on our internal analysis, we estimate that the U S dealer wholesale market continues to remain well below normalized volume.

And contracted 21% year over year in Q3.

Despite the macro backdrop <unk>.

We are executing our key growth initiatives within our control.

Including gaining market share and attracting new dealers to our marketplace.

Given our 5% year over year unit decline in Q3.

And an estimated market contraction of 21%.

This implies an ACB grew market share by approximately 16% year over year.

Next I'd like to wrap up the growth section with highlights in our value added services.

Our investments in the technology and resources to scale ACD transportation and ACP capital are driving strong top line growth.

Also improving customer experience and creating efficiencies.

For our partners and ACB.

On Slide 13, you can see the ACD transportation continues to deliver strong results.

And it's truly scaling into a great business.

Our growing carrier partner.

And fast cycle time resulted in attach rate once again exceeding 50% in Q3.

With newer technology, such as our carrier app gaining wider adoption.

In Q3 over 60% of our transports were automatically dispatched an increase of 20 percentage points from Q1.

The investments we are making in transport technologies are attracting new carriers to our marketplace and driving operating efficiencies.

In fact, our transport business another key milestone in Q3 with.

With revenue margin in the low double digits in.

An increase from the mid single digits in Q2.

As a reminder.

Our 2026 financial targets assume transport revenue margin of 15%.

So our rapid progress this year is clearly putting us on a path to achieving this target.

Turning now to slide 14.

Our ACD capital team continues to deliver strong results in the market.

Capital attach rate doubled year over year in Q3, resulting in over 75% loan volume growth.

Our tech investment within our capital business are also paying dividends.

ACS capital portal launched in Q1 and adoption has been strong with 75% of active ACD capital dealers now leveraging this post auction financing solutions.

Lastly, we have continued to ramp up our investments in ACD capital sales capacity to drive adoption and dealer engagement to ensure the value added service, it's 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 16.

I would like to highlight a few examples of product innovation that will drive growth by enhancing the dealer buying experience on our marketplace.

And enable HCV to engage with a broader range of large dealer groups.

We began with our advanced fire solution.

<unk>.

This solution enhances the buyer experience through intelligent notifications and optional auto bidding capabilities.

Sam creates persistent demand in our marketplace.

Leading to better price realization for our seller and ultimately to higher conversion.

We are still early but with our <unk> thousand 500 dealers leveraging Sam on our marketplace. Today, we believe it can be a big growth driver as we expand use cases and capabilities.

Next we're also enhancing our marketplace experience by testing a host of new formats.

Included.

Varying auction duration sorry.

<unk> pricing.

And vehicle specific merchandise.

Our testing is showing promising conversion results and could increase buyer and seller success on our marketplace.

Lastly, our private marketplace solution continues to gain market traction with some of the largest dealer groups in the country.

This solution enables dealership groups to easily auction inventory within their network to maximize group profit.

It's fully customizable to match each group specific needs and seamlessly integrate with our open marketplace. When a vehicle is not purchased in the private marketplace.

On slide 17, I will wrap up the innovation section with examples of how we are scaling our operations, while innovating to drive customer success and reduce costs with a focus on our market, leading data and inspection capabilities.

First our apex launch has been going great, but adoption going across our nationwide inspection team.

We call the APAC as our next Gen data collection to us with upgraded audio capture capabilities.

And our sensor detection for vibration displacement and ultrasonics.

The more comprehensive data set delivered by apex drive significantly higher transparency into vehicle operating condition.

Also increasing infection productivity of our teammates.

Next we are excited to leverage our virtual data powered by AI.

Turning to <unk>, we have developed <unk> converter detection model.

As you may be aware there has been a huge spike in catalysts converted for us due to a higher content of valuable precious metals.

They're also very expensive devices or a place. So it's a critical element of our inspection process to ensure dealer can accurately derived vehicle values.

Our model can actually detect the presence or lack of a catalyst converter with 97% accuracy.

And then the right, perhaps a bit less flashy, but still an important element of avia condition as Russ.

Emmanuel infections can easily mistake surface Ross for a deeper structural or penetrating right.

Which materially changes the equation on the vehicle value.

Our app use of AI technology automatically detect rough classification.

Quantify the amount on the under carriage, which again raises the bar and Acd's inspection transparency, while reducing arbitration risks.

Next I'd like to introduce our newest innovation that we have in beta.

Pre inspection data capability, we have depth internally co pilot.

Co pilot is a proprietary technology that Leverages machine learning.

Addictive analytics guilty.

<unk> team insights and customer feedbacks and form our BCA and common vehicle specific issues before conducting an infection.

We are equipping our inspection team with valuable knowledge gained through millions of vehicle data point and inspection.

And it's being delivered in an easy to consume format specifics that a vehicle they are standing in front of us.

All before they start the infection.

So to wrap up on innovation.

It's clear that our team is delivering highly differentiated technology solutions to the market.

And to our own operations.

That expand our competitive moat and help drive profitable long term growth.

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.

Thank you everyone for joining us today.

We are pleased with our Q3 financial performance.

We delivered revenue in line with our guidance with upside to adjusted EBITDA.

Spike the challenging macro factors George outlined earlier on the call.

We also demonstrated the strength of our business model with revenue margin and adjusted EBITDA margin expansion versus Q3 dollars 21.

Turning to slide 19, I will begin with a review of our third quarter results.

Revenue of $105 million was at the midpoint of guidance representing year over year growth of 15% versus a strong results in Q3 21.

Adjusted EBITDA loss of $12 million or 11% of revenue beat our guidance range and EBITDA margin improved approximately 200 basis points versus Q3 'twenty one.

Turning to slide 20, I will cover some additional detail on revenue.

Total revenue of $105 million, representing about 25% CAGR since Q3 'twenty.

Auction of insurance revenue, which was 53% of total revenue grew 7% year over year, whereas the solid results in Q3 'twenty one.

Year over year growth in auction and assurance of off to a 13% was driven by higher GMT due to the strong mix of vehicles sold on our platform and the <unk> increase we instituted last September .

Marketplace services revenue, which was 38% of total revenue grew 26% year over year.

Selecting strong adoption of our ACB transportation on capital offerings.

Our SaaS and data services products comprised 8% of total revenue and grew 20% year over year, driven primarily from growth in our digital business and adoption of data enabled inspection services.

Now turning to slide 21, I will review cost in the quarter.

Q3 cost of revenue as a percentage of revenue decreased approximately 400 basis points versus Q3 'twenty one.

The improvement was driven primarily by our transport business, which delivered a low double digit revenue margin in the quarter.

To reinforce Georges earlier point about the scale, we're delivering and transport our 2026 targets assume a 15% revenue margin for this business.

By having achieved low double digit margins. This soon is a strong indicator of the long term profitability of this business.

Also a reminder, our transport revenues recorded on a gross basis.

The margin improvement has an outsized impact on our overall blended margins.

Turning now to operating costs can.

A key takeaway here is that after significantly ramping opex in 2021.

Support market expansion and technology initiatives, we have.

<unk> to invest this year, but at a much lower rate of growth.

This is a testament to the ACC team, who has done a great job identifying ways to optimize how we operate while still delivering superior customer service to our dealer partners.

Moving to slide 22, let me put a finer point on our investment strategy and path to profitability.

Given <unk>, leading market position in large addressable market opportunity, we continue to support both our growth and technology investments.

At the same time, we have remained focused on investing prudently to ensure a clear path to profitability.

As you can see our focus this year on spending discipline and operational efficiencies expected to yield a material full year decrease in opex growth.

We're doing this while also preserving our key go to market and technology investments to ensure ACB and us in an even stronger position when market conditions improve.

As it relates to our EBIT breakeven objective, we believe that despite the ongoing market and macro headwinds facing ACD. There are additional levers in our business to help us achieve this objective.

Next I will highlight our strong capital structure on slide 23.

We ended Q3 with $502 million in cash and equivalents and marketable securities and $71 million of long term debt to finance, our rapidly growing HCV capital business.

Note that our Q3 cash balance includes $138 million of float at our auction business as.

As we've discussed previously the amount of float on our balance sheet can fluctuate meaningfully.

On business trends in the final two weeks of each quarter and it has a corresponding impact on operating cash flow.

In Q3 cash flow used in operations to improve materially to just $3 million with a sequential increase in float contributing $13 million of positive cash flow.

Based on our current outlook for the balance of 2022, we continue to expect cash used in operations to decline in the second half of 'twenty two relative to the first half of the year.

Now I'll turn to guidance on slide 24.

For the fourth quarter of 2022, we are expecting revenue in the range of 97% to $100 million.

Adjusted EBITDA is expected to be a loss in the range of $15 million to $17 million.

For the full year 2022 revenue is now expected to be a range of 421% to $424 million.

This range represents growth of 17%, 18% year over year.

It is modestly below our previous guidance to reflect a more cautious view of the macroeconomic factors impacting wholesale volumes and conversion rates in our market.

Despite this lower revenue outlook, our adjusted EBITDA loss is expected to increase to $2 million at the midpoint of revised guidance.

Adjusted EBITDA is now expected to be a loss in the range of $59 million to $61 million or approximately 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 with current market conditions persisting for the balance of the year.

Finally, we expect non-GAAP operating expenses to grow approximately 24% year over year.

Let me wrap up on slide 25 by reviewing our 2026 financial targets.

We are very pleased with our execution was proven to be a very challenging macro environment. We remain confident in our ability to achieve $1 3 billion of revenue and $325 million of EBITDA in 2026.

Our confidence is reinforced by a number of factors, including <unk>.

Strong dealer penetration and wallet share gains across our territories, resulting in sustained market share gains.

Our broad technology platform, enabling durable long term growth and operating efficiency.

Consistent improvement in revenue margins and a commitment to balancing growth and investments as our business scales.

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 strong execution during these challenging times in our industry.

Specialty products, our ACD team that has delivered these results.

We continue to gain market share by attracting new dealers through our marketplace.

And by gaining wallet share within our existing customer base, which.

Which positions ACB, a strong growth when market conditions improve.

We're executing on our territory penetration plan and our suite of marketplace offerings are gaining traction.

We are innovating and delivering an exciting product roadmap to further differentiate ECB and expand our addressable market.

We are on track to generate over $1 billion in revenue with attractive margins through a proven business model that we believe will drive significant shareholder value.

We will remain committed to continue to build a world class team to deliver on our goal.

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

Ladies and gentlemen, if you have a question or comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile the Q&A roster.

Our first question comes from Vincent Cardoso Jefferies. Your line is open.

Hey, Vince.

Hey, guys. This is Vincent on for John Collin County at Jefferies.

Do you think you can talk about what youre seeing in terms of any any development in Q4, so far to headwinds wholesale conversion rates and then.

You can get help us.

Get a sense of sort of where headwinds hitting the hardest.

How are you know headwinds impacting customer engagement and retention versus kind of.

The impact that youre seeing because of the sales teams and.

They try to enroll new dealers.

Hey, Vincent it's George I'll start and then if bill wants to chime in.

So Vincent.

Look at the Black book data that recently came out with.

It really informs us that.

What we really have seen as conversion rates have continued to decline and then sort of it started to level out a little bit.

I think in the last 24 hours. It showed it went down minimally.

And we're not going to speak much to Q4, it's beyond my saying.

Our our conversion data and black books.

Third pretty consistently so high level losses.

We could be we could have solved the trough sort of how we're thinking about it and we are sort of leveled out I'm conversion.

And then the second part of your question. There is even though we've continued to grain gained dealers when.

When you look at our market expansion.

I think I'll answer your question a couple of ways number one.

We now have a third of franchise dealers across the country starting to use ACB some more so than others. Some we have limited wallet share.

A lot of wallet share.

So what does that say that says dealers are looking for ways to wholesale their vehicles differently.

At the same time, we are starting to see.

Listings her list or if you would look at it from a 100% of their wallet share listeners for listeners across the industry and listings furniture has started to decline.

And that's mainly related to the macro environment.

Dealers are selling less cars the combination of use plus NIM.

So even though we've gained listers and even though we've gained listings this year by over 24%.

We are starting to see the number of wholesale wholesale cars available per listener decline.

So those are something like the macro things going on but you are seeing compared to the others in the industry.

We bode well.

And we've done a great job of taking share in.

And gaining more relationships and also starting to take more wallet share.

Yes, so what I would just add.

Then just based on what George took you through in terms of the context for our guidance.

Assuming essentially that conversion rates are basically flat.

With Q3.

And again remain at this call at depressed level versus our historical conversion rates, but we have assumed that listings.

For Lyster as we call it Doug.

Does decline based on this macro environment.

That we're all kind of dealing with today. So that's kind of the underpinning for our our guidance for Q4 essentially.

Got it for your question. Thanks, so much guys.

Thank you.

One moment for our next question.

Our next question comes from Chris <unk> with Needham Your line is open.

Hey, Chris.

Hey, good afternoon guys.

Question on as vehicle prices depreciate.

And I'm just kind of curious what you guys are seeing what safeguards you have in place and is that something more of a we should think of as a growing pain and you guys are somewhat passed with the caveat that you always have to be vigilant around it.

Yes, Hey, Chris I'll start thanks for the question Greg Great question.

You've probably seen throughout the industry.

That.

There are times you could you have risk for higher arbitration is price declining.

With us.

Quarter over quarter, we actually improved.

In a market where the prices were going down.

When you look at the investments we've made in technology in our inspection platform. When you look at the discipline in our operations. When you look at the way we're operating the business.

We actually improved.

And in a tough market that is not easy.

So so Chris when you really think about.

We've really invested very significantly in this inspection technology.

Invested in a national infection team there.

Employees of ours, who are working hard out there who are doing all the right things, we're not relying on any third parties.

When you when you look at the internal processes, we have to make sure we have.

Good actors not bad actors on the platform.

We've got tremendous discipline here at <unk>.

We still have more room to grow we got still improvements that we can sort of improve throughout the next year and we have not achieved all of our goals and objectives and maybe bill can sort of chime in a little bit more on that yes.

Yes, sure Chris what Youll see in the supplemental data is that we actually took our.

On our P&L is basically our assurance cost of revenue, which is effect effectively arbitration costs down quarter on quarter from $14 6 million to $12 2 million.

If you look at it on a per unit base, we were down almost 10% on a per unit basis. So actually we've we've made some great strides.

In terms of driving those costs down.

Despite whats a pretty challenging environment today, so youll see some of that in the math in terms of the data.

Okay, Perfect and then just one more if I could bill.

Bill you mentioned the buy fee increase last December if I look at let's say two.

2019 brick and mortar auction piece you guys are still 10% to 12% below there is that something that I know youre not going to commit to annual price increases, but I'm. Just curious how you think about the evolution of pricing on the platform.

As you kind of.

Grow the platform.

Yes, it's a good question and you're right. We do have some headroom there and in fact, we did pass.

A small a smaller increase in our buy fees this quarter.

Which again tends to mitigate any downside we have on <unk> to declining prices for for vehicles.

So we've got some headroom there.

Yes.

We will see how we what we decide going forward in terms of whether we continue to March that upward over time I mean, we're also all subjects.

Not just us but for all our competitors are subject to inflationary costs right. So.

We've.

We've been able to pass some of this through pretty successfully.

So again mitigate any downside on <unk> for us going forward, John and Chris I'll, just add a little more of that.

Sort of our philosophy is don't be a pig.

We do have opportunity to increase and.

Both small price increases we made.

Over the last 14 months.

We got we had a very limited.

Commentary from the dealer community comments like surprised it didn't increase it more comments like that is still extremely fair.

So to your point, we still have we still are charging fees Laurie lower rhythm markets. We're.

And we will be smart about this for next few years.

We should earn.

Market value for what we're doing in time.

But we will be smart about it.

And we will do it carefully and we will do it in a manner where dealers actually are also feeling like we're being fair to the whole. Thanks, So Chris so far so good as we've increased ARPA within a market where <unk> was actually challenge.

Okay got it. Thank you I won't be a pig and I will pass the mic.

Yeah.

One moment for our next question.

Our next question comes from <unk> Khan with <unk>. Your line is open.

Yes.

Hi.

Alright, thanks, and thanks, a lot. So two questions from me maybe just on the just to kind of piggyback on your response there about price.

<unk> that you did did just to clarify that that happened in Q4 or did you also benefit from it in Q3, just trying to figure out the timing.

And then secondarily just on that.

On the innovation that you kind of highlighted.

When can we expect to see the benefit in terms of maybe higher efficiency.

In the period an infection crossing.

Starting to use these.

Okay. This is bill so I'll take the first question then I'll pass it to George.

Yes, so that increase actually was earlier this quarter. So it was.

Literally just a few weeks ago. So we'll get the benefit for most of the quarter, but not all of it.

Meaning.

The fourth quarter to fourth quarter, Yes, Youre correct question no to the Q3, yes, yes, sorry didn't impact Q3.

And then on your second question.

I believe you are asking about sort of the.

NCS and gaining scale out with our inspection team does that really.

This round.

Yeah, and even maybe leveraging some will then.

Cynthia.

You highlighted whether it's.

Yes.

Other things that you can do to kind of make the process more efficient faster maybe okay got it.

Yes, thanks for clarifying so.

We're still investing so I'll give you a couple of different categories Apacs, and then there'll be an adjacent thing we'll be working on where there is some other data in the vehicle, where we get a little bit more manual today.

Think of it each part of the inspection any part right now.

Could take us, let's say four to seven minutes per sort of application or device or utilized in the aggregate we might be spending between 20 and 40 minutes per infection with an objective of eventually getting it down to where each and every vehicle is taking you under 20 minutes.

And these investments we're making.

Our still early so we won't see like massive.

Benefit in Q4, or even Q1, but when I think about between now and the end of next year.

The investments in apex in vaccine investments in us Curating the type of an inspection that we should do in a low price vehicle versus a fairly high priced vehicle.

The inspection, we should do based on that vehicle tight so this new investment.

This new product that we internally call copilot right now.

It allows us to say based on this Nissan which has the following issues go look at the following thing so still early.

Some of this we just felt we're really excited about it but we've got objectives internally that we're going to hit next year.

And you can see the discipline, we have varied ACB, we say, we're going to do something we're going to do it and we've built this tac to help us get more and more efficient on the time. It takes in fact the vehicles, but at the same time, you've probably seen by doing some studies on the industry. You don't wanted to then get kill you on arbitration.

So you need to be efficient, but you also need to get the data you need <unk>.

Or else the car is going to come back and it's going to hurt you.

And you don't want any surprises.

Where that combination of efficiency.

But by getting the data we need we think we're years ahead of anybody else in the marketplace.

Thanks.

Got it thank you guys.

Okay.

One moment for our next question.

Our next question comes from Rajat Gupta with Jpmorgan. Your line is open.

Hey, Jonathan.

Hey, Thanks for taking the question.

Maybe.

This is Mike.

Sure.

<unk> question, maybe but.

Trying to understand like how you're managing your.

Cost structure your Opex.

In context of what Youre seeing in terms of conversion rates on this thing you've obviously, given the fourth quarter guidance, but.

I'm curious like how are you planning for 2023.

Okay.

Are you planning are you viewing fourth quarter as a trough for the business.

You can expect in 2023 to be a recovery here.

And in that context, like how do you plan to manage our expense structure.

Is your opex level enough that you can just drill into that.

Into whatever the volume outlook is between <unk> three or do you think you might be to make more parts. So just you're saying both like.

Doug budgeting, maybe for joining during the <unk>. If you could just clarify that and then I have a follow up thanks.

So its Phil.

Yeah, So look.

Obviously on our last call we talked about the fact that we're exiting this year at a $40 million lower opex run rate than what we guided to when we entered into the year.

That said.

To answer your question more specifically there are other opportunities for us to continue to optimize the business going into next year.

And that's really across the company, but I will just give you a few examples just to give you a flavor for this so if you look at arbitration costs and our inspection costs together right. This year, that's about $130 million roughly evenly split between the two okay arbitration costs.

Answered that question earlier in terms of driving those costs down from Q2 to Q3. So there is there is already a great strides that we're making in terms of reducing the frequency and the size of arbitration claims.

But really going forward there is the ability to continue to leverage a lot of the technology that George highlighted.

In his prepared remarks, so theres a lot more room for improvement and I would argue in the context again of the.

The environment that we're dealing with it's particularly impressive.

When you consider this backdrop in terms of us being able to drive those costs down.

What are you seeing.

Are those costs going up.

And a lot of other cases, so that's number one.

Number two on the inspection front, obviously, we've got a big team out there on.

On the inspection side, and we've been pretty focused on making sure we manage that as well as possible going forward and we've made some adjustments to our cost structure.

Last quarter, but even if you look at our current team out there we're still averaging across the countries six inspections per day versus our best territories at roughly double that.

What that tells you is that we've got less mature territories that are still far below our average and really that gives us a lot more capacity.

To grow our units with really a relatively small increase in costs right.

That's just an opportunity as it exists today without us pretty much changing anything.

And you can bet that we're going to continue to look at ways that we can continue to optimize that side of our cost structure.

Another area just is one more example is offshoring.

We've already started establishing.

Each head offshore in terms of lower cost engineering, but we're in the process of really leaning in even more going into next year and expanding that.

And basically bringing on lower cost capacity to augment our existing team. So.

Those are just a few examples and there is a myriad.

Array of other areas that we can optimize so.

I would tell you is that we're continue we're continuing to focus on.

Everything we can in terms of optimizing going forward.

And that will put us in a better position to deal with any other market turbulence as we look to hit our target of exiting next year at EBITDA breakeven Totherow, George if you want to add any more color to that.

Rajiv.

I can go further into how we're thinking about 2023 or you can have a follow up question up to you.

Maybe like.

Any comments on like the fourth quarter trough to drink drink trends would be helpful.

So the way we think about 2023.

As we really put it into two buckets one is.

What are the external <unk>.

Factors, we can control and thats sort of OEM.

OEM production of units consumer borrowing.

Used car values whats happening in the market those are the things that we can control.

And we think okay, what can we control.

And when Youre going to see us really lean in on between now and we come back and deliver our annual plan.

One, let's talk about market share.

Even when you look at today, where we're gaining.

We're gaining the right to go out.

<unk> worked with more dealers.

Third are the dealers out there are starting to work with HCV.

But today, we are only 7%.

Only have 7% share.

So when you look at first and foremost we've done a fantastic job.

On more dealers fantastic jobs turn earn more wallet share.

So we thought we were going.

To hold ourselves accountable to taking even more next year.

And that's sort of first and foremost.

Both for when I think about mature territories that means more wallet share and I think our new territories.

Solid accelerating the dealer penetration, while also increasing wallet share for those that are dabbling with us.

When you think about.

In addition to taking share.

We also think it's about adding more value, which you've seen us consistently do I mean, we've been delivering more products.

Adding more value products like private marketplace and others dealers are starting to work with HCV because of these value add.

In a market that's contract being challenging.

Our value add approach is helping us win youre seeing us focus on scale quarter after quarter.

And when you think about how we focus on scale, whether it be our inspection technology that we talked about as bill mentioned growing into the size of our inspection team and other elements of scale.

Last but not least I would say is you haven't heard us talk much about consumer or commercial over the last year.

But we've been building away within building products, we've acquired a few.

We're starting to work with some rental car companies. We've got some other elements of commercial that will talk about.

In the coming sort of quarters as we start to get a little more traction, but we think 'twenty three we.

We will both go to market with an asset light consumer offering.

That helps dealers acquired cars not not us taking risk on these vehicles and second we'll be expanding our commercial offering because we're already starting to get some traction with the rental car companies and this is rentals are companies selling cars by the way.

This is where we're starting to see what repo companies need and we're actually going after their needs and making sure. We have a full service. So we're feeling good about next year, you really saying that we feel good.

We're going into this we're being disciplined in our approach, but we're still feeling really anywhere you want to add to that yes, I would just just a couple more items.

So I talked about the cost side of the equation.

So in terms of the revenue and margin side.

Things that things that were thinking about and feeling good about going into next year. So.

The <unk> increase that we just passed on will further.

Kind of mitigate any downside that we have on <unk>.

So we're not necessarily entirely insulated from a reduction in used car prices, but we're certainly going to mitigate part of that.

Would affect our <unk>.

And secondly, so going into next year with a much better margin profile in our transport business. We came into this year with it being essentially breakeven we're going to go into next year with low double digit margins and again since it's on a gross revenue basis.

Can be relatively material to our margin profile. So I just wanted to throw that in as well just to give you a little more context for all sides of the P&L.

Because I've got.

Or are you viewing fourth quarter as the trough for the industry.

I don't know like George.

Was that kind of implied in your answer what room now.

Yes listen we.

<unk>.

We none of US know what next year is going to bring us.

I'm, telling you Raj is how we're going to hold ourselves accountable, meaning the market Mike. It works none of US know right now trying to.

There is predictions on politics for last couple of days that didn't happen right.

Think about where we're going to hold ourselves accountable to grow.

And that's really more like a mind share as you know what the market might get worse, who knows we are seeing new car production by the way started to come back that's one little positive and we're starting to see by the way some programs come back. So it's not like what some of the dealer groups out there like when I think about what some of the great franchise dealer groups out there to go in next year or not.

Predicting it going down.

That's positive.

Okay predict some of them are predicting a couple points higher.

And volume so.

Some of our largest customers are predicting higher volume of units next year. That's positive I think new car dealers do have a slight advantage over us next year as it relates to selling cars only because they'll come with programs like.

Zero percent interest, 1.9% financing, we even saw in the last 24 hours a couple of other manufacturers come out with the rebate I mean, we haven't seen that.

Two years, so all of that implies I think next year could be a better year, but whether it is or not we're going to hold ourselves accountable for taking more share.

Got it great. Thanks, Thanks for all the answers and good luck Sir.

Thank you one moment for our next question.

Our next.

Comes from Eric Sheridan with Goldman Sachs. Your line is open.

Hey, guys.

Great Great to speak to you I hope everybody is well on the team maybe I do want to follow up on that last answer because there was a lot in there.

If you think about what's in your control, which was one part of the bucket you said, what do you see as the critical pieces of the execution that you're holding yourself to that you think would be most determinant in terms of a year from now we're sitting here a new gained dealer share as a result of those efforts 12 months.

Todd versus where you sit today and you've already gotten a fair bit of dealer share, but to put a little bit more.

Sort of elements of what pieces of execution here. The most focused on that you think would yield that share 12 18 months from now and then in terms of the extra analogies I totally get the the volatility of the environment and the unknown variables.

When you look at those variables, though which now of those variability do you think is the most important to unlock elements of the supply demand dynamic that you would be.

That would be most advantageous to you with it.

Is it OEM supply is that the consumer demand piece tied to interest rates, which externality do you think would result in the biggest unlock over the next 12 months. Thanks.

Yes.

Certainly Eric Thanks for the question.

No.

So when I think about our execution and as we start to prepare for next year.

One is dealers are going to be looking for more and more guide.

But what is the value of this asset.

And we were delivering.

A series of enhancements one is price expectations too is when should they be launching the car.

The duration of that car should be launched through 20 minutes should be lunch for two hours.

Fourth should they sell it within their group <unk> meeting within the large dealer groups should they should even do an auction yet should they first tried to keep it so think Eric us delivering on us becoming at.

At the end of the day the intelligence platform for the dealer and we've got we're way ahead of the competition.

And we whereas up until I would say recently, it's been atvs.

I would just say this sort of random 20 minute auction.

And now we're adding we spent the money to have several hundred engineers, we've been building away hopefully all you can appreciate the amount of products you see.

Deploy quarter after quarter.

And we're going to expect some results from all of that and I'm already sensing it from the testing and the opportunities I'll give you. One example.

Two dealer groups in the U S. Now to dealer franchise Yogurts are some of the largest buyers on ACB.

That happened right after we launched <unk> private marketplace.

So not only are they starting to sell cars.

They became our largest buyers so think one product. So so bucket number one Eric is execution of our product delivery getting into the hands of our dealers because that offers more value by offering more value you get more share that's bucket number one.

Number two.

As being extremely disciplined on our approach on.

And whether it's revenue per unit, whether its arbitration and goodwill good actors bad actors you never Chase you.

You build a good business.

<unk> seen us do that not just counting on these calls.

Units the units and important but we're going to grow revenue, we're going to grow margin.

We're going to hit our path to profitability and.

And we're not here just dimension X units or <unk>.

So, while we're going out there and gaining.

Our product advantage and building a large relationship we will be doing will be executing while delivering this with more disciplined more and more disciplined which we've already acted on and done a great job look at our quarter over quarter improvements.

And then three when I think about the broader capability here.

Not only offering more value by products.

I mentioned before but transportation, you're seeing adoption of Retrans patient youre seeing products like HCV capital Youre seeing us enhance our overall offering products like Sam allowing them to buy more Eric we're setting ourselves up and extremely differentiated way.

So when.

When I think about 2023.

See everything from the products have gone live or the stuff that we are testing we are testing right now.

It is just increasing.

Further increasing my confidence that we are investing our resources well see.

We're seeing we're seeing some of the results of that.

The second part of your question.

Was like what what what of the uncontrollable.

Pieces Oems consumer sort of used car values like what do I think is the most important.

Really at the end of the day number of cars being traded in to a dealer.

Is.

Whether it's being sold as a new car or a used car.

The number of trades coming in meaning the number of transactions coming in.

That is the biggest component of the dealer wholesale market.

So sort of thing that the first element of our Tam as the dealer wholesale market.

And as the benefit of new cars being produced.

And the benefit of starting to see some.

Promotions by the Oems, we've been starting to see over the last few weeks here.

As we will start to see franchise dealers with advantages of selling cars that will lead to trades.

And so I think that bodes well for us we've got great relationships already walking in a third.

The mom and pop independent dealers are almost always going to figure out a way to win.

They're always can always figure out what theyre going to readjust based on what they're paying for these used cars as prices come down they're going to be more and more discipline. These are like some of the best entrepreneurs in this country independent used car dealers.

So think about that top of the final the supply comes from the trades.

The OEM production will start to come back I think our franchise dealers should do well next year.

I think that could really bode well for us.

Thanks for all the color George really appreciate it.

Yes, certainly there.

One moment for our next question.

Our next question comes from Daniel <unk> with Stephens. Your line is open.

Yes, Hey, good evening guys. Thanks for taking my question.

Danielle discussion of kind of a high level. So just a couple kind of clarify are the financial you talked about the internal kind of dealer offering a few times George.

Obviously, that's growing with the franchise groups.

Does the profitability of that channel is that growth next year is that going to be a drag to revenue per unit to the big group get better pricing and then any kind of help on scaling like what percentage of volume is it this year, where do you expect that to go next year as you grow that business.

So Daniel to think about it.

It's not a drag it's more like a wash.

But more importantly, it's.

I'll give you like the goals objectives, a dealer that I was talking to this morning, Okay Theyre objective would be.

Of the trades coming in and of the aged inventory, taking keep 15% of those cars. So they would've wholesales inside their group that would be very successful.

So that specific group wholesale a 100000 cars.

Between trades.

And aged vehicles. They can keep 15% so think Daniel most of the cars and up in open auction any.

Their goals and objectives are a reasonable like these dealer groups are smart they don't want to actually keep in retail the car that Scott material issues.

Doesn't fit within the REIT is going to hurt their brand.

Just about all of them are very reasonable.

So think about it.

<unk> in fact.

We got a nominal fee then we actually it works well into the.

Any kind of charging a small fee and then we go out and we didn't get our other fees for let's say wholesale in the vehicle. So when you actually look at it from the front just inspecting to then actually go into the open marketplace.

It actually does not.

Hinder our unit economics.

So I think look at it simply as their goals and objectives are reasonable and since our Golden vectors are reasonable that's when a partnership works out.

Got it got it and then just you mentioned build on your comments the transportation margin took a big step higher kind of low double digits. This quarter for mid single with last quarter.

Where can that go longer term kind of what drove the improvement was it the decline of fuel prices was it just the scale of the business and then could that keep taking like tire on transport or is this kind of where it should be.

Yes, yes. Thanks for that question, so first what drove the improvement.

So so.

So number one and this is something we kind of pivoted a few quarters ago. We started moving from just focusing on increasing the attach rate because we hit our targets at that point in time.

Several quarters ago to really focus on maximizing spreads. So it was kind of just a conscious change.

Our orientation for the team in terms of what they need to focus on but if we look at what some of the other drivers are through technology and data intelligence, we basically deployed.

These capabilities to do auto dispatch, which was 70% of our transactions now last quarter.

So that's a huge percentage of our transactions just happen automatically.

<unk> loads.

Also which is requiring less human intervention.

Including improvements in how we price through different lanes. So that's number two and then number three we're also optimizing deliveries through better carrier management. So these kind of collectively are allowing us to drive those margins up.

<unk> faster than we actually expected.

The target transfer.

Transport margins of 15% by 2026, so we're kind of well ahead of schedule.

Right now.

We're pretty happy to be in the low double digits.

We think thats certainly very sustainable as we go into next year.

Whether we can continue to improve that next year, we'll see but we're already within striking distance of our long term targets. So.

We're pretty happy and again, that's been a nice tailwind to our overall.

Margins for the business.

Great I'll leave it there thanks for all the color.

Okay. Thank you, ladies and gentlemen conclude the Q&A portion of today's conference I'd like to turn the call back over to Sam for any closing remarks.

Thanks, and I'd like to thank everybody for joining us on our call. Today. Please note that we will be on the road at several investor conferences. This quarter you can find all the details on our Investor Relations website. So we do look forward to seeing you on the road hopefully and thank you again for your interest in <unk> and have a great evening.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Ladies and gentlemen, thank you for standing by and welcome to the CVA third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the specialty depressed star one on your telephone I would now like to turn the call over to your host Tim Fox you may begin.

Thank you operator, good afternoon, and thank you for joining Acb's conference call to discuss our third quarter 2022 financial results with me on the call today are George from own Chief Executive Officer, and builds a 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 can be found in our SEC filings.

Today's press release, both of which can be found on our Investor Relations website.

During this call we will discuss both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP financial measures is provided in today's earnings materials, which can also be found on our investor Relations website.

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 third quarter performance with revenue in line with guidance and EBITDA exceeding guidance.

The team once again delivered impressive results, while navigating through a very challenging macro environment.

With that let me turn to third quarter highlights on slide four.

Our market momentum continued in the third quarter with revenue of $105 million.

Our year over year growth of 15%.

<unk> strong results in Q3 dollars 21.

Despite a modest year over year decline in units.

<unk> grew to $2 1 billion.

Due to an increase in <unk>, which was driven by strong vehicle mix and also wholesale price inflation.

Overall, we are very pleased with our execution in Q3.

Our progress in key strategic initiatives.

Strong results, despite an automotive market and continued supply constraints.

Weakening retail demand.

And vehicle price depreciation.

Because market conditions are expected to remain challenging in Q4.

We have assumed that wholesale volume and conversion rates will be compressed through the balance of the year.

Our guidance reflects this more cautious view of current market conditions, while also reflecting a balance between investing in growth and maintaining a clear path to profitability.

Turning to slide five.

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

Growth innovation and scale.

With growth.

Moving to slide seven.

I'll begin with a brief overview of the dealer wholesale market and the <unk> or enroll retail automotive players as a wholesale supply source.

U S retail vehicle market is composed of 16500 franchise dealers and 38000 independent dealers.

Together, they've historically sold over 45 million, new and used vehicles annually.

These retail consumer transactions are typically accompanied by a trade it and in turn are sold into the wholesale market.

Dealer also rely on the wholesale market to dispose of aged vehicle inventory, that's not sold retail after a few months.

Together trade and age units produced an estimated $11 million dealer wholesale unit a year.

With this market structure as context, let's turn to slide eight to further illustrate the supply side trends in armor.

The U S retail market continues to remain under pressure due to OEM supply challenges.

More recently consumer affordability issues stemming from increased borrowing costs.

There are some early signs that automotive supply teams are improving which bodes well for wholesale supply volumes longer term.

But for now cautious consumer behavior is clearly pressuring new and used retail subs.

Now turning to slide nine.

Let's look at the demand picture in the wholesale market.

The China left illustrates a renormalization of vehicle prices that is also reflecting softening consumer demand.

After reaching historically high levels in 2021 wholesale prices declined during the first quarter this year.

Modestly in early Q2.

But had been decelerating consistently since that time.

Wholesale price depreciation, especially when encourage quickly.

Typically lead to conversion rate compression across the auction industry.

As dealers become more price sensitive in the wholesale market.

You can see this illustrated in this hurt in the rate.

So industry conversion rates declining for the past five months.

Next on slide 10.

We provided additional insights of our business that underpins our confidence in <unk> long term growth opportunity.

The chart on left shows quarterly listings on our marketplace.

Which is a measure of dealer penetration and marketplace adoption.

After moderating in the second half of 2021.

And supply is mounted lifting volume turn positive at the beginning of 2022.

<unk> grew 19% year over year Q3.

Through Q3 listings have increased 24% year over year, reflecting our strong execution on dealer penetration and wallet share expense.

In fact franchise dealer penetration reached approximately 33% across the U S.

And increased 500 basis points since Q4 'twenty one.

Of course in many cases, our wallet share is limited today.

As we are in the early days of working with many new dealers.

However, this expanding network build a robust foundation for growth once wholesale volumes recover and we continue to gain more wallet share.

The figure on the right is an updated view of the core.

Orderly variance and Acd's conversion rates.

As we've highlighted over the past few quarters pre pandemic conversion rates in our marketplace. We are in a tight range then increase significantly the supply demand and wholesale pricing factors drove very strong conversion rate.

Beginning earlier this year as vehicle prices and consumer demand moderated cautious buying behavior in the wholesale market resulted in the conversion rates returning to normal historical levels.

This trend continued in Q2 with conversion rates ticking up quarter over quarter.

Then declined further in Q3.

Correlating with the black with data shown on the prior slide.

We are confident that conversion rate will recover as the macro environment normalize.

Which will serve to be a growth tailwind given our strong listing performance.

Furthermore, we are currently in place with new pricing tools and marketplace format aimed at increasing conversion rates.

However, based on the latest market trends, we believe it is prudent to assume conversion rates will remain below the lower end of historical ranges for Q4.

Turning to slide 11.

You can see that conversion had a material impact on unit volume in Q3.

More specifically the year over year change in conversion rate with a greater than 30000 unit headwinds.

Negative impact unit growth by around 20%.

Despite the modest year over year unit decline GMB grew 6% to $2 1 billion with.

With growth driven by strong ARPA.

Turning now to slide 12.

Based on our internal analysis, we estimate that the U S dealer wholesale market continues to remain well below normalized.

And contracted 21% year over year in Q3.

Despite the macro backdrop.

We are executing our key growth initiatives within our control.

Including gaining market share and attracting new dealers for our marketplace.

Given our 5% year over year unit decline in Q3.

And an estimated market contraction of 21%.

This implies an ACB grew market share by approximately 16% year over year.

Next I'd 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 ACP capital are driving strong top line growth.

Also improving customer experience and creating efficiencies.

For our partners and ACB.

On Slide 13, you can see the ACD transportation continues to deliver strong results and.

And it's truly scaling into a great business.

Our growing carrier partner.

And fast cycle time resulted in attach rate once again exceeding 50% in Q3.

With newer technologies, such as our carrier app gaining wider adoption.

In Q3 over 60% of our transports were automatically dispatched an increase of 20 percentage points from Q1.

The investments we are making in transfer technologies are attracting new carriers to our marketplace and driving operating efficiency.

In fact, our transport business another key milestone in Q3.

With revenue margin in the low double digits and.

Kris from the mid single digits in Q2.

As a reminder.

Our 2026 financial targets assume transport revenue margin of 15%.

So our rapid progress this year is clearly putting us on a path to achieving this target.

Turning now to slide 14.

Our ACD capital team continues to deliver strong results in the market.

Capital attach rate doubled year over year in Q3, resulting in over 75% loan volume growth.

Our tech investment within our capital business are also paying dividends.

<unk> capital portal launched in Q1 and adoption has been strong with 75% of active ACD capital. There is now leveraging this post auction financing solution.

Lastly, we have continued to ramp up our investments in ACD capital sales capacity to drive adoption and dealer engagement to ensure this value added service is 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 16.

I would like to highlight a few examples of product innovation that will drive growth by enhancing the dealer buying experience on our marketplace.

And enable ACD to engage with a broader range of large dealer groups.

We began with our advanced <unk> solution.

<unk>.

This solution enhances a buyer experience through intelligent notifications and optional auto bidding capability.

Sam creates persistent demand in our marketplace.

Leading to better price realization for our seller and ultimately to higher conversion.

We are still early but with over 400 dealers leveraging Sam on our marketplace. Today, we believe it can be a big growth driver as we expand use cases and capabilities.

Next we're also enhancing our marketplace experience by testing a host of new formats.

Including.

Barry oxygen duration sorry.

<unk> pricing and vehicle specific merchandise.

Our testing is showing promising conversion results and could increase buyer and seller success on our marketplace.

Lastly, our private marketplace solution continues to gain market traction with some of the largest dealer groups in the country.

This solution enables dealership groups to easily auction inventory within their network to maximize group profit.

It's fully customizable to match each group specific needs and seamlessly integrates with our open marketplace. When a vehicle is not purchased in the private marketplace.

First our apex launch has been going great, but adoption going across our nationwide inspection team.

Recall the APAC as our next Gen data collection to us with upgraded audio capture capabilities and a sensor detection for vibration displacement and ultrasonics.

The more comprehensive data set delivered by apex drive significantly higher transparency into vehicle operating condition.

Also increasing in spectrum productivity of our teammates.

Next we are excited to leverage our virtual data powered by AI.

Turning to <unk>, we have developed <unk> converter detection model.

As you may be aware there has been a huge spike in catalytic converter thats due to the higher content of valuable precious metals.

We're also very expensive devices or a place. So it's a critical element of our infection process to ensure dealer can accurately derived vehicle that.

Our model can actually detect the presence or lack of a catalyst in Nevada with 97% accuracy.

And on the right, perhaps a bit less flashy, but still an important element of air condition as Russ.

Manual inspections can easily mistake surface Ross for a deeper structural or penetrating rights.

Which materially changes the equation and the vehicle value.

Our app use of AI technology to automatically detect rough classification and quantify the amount on the undercarriage, which again raises the bar and Acd's inspection transparency, while reducing arbitration risks.

Next I'd like to introduce our newest innovation and we Havent data a pre inspection data capability, we have done internally co pilot.

<unk> is a proprietary technology that Leverages machine learning.

Predictive analytics Gil.

<unk> team insight and customer feedbacks and form our BCA and common vehicle specific issues before conducting an infection.

We are equipping our interaction with valuable knowledge gained for millions of vehicle data point and infection.

And it's being delivered in an easy to consume format specifics at a vehicle they are standing in front of us.

All before they start the impact.

So to wrap up on innovation.

It's clear that our team is delivering highly differentiated technology solutions to the market.

And through our own operations that.

That expand our competitive moat and help drive profitable long term growth.

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.

Thank you everyone for joining us today.

We are pleased with our Q3 financial performance.

We delivered revenue in line with our guidance with upside to adjusted EBITDA.

Slide the challenging macro factors George outlined earlier on the call.

We also demonstrated the strength of our business model with revenue margin and adjusted EBITDA margin expansion versus Q3 'twenty one.

Turning to slide 19, I will begin with a review of our third quarter results.

Revenue of $105 million was at the midpoint of guidance representing year over year growth of 15% versus strong results in Q3 21.

Adjusted EBITDA loss of $12 million or 11% of revenue beat our guidance range.

EBITDA margin improved approximately 200 basis points versus Q3 'twenty one.

Turning to slide 20, I will cover some additional detail on revenue.

Total revenue of $105 million, representing a 25% CAGR since Q3 'twenty.

Auction of insurance revenue, which was 53% of total revenue grew 7% year over year versus solid results in Q3 'twenty one.

Year over year growth in auction and assurance of off to a 13% was driven by higher G&A due to the strong mix of vehicles sold on our platform and the <unk> increase we instituted last December .

Marketplace services revenue, which was 38% of total revenue grew 26% year over year.

Selecting strong adoption of our ACB transportation on capital offerings.

Our SaaS and data services products comprised 8% of total revenue and grew 20% year over year, driven primarily from growth in our Max digital business and adoption of data enabled inspection services.

Now turning to slide 21, I will review a cost in the quarter.

Q3 cost of revenue as a percentage of revenue decreased approximately 400 basis points versus Q3 'twenty one.

The improvement was driven primarily by our transport business, which delivered a low double digit revenue margin in the quarter.

To reinforce Georges earlier point about the scale, we're delivering and transport our 2026 targets assume a 15% revenue margin for this business.

But having achieved low double digit margins. This soon is a strong indicator of the long term profitability of this business.

Also a reminder, our transport revenues recorded on a gross basis.

Margin improvement has an outsized impact on our overall blended margins.

Turning now to operating costs. The key takeaway here is that after significantly ramping opex in 2021 to support market expansion and technology initiatives. We have continued to invest this year, but at a much lower rate of growth.

This is a testament to the ACB team, who has done a great job identifying ways to optimize how we operate while still delivering superior customer service to our dealer partners.

Moving to slide 22, let me put a finer point on our investment strategy and path to profitability.

Given <unk>, leading market position in large addressable market opportunity, we continue to support both our growth and technology investments.

At the same time, we have remained focused on investing prudently to ensure a clear path to profitability.

As you can see our focus this year on spending discipline and operational efficiencies expected to yield a material full year decrease in opex growth.

We're doing this while also preserving our key go to market and technology investments to ensure ACB is in an even stronger position when market conditions improve.

As it relates to our EBIT breakeven objective, we believe that despite the ongoing market and macro headwinds facing ACD.

Our additional levers in our business to help us achieve this objective.

Next I will highlight our strong capital structure on slide 23.

We ended Q3 with $502 million in cash and equivalents and marketable securities and $71 million of long term debt to finance, our rapidly growing HCV capital business.

Note that our Q3 cash balance includes $138 million of float at our auction business as.

As we've 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.

In Q3 cash flow used in operations to improve materially to just $3 million with a sequential increase in float contributing $13 million of positive cash flow.

Based on our current outlook for the balance of 2022, we continue to expect cash used in operations declined in the second half of 'twenty two relative to the first half of the year.

Now I will turn to guidance on slide 24.

For the fourth quarter of 2022, we are expecting revenue in the range of 97% to $100 million.

Adjusted EBITDA is expected to be a loss in the range of $15 million to $17 million.

For the full year 2022 revenues and I expect it to be a range of 421% to $424 million.

This range represents growth of 17% to 18% year over year and is modestly below our previous guidance to reflect a more cautious view of the macroeconomic factors impacting wholesale volumes and conversion rates in our market.

Despite this lower revenue outlook, our adjusted EBITDA loss is expected to increase to $2 million at the midpoint of revised guidance.

Adjusted EBITDA is now expected to be a loss in the range of $59 million to $61 million or approximately 14% of revenue.

As it relates to our 2022 guidance. In addition to the macro factors impacting wholesale volumes, we're assuming that conversion rates remain at or below the lower end of our historical range with current market conditions persisting for the balance of the year.

Finally, we expect non-GAAP operating expenses to grow approximately 24% year over year.

Let me wrap up on slide 25, our reviewing our 2026 financial targets.

We are very pleased with our execution was proven to be a very challenging macro environment.

We remain confident in our ability to achieve $1 $3 billion of revenue and $325 million of EBITDA in 2026.

Our confidence is reinforced by a number of factors, including <unk>.

Strong dealer penetration and wallet share gains across our territories, resulting in sustained market share gains.

Our broad technology platform, enabling durable long term growth and operating efficiency.

Consistent improvement in revenue margins, and our commitment to balancing growth and investments as our business scales.

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 strong execution during these challenging times in our industry.

We are especially proud of our ACD team that has delivered these results.

We continue to gain market share by attracting new dealers through our marketplace.

And by gaining wallet share within our existing customer base.

Physicians ACB, a strong growth when market conditions improve.

They are executing on our territory penetration plan and our suite of marketplace offerings are gaining traction.

We are innovating and delivering an exciting product roadmap to further differentiate ECB and expand our addressable market.

We are on track to generate over $1 billion in revenue with attractive margins through a proven business model that we believe will drive significant shareholder value.

We will remain committed to continue to build a world class team to deliver on our goal.

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

Ladies and gentlemen, if you have a question or comment at this time. Please press star one on your Touchtone telephone.

We'll pause for a moment, while we compile the Q&A roster.

Our first question comes from Vincent <unk> with Jefferies. Your line is open.

Hey, Vince.

Hey, guys. This is Vincent on for John Collin County at Jefferies.

Do you think you can talk about what youre seeing in terms of any any development in Q4, so far to headwinds to a wholesale conversion rates and then maybe you can help us get.

<unk> sense of sort of where headwinds hitting the hardest.

How are you know headwinds impacting customer engagement and retention versus kind of.

The impact that youre seeing to add to the sales teams and.

As they try to enroll new dealers.

Hey, Vincent it's George I'll start and then if bill wants to chime in.

So Vincent.

If you look at the Black book data that recently came out with it.

Really informs us that.

What we really have seen as conversion rates have continued to decline and then there is sort of is starting to level out a little bit.

I think in the last 24 hours. It showed it went down minimally.

And we're not going to speak much to Q4, it's beyond my sayings.

Our our conversion data and black books.

Mirrored pretty consistently.

High level losses.

It could be we could have solved the trough sort of how we're thinking about it and we are sort of leveled out on conversion and then the second part of your question there.

Even though we've continued to grain gained dealers.

When you look at our market expansion.

I think I'll answer your question a couple of ways number one.

We now have a third of franchise dealers across the country starting to use HCV some more so than others. Some we have limited wallet share.

A lot of wallet share.

So what does that say that says dealers are looking for ways to wholesale their vehicles differently.

At the same time, we are starting to see.

Listings her list or if you would look at it from a 100% of our wallet share listeners for listeners across the industry and listings furniture has started to decline.

And thats, mainly related to the macro environment.

Dealers are selling less cars, the combination of <unk> plus new.

So even though we've gained listers and even though we've gained listings this year by over 24%.

We are starting to see the number of wholesale wholesale cars available per listener decline.

So the order sounded like the macro things going on but you are seeing compared to the others in the industry.

We bode well.

And we've done a great job of taking share in.

And gaining more relationships and also starting to take more wallet share so anything else for that yes, so what I would just add.

Then just based on what George took you through in terms of the context for our guidance.

Assuming essentially that conversion rates are basically flat.

With Q3.

And again remain at this call at depressed level versus our historical conversion rates, but we have assumed that listings.

<unk> per lyster as we call it.

Does decline based on this macro environment.

But we're all kind of dealing with today. So that's kind of the underpinning for our our guidance for Q4 essentially.

Got it for your questions. Thanks, so much guys.

Thank you.

One moment for our next question.

Our next question comes from Chris <unk> with Needham Your line is open.

Hey, Chris.

Hey, good afternoon guys.

Just had a question on as vehicle prices depreciate.

I'm just kind of curious what you guys are seeing what safeguards you have in place.

And is that something more of a we should think of as a growing pain and you guys are somewhat past it with the caveat that you always have to be vigilant around it.

Yes, Hey, Chris I'll start.

Yes, thanks for the question and Greg Great question.

You've probably seen throughout the industry.

There are 10, you could have risk for higher arbitration is price declining.

With us.

Quarter over quarter, we actually improved.

In a market where the prices were going down.

When you look at the investments we've made in technology in our infection platform. When you look at the discipline in our operations. When you look at the way we're operating the business.

We actually improved.

And in a tough market that is not easy.

So so Chris when you really think about.

We've really invested very significantly in this inspection technology, we've invested in a national infection team there.

Employees of ours, who are working hard out there who are doing all the right things, we're not relying on any third parties.

When you when you look at the internal processes, we have to make sure we have.

Good actors not bad actors on the platform.

We've got tremendous discipline here in Asia.

We still have more room to grow we got still improvements that we can sort of improve throughout the next year and we have not achieved all of our goals and objectives, but maybe bill can sort of chime in a little bit more on that yes sure.

Chris what Youll see in the supplemental data is that we actually took our whats on our P&L is basically our assurance cost of revenue, which is effect effectively arbitration costs down quarter on quarter from $14 6 million to $12 2 million.

If you look at it on a per unit base, we were down almost 10% on a per unit basis. So actually we've we've made some great strides.

In terms of driving those costs down.

Despite what is a pretty challenging environment today, so you'll see some of that in the map in terms of the data.

Okay, Perfect and then just one more if I could.

Bill you mentioned the buy fee increase last December if I look at let's say two.

Grow the platform.

Yes, it's a good question and you're right. We do have some headroom there and in fact, we did pass.

Small a smaller increase in our buy fees this quarter.

Which again tends to mitigate any downside we have on <unk> to declining prices for for vehicles.

So we've got some headroom there.

Yes.

We'll see how we what we decided going forward in terms of whether we continue to March that upward over time I mean, we're also all subjects not just us but for all our competitors are subject to inflationary costs right. So.

We've.

We've been able to pass some of this through pretty successfully.

So again mitigate any downside on <unk> for us both forward and Chris I'll, just add a little more of that sort.

Our philosophy is don't be a pik.

We do have opportunity to increase and with both small price increases we made.

Over the last 14 months.

We got we had a very limited.

Commentary from the dealer community comments like surprised at and increased it more comments like that is still extremely fair.

So to your point, we still have we still are charging fees, Laurie lower rhythm markets, where.

And we'll be smart about this for next few years.

We should earn the market value for what we're doing in time.

But we will be smart about it.

And we will do it carefully and we'll do it in a manner where dealers actually are also feeling like we're being fair to the whole. Thanks, So Chris so far so good as we've increased ARPA within a market where <unk> was actually challenged.

Okay got it. Thank you I won't be a pig and I will pass the mic.

Yeah.

One moment for our next question.

Our next question comes from <unk>. Your line is open.

Yes.

Hi.

Alright, thanks, and thanks, a lot. So two questions from me maybe just on the just to kind of piggyback on your response there about price.

Increase that you did.

Just to clarify that that's happening in Q4 or did you also benefit from it in Q3, just trying to figure out the timing.

And then really this one.

Innovations that you kind of highlighted.

When can we expect to see the benefit in terms of maybe higher efficiency.

In the field and the infection crossing is strong.

Starting to use these.

Okay. This is bill so I'll take the first question then I'll pass it to George.

Yes, so that increase actually was earlier this quarter. So it was.

Literally just a few weeks ago.

So we'll get the benefit for most of the quarter, but not all of it.

Meaning.

For the fourth quarter, Yes, Chris question no to the queue.

Sorry didn't impact Q3.

And then on your second question.

I believe you are asking about sort of the efficiencies and gaining scale out with our inspection team does that really your cautiousness around.

Yeah, and even maybe leveraging some will then innovations here.

Yes.

Highlighted whether it's Eric.

Yes.

Other things that you can do to kind of make the process more efficient and faster.

Got it.

Yes, thanks for clarifying so.

Think about each part of the inspection any part right now.

Could take us, let's say four to seven minutes per sort of application or device or utilized so in the aggregate we might be spending between 20 and 40 minutes per infection with an objective of eventually getting it down to where each and every vehicle is taking you under 20 minutes.

And these investments we're making.

Our still early so we won't see like massive.

Benefit in Q4, or even Q1, but when I think about between now and the end of next year.

The investments in apex in vaccine investments in us curating that type of an inspection that we should do in a low price vehicle versus a fairly high priced vehicle.

The inspection, we should do based on that vehicle tight so this new investment.

As new product that we internally call copilot right now.

Allows us say based on this Nissan which has the following issues go look at the following thing so still early.

Some of this we just felt we're really excited about it but we've got objectives internally that we're going to hit next year.

And you can see the discipline, we have varied ACB.

Do something we're going to do it and we've built this tac to help us get more and more efficient on the time. It takes in fact the vehicles, but at the same time, you probably see may doing some studies on the industry.

Wanted to then get kill you in arbitration.

So you need to be efficient, but you also need to get the data you need <unk>.

Or else the car is going to come back and it's going to hurt you.

And you don't want any surprises.

Where that combination of efficiency.

But beginning in the data we need we think we're years ahead of anybody else in the marketplace.

Thanks.

Got it thank you guys.

Okay.

One moment for our next question.

Our next question comes from Rajat Gupta with Jpmorgan. Your line is open.

Hey, Jonathan.

Hi, Thanks for taking the question.

Maybe.

This is Mike.

Sure.

<unk> question, maybe but.

Trying to understand like how you are managing your cost structure.

Opex.

In context of what are you seeing in terms of conversion rates on lifting you've obviously, given the fourth quarter guidance, but.

I'm curious like how are you planning for 2023.

Are you planning are you viewing fourth quarter as a trough for the business.

You can expect in 2023 to be recovery here.

And in that context, like how do you plan to manage our expense structure.

Is your opex on a level of knowledge that you can just go into that.

Whatever the volume outlook is between <unk> three or do you think you might be to make more cuts.

So just you're saying both like.

No.

Budgeting, maybe for joining during the <unk>, if you could do to help.

And then I have a follow up thanks.

So its Phil.

Yeah, So look.

Obviously on our last call we talked about the fact that we're exiting this year at a $40 million lower opex run rate than what we guided to when we entered into the year that said.

To answer your question more specifically, yes, there are other opportunities for us to continue to optimize the business going into next year.

And that's really across the company, but I will just give you a few examples just to give you a flavor for this so if you look at arbitration costs and our inspection costs together.

Alright, this year, that's about $130 million roughly evenly split between the two okay arbitration costs.

We answered that question earlier in terms of driving those costs down from Q2 to Q3. So there is there is already great strides that we're making in terms of reducing the frequency and the size of arbitration claims, but really going forward. There is the ability to continue to leverage a lot of the technology that George highlighted.

In his prepared remarks, so theres a lot more room for improvement and I would argue in the context again of the.

The environment that we're dealing with it's particularly impressive.

When you consider this backdrop in terms of us being able to drive those costs down.

What are you seeing.

Are those costs going up.

And a lot of other cases, so that's number one.

Number two on the inspection front, obviously, we've got a big team out there on.

On the inspection side, and we've been pretty focused on making sure we manage that as well as possible going forward and we've made some adjustments to our cost structure.

Last quarter, but even if you look at our current team out there we're still averaging across the countries six inspections per day versus our best territories at roughly double that so what that tells you is that we've got less mature territories that are still far below our average and really that gives us a lot more.

<unk>.

To grow our units with really a relatively small increase in costs right.

That's just an opportunity as it exists today without us pretty much changing anything.

And you can bet that we're going to continue to look at ways that we can continue to optimize that side of our cost structure.

Other area just is one more example is offshoring.

And we've already started establishing a beachhead offshore in terms of lower cost engineering, but we're in the process of really leaning in even more going into next year and expanding that.

And basically bringing on lower cost capacity to augment our existing team. So.

Those are just a few examples.

There is a myriad.

<unk> array of other areas that we can optimize so.

Well I would tell you is that we're continue we're continuing to focus on.

Everything we can in terms of optimizing going forward.

And that will put us in a better position to deal with any other market turbulence as we look to hit our target of exiting next year at EBITDA breakeven Federal George if you want to add any more color to that.

Okay.

I can go further into how we're thinking about 2023 or you can have a follow up question sub tier.

Maybe like.

Any comments on the fourth quarter trough to drink drink trends would be helpful.

True.

We think about 2023.

As we really put it into two buckets.

One is.

What are the external factors, we can control and thats sort of OEM.

OEM production of units consumer borrowing used car values whats happening in the market those are the things that we can't control.

Okay, what can we control.

And when Youre going to see us really lean in on between now and we come back and deliver our annual plan.

One, let's talk about market share.

Even when you look at today, where we're gaining.

We're gaining the right to go out.

<unk> worked with more dealers.

Third are the dealers out there are starting to work with HCV.

But today, we are only 7%.

We only have 7% share.

So when you look at first and foremost we've done a fantastic job.

Bringing on more dealers fantastic jobs turn earn more wallet share.

But we thought we were going to hold ourselves accountable to taking even more next year.

And that that sort of first and foremost.

Both for when I think about mature territories that means more wallet share and I think our new territories.

Solid accelerating the dealer penetration, while also increasing wallet share for those that are dabbling with us.

When you think about.

In addition to taking share.

We also think it's about adding more value, which you've seen us consistently do I mean, we've been delivering more products.

Adding more value products like private marketplace and others dealers are starting to work with HCV because of these value add.

In a market that's contract being challenging.

Our value add approach is helping us win youre seeing us focus on scale quarter after quarter.

So when you think about how we focus on scale, whether it be our inspection technology that we talked about as bill mentioned growing into the size of our infection team and other elements of scale.

Last but not least I would say is you haven't heard us talk much about consumer or commercial over the last year.

But we've been building away within building products, we've acquired a few.

We're starting to work with some rental car companies. We've got some other elements of commercial that will talk about.

In the coming sort of quarters as we start to get a little more traction, but we think 'twenty three we.

We will both go to market with an asset light consumer offering.

We're going into this we're being disciplined in our approach, but we're still feeling fairly anywhere you want to add to that yes, I would just just a couple more items.

<unk>.

I talked about the cost side of the equation.

So in terms of the revenue and margin side.

Things are things that we're thinking about and feeling good about going into next year. So.

The <unk> increase that we just passed on will further kind of mitigate any downside that we have on ARPA.

So we're not necessarily entirely insulated from a reduction in used car prices, but we're certainly going to mitigate part of that.

Would affect our <unk>.

Can be relatively material to our margin profile. So I just wanted to throw that in as well just to give you a little more context for all sides of the P&L.

Because I have got.

Or are you viewing the fourth quarter as the trough for the industry.

I don't know like George.

Was that kind of implied in your answer worker now.

Yes listen we.

<unk>.

We none of US know what next year is going to bring us.

I'm, telling you Raj is how we're going to hold ourselves accountable, meaning the market Mike. It works none of US know right now trying to.

There is predictions on politics for last couple of days that didn't happen right.

Think about where we're going to hold ourselves accountable to growth.

Predicting it going down.

That's positive.

Okay. They are predict some of them are predicting a couple points higher.

And volume so.

Some of our largest customers are predicting higher volume of units next year. That's positive I think new car dealers do have a slight advantage of overused next year as it relates to selling cars only because we'll come with programs like.

Zero percent interest, 1.9% financing, we even saw in the last 24 hours a couple of other manufacturers come out with the rebates I mean, we haven't seen that.

Two years, so all of that implies I think next year could be a better year, but whether it is or not we're going to hold ourselves accountable for taking more share.

Got it great. Thanks, Thanks for all the answers and good luck Sir.

Thank you one moment for our next question.

Our next question comes from Eric Sheridan with Goldman Sachs. Your line is open.

Hey, guys.

Great Great to speak to you I hope everybody is well on the team maybe I do want to follow up on that last answer because there was a lot in there.

If you think about what's in your control, which was one part of the bucket you said, what do you see as the critical pieces of the execution that you're holding yourself to that you think would be most determined that or in terms of a year from now we're sitting here a new gained dealer share as a result of those efforts 12 months.

<unk> versus where you sit today and you've already gotten a fair bit of dealer share, but to put a little bit more.

When you look at those variables, though which.

Now of those variability do you think is the most important to unlock elements of the supply demand dynamic that you would be.

That would be most advantageous to you is it is it OEM supply isn't the consumer demand piece tied to interest rates, which externality do you think would result in the biggest unlock over the next 12 months. Thanks.

Yes.

Certainly Eric Thanks for the question.

No.

So when I think about our execution and as we start to prepare for next year.

One is dealers are going to be looking for more and more guidance.

What is the value of this asset.

And we were delivering.

Is a series of enhancements one is price expectations too is when should they be launching the car.

The duration of that car should be launched through 20 minutes should be lunch for two hours.

Fourth should they sell it within their group <unk> meeting within a large dealer groups should they should even do an auction yet should they first tried to keep it so think Eric us delivering on us becoming at.

At the end of the day the intelligence platform for the dealer and we've got we're way ahead of the competition.

And we whereas up until I would say recently, it's been <unk>.

I would just say this sort of random 20 minute auction.

And now we're adding we spent the money to have several hundred engineers, we've been building away hopefully all you can appreciate the amount of products you see.

Deploy quarter after quarter.

And we're going to expect some results from all of that and I'm already sensing from the testing and the opportunities I'll give you. One example.

Two dealer groups in the U S. Now to dealer franchise dealer groups are some of the largest buyers on ACB.

That happened right after we launched <unk> private marketplace.

So not only the M&A starting to sell cars.

They became our largest buyers so think one product so bucket number one Eric is execution of our product delivery getting into the hands of our dealers because that offers more value by offering more value you get more share that's bucket number one.

Number two.

It is being extremely disciplined on our approach on.

And whether it's revenue per unit, whether its arbitration and goodwill good actors bad actors you never Chase you.

You build a good business.

<unk> seen us do that not just counting on these calls.

Units, how many units and important but we're going to grow revenue, we're going to grow margin.

We're going to hit our path to profitability and.

And we're not here just dimension X units or <unk>.

So, while we're going out there and gaining.

Our product advantage and building a large relationship we'll be doing we'll be executing while delivering this with more disciplined more and more disciplined which we've already acted on and done a great job look at our quarter over quarter improvements.

And then three when I think about the broader capability here.

Not only offering more value by products.

So when.

When I think about 2023.

See everything from the products that have gone live or the stuff that we are testing we are testing right now.

It's just increasing it just further increasing my confidence that we are investing our resources, well and where we're seeing we're seeing some of the results of that.

The second part of your question.

Was like what what.

The uncontrollable piece.

Pieces OEM consumer sort of used car values like what do I think is the most important.

Really at the end of the day number of cars being traded in to a dealer.

As you know.

Whether it's being sold as a new car or a used car.

The number of trades coming in meaning the number of transactions coming in.

That is the biggest component of the dealer wholesale market.

So sort of thing that the first element of our Tam as the dealer wholesale market.

And again.

As the benefit of new cars being produced.

And the benefit of starting to see some pre.

Promotions by the Oems.

Been starting to see over the last few weeks here.

As we will start to see franchise dealers with advantages of selling cars that will lead to trades.

And so I think that bodes well for us we've got great relationships already walking into the third.

The mom and pop independent dealers are almost always going to figure out a way to win.

They're always can always figure out what theyre going to readjust based on what they are paying for these used cars as prices come down they're going to be more and more discipline. These are like some of the best entrepreneurs in this country independent used car dealers.

So think about that top of the final the supply comes from the trades.

The OEM production will start to come back I think our franchise dealers should do well next year.

I think that could really bode well for us.

Thanks for all the color George really appreciate it.

Yes, certainly there.

One moment for our next question.

Our next question comes from Daniel <unk> with Stephens. Your line is open.

Yeah, Hey, good evening guys. Thanks, taking my questions.

Danielle discussion of kind of a high level. So just a couple kind of clarify the financial you talked about the internal kind of dealer offering a few times George.

Obviously, that's growing with the franchise group.

Does the profitability of that channel is that growth next year is that going to be a drag to revenue per unit to the big group get better pricing and then any kind of help on scaling like what percentage of volume. This year, where do you expect that to go next year as you grow that business.

So Daniel to think about it.

It's not a drag it's more like a wash.

But more importantly it.

I'll give you like the goals objectives of a dealer Linda I was talking to this morning, Okay. Their objective would be.

Of the trades coming in and of the aged inventory, taking keep 15% of those cars. So they would've wholesales inside their route that would be very successful.

So that specific group wholesale a 100000 cars.

Between trades.

<unk> and aged vehicles. So they can keep 15% so think Daniel most of the cars and up in open auction any.

Their goals and objectives are a reasonable deal.

These dealer groups are smart they don't want to actually keep in retail the car that Scott material issues. It doesn't fit within the REIT is going to hurt their brand.

Just about all of them are very reasonable so to.

Think about it.

Lots of cars in fact.

We got a nominal fee then we actually it works well into the way, we already kind of charging a small fee and then we go out and we didn't get our other fees for let's say wholesale in the vehicle. So when you actually look at it from the front just expecting to then actually.

Going to the open marketplace.

It actually does not.

Hinder our unit economics.

But I think look at it simply as their goals and objectives are reasonable and since our goal is injected and a reasonable that's when a partnership of books out.

Got it got it and then just you mentioned build on your comments the transportation margin took a big step higher kind of low double digits. This quarter for mid single with last quarter, where can that go longer term kind of what drove the improvement was it the decline of fuel prices was it just the scale of the business and then could that keep taking like tire on transport or is this kind of where it should be.

Yes, yes. Thanks for that question, so first what drove the improvement.

So so.

So number one and this is something we kind of pivoted a few quarters ago. We started moving from just focusing on increasing the attach rate because we hit our targets at that point in time.

Several quarters ago to really focus on maximizing spreads. So it was kind of just a conscious change.

Our orientation for the team in terms of what they needed to focus on but if we look at what some of the other drivers are through technology and data intelligence, we basically deployed.

These capabilities to do auto dispatch, which was 70% of our transactions now last quarter.

So that's a huge percentage of our transactions just happen automatically.

We're matching loads.

Also which is requiring less human intervention.

The target.

Transport margins of 15% by 2026, so we're kind of well ahead of schedule.

Right now.

We're pretty happy to be in the low double digits.

We think thats certainly very sustainable as we go into next year.

Whether we can continue to improve that next year, we'll see but we're.

We're already within striking distance of our long term targets. So.

We're pretty happy and again, that's been a nice tailwind to our overall.

Margins for the business.

Great I'll leave it there thanks for all the color.

Okay. Thank you, ladies and gentlemen conclude the Q&A portion of today's conference I'd like to turn the call back over to Sam for any closing remarks.

Thanks, and I'd like to thank everybody for joining us on the call. Today. Please note that we will be on the road at several investor conferences. This quarter you can find all the details on our Investor Relations website. So we do look forward to seeing you on the road hopefully and thank you again for your interest in <unk> and have a great evening.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Q3 2022 ACV Auctions Inc Earnings Call

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