Q4 2022 ACV Auctions Inc Earnings Call

February 22, 2023

Okay.

Yeah.

Good day, and thank you for standing by.

Welcome to the AC D a fourth quarter 2022 earnings call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

We'll then hear an automated message advising your hand is raised to withdraw your question Press Star One one again and your question will be withdrawn. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Tim Fox Vice President of Investor Relations.

Thank you operator, good afternoon, and thank you for joining Acb's conference call to discuss our fourth quarter and full year 2022 financial results.

With me on the call today are George Simone Chief Executive Officer, and builds a relic 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.

Can involve factors that could cause actual results to differ materially from those expressed or implied by such statements.

For a discussion of the risks and uncertainties related to our business can be found in our SEC filings and in today's press release, both of which can be found on our Investor Relations website.

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

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

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

Thanks, Tim Good afternoon, everyone and thank you for joining us.

We are pleased with our fourth quarter performance.

Which capped off a year that required strong execution from the ACB team during a challenging market environment and.

And execute we did.

We delivered 18% revenue growth and gained share in a market that declined an estimated 20%.

We expanded our marketplace.

Exiting the year with over 24000 dealer partners.

<unk> reached an exciting milestone for.

Forming over $1 million inspection in 2022.

Our technology team launched a broad range of new solutions to drive growth and scale across our operation.

And we achieved all this while expanding margin and exceeding our EBIT guidance.

As we turn to 2023, we are encouraged to see positive signs emerge in the automotive market with industry headwinds beginning to moderate.

Our focus this year remains consistent.

Our growing market share.

Spanning our competitive moat with leading edge technology.

Increasing margin and driving scale to deliver on our EBIT targets.

With that let's turn to a brief recap of fourth quarter and full year 2022 result on slide four.

Fourth quarter revenue of $98 million was within our guidance range and as expected declined modestly year over year versus very strong results in Q4 dollars 21.

<unk> of $1 8 billion declined year over year, primarily due to a 20% decrease in <unk> per unit at.

As wholesale prices declined from historical highs in Q4 of 21.

We sold 125000 vehicles in our marketplace, which was in line with guidance and reflected the impact of a 1000 basis point decrease in conversion rate versus Q4 'twenty one.

For the full year revenue of $422 million increased 18%.

Challenging market conditions in the second half of the year.

<unk> for the year increased to $9 billion.

Due to a 20% increase in <unk> per unit.

While units declined modestly year over year.

Reflecting a 200 basis point decrease in conversion rate.

On slide five I will frame the rest of today's discussion around the three pillars of our strategy to drive long term shareholder value.

Growth innovation and scale.

I'll begin with <unk>.

On slide seven.

<unk>, providing contacts with a dealer wholesale market in relation to the broader automotive retail market.

First to illustrate the supply side of our market. We have provided data on new light vehicle volumes.

As you can see in the chart in the left SAR increased sequentially in Q4, which is an encouraging sign that automotive production challenges are finally easing.

However, as you can see in the chart on the right volumes last year were down 8% year over year.

And 20% below pre pandemic volume.

This decline in retail sales translated into fewer trade.

Which pressured wholesale auction listings during the year.

Turning to slide eight.

Let's review trends for used vehicles.

Our retail used vehicle market was under pressure throughout 2022 as interest rate increased in retail prices remained elevated relative to historical levels.

This resulted in us retail sales declining 11% year over year.

Which created additional headwinds in trading volume and wholesale auction listings.

On a more positive note.

Recent industry data has pointed to a solid start for the us retail market. This year with volumes up month over month and year over year in January .

These recent trends for new and used retail sales are positive signs for the wholesale market. However, the macro factors impacting supply in the market may persist throughout 2023.

And we have factored that into our guidance.

Now turning to slide nine.

We're also seeing some encouraging inventory trends that typically benefit the wholesale market.

The chart on the left shows that the used vehicle supply has reached levels not seen since the onset of the pandemic.

Why is this important.

<unk> are in the business of selling cars not storing them.

Is used inventories build and vehicles start to age hewler's leveraged wholesale channels to sell their aged inventory.

Dealers also tend to become less price sensitive as inventories reached elevated levels, which improves auction conversion rate.

We have started to see these dynamics play out in our marketplace in early 2023, which is a positive leading indicator for the wholesale market.

Chart on the right illustrates that the supply of new light vehicle is also recovering, albeit at historically low levels.

It is important for two reasons.

First and most obvious reason is that dealers require an adequate supply of inventory to satisfy consumer demand.

Second reason is that when dealer lots are replenished with new vehicles, various added incentive to reduce aged used inventory, which in turn generates more volumes for wholesale channels.

So the takeaway here from a market perspective is that we appear to have turned the corner as.

As I mentioned earlier, the persistent headwinds impacting wholesale volumes appear to be moderating.

Next on slide 10.

We're sharing additional insight into our business that reinforces our confidence in <unk> long term growth opportunity.

Chart on the left shows annual listings on our marketplace, which is a measure of dealer penetration and marketplace adoption.

In 2022 weaker listings, 20% year over year.

Despite a 10% decline in retail sales.

Listings growth was driven primarily by franchise dealer penetration, which increased 600 basis points year over year to just over 40%.

Bear in mind, we are.

Still in the early days of engaging with the majority of our dealer partners, therefore, increasing wallet share across our marketplace is a large opportunity.

And key objective for this year.

The figure on the right is the annual variance in ACB as conversion rates.

We highlighted over recent quarters pre pandemic conversion rates on our marketplace are quite stable and predictable than.

And then as supply demand and wholesale prices were impacted by pandemic related factors conversion rates increased significantly.

While this increase was a growth tailwind in 2021 conversion rates declined significantly in the back half of 2022.

As price depreciation accelerated resulting in cautious buying behavior.

To put this into perspective, the 200 basis point year over year decline in conversion rate resulted in a 125000 unit headwind in 2022.

As I mentioned earlier, we are encouraged to see this trend start to reverse in early 2023, and we believe conversion rates will revert back to normalized levels throughout the year.

Turning now to slide 11, we.

We estimate that the U S wholesale market continues to remain well below normalized volumes and contracted 20% year over year in 2022.

Despite this market backdrop.

We are executing on our key growth initiatives and gaining market share.

Given an estimated market contraction of 20%.

And a 3% year over year unit decline.

This implies the ACD grew market share by approximately 17% in 2022.

Next I would like to wrap up the growth section with highlights on our value added services.

On Slide 12, you can see the ACB transportation continues to deliver strong results and is scaling into a great business.

Our strong carrier network and fast cycle times resulted in attach rate once again exceeding 50%.

In fact, our carrier partners achieved record cycle times during the quarter benefiting both sellers and buyers in our marketplace and setting us further apart from the competition.

Over 80% of our transport for automatically dispatched in Q4, an increase of 1000 basis points from Q3 our.

Our technology investments continue to drive both growth and operating efficiencies.

These efficiencies resulted in another quarter with revenue margin in the low double digit and increased from the mid single digits in early 2022.

As a reminder.

Our 2026 financial target assumes transport revenue margin of 15%.

And our progress is clearly putting us on a path to achieve this target.

Turning now to slide 13.

ICD capital continues to experience strong demand in the market.

Capital attach rates grew over 90% year over year in Q4.

I'll turn it over 70% loan volume growth.

And average loan values, increasing approximately 20% year over year.

We have continued to ramp our investments to drive dealer engagement and scale to ensure that ACD capital as an important growth and profit driver going forward.

Turning to the second element of our strategy to drive long term shareholder value innovation.

On slide 15, I'll first recap some of the growth oriented product innovation delivered in 2022.

These innovations are focused on enhancing the dealer buying experience.

Increasing conversion rate.

Advancing our marketplace offerings.

And expanding our Tam.

Let me begin with the dealer buying experience.

Marketplace too that all delivered a new UI with updated filtering search notification features.

Our advanced fire solution sand enhanced the buying experience through intelligent notification and auto bidding capabilities.

We leaned in with tax to increase conversion rates by launching new auction format.

And enhanced pricing data, creating a broader range of merchandising options for our dealer partners.

Our private marketplace solutions experienced strong traction with some of the largest dealer groups in the country.

This solution enables dealers to easily auction inventory within their network and leverage <unk> open marketplace for unsold units.

In transport, we launched a mobile carrier to provide carrier partners with digital tools to streamline their business and we developed targeted lane pricing to improve spreads and drive margin expansion.

We launched the <unk> capital portal equipment dealers were 24 by seven self service access to critical data and to drive further adoption of our capital offerings.

Lastly, we expanded our Tam with new solutions from our driveway and monk acquisition.

Enabling dealers to transform their consumer sourcing experience with digital solutions powered by machine learning and data.

These solutions also enable ACB through our dealer partners to engage upstream of the consumer prior to deploying our critical PCI resources.

On slide 16 are examples of tech investments that extend into our operations deliver.

Delivering customer success, while reducing costs.

Our Nextgen collection device APAC deliver significantly higher transparency into vehicle operating conditions, while also increasing the inspection productivity of our teammates.

We launched new virtual lift capabilities that target specific pain points and the infection process. These.

These capabilities leverage AI technology, raising the bar in HCV infection, transparency, while reducing arbitration risk.

To further advance our infection capability, we introduced co pilot and our guard these technologies leverage machine learning.

Predictive analytics and sensor data to inform our <unk> on a vehicle specific issues before conducting an inspection.

Lastly, our technology investment and title processing is leveraging our in house image recognition and data extraction supporting title processing with higher efficiency and accuracy.

Turning now to slide 17, we have an exciting roadmap of innovation to further expand our competitive moat.

Our primary focus on innovation. This year is to further enhance and leverage our vehicle intelligence platform, which is powered by AI and machine learning.

In conjunction with our extensive and growing data repository.

We will continue to focus on increasing conversion rate by enhancing our programmatic capabilities.

And elevating the dealer experience with new self service features.

Our industry, leading inspection capabilities will raise the bar, even higher with the full rollout of APAC copilot, Armguard and with Monkey integration that result in improved condition report and lower arbitration exposure.

We'll continue to expand our transportation platform.

And implement a loan management system to enable off network financing, an ACB capital and will launch. This next generation of SaaS and data service offerings with a major upgrade of Max digital and deeper integrations of driveway and monk for consumer sourcing through our dealer partners.

To wrap up on innovation I think you'll agree that our team is delivering industry, leading technology to the market.

And into our own operation that expand our competitive moat and helped 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 and thank you everyone for joining us today.

We are pleased with our Q4 financial performance.

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

Despite 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 Q4 'twenty one.

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

Revenue of $98 million was within our guidance range and declined modestly year over year versus strong results in Q4 'twenty one.

That's some context to our revenue performance.

Note that the Q4 'twenty two conversion rate declined one basis points versus Q4, 'twenty, one, resulting in an approximate $18 million headwind.

Adjusted EBITDA loss of.

$13 million or 13% of revenue beat our guidance range and EBITDA margin improved approximately 300 basis points versus Q4 2001.

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

Total revenue of $98 million represented a 35% CAGR since Q4 'twenty.

Auction and assurance revenue, which was 56% of total revenue declined 3% year over year versus strong results in Q4 'twenty one.

The revenue performance reflects a 10% year over year unit decline due to the conversion rate compressions.

Partially offset by higher auction and assurance <unk>.

Marketplace services revenue, which was 35% of total revenue declined 3%.

ACP capital revenue more than doubled year over year, However, transport revenue, which has a much larger business today was impacted by the decline in units year over year.

Our SaaS and data services products comprised 8% of total revenue and grew 5% year over year.

We are making significant improvements to the mass digital platform. While also taking a more measured approach to customer acquisition to position ourselves for reacceleration of growth as we exit 2023.

Turning now to slide 21, I will review cost in the quarter.

Q4 cost of revenue as a percentage of revenue decreased approximately 400 basis points year over year.

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

Operating costs, excluding cost of revenue was effectively flat year over year in Q4.

This reflects the significant investments we made in 2021 to support market expansion and technology initiatives and reflects our focus in 2022 on expense discipline as we optimized our scaled our business.

Moving to slide 22, let me framework investment strategy and path to profitability.

Our focus on spending discipline and operating efficiency resulted in a material decrease in opex growth in 2022.

In fact, our adjusted EBITDA loss of $56 million was at the midpoint of our original 2022 guidance.

Despite 30 million less revenue than initially anticipated due to the challenging market conditions.

And we accomplished this while preserving our go to market and technology investments to ensure ACD is in a strong position as market conditions improve.

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

We ended Q4 with $497 million in cash and equivalents in marketable securities of $76 million of long term debt to finance, our growing HCV capital business.

Note that our Q4 cash balance includes $145 million of float in our auction business.

As we've discussed previously the amount of float on our balance sheet to fluctuate meaningfully based on business trends in the final two weeks of each quarter that.

That has a corresponding impact on operating cash flow.

In Q4 cash flow from operations was $1 million with a sequential increase in float contributing $7 million in positive cash flow.

Consistent with the outlook, we provided last quarter cash used in operations declined significantly from $73 million in the first half of 'twenty, two but just $2 million in the second half of the year.

Now I will turn to guidance on slide 24.

For the first quarter of 2023, we are expecting revenue in the range of $107 million to $110 million.

Adjusted EBITDA is expected to be a loss in the range of $12 million to $14 million.

For the full year revenue is expected to be a range of $460 million to $470 million.

This range represents growth of 9% to 11% year over year.

Adjusted EBITDA is expected to be a loss in the range of $30 million to $35 million and over 40% improvement versus 2022.

And we remain committed to achieving adjusted EBITDA breakeven exiting this year.

As it relates to our guidance, we are assuming that new vehicle supply remains constrained in the near term that improves as production and inventory continue to recover throughout the year.

We're also assuming that conversion rates increase from the historically low levels in the back half of 2022 as wholesale price depreciation moderates.

Finally, we expect non-GAAP operating expenses, excluding cost of revenue and depreciation and amortization to grow at approximately half the rate of revenue growth.

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

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

Our confidence is reinforced by a number of factors, including strong dealer penetration and wallet share gains, resulting in sustained market share gains.

Opportunities to expand our tam into adjacent markets, including commercial wholesale.

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

Consistent improvement in revenue margins, and our commitment to balancing growth and investment as our business skills.

We look forward to providing you with details on our long term targets at our upcoming analyst day on June one.

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 challenging times in our industry and.

And we are especially proud of our team has delivered these results.

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

And by gaining wallet share, which positions ACB for attractive growth as market conditions improve.

We are executing on our territory penetration plan.

Gaining traction with an expanding suite of offerings.

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

We are on track to achieve our near term adjusted EBITDA target.

And over the medium term generate over $1 billion in revenue with attractive margins that we believe will drive significant shareholder value.

We are committed to achieving these results while building a world class team to deliver on our goals with that I will turn the call over to the operator to begin the Q&A.

Thank you.

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Our first question comes from the line of Chris peers at <unk> <unk> co.

Okay.

I just wanted to kind of keep your line is now open.

Alright.

Sorry about that.

George I just wanted to take your temperature and temperature of dealing with kind of you speak with Rod given better February wholesale data.

Typically because January seemed to retail did better in January because of lower prices and just kind of talking to dealers and investors I'm just curious what youre thinking about the path on prices going forward at the retail level given the wholesale price strength, because that would kind of have an effect on.

Retail units and just kind of curious how are you thinking about that and how dealers are thinking about it.

Hear me Okay.

To make sure.

I can hear you okay great.

We had a little phone issue there for a second and just what did you hear any of what I said, yes.

Yes, yes.

Hey, guys, we had a phone issue right.

Great. One other question started but I would say.

The year has started to your point January is generally.

Favorable I think compared to how a lot of dealers are expecting with interest rates rising.

Consumer.

The consumer a pullback in the market in both January and February I would say have been probably a little bit more positive and dealers were expecting.

Theres, probably a few different theories on why.

One one theory of why the market has held together pretty well.

It could be consumers are out knowing interest rates are only going to go up so theyre buying cars.

And knowing that even though prices have remained elevated interest rates may keep going up.

The market has signaled right. So I would say a couple of different reason why that could be happening, but either way. We're seeing so far Chris is that dealer sentiment right now is still strong.

I think the market is hanging in there even more than dealers were expecting.

Okay, and just could you comment on just kind of what wholesale prices going up could mean through retail prices I know the relationship tends to be.

Certainly when direction, but just kind of we had kind of a funky end of last year with a wholesale retail spreads really widened out so I'm just trying to get at is dealer extinct.

At higher wholesale prices will necessarily flow through to higher retail prices or because of lower wholesale prices, we might not see that phenomenon, which would help retail units and help auction conversion et cetera.

Yes, I think Chris if you see retail prices for for used have hung in there pretty strong thus far this quarter I think a few different engineered ports.

So I think wholesale has been strong and retail has been strong. So I think there has been a pretty consistent correlation there.

Okay alright, thank you.

Thanks, Chris Thank you.

Thank you Chris will give us one moment, while you're preparing the next question.

Our next question is from Bob buyback.

C J S Securities.

Your line is now open.

Hey, Brian Good afternoon, and thanks for taking my questions Hi, how are you guys.

So I wanted to start you've touched on a couple of these points, but maybe pin you down a little bit here in terms of.

Where do you see kind of unit growth coming from like what buckets next year, maybe you can rank them I'm not asking for specific numbers of units, but is it seems same dealer growth share of wallet the.

The biggest growth drivers at new dealer sign ups as an expanding Tam is it commercial but if you could just rank order the buckets of growth.

Where do you see units coming from.

Please.

Yes, certainly Bob.

We.

I think.

Our measured approach to our growth has been adding more rooftops.

Definitely.

Grabbing more wallet share from dealerships has been a larger focus you've heard me.

Really to talk about that on our last few earnings calls.

We still have a lot of room to grow.

Within the rooftops we already.

Working with ACP, we already have over a third of franchise dealers working with ACB, So that supply alone just from.

Any additional wallet share as a significant opportunity.

There are other areas of growth, but if I had to just pick a few.

I would say, adding more dealers and <unk>.

Focusing on wallet share would be the most significant.

Got it okay, great and then.

You've given the tight supply environment.

Volatility and declining prices et cetera, we've read there's been some kind of mix shifts that auction, meaning maybe more 10000 dollar cars are treating or 10000 and below but dealers are holding onto the 20 to $25000 of course, because we can't get them anyway.

Is that the case or what are you expecting I guess in terms of the mix add auction next year and how might that impact the P&L.

Hi, Bob.

We've seen our mix shift help from having sort of newer more recent vehicles are vehicles that are.

H three years and younger as an example, the one cohort has actually grown pretty significantly into from a percentage perspective. So.

I know that probably seems strange to say why why that would be but dealers are starting to get.

New supply starting to come back.

Used.

Aged is is still relatively low but starting to.

Go back towards normal.

And when you look at all the factors dealers holding onto the right cars vehicles that matches their specific.

<unk> mix of inventory sort of their sweet spot.

That's really what dealers always.

While we did prior to Covid from a priority for all of the sort of industry challenges. So look at it as a return to normal.

But yes, we are definitely growing.

Our share.

And with the newer vehicles in the marketplace.

Okay. That's great. Thank you so much.

Thanks, Bob.

Thank you Bob concludes moment with panel next question.

Next question comes from Michael Graham.

Of Canaccord. Your line is now open.

Hey, Thank you.

It's great to see some of these trends turn around.

I wanted to ask two questions. The first is as you mentioned share of wallet a couple of times as being an important factor.

This year and I, just wonder if you could outline.

Couple of the key success factors in sort of growing your share of wallet in your existing rooftops and then.

I just wanted to ask on the quarter Youre GMB declined around 29%, but auction revenue was only down three 5%. So just wondering if you could.

<unk> had some light on what was going on underneath the hood there in Q4. Thanks.

Yes, certainly.

I'll start there Michael and Bill can chime in on the on the auction revenue side.

So.

We're seeing.

Strength in mix as I mentioned before so that's actually held flat in a moving forward basis <unk> Bill.

But why don't you actually go first and then I'll chime in.

Hey, Michael so.

Youre right our <unk> per unit did go down pretty substantially but actually our <unk> increased 5% for example quarter on quarter and most of that is essentially attributable to the price increase on <unk> that we pass through in October if you remember.

And that more than offset any reduction in <unk> per unit.

The same dynamic would apply year on year as well so.

Yes.

<unk>.

I've really been able to mitigate.

Any decline in <unk> as a result.

And in fact for this year, we're expecting some modest further modest declines in G&A per unit at our <unk>, we expect to be flattish year on year, if we think about what's baked into our guidance as well.

And as far as wallet share that the types of things, we're doing to focus on growing wallet share one is having our inspectors show up to our existing customers more often so that's a pretty simple tactic second add more value.

Some of our product offerings for example driver Blake in for a few of our customers month. These are consumer acquisition tools as part of our go to market for these consumer acquisition tools as <unk>.

Asking the dealers form more share so think about it as we offer more value we're looking for more of your wholesale.

And a few other things like that to help us drive.

Both.

Our relationship and.

And opportunity with our customers.

Okay, great. Thanks, a lot guys.

Yeah.

Thank you one moment, while we prepared our next question.

Okay.

Our next question comes from John Comandante from Jefferies. Your line is now open.

Hey, guys. This is Ben.

Dan Carter on for John Thanks for taking my question.

How are you.

Great.

Competition heading into 'twenty three at a time when there is.

Maybe just a little bit less of the pie to be to be shared by the various physical and digital auction providers do too.

Depressed volumes in the industry.

And then as a related follow up I'd be curious to hear your thoughts on kind of what you view as <unk>.

The most important areas for the business to improve in order to extend your early lead over over some of the other digital players in the industry.

Yes, Sir.

When you think about competition.

Competition I think.

What youll see is we likely extended our lead in digital.

Compare us to others in the industry.

But as we all know.

The largest share is still in the physical auction. So moving more to digital is sort of a key part of our focus.

Over the next few years and when.

And when you look at all the various capabilities, we're bringing to the market.

One of which is AC private marketplace. It helps large dealer groups.

Trade vehicles within a group. That's an example of ACB, adding more value those cars first trade before it goes out into an open marketplace.

That's one example of a product offering that.

Outside of our open marketplace, that's helping us gain share our newer products like <unk>, a month and how we're going to go to market. Later this year and early next year with Max are all offerings.

We are looking from our market share from the wholesale side as well, so we're bringing a broader approach.

And a broader partnership to our dealer partners that helps us differentiate.

From just a traditional auction company.

Thanks George.

Certainly.

Any other questions.

Alright. Thanks.

Certainly thank you.

Yes.

Operator, our next question comes from Rajat Gupta a J.

P. Morgan your line is now open.

Alright.

Hi, Thanks for taking the question.

Just had a question on the Opex guidance no.

I think it implies 5% year over year.

During the concert revenue.

Q curious like what.

Warning.

What does the governed by.

Because I mean, you haven't given us a breakup of the wall of the revenue target in terms of volumes versus pricing. So I'm just curious.

What's driving that Opex increase.

Is it more a function of the wall here or do you feel like you have more cushion on the investing because pricing is stronger.

I was just curious if you could elaborate on that.

Follow up thanks, Yes, Hey, Rajat, it's bill so.

There are a few drivers.

Opex growth so keep in mind that our Opex, which includes marketplace operations includes our inspectors.

And we are actually we are starting this quarter growing our inspector footprint.

Based on aligning that capacity with with volume so that flows through opex.

On our P&L.

And as you know that's an important driver to support our growth.

That would be that would be one area.

The other area is.

Some other investments that we're making on the go to market side.

Terms of Carlos also supporting our growth.

In terms of sales folks supporting major accounts.

More kind of go to market investments at ACD capital to support the growth there as well, even though that growth.

It's going to be a little more meters than it was last year.

And.

Just in general if you look at our overall growth that we've modeled for the business. This year, we want to make sure we have the resources.

Baked into our financial model.

Model to support it so.

We've demonstrated so far in the past, especially last year, especially last quarter that we've been pretty disciplined. So you wouldn't expect that we would be making any.

Decisions in terms of Opex, unless there's a really strong basis in terms of supporting volume or return on investment.

Hopefully that answers your question.

Got it that's.

That's helpful, but any way to frame in terms of now.

The in spectrum growth versus volume growth kind of equation.

Any way to size that like what kind of volume growth requires what kind of and spectrum growth from the base you are at right now.

Yes, it's kind of hard to give you.

Our formula is good because it's not necessarily that precise and a lot of ways. We will we have to do is basically built capacity in advance of expected volume right. We can't just.

Generate.

Higher volumes in a territory and not have the capacity to support it.

So we basically through our Biz ops teams basically look at projected volume across all of our territories across the country.

We will make decisions as to where we selectively need to add capacity to it.

Sure we can support that volume so.

I can't give you.

A formula that you can apply necessarily to the model per se.

Hi.

Got it which I can give you more clarity than that but thats.

That's actually how we make those decisions.

Understood fair enough.

Maybe like you have a follow up I know you reiterated we are you officially reiterating the 2026 targets or is that more of a placeholder from.

Now from the analyst day.

Youre going to like 35 million EBITDA loss.

2023.

That <unk> to 325 and three years.

Thanks, Mike.

Is that is that we pretty much sell intact or are we going to get an update on that at some point to share.

Just if you could clarify that thank you.

Yes.

In our prepared remarks today, we are reiterating those targets, we haven't changed those targets.

At our analyst day on June 1st we will be doing a deep dive in terms of the different parts of the model.

How the how the model has evolved from our analyst day last year in terms of how we hit those targets. So.

That'll be a very big part of our analyst day on June one.

Understood great.

Thanks for taking the questions.

Okay. Thanks, Rob.

Thank you one moment, while we prepare our next question.

Okay.

Our next question comes from Nick Jones from JMP Securities. Your line is now open.

Great. Thanks for taking the questions two if I can sneak in here.

I think George you mentioned there was about a third of franchise dealers on the platform. How do you think about any limiting factors or kind of sophistication levels required by like to kind of double that number over time as you gain more share and then when you go and try to build wallet share within dealers kind of whats limiting their desire to kind of organic.

Add more units our wholesale units to the platform.

Kind of.

Stopping them from kind of organically doing that thanks.

Yeah.

And when I think about.

The.

What's the limit I mean, I don't I don't really put a limit on how many dealers could be working with us.

Do you happen to.

Think about it.

How could we for example double.

And today, it's really about dealers feeling.

Good about moving their wholesale operation online person foremost.

If it's going to move online from a physical auction then im feeling more comfortable.

<unk> is also the winning twice there and you've seen so far compared to other digital competitors.

Ben the preferred partner.

As it relates additional so I think it's just a matter of time and it really the second your second question is I think related in that.

We have significant wallet share on customers that we've been working with for three or four years.

I mean very significant wall share.

And customers that at all.

Aren't new to the platform aren't new to digital.

So to us it's really just a matter of time.

These other value added services were providing will also be helpful. Because what it does as you start to have a relationship with.

With the dealer principals or the.

Most senior level executives in the dealer group not just the <unk>.

Local decision maker for that specific rooftop.

So think about this as a two.

Twofold way for us to increase wallet share one just the inertia of time approving a digital in HCV are the right ways for you to dispose of your wholesale and second to be a broader partner for the dealership, which gives you an edge over the other competitors we have in the marketplace.

Great. Thanks George.

Fair enough. Thank you.

Thank you one moment while arena next question these days.

Okay.

Our next question is from Dan umbrella from Stephens.

Your line is now open.

Yes, hi, good afternoon. Good afternoon, guys. Thanks, taking my questions.

Bill I wanted to start with more of a financial question I guess, given the knowledge that impact your costs go into Opex, just looking at the <unk>.

Marketplace gross margin line, we saw some nice leverage in <unk>. Despite a year over year decline in volume I guess is it fair to assume this year, we should get even further leverage as volumes begin to pick back up and you lever some of those fixed costs or what are the incremental investments that might be needed that could limit that leverage of volume and Bruce.

Yeah, Hey, Daniel so.

As you know we don't guide to.

Cost of revenues slash.

Revenue margins, but we are assuming in our modeling that we do continue to improve our margin profile.

And we were able to drive our cost of revenue down.

Down somewhat.

As we kind of get back more into a growth mode here.

So.

But I would say that we've already made a lot of the investments that are going to drive that we'll continue to make new investments that will help us maybe towards the latter part of this year going into next year as we think about hitting our target model, which we'll talk about more at our analyst day in June .

But.

For sure where I mean, we've kind of demonstrated a pretty pretty significant improvement.

And our margin profile.

Especially this quarter. If you think about your year on year were up over 400 basis points in terms of cost of revenue being down and we had a nice quarter on quarter improvement as well. So I'm not sure I would assume that we're going to be able to kind of maintain that kind of year on year improvement.

In 'twenty three but certainly we're assuming that there is there is kind of.

Hello Youll.

Move met upstream in terms of the margin profile as we get more and more efficient scale certainly helps.

I think all the investments that we continue to make.

Yes.

We demonstrated we have some pricing power as well.

That's certainly the.

Another factor in improving margins, we've talked about transport extensively our capital business will continue to grow and Thats a high margin business. So it's all those factors combined.

Got it that's helpful and then George maybe one more on the strategic thing thinking about the innovation pillar of growth you talked about last year apex <unk> gain some share I think in the slide deck you called out co pilot and are barred neutrals can you just provide more color. What are these tools add to your portfolio or offering that you don't.

Have today and then how does that compare when I think about when we think about the larger incumbent players.

The Omnichannel players today do they have similar tools are these truly incremental to the wholesale channel and how do you think about that going forward and deliver innovation.

Yeah, Hey, Daniel Great question Ted.

These are differentiated technologies.

And.

To put it in simple terms.

Youre about to inspect the vehicle.

And let's say that specific vehicle had.

Transmission issues.

80% of the time.

Well incentive.

Every one of our inspectors.

Becoming an expert after let's say four years and doing thousands of infections.

Every single Inspector becomes an expert before they inspect that one given vehicle.

If you look at last year alone, we inspected 1 million cars.

So the data mode that we're harnessing is really incredible.

We don't really believe there's anyone in the world.

Who is listening to us any vehicles.

<unk> vibration issues and other types of issues, where there is new technology. We've just recently launched.

The way we are harnessing our data.

And the way we're structuring our data allows us to first and foremost moderate our arbitration costs over time.

That would be that would be the benefit we'll see in our financial statement over the next few years not all at once but I think about a little bit small benefits over time.

And number two is buyers gained more confidence because they are.

They're having less arbitration issues creates higher buyer satisfaction and.

And three as these technologies could be used outside of the auction marketplace in a matter of fact.

That's probably the most frequently asked thing from dealers and this past <unk> show.

With dealers asking us to tweak our product roadmap this year because they want to use this technology outside of the auction it meaning when they're having the cars come into their own.

Sure.

The retail or wholesale so yes, I think great question.

The more we invest in technology.

The more differentiation more value, we're providing to dealers across the market.

And if I can tack on a follow on I guess, how is the hiring ability for inspectors that Amin technicians across auto work in various work, but is it more difficult to find people to do anything sectors. I think my Bill's answer earlier needing more inspectors to fuel growth just trying to think about how available is that labor and as that loosening up at all yet.

I would say, 80% 90% of the country are hiring has not changed at all.

Really our days to fill a role.

<unk> has been very strong now keeping in mind, we're not hiring as many inspectors.

Per month as we were.

About a year ago so.

Our number of inspectors growth because we do have a nice size today of over 800 and factors that's a nice size across the country, but the simple answer would be we're not having a difficult time.

We don't we're not looking for as much of that mechanical background. As you mentioned from a true mechanic. So we can do a lot of training and then to your first question about the validity of this investment making under tools. It helps take someone with a car background, but not a full mechanical background and turn them into a great <unk>.

Her into a great inspector.

Great. Thanks for all the color and best of luck guys.

Thank you Daniel.

One loan widening our next question this stage.

Our next question is Ron Josey from Citi. Your line is now open.

Great. Thanks for taking the question queue. Please I just wanted to follow up maybe George and bill around the drivers for conversion rates improvements.

I think going forward for this year I think I heard you say enhancing programmatic capabilities coming up this year. If you could just provide more details on what can drive conversion rates higher that would be helpful. And then and then George as a follow up to your point, just there and using the data outside of the marketplace I mean since really.

Getting to know you before Igl, it's all been all about the data and being able to leverage that and so how how closer we had actually being able to do that that given that dealers are asking for the product is this something that might be viable here in the next couple of years. Thank you guys.

Yes, certainly Ron so we're.

We're not in.

We're not assuming conversion rates.

Improved much more than they are today across the.

The back half of this year, so I just want to make sure.

Conversion rates are out there pretty strong.

So if we don't we don't see need significant improvement in conversion rates this year.

Maybe to answer your question more directly it would be that the why is last year.

We saw this radical price depreciation, which really affected the marketplace for wholesale very significantly we saw conversion rates go down below the sort of traditional levels.

We think this year, we're going to see more stabilization, even with used car values this quarter being relatively strong in let's say towards the end of the year that we're expecting them to go down.

But I think we will see this moderated depreciation these cars were still not going to see a ton of supply back all at once.

So think about.

The market is sort of <unk>.

Living with the current environment, better and trying to figure out a way to describe it but we've kind of.

We're really at that sort of stabilization point, where dealers understand there will be values will go down.

Conversion rates are are are strong.

I would say.

Where we're really in an effective market right now.

Did you have another question trying to remember.

That's super helpful. Yeah, I was just following up on your comment about using the data corpus that you Hello, right given the Merrill Lynch. Thank you.

So on the data side.

We're.

We're trying not to boast too much but I think we're building one of the broadest AI capabilities. There is an automotive at this time.

And it really ranges from imagery, our monarch acquisition was a fantastic acquisition.

We're really still in the early days. So this isn't affecting our revenue our costs have materially this year, but the technology is extraordinary the AI coming from our R&D team on everything from.

Looking at.

A windshield and whether or not.

Glass has been broke into scanning.

The undercarriage and see if a catalytic converters missing or listening to an engine and be able to detect.

A high percentage of time think like almost 90% of time to get attacked and engine issue just listened to the engine all of that machine learning and AI is really creating.

An incredible moat for us and yes dealers are asking for these tools.

For their own use cases.

We're just not ready at this moment.

We've got some work to do to.

Take those capabilities and turn them on to show that it can be their own SaaS services and we're brainstorming on how we would do that I would say, maybe we can get some of this to market by late this year early next year, we're trying to obviously.

Be careful about adding too many goals and objectives, focusing first and foremost on the marketplace objectives. We've laid out for you. All how we also don't want to increase head count significantly this year as Bill mentioned, we're really moderating our head count but.

We'll come we'll deliver some of these key objectives I think late this year early next year.

And I think that'll be fine I don't think there is a need for us to move any faster. If these are very sort of <unk>.

<unk> differentiated capabilities not only in there.

And what they provide for the dealer, but the cost because these devices are very low cost for us. So there are other technologies out there that dealers could go out there and license with a cost per lot per rooftop. So yeah. We've got some great.

Some great opportunities in the future to add even more.

A broader relationship with these dealers.

Would look towards sort of.

Early next year, and we'll probably talk about more of this.

On our Investor day, and maybe be a little bit more specific then on being today.

Great. Thank you George.

Certainly thank you.

Thank you one moment, while preparing the next question.

Our next question comes from Gary Kessler P&L.

From Barrington.

Research Your line is now open.

Good evening, everyone, Hey, George it looks like according to the data that I have that your dealer penetration somewhat accelerated in Q4.

I think I had it at 33% in Q3 up to 40 in Q4.

What accounts for that Youre more feet on the street.

Or just what would account for that acceleration.

Gary I don't have a specific reason.

Beyond I would say at any one quarter you do see us if you look back in time, there has been quarters, we've had a little higher or.

You know.

But I think pretty consistent.

Talk about HCV across if you look at it across a year, we've really had this pretty consistent growth in both dealerships consistent share of wallet share price you really can't point to one thing in Q4, it would have to be probably all of these things coming together. This broad value added services moat that we're building around what we're doing.

But I don't have anything on top of my head right now to point. The one reason why we accelerated growth in Q4.

Thank you.

No. Thank you Gary.

But with.

We've done okay sounds good.

Is that your last question here.

That is my last question.

I would now like to turn it back to Tim Fox.

Vice President of Investor Relations for closing remarks.

Great. Thanks, Joe So I'd like to thank everybody for joining us today on the call.

Note that we are going to be participating in Jmp's Tech conference in San Francisco on March seven and as Bill mentioned and George mentioned, we'll be hosting our 2023 analyst day on June <unk> in New York registration details can be found in either the press release or on our IR website.

Look forward to seeing you on the road hopefully in the next few months and thank you again for your interest in HCV and have a great evening.

Thank you for your partner.

In today's conference. This does conclude the program you may now disconnect.

Okay.

The conference will begin shortly.

Lower Johan during Q&A, you can dial star one one.

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