Q2 2023 ACV Auctions Inc Earnings Call
Yeah.
Good day, and thank you for standing by.
I'll come to the a C D. A second quarter 2023 earnings call.
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I would now like to hand, the conference over to your Speaker today, Tim Fox Vice President of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and thank you for joining <unk> conference call to discuss our second quarter 2023 financial results.
With me on the call today are George from Allen, 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 involve factors that could cause actual results to differ materially from those expressed or implied by such statements.
A discussion of the risks and uncertainties related to our business can be found in our SEC filings and in today's press release, both of which can be found on our Investor Relations website.
During this call we will discuss both GAAP and non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP financial measures is provided in today's earnings materials, which can also be found on our investor Relations website.
And with that let me turn the call over to George.
Thanks, Tim Good afternoon, everyone and thank you for joining us.
We are very pleased with ACD continued momentum in the second quarter.
Another record breaking quarter in revenue once again exceeded the high end of guidance.
Reflecting strong execution by the team as we continued to gain market share.
Demand for ACB transport and EQT capital was very strong.
Which contributed to both revenue growth and revenue margin expansion versus Q2 2022.
And our continued focus on driving profitable growth resulted in adjusted EBITDA also exceeding guidance.
Highlighting the leverage in our model.
With that let's turn to a brief recap of the quarter on slide four.
Second quarter revenue of $124 million was $4 million above the high end of guidance.
Resulting in 8% growth year over year.
<unk> of $2 5 billion declined 10% year over year, reflecting continued moderation of wholesale market prices.
Despite this price moderation ARPA increased year over year, reflecting our price increase from last fall.
We sold 153000 vehicles on our marketplace.
The sequential increase from strong results in Q1 and growth of 3% year over year.
Year over year unit growth benefited from an increase in conversion rate, which benefited from a range of data enabled marketplace innovation focused on enhancing dealer engagement.
On slide five.
I will again frame the rest of today's discussion around the three pillars of our strategy to maximize long term shareholder value.
Growth innovation and scale.
I'll begin with growth.
On slide seven.
I'll begin by sharing observations about the broader automotive market as context for the trends we are seeing in the dealer wholesale market.
In Q2 light vehicle retail volumes increased 2% quarter over quarter and.
And increased 17% year over year from depressed levels.
Star is still running about 10% below pre pandemic levels.
Inventories are slowly building, which.
Which is key to supporting the recovery to retail sales.
Used vehicle retail sales were flat quarter over quarter and year over year.
As affordability issues continue to impact consumer demand.
In fact used retail volumes were about 15% below 2019, and the first half of this year.
Combined new and used retail unit increased about 6% year over year, which is a positive sign for supply into the wholesale market.
As we expected.
Wholesale prices and conversion rates declined quarter over quarter from seasonally high levels in Q1.
However, we believe prices will follow a more normalized depreciation curve this year and conversion rate will also follow normal seasonal patterns.
On balance.
We continue to believe the end market conditions continue to show early signs of improvement.
Giving us confidence to again raise guidance for the year, which bill will take you through later.
Turning now to slide eight.
We estimate that the U S dealer wholesale market remained well below normalized volumes in Q2.
But were in line with the seasonally strong first quarter.
We remain confident that the market continues to recover our growth will benefit from both market expansion and market share gains.
In Q2, given our 3% year over year unit growth.
And an estimated market contraction of 14%.
This implies the ACD grew market share by approximately 17%.
Next I would like to wrap up the growth section with highlights on our value added services.
First on slide nine.
The ACB transportation team delivered another strong quarter.
And it's scaling ahead of schedule.
Our strong carrier network and record cycle times resulted in attach rates, reaching the mid 50% range.
Our technology investment and dispatching and pricing optimize by AI are driving both growth and operating efficiencies.
These efficiencies resulted in revenue margins in the mid teens and increase of over 900 basis points year over year.
As we discussed at our recent analyst day, our 2026 financial targets assumed transport revenue margin in the high teens. So.
So we are squarely on track to achieve that objective.
Turning to slide 10.
Our ACB capital team also delivered strong results in Q2.
After achieving 10% attach rates for the first time in Q1.
ACI capital maintained this level in Q2, resulting in a 50% loan volume growth year over year.
And combined with very strong ARPA expansion delivered over 110% revenue growth.
Along with our core floor plan offerings, we are investing in new ACD capital products for our salad, enabling the emerging consumer to dealer market.
We remain confident ace III capital would be an important long term growth and profit driver.
Turning to the second element of our strategy.
Sure.
On slide 12, I'd like to highlight how we're leveraging innovation to drive growth and in this case, our improving conversion rates.
We have further expanded the rollout of our to our auction.
Complementing our traditional 20 minute live auction format.
And just a few short quarters, we are running over half of our auctions for two hours.
We're also testing new merchandising links for.
For a vehicle listings are segmented by a specific set of criteria to provide buyers with even more flexibility and searching for the right inventory.
Our mantra for continuous improvement extends to our hands vehicle display page that makes vehicle condition data easier to digest, enabling faster buying decisions for our dealer partners.
We are leveraging AI to enhance our inventory matching capabilities.
The feed alerts to dealers based on their historical buying patterns.
Lastly, we continue to innovate on our pricing engine, which is powered by machine learning and Leverages, our industry, leading vehicle condition data along with a growing curated automotive datasets.
The goal here is to provide dealers with holistic pricing guidance to drive even higher success rates on our marketplace.
The AC pricing and Jay now power, several ATV products, including ACD auctions market report.
Our clear car brand of consumer sourcing tools.
And upgrades, we're making to Max visual.
As I mentioned earlier, our conversion rate expanded over 150 basis points year over year.
And we believe innovation is a key element in driving these results.
On slide 13, we highlighted examples of tech investments that extend into our operations delivering customer success.
While reducing costs.
In this case arbitration costs.
As you know minimizing arbitration has been a key focus for both customer satisfaction and optimizing margins.
The key here is inspection accuracy.
Several innovations that are improving the inspection accuracy and efficiency our copilot.
Got it.
Apacs.
And our AI powered imaging apps.
Co pilot and our guard leverage machine learning predictive analytics and sensor data to inform our PCI and vehicles specific issues before and after conducting an infection.
Our next Gen collection device apacs deliver significantly higher transparency into vehicle operating initiatives, while also increasing inspection productivity for our <unk>.
Our imaging AI continues to improve.
Virtual lift increases accuracy by identifying specific condition by catalytic converters and Ross.
In Q2, these innovations helped drive an 8% reduction in arbitration costs year over year.
Which is great performance in the current market.
To wrap up on innovation I think you'll agree that our team is delivering industry, leading technology to our dealer partners and to our own operations.
We have an exciting roadmap of innovation to drive growth and scale.
And we look forward to sharing more next quarter.
With that let me hand 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 very pleased with our Q2 financial performance again, delivering record revenue above our guidance range with upside to adjusted EBITDA.
We also demonstrated the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q2 'twenty two.
Turning to slide 15, I'll begin with a recap of our second quarter results.
Revenue of $124 million was above the high end of our guidance range and grew 8% year over year.
Adjusted EBITDA loss of $4 million also beat our guidance range and adjusted EBITDA margin improved approximately 900 basis points versus Q2 'twenty to <unk>.
Administrating the attractive operating leverage in our model.
Next on slide 16, I will cover additional revenue details.
Auction on insurance revenue, which was 56% of total revenue increased 6% year over year.
Solid results in Q2 'twenty two.
This revenue performance reflects 3% year over year unit growth and auction and assurance <unk> of $453, which also grew 3% year over year.
As George mentioned earlier, despite a decline in <unk> per unit up 13% year over year, we were able to grow <unk> by 3%, reflecting our price increases last fall and we believe we still have pricing headroom going forward.
Marketplace services revenue, which was 37% of total revenue grew 12% year over year.
Results were driven by record revenue for both ACB transport at ACB capital.
Our SaaS and data service products comprise 7% of total revenue and grew 1% year over year.
As we discussed over the last few quarters, we are making significant improvements to the Max digital platform.
Taking a more measured approach to customer acquisition in the near term.
We're confident these improvements position Max for a reacceleration of growth entering 2024.
Turning now to slide 17, I will cover costs in the quarter.
Q2 cost of revenue as a percentage of revenue decreased approximately 480 basis points year over year.
The improvement was driven by both strong auction and assurance results.
<unk> transport.
As George mentioned, we delivered mid teens transport revenue margins in Q2.
Which is within striking distance of our 2026 targets.
We continue to focus on expense discipline, as we optimize and scale our business.
non-GAAP operating expense, excluding cost of revenue increased 2% year over year.
Versus 36% year over year growth the prior year.
This reflects the significant investments we made in prior years to support market expansion and technology initiatives.
Moving to slide 18, let me frame, our investment strategy and path to profitability.
Our focus on spending discipline and operating efficiency is expected to result in a material decrease in opex growth this year.
<unk> in our adjusted EBITDA loss declining by over 50% year over year.
And as you've seen reflected in our Q2 results. We have accomplished this while preserving our go to market and technology investments to ensure <unk> is in a strong position as market conditions improve.
Next I will highlight our strong capital structure on slide 19.
We ended Q2 with $500 million in cash and equivalents and marketable securities.
And $105 million of long term debt to finance the growth of ACD capital.
Note that our Q2 cash balance includes $168 million of flow and our auction business.
As we've discussed previously the amount of float on our balance sheet can fluctuate meaningfully based on the business trends in the final two weeks of each quarter.
It has a corresponding impact on operating cash flow.
For the first half of 2023 cash flow from operations was $23 million or.
A significant improvement from the $73 million loss in the first half of 2022.
Now I will turn to guidance on slide 20.
For the third quarter of 2023, we're expecting revenue in the range of $115 million to $119 million.
Adjusted EBITDA is expected to be a loss in the range of $8 million to $10 million.
For the full year 2023, we are raising our expected revenue to a range of $474 million to $482 million.
Representing growth of 12% to 14% year over year.
We are also reducing our expected adjusted EBITDA loss to a range of $23 million to $27 million and we remain committed to achieving adjusted EBITDA breakeven exiting this year.
As it relates to our guidance, we are assuming that new and used vehicle supply has remained lower than historical levels in the near term that improve as production and inventory continue to recover.
We're also assuming that conversion rates follow normal seasonal patterns in the second half of the year and wholesale price depreciation continues.
Let me wrap up on slide 21 by reviewing our 2026 financial targets.
We are very pleased with our execution in a challenging macro environment and remain confident of our ability to achieve $1 3 billion of revenue and $325 million of adjusted EBITDA in 2026 with 25% adjusted EBITDA margin.
As we detailed at our analyst day in June our confidence is reinforced by a number of factors including.
Strong dealer penetration and increased wallet share, resulting a sustained market share gains.
Opportunities to expand our tam into adjacent markets, including commercial wholesale.
Our broad technology platform, enabling long term growth and operating efficiency.
Consistent improvement in revenue margins, and our commitment to balancing growth and investment 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 that our strong execution in the second quarter.
And we are especially proud of our ACB teammates to deliver these results.
We continue to gain market share by attracting new dealer and commercial partners for our marketplace and by gaining wallet share, which positions <unk> for attractive growth as market conditions improve.
We are executing our territory penetration plan and gaining traction and expanding suite of offerings.
We are delivering an exciting product roadmap to further differentiate ACB and expand our addressable market.
We are on track to achieve our near term adjusted EBIT target.
And over the medium term generate over $1 billion in revenue with attractive margins and 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 ill turn the call over to the operator to begin the Q&A.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Our first question comes from the line of Michael Graham with Canaccord.
Hi can you hear me okay.
We can get good morning, Michael Okay. Good. Thanks, I just wanted to thanks for the question and congrats on the execution I just wanted to ask.
Macro question on the environment for dealer wholesale you mentioned new car sales are sort of picking up.
Inventory levels are getting more healthy, which helps prime the pump for the used market, but also that we're still facing this period of high prices for used retail I just wanted to kind of ask where you think we are on that curve of <unk>.
Marching towards normalcy in the used market and how long do you think it takes to get there if the if the new vehicle market.
<unk>, it's sort of a positive trend.
Yeah, Hey, Michael.
Again, thanks for the question.
Yes.
We talked quite a bit about this on our investor and analyst day.
<unk>.
One is that we talked about really the steps that all take place in sort of that return to normal market conditions.
One being new car production in new car sales starting to come back to tore.
It's normal.
Sure.
Seeing great progress there so very very excited to see that.
Even with this sort of all.
The thoughts of the concerns around the economy consumers are buying new cars. They are excited about these new cars. So all these great products coming out.
Oems are putting incentives are starting to put incentives around these new cars. So step number one has been seen new car production comeback and that that is starting to happen.
An important part.
We're also starting to see used car values start to come down.
That's important because if you could buy you don't want to buy a used car new car used car has to be of lower value than that said new car and with that also it will help once interest rates also come down to those used cars, so think new car sales.
Right direction, we'd like to see used car volume and sales.
Come back a little bit more significantly and it will also start to see used cars start to add offline dealers lots.
Over the next couple.
When you think about in that path of normalcy. So I really have said the same thing I, probably said on Ana.
On the Investor Analyst day, but.
We are these are all positive signs. We also side. This year, we thought would be the trough where.
And that was all part of our forecasting for the year part of our.
Our expectations.
We will start to see next year be the year, where we'll start to get back towards normal.
And then between now and 2026, we're thinking by 2020 things are normal.
But this year being the trough and it starts to come back from that.
Okay. Thank you George.
Yes sure. Thanks, Mike Thanks, Mike.
Yes.
Yes.
Our next question comes from the line of Nick Jones with JMP Securities.
Alright, thanks for.
Taking the question.
I guess one.
Some of your expectations around depreciation for the rest of the year I guess, what gives you confidence that kind of the trajectory of.
Unit depreciation and then I guess.
Mario Weathers.
More volatility do you feel dealers are better prepared.
Up to bid on cars that are more volatile than maybe.
Result in less arbitration, if things do get more volatile.
Yes, Nick Thanks for the question, yes, we.
We do have as part of our.
Planning for the year, we do have used car values going down and we feel very comfortable but bill can chime in tomorrow, if I don't answer completely but we feel very good about how we've modeled.
Used car values.
Declining and what that means from Maverick GMB. So so one I would say we feel good about it but then I think the flip side to your question do I think it's a great question is what does this all mean for dealers.
At the end of the day.
They've got together a number on a trade.
And consumers walking and they've got this trade of a vehicle, let's say, it's got 80000 miles or whatever how many miles are on it and they've got to put in a new number on this and that number will be going down throughout the year, we're helping by providing great data.
To that to the dealers.
Real time data not just the old way. The books were done that were just based on averages over many months. This is really a real time data, we've got AI powering our data.
And helping those dealers with their pricing.
More and more dealers out there are starting to use the ACB market report.
Trying to get our data into more places to help dealers and consumers understand that the new value for that trade Anthony price it right Nick.
They want to have a hard time selling in the wholesale market.
I still have priced it right today.
<unk> so the combination of our real time market data. How we then take the market data plus the condition assessment of that vehicle is a unique value.
We think helps dealers in that declining market.
And as long as that price right to the consumer they'll be fine.
And we are here to help them.
I think I'll just add a couple of points here so our guidance.
Assumes that.
<unk> come down double and double digits for the second half so we've baked that into our assumptions.
I would also add that you'll notice that we actually.
So on a marketplace that increase in <unk> per unit in Q2 versus Q1.
And that was attributable to an improvement in mix.
On our marketplace. So we're not assuming that though going forward. We are assuming there is a steady decline.
In the second half.
Really helpful. Thanks, George Thanks Bill.
Thank you.
Our next question comes from the line of Eric Sheridan with Goldman Sachs.
Thank you so much for taking the question I want to come back to two themes from the analyst day that you touched upon in your prepared remarks today can you talk a little bit about conversion longer term, you've opened up sort of a gap vis vis the industry and what I understand what you see is key to either maintaining that gap or even widening is.
We've talked about over the medium to long term when you think about conversion and then also pricing you took price last year.
Any updated thoughts on <unk>.
Elasticity over the long term in terms of platform pricing and maybe those two concepts are sort of broadly.
And to each other but just wanted to get any updated longer term bottlenecks.
Yes, Thanks, Eric.
We spend a lot of our resources focused on conversion and focus on helping both sellers and buyers and just to remind ourselves as both the benefits the seller and the buyer to get conversion rates sellers, because I would say, they're selling more of their inventory.
Quicker faster and buyers because they're not wasting their time bidding on cars that don't have health selling so beyond the model itself, it's really important for the end customers.
On the seller side, it's several things so you've been hearing us talk about auction format. You in here I was talking about this conceptually different lanes that were different vehicles are selling in different ways, we're investing quite a bit on this mine.
<unk> trials, one size doesn't fit all and each vehicle should be sort of merchandise the right way.
There is talk about that more and more over the next sort of six to nine months.
We've been putting a little out there at a time as we are building, but we've got a pretty significant effort on our merchandising strategy.
And.
We head into and then I really talk about it more went south boiler.
More to come on merchandising, but that's one key thing so think merchandising it making sure buyers see the vehicle right.
That just came up for 20 minutes. It wasn't seen in we've got a pretty significant effort.
A lot on AI and matching this merchandising to the buyer. So we've got all this rich data we've got.
All of these buyers signed up around the country.
And really matching salaries salaries and buyers. So we've got a tremendous effort on matching so some significant.
Technology and other resources there.
We are spending.
Then broadly when you think about taking the friction out you want to make sure buyers are bidding on the right cars for them. So if it's a higher risk ask Scott are lower risk, meaning more issues are less issues on that given vehicle the condition report and other data.
From that you get from that vehicle helps you create that magic. So long winded answer to a quite a bit on the us working on improving condition rates.
This is never done.
We can be on this call 10 years from now we will talk about how we're investing.
And globally matching up sellers and buyers right because you're really working on this connection.
If you have any given asset making sure it's going to the from the from a salary to the right buyer.
Price.
And really.
I don't think we could talk too much about that today, but I will say that we've said that we've got more room.
And in a way to think about that room is how you straddle pricing with value.
Meaning in our base offering today, we give buyers quite a bit of assurance.
So you can't compare at tit for tat to our competitors' pricing buyers get a certain level of assurance and then in addition, we will start to offer some other buyer assurance initiatives, we have one product out there today, we will be launching more so.
You'll hear us talk more about that towards the end of the year, but for today I will say that we do have some more room.
Eric and probably more to come on that topic.
Really appreciate all the color George Thank you.
Thank you thanks.
Okay.
Okay, operator, we're ready for the next question.
Our next question comes from the line of John Collins <unk> with Jefferies.
Thanks for taking my questions I Hope I didn't just break the system right there.
Blame you John .
Starting with the first wanted to start with guidance. So your outlook calls for a sequential acceleration in revenue growth. The next couple of quarters can you just break down your expectations for marketplace and assurance services and data.
And specific to marketplace, an inch and assurance what's embedded in your outlook in terms of conversion rates and listings and what are the sort of the key factors that can drive a delta relative to your expectations and then next question just quickly on gross margins.
For auction and sorry transportation capital other services, they moderated a little bit sequentially and I think thats. The first time, they've moderated sequentially in two years and so maybe just talk a little bit about what drove that sequential moderation and then related to that talk about.
The opportunities to continue to drive the attachment rate for ACB capital higher overtime I know there is a lot of them there sorry about that.
Hey, John It's Bill So let me let me answer the second question first.
So what we saw in Q2 was yet another.
Improvement in our transport margins quarter on quarter.
Which we just continue to execute at a very.
Were really high level in terms of our transport business. So.
We're pretty happy with that so that was certainly part of it also on the capital side.
Keep in mind in an increasing interest rate environment, we're passing through those those rate increases to our customers.
So.
I would expect all of our competitors are doing as well.
That's.
A tailwind also in terms of margins. So those are the two dynamics.
With respect to marketplace services.
Okay.
In terms of our guidance.
So what I would tell you is we're assuming that we continue to gain share.
This past quarter based on our math, we gained 17, we gained share at the rate of 17% for Q2, which seems to be kind of the zone that we've been in for the last several quarters. So we are certainly extrapolating continued share gains.
Obviously in the second half there is a seasonality factor as well, but there are a number of other initiatives that we just continue to drive internally that we think will allow us to execute at the level that we've baked into our guidance.
That's probably all we would say at this point I don't know if there's anything you want to add George.
No.
We see a favorable compare.
So to state the obvious.
Yes.
Where we're happy with the execution and the end of the year just assumes we just keep executing the way we bet.
Thanks for the detail appreciate it.
Sure. Thanks, Sean.
Our next question comes from the line of Nevada, Kang with B Riley.
Yeah, Hi, Thanks, a lot.
George maybe.
Heard you correct.
Wanted to clarify this did.
Did you say that half of the auctions that are ending for up to two hours.
Yes.
Is that right and what are you hearing from dealers on that format looks like in <unk> any color. There would be helpful. And then anything you can share with respect to dealer count on the platform as it is it stable or that growing what are you seeing on that front.
Yes.
So yes, you heard correctly on the two hours so.
<unk>.
We primarily offer that to our auction through our.
Sellers with higher conversion rate so that.
If we are in a way to think about it's almost like offering them real estate more time on the platform.
We primarily give it today to R. R.
Our.
Top producing sellers.
And also some to our new sellers, who are also showing some some good signs.
Okay.
Dealers sellers typically love it.
Some buyers love at some hires down.
There is.
Like anything.
A little bit.
Everyone's got their own sort of favorite way.
To approach things, we keep making tweaks a matter of fact, I think we have some rollout happening not to get into the weeds, but even this week and next week I am buyers to be able to pick and choose when they get their notification and Mike they could get the notification downturn, if they only want the notification within 20 minutes no change for them things like that.
So high level, taking it back a step look at it.
The Asia Europe .
You're you're matching buyers and sellers it is helping with conversion that's helping us outpace what's happening in the industry and then Youre never done. So whatever features that we have out there right now it just happens to do with live at this point and the team is working away to get more controls to sellers and to buyers so that each one.
Loves what we are doing well.
We will just keep iterating.
Got it and then on the dealer count any any color or commentary, yes dealer account, we only really talk about that once a year, it's not something we do quarterly but generally we're doing.
We're pretty consistent company.
Youre seeing its quarter over quarter, and whatnot are gains being pretty consistent so I would say consistent.
Alright. Thank.
Thank you.
Thank you. Thank you.
Our next question comes from the line of Christopher Pierce with Needham.
Hey, good afternoon.
You touched on it.
New car sales, if you break down new car sales that we're seeing a lot of rental car fleets have you kind of taking your allocations from Oems I'm. Just curious you guys touched on rental car penetration at the analyst day, how does that kind of.
And I'm certainly not an expert here, but when theyre taking in cars.
Some deep leading I would assume.
Do you guys view that opportunity as that kind of an opportunity that's become more near term you might have thought because of the changes you've made and the allocation youre getting from Oems.
Yes definitely.
It's a new opportunity and the nice thing is it.
Historically, it's been very well I think a few hundred units a month right. So.
This is all in a way not new for us to grow into the sector.
The nice thing when you look at the broad commercial Tam that I've mentioned to you all at some commercial need land. Some commercial doesn't as we scale rental would be an example, where we can gain units across the country, even where we don't have land.
Sure.
So that's one of the nice elements of the rental.
Now that <unk> is still very low so it's nice to see it starting to go up.
I think really high level that will be giving you exact numbers. We will go from a few hundred units a month to a few thousand then it will become more and more substantial over time.
The answer the simple question is that part of the ecosystem.
Is starting to come back.
When I think about the industry coming back to normal between now and 2026 that one example of a part of the industry starting to trend the right direction, some low very low <unk>.
Very very low compared to historical deflating and wholesale volumes, but.
Okay, showing some positive signs.
Okay and then just lastly, you guys talked about revamping Max Max digital and putting it back out there early next year I'm just kind of curious what does the product when a deal is used to use it for and what are your kind of intending or what are you, hoping they'll use a corridor or is it just pricing data or is there more to it than 10 dumbing it down that much.
I'll try to say this in a way where it does not make a press release or news article because thats not happened till January February so tried to provide you a little color okay.
If you connect the dots here.
Max digital that we acquired <unk>.
Inherited helped dealers price inventory.
Both trades.
Sort of how they're going to price a trade and how theyre going to price their retail inventory better.
High level I'd also does some merchandising like he does merchandising around imaging and helps dealers put the right photos on the internet areas like that.
We are in the process of taking the ACD assets.
So think things like self inspection and some of the things you've heard us talk about.
Which help understand condition of a vehicle and how that relates to pricing.
And.
Yes, our objective is.
Think about like <unk> kind of like our Super Bowl event every year.
And we're hoping to get what we're done and the reason I keep saying end of this year. Early next year is because we want to show up with sort of this refreshed product okay.
It's sort of our own force timeline to have a little finding here and come out with this fresh this fresh view of this this product and how it is going to help dealers leverage is broader ACB dataset.
That allows them to do their own.
Self inspection the way I understand the value of these assets do a little bit more so yes, I think that's all teaser today I think I can give you a little bit more than I did at analyst day.
More to come between now and through early next year.
Okay. Thank you I appreciate it.
Thanks, Chris.
Our next question comes from the line of Ronald Josey with Citi.
Great. Thanks for taking the question can you hear me Okay, yes.
Yes, certainly Brian .
Great. Thanks, I wasn't sure if I was like so maybe George just a quick follow up to that understood. You don't want to say too much about what might be coming but I thought I heard you say on the call that more dealers are used to using or utilizing <unk> market data to set prices and improving the offering experienced so just can you tell us about what's what's available in the here and now as we think about.
What what might be coming down the pike.
And as you as we think about wallet share gains, which was a big part of the of the analyst day.
And we just heard earlier on just how friction is being reduced talk to us about how all these different tools can you just help the sales process and improve wallet shares overall and I have one quick follow up.
Okay great.
So Ron on your first question.
<unk>.
The HCV.
Pricing engine lives in several places.
So Max is just one of those places so within the auction.
Basically auctions as a market report, where while all year.
Bidding on a car you can go really deep and look at that market price waste. That's free that's dealers being able to go in as a value add to being NAC auctions customer helps that matching a little bit more the way it was maybe a little bit more oriented to the buyer versus seller.
It gives all of this transactional data and.
And pricing data.
Newer area that we just updated it was taking the pricing engine too.
Hey to get in the weeds here, but to launch scream align screen as on the seller side to helping the sellers decide what the price that asset that was a recent thing our team has been iterating on.
Alright, we have inspected this vehicles for you you thought it was a $25000 car now that we've inspected it looks like at the $23000 car you want to change your reserve price that was for an example, again that same pricing engine went from being helping buyers to now helping sellers a little bit more at that.
Part is also not in a subscription level like Max.
Whereas if you're going to Max digital Max digital broader I think about this as a broader image of our management tool, where it's not just helping you price it going into workflows is going and whether you are taking.
<unk> taken that car to trade and retail it or wholesale it so it's a broader use case.
Just what's the wholesale value.
So it's taking all those lessons learned and are priding aimed to a broader.
Platform.
So that was your first question.
Your second question.
Was around way I am sorry repeat your second question.
Well it was I think I think you sort of answers around wallet share gains and I think it's around wallet share gains overall.
Alright, perfect you had another one I go ahead.
And that one was unclear call just.
Mathematically at Analyst day, we didn't hear it we haven't heard about it so yes, so and to your point, that's the port there where the pricing engine go. So thank you probably finished ma'am.
So the same platform right. This pricing engine, we've been building its al.
Leveraging AI and machine learning to help us price vehicles.
We are we are really excited about where we're at.
We've quietly launched Sinclair car brand.
If this was the restaurant analogy I've given to some of you is.
We've launched you've launched the restaurant.
We havent, yet actually Don our Grand opening yet, okay, so you're sort of like getting it out to market.
Our objective is still to do okay. Claire cars here sort of press release and go to market. We do have several hundred dealers using clarifying.
We've got.
No.
Over the last couple of months we've got.
Healthy amount of new dealers signing up we're feeling really good about.
Clear car helps.
Dealers price the vehicle accurately with the with consumers who start their journey and their own driveline.
So you're at home you want to decide what is the value of your vehicle.
<unk> put a clear car on the dealer's website.
Or it can be its own website. This has like a wee by car type of thing so whether it's a dedicated webpage or within their dealer webpage. The consumer answers a few questions and then the new version also by leveraging.
Product month, we acquired consumer can go round take some pictures and we leverage AI to understand condition and from all of that we're putting a number on a vehicle.
And so we love what we're up to here dealers love It we're getting really positive signs.
Again, using the restaurant analogy you think like the Grand opening is coming soon.
We like to get these products out there in market kind of really see okay, where are we in scaling it before we do like all of the pricing and.
But we're really excited about what we're at but Youll see probably from Alice today now we now have a web site up there we've got some content up there, we're making our ways is.
It's similar to what I said before between now and the end of the year, we will get more aggressive.
Awesome. Thank you George.
Thanks, Ron.
Our next question comes from the line of Bob <unk> with CJS Securities.
Yes, Hi, good afternoon can you hear me, it's Pete Lucas for Bob.
Yes.
<unk>.
Hi, one of the biggest areas of focus has always been inspections, we've talked about that a bit in terms of the technology that you're looking to rollout, but can you tell us a little.
Expand on in terms of your 2026 numbers remind us of inspections for Dci.
And efficiency built into those 26 numbers.
Yeah, Hey, it's bill so.
So we are currently running around six inspections or so on average per inspector.
And as we've talked about in the past our best performing inspectors are roughly double that.
So we've got some of the spectra is obviously well below the average and less mature territories. So what we've assumed is certainly greater efficiency by 2026, but not on average at the maximum productivity of our best in spectrum today.
So assume high single digits up to 10.
<unk> a day on average by 2026.
So that Directionally is what we baked into our modeling.
Extremely helpful. And then just one more we know Youre always innovating and you talked a lot about that on the call, which was very helpful. But in terms of next up in the 26 calls is there anything you need to.
And is it a build versus buy strategy is there a missing piece or something we should be thinking about there to get to those goals.
I think on analyst day.
We felt like we really laid out the plan.
Both our expansion of our <unk>.
Our product vision.
This making the inspection better and better and.
Without giving everyone exactly were up two rigs you want to keep a little bit for our own patent protection legally keeping ourselves.
Protected on how things are building I think we really leaned in and said this is the future where we're really leveraging AI to help us with the vehicle condition and inspection and I think it's an area, where we're way ahead of the industry.
So I think so I think just more more subsequent continuing our path.
I think the only thing you have to believe there to answer. Your question is we believe in and keep executing like we've been.
Territory expansion, just keep growing the way we've been growing.
On the commercial side that would start to be a part of our Tam expansion. So that part we started to also lay out.
Yes look it's continuation of share gains.
And we quantify that.
Yes.
Leveraging some of our pricing power over time.
It's the market recovery bye.
By 2026.
And those are the those are the biggest drivers if you go back and look at the chart that we've put together breaking out the different revenue components.
Extremely helpful. Thanks, I'll jump back in the queue.
Yes, Thanks, Steve.
Our next question comes from the line of Daniel <unk> with Stephens.
Yes, Hey, good afternoon, everybody Danielle from Stephens.
One longer term question and then one follow up I want to start when we think about market share you've talked about some of the services and inspection you offer but liquidity is still really important long term share I guess are you still adding buyers to the platform I think the comment earlier with sellers are relatively consistent but how would you judge your liquidity at auction are stellar returns versus some of your large.
Omnichannel competitors out there.
Yeah, how are you.
<unk>.
We're executing I would say as planned we've got.
On the buyer side, we've got.
Pretty significant effort on our.
Bringing a new buyers.
Not to get into the weeds, but yes, we had.
Zinc two months a month ago, two months ago, a little internal record I think we haven't seen in many many many months, which is like the most amount of new buyers sign up in one month, we were all clapping garin resolve we're pretty psyched about it.
So new buyers are coming on board, even though there was a little record broken internally I would say consistent consistent new buyer.
Acquisition retention has been I would say consistent.
So.
Really no change.
We're bringing on sellers and buyers there are some parts of the country, where we don't have enough supply to really get the demand, which is no different than what I've been telling you. Many of you all for less.
For all six seven years are those last couple of years right. Yes, you can bring more demand up in certain regions as you get more supply there is a little bit of matchmaking.
In that regard.
So I.
I guess I would use the word consistent we've been consistently adding on sellers and buyers.
Great. That's helpful. And then Bill maybe quick clarifier to John's question earlier industry conversion rates have picked up the last three or four weeks is that what's baked into the guidance and then I didn't see any comment on kind of your previous expectation to exit this year at a positive EBITDA run rate could you just discussed.
Discuss those two pieces of the outlook.
Sure.
Yes, so we are assuming conversion rates to moderate in the second half because and Thats just based on seasonality Daniel so.
I would say nothing out of the out of the ordinary there.
We did have another good quarter in Q2 in terms of conversion rates. It was it was down from Q1, but Q1 was well above historical norms. So let's say our conversion rates are are doing pretty well and what we've talked about previously is that we expect the year.
To have conversion rates that are consistent with kind.
Kind of historic historical normal pre Covid, which is the mid fifties right. So.
So that's all that's all baked in and.
There are a number of things that we're doing we talked about the two hour auctions.
Things of that sort to try to continue to drive conversion rates up from where they are and so we're pretty happy so far with the results we're seeing.
Okay.
Amit.
Yes, I believe in my prepared remarks, I reiterated that we are we continue to reiterate our commitment to exit this year at EBITDA breakeven.
Great and sorry to cut you off George was there something else Youre Ed Yes.
And just when you look at some of these.
External things that say about conversion rates going up versus us, saying, we think we'll be your typical seasonal patterns.
A lot of that data Youre seeing was from let's say less X weeks, we have to obviously have a tough to understand what could happen between now and the end of the year. So just to separate those two things. That's why it's always just prudent for us to say follow seasonal patterns Thats, a prudent way to go.
It makes sense I appreciate the color guys best of luck. Thank you. Thank you.
Our next question comes from the line of Rajat Gupta with Jpmorgan.
Okay.
Good.
Yes.
Okay, great. Thanks.
Thanks for taking the question just a couple of quick ones.
Great.
Customer showrooms.
The gross margins was lower sequentially.
Was there anything to flag.
Over there.
When you pick up an arbitration costs I know you talk about the year over year improvements.
Just in terms of inspection already but just curious like was there anything to flag.
Current quarter expenses likely the margins there came a little lower than what we had expected.
And then a follow up on Opex.
It was really nice to see Opex actually moved down sequentially in the seasonally better quarter.
The guidance continues to call quite a pickup in the second half versus the first half.
In a seasonally light second half.
Can you clarify what's going on there or just preparing for next year.
Any other color you could add thanks.
Okay, I'm trying to keep track of all the different parts of your question. So let me. Please so the first one was on margins for customer assurance.
If you remember in Q1, we talked about the <unk>.
Great performance, we had on the arbitration front, which drove.
Overall, our blended gross margins at 50% in Q1, obviously right.
We did say that we expected that Q2, our costs would go up sequentially quarter on quarter.
That's what drove the reduction in margin.
I think we've taken you through how the accounting works for that right.
In terms of you kind of look at the trailing the trailing 12 months.
Average and then depending upon what your actual isn't that quarter. It moves the actual margins reported either up or down. So frankly that was not a surprise to us at all.
In fact at the end of the day, our overall revenue margin.
It was 49%, which was actually a little better than we modeled internally.
Obviously.
With the Opex efficiencies that that <unk>.
You mentioned, yes, we had a really strong bottom line performance.
With EBITDA loss of $4 million so.
I know the third question was on Opex.
So let me just answer that one and then I'll get a reminder, with respect.
<unk> was but in terms of opex for the second half.
<unk>.
Part of this <unk> is actually the timing of spend.
So we can't be exact every quarter in terms of what the linearity is of our opex.
So what youre seeing is baked into our guidance.
A slightly higher opex spend.
In the second half versus the first half obviously, we will try to beat those numbers, but overall obviously we're.
We're lowering our projected EBITDA losses for the full year based on our New guide right now your remind me what your second question was.
Yes, it was more on Opex.
Sequentially despite.
Seasonally better quarter sequentially. So I was just curious like what.
What drove the sequential production there yes.
Yeah. Good question, so actually our single largest expense on the marketing side is the <unk> trade show, which happens in Q1 and Thats.
Yes, Thats, a seven figure cost for us.
So that that obviously only occurs in hits.
Q financials. So that is as is the primary driver in terms of the quarter on quarter decline.
Got it got it so just to clarify on the arbitration. So there was nothing REIT industry.
Specify according to be concerned about from an arbitration perspective during the strike period, a slight price declines are coming in the industry.
Yes, Thats right.
We beat our internal expectation.
We tried to telegraph that like we always do as much as possible like Q1 was exceptional I think I said, specifically don't expect exactly this way every quarter, but directionally, we hit closer to our 2026 calls in Q1 of this year. So don't expect all of it to be like quarter to quarter as linear that way, but yes, we did.
Our goals and us are heading.
Exceeding.
Exceeding guidance on EBITDA, we did beat our internal margin goals as well so not only our opex, but we beat our internal so we.
We did execute better than we had internally planned.
Understood great.
And nothing Weird your second part of that quite follow ups, we earned with customers or arbitration nothing wed like that it was just.
The quarter over quarter comparison, yes.
By the way rich out I would also add on in Q2, we added over 100 employees.
So while the sequential decline was as I mentioned because of the the trade show expense in Q1, we continue to exercise a lot of discipline and prudence around our discretionary spending levels.
We're trying to always invest in the future and invest in technology and go to market for also.
Very very focused on operating efficiencies.
And continue to drive those.
Joe.
Every quarter and we expect to continue to do that as best we can.
Great great. Thanks, Thanks for all the color.
Yes, thanks, good luck.
Our next question comes from the line of Gary <unk> with Barrington Research.
Hey, guys how are you doing.
Great good.
Good good couple of questions here, if you can answer this George.
I know you don't give out your exact conversion rate, but could you maybe directionally.
Talk about how your conversion rates were.
In excess of what the industry conversion rates were in the quarter.
[laughter].
Gary I'd, rather not go there.
Again, it's not how everyone is using this conversion rate as those are all the same thing.
I would look at at this site.
We are doing.
We're probably.
Executing on conversion rate.
Slightly ahead of schedule is helping on units thats, helping and customer satisfaction.
And yes, compared to many of our competitors, where we're probably doing a better job.
But it's really hard for me to give you like a number or a compare.
But I would say generally speaking.
Thematic late.
Many of our sellers are ecstatic.
Buyers are there.
We're not wasting time bidding because theyre actually getting more and more of these cars.
And every week and every month, you could take industry out of it meaning all the macro stats we've used card.
Declining.
Are all of the stuff, we keep talking about is helping whether it's pricing guidance and merchandising.
Helping buyers.
The bid on the right vehicles.
We're doing a lot here, it's not one thing I think that's the competitive advantage. We have is we have the resources.
Both on product and technology as well as the people out in the field and on the phone.
Sort of complement and help our sellers and buyers sort of come together and the vehicles. So we're feeling really good about it so starting to answer your question specifically given numeric number so we feel good about what we're doing.
Okay.
Then second question is you guys that are out in the field, especially dealing with the franchise dealers are and maybe.
Typically more of the OEM franchise dealers because vehicle supply on the new car side is starting to get a lot better are you seeing people seeing in the field that the dealers are less apt to retail or trade in their <unk>.
Selling it.
Through your system.
Rather than keeping it on the lot.
Okay.
So first scary.
I know, we don't give that all of this granularity out because it gets confusing, but yes listings are starting to come up.
That's a sign that willingness to trade.
So that's a that's a positive sign for us. So so yes, we are starting to see more willingness.
And as the dealers' lots start to fill up keep in mind. Most of these dealers lots are still 20% to 30% Tim is that right, yes lower than they were in 19.
So you're still seeing Gary.
20% to 30% of dealers lots have a lot of empty spots for vehicles. So.
New car supply was like SAP, one used cars supply is almost like step two that will take a little bit.
But even while step one is starting to happen, we're starting to see a little bit of that willingness.
Early signs, but early on that recovery, but yes. Some early signs that are positive show dealers willingness to wholesale.
Year over year, hopefully by next year I can say year over year dealers will have 11.
Wholesale vehicles year over year, obviously, I've been saying the opposite up into at this point.
Okay. Thank you.
Thank you thanks, Gary.
That concludes today's question and answer session I would like to turn the call back to Tim Fox for closing remarks.
Great. Thanks Liz.
Thank you everybody for joining us on our call today. Please note that we are going to be participating at the Canaccord annual growth conference.
This Wednesday in Boston, So we look forward to hopefully seeing you there or at another conference over the quarter and once again. Thank you for your interest in <unk> and have a great evening.
This concludes today's conference call. Thank you for participating.
You may now disconnect.
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