We'll go ahead and get started here, here at the top of the hour. Thanks everyone for joining us here this morning. No, I'm Daniel Imbro, cover Automotive here at Stephens. Really pleased to be joined this morning by ACV Auctions. Many of you know the company, but from the company, Bill Zerella, CFO. The format will be fireside, so you guys have been here all week. It'll be pretty open Q&A. Please ask questions. But with that, Bill, thanks for joining us.
Thank you. Happy to be here.
Awesome. Well, we'll get into more detail, and I think most here know the story, but for those that might be newer, it's been a few years since the IPO. Can you provide a little bit of background on ACV, kinda where you guys fit into the automotive ecosystem, and then we can dive into more detailed questions from there?
Sure. So, ACV was founded back in 2016, with a focus to disrupt basically the dealer to dealer and ultimately commercial, wholesale space. You know, we, for the most part, competing against physical auctions. So this industry, has basically been one that's transacted through physical infrastructure for the last, you know, number of decades. It's a very large market. There are about, at least pre-COVID, there were about 11 million wholesale, cars that were sold dealer to dealer, used cars. And, on the commercial side, anywhere from 7-8 million on top of that. So it's a pretty big market, again, dominated by some large players. Manheim
Mm-hmm
which is owned by Cox, is the largest player in the market. It's typically followed by KAR, now OpenLane. There's been some transactions where now KAR is kind of basically sold their physical assets to Carvana, and are now just purely digital player. But basically, ACV essentially pioneered the whole notion of transacting a car online. And effectively, ACV is really a data company, because what enables us to transact cars online and provide transparency to buyers sight unseen, is a data set that we put together based on leveraging technology and inspectors around the country, which we have about 800 on the payroll right now, that will physically inspect a car, put together a data set on that car, which manifests itself in what we call a condition Report.
Which is then attached to an online presentation of that car, pictures, but ultimately statements regarding the, you know, the physical attributes of the car in terms of any, you know, issues with the car that we identified through an inspection. And that ultimately allows a buyer anywhere online to be able to, you know, potentially go and bid on that car and purchase it. There are other facets to our business. First, you know, we stand behind the accuracy of what we're disclosing, and we'll actually for those dealers that elect an offering that we call Go Green, and that's about 85% of our dealers. If there are any arbitration claims related to anything that we've missed, then we will arbitrate it with the buyer and compensate them for that.
So we basically stand behind the Condition Report that we generate. Plus, we provide other ancillary services that attach into our marketplace. We have our own transport marketplace. I believe now we're the fifth largest transporter of cars in the United States. So more than half of the cars that transact on our platform, we actually provide the transportation to get from seller to buyer. With average distances today that are typically between 415, 500 miles. So again, buyers from anywhere in the country can basically bid on a car in a digital marketplace, whereas physical auctions are typically populated by local buyers. So we dramatically expand the buyer base, and ultimately provide more bidding for any particular car. So transport is one ancillary service.
The other is ACV Capital. This is what's called a floor plan business. This is a pretty well-established financing business that, you know, our largest competitors have been in
Mm-hmm
for many years. Very profitable, in which, we're providing short-term financing to buyers, and buyers of used cars are typically, independent dealers. Okay? And they're accustomed to basically getting financing
Mm-hmm
on a short-term basis to allow them to purchase vehicles. So we launched this a few years ago, and it's our fastest growing part of the business. In fact, last quarter it grew 80%. Prior years, it's grown in excess of 100%.
Yep.
It flows through our PNL at 90% gross margins. So, you know, it's also a very attractive part of our business. So these ancillary services, you know, basically attach into our marketplace. And, you know, as a result of all this, we've, we've grown pretty well, over the last few years, went public in March of 2021. Last point I'll make is, obviously, COVID caused a lot of distortions in the automotive space, which, which we can get into.
Mm-hmm.
But, we've been able to weather through that. You know, while our growth rate, you know, declined, you know, as a result, the last couple of years, we've continued to gain share and actually have outpaced, you know, our competitors in that regard.
Yeah, that makes, that makes a lot of sense. And if, if I think about the differentiation, I think we'll touch, you touched on some of this, but like to start at this level, when your salespeople go in the field, what is the differentiator? What's the biggest competitive advantage that, that wins you that share, to your point, to keep outgrowing your peers? And then how do you feel about building the moats around the business of, of making that a defensible
Yeah
difference over time?
Yeah. So first, I would tell you that, most of this market is still physical. Our estimate is that the digital portion of this market is maybe somewhere in the 15% range, give or take. And we're the biggest player in terms of digital. So we more often than not will compete against, you know, physical auctions. And it's not just, for example, Manheim, which is the largest player. Carvana has a smaller piece of that as well. Of course, they purchased ADESA from KAR. But there's a bunch of independent physical auctions around the country as well. So those are our primary competitors.
And frankly, the value proposition is much along the lines that I just described, in terms of, when a dealer decides to sell a car at a physical auction, those cars have to be transported to the physical auction, and they drive through lanes with an auctioneer, okay? And typically, local buyers are bidding. You know, there's some evolution there in terms of what the physical auctions are doing, you know, with Simulcast to try to, you know, bring in other buyers. But in our case, we send inspectors to the dealer location. They will inspect the car at that location. The car never needs to be transported. Once the Condition Report is completed, we can literally auction it immediately.
Mm-hmm.
Okay? And it appears online. So there's a convenience factor for dealers, number one. Number two, we provide that transparency to buyers, and have a large buying base because of the fact that it's only digital, right? Because we're a digital-only company. And that, we believe, you know, creates more, you know, potential bidders for a car, and ultimately drives a better price for the seller, okay? And then lastly, we stand behind our condition report, as I mentioned earlier, and we protect the seller, assuming they buy our Go Green service, which is again, you know, 85% of our sellers. And if there's any arbitration claims, we handle that, and protect the seller from any exposure. So, and then we have, of course, the ancillary services that I mentioned, which our competitors have as well.
You know, we more than anything are kind of a native digital company. The company was started as a technology player.
Mm-hmm.
We, you know, are driven by technology. We're a tech company. We believe that also distinguishes ourselves versus our competitors, you know, since we infuse technology into everything that we do as a business.
Cool. And if I think about the industry recovery out of COVID, we obviously talked about, you know, the wholesale markets, call it 30-some-odd% depressed. The factor that needs to get better for like OEM production, that fills dealer lots, it pushes more cars to you guys. I guess, can you remind the people in the room, or just what is y'all's expected timeline for, for that overall recovery, up to, to when we get back to wholesale? And, and in your opinion, Bill, is it, is it more linear, or is there some certain kind of factor that needs to change before we see a more hockey stick type recovery in the volume?
Yeah. Probably first, we should talk about why new car sales matter to the wholesale
Mm-hmm
market. So, new car sales basically drive the trades of used cars to these franchise dealerships. And when there are less new cars to sell, there are by definition, less trades, right? So all the supply chain issues that occurred during COVID had a dramatic impact on new car production. And SAR went from something like 17 million down to, like, I think, like 12 million or so. I think it was about a 5 million unit negative impact. And that's why, by the way, the average age of a used car being driven in the United States now is, like, approaching 12 years old. It's. I think it might be the highest ever.
It is.
Right? Because during COVID, people couldn't get new cars, right? There just weren't any new cars available. So, that's the top of the funnel into the wholesale market. Since on average, half of those new car sales result in trades of used cars. So if you have a used car, you trade it in to the dealer to get a new car. And then half of those typically end up going to wholesale. So they'll keep half, you know, if they're especially late model cars, that they'll maybe have some mild reconditioning, maybe new tires, brakes, they'll detail it, then they'll put it on the front line, which means it's a late model car. A great example would be, like, a car that comes off of a 3-year lease, right? That's a relatively new car, typically in pretty good condition.
Most dealers will typically keep those cars and then resell them, right? And then the rest of the cars, they put into the wholesale market. So when new car production was negatively impacted, that had several impacts on the market. First, it drove less trades, which had a negative impact on the wholesale market. Second, because dealers needed cars to sell, whatever trades they did get, they kept a higher percentage of them, reconditioned them, and sold them on the lot. And they were, a nd if any of you had, you know, you would see this, you know, just your own personal experiences. You know, typically, franchise dealerships, if they're selling used cars, those are typically, again, later model cars.
Mm-hmm.
Right? During COVID, they were keeping cars that had 80,000 or 90,000 miles on them, which they would never have kept before, because they needed cars to sell, right? So, you know, because their lots were empty. So this whole dynamic is what, you know, both these dynamics had a negative impact on, on the wholesale market. So the good news is, new car production, it has improved dramatically. So a lot of these supply chain issues are in the past now. It sort of depends on the OEM. You know, what's what might be surprising is, a lot of the Japanese car manufacturers actually had bigger supply chain issues than a lot of the other OEMs out there. So,
you know, they've kind of lagged behind, but for the most part, SAR now has seen a pretty nice recovery this year. 17 million pre-COVID, I think SAR now is something like 15.5 million or 15.7 million, something like that. So kind of approaching 16 million, which is. Looks like we got a little bit of
Turn that back on.
Somebody's hitting the lights
Get that back on.
on and off. Somebody must be leaning against them. Okay. Oh, there you go.
Thank you.
Okay. So actually, new car production is making a pretty strong recovery, right? Which is an important element to the recovery of the wholesale market. The second piece is, you know, dealers not keeping as many cars as they did before.
Yeah.
What we have, the data that we have looked at, clearly demonstrates they're still keeping more cars than they were pre-COVID, right? As their lots fill up and as they get back to being focused on kind of frontline vehicles, you know, which are more consistent with their brand
Mm-hmm.
right? Then that should have positive implications for the wholesale market. So now, that was a long
No
long discussion, right? But, the question gets to be: so when does all this normalize, right? We believe in the next several years, and certainly we've talked about this at our Analyst Day back in May, that we believe by 2026, the market gets back to what it was pre-COVID, right? There are some folks who would argue that, you know, the, the new car market never gets back to 17 million. We don't see,, we I mean, it's already approaching 16 million, right? And our economy, you know, is experiencing some stress, right? So we don't, I don't see any reason why it doesn't get back to that, at least. As the population of the country grows, more people need cars.
It's just kind of, you know, the trends, if you look at over the last, you know, many, many decades, right? So we see that happening over time, over the next several years. And then we also believe that over time, that, you know, dealers will kind of return to their pre-COVID focus in terms of what they keep versus what they, what they flip in the wholesale market. There is a restriction on their capacity in their shops to actually recondition cars, right? They make a lot of money in terms of any repairs and maintenance, right? If any of you brought your cars to a dealership for repairs or maintenance, you would know what I'm talking about, right?
So they only have a certain amount of capacity in their, you know, in their shops to actually do that, and that's guaranteed profit, right? Whenever you're reconditioning a car and selling it wholesale, you can project and model out what your margin is gonna be, but you never really know for sure, right? So we think all of this ultimately does get back to normality in the next several years. We don't think it's gonna happen overnight, though. So that was a long-winded explanation. Hopefully, that-
No
gives everybody some perspective.
It's helpful. So if we think about a multi-year volume recovery-
Mm-hmm
That's kind of, that's about half the revenue equation. The other side, obviously, revenue per unit.
Mm-hmm.
There's been a lot more momentum, I feel like, in the last 12 or 18 months on that pricing side.
Mm-hmm.
Can you talk about both from pricing and from ancillary services, how do you foresee the right growth rate for revenue per unit for
Mm-hmm
you guys, as volume recovers in the coming years?
Yeah. So the context here is, excluding the ancillary services, just auction fees are made up between sell fees and buy fees. Sell fees are primarily fixed in nature.
Mm-hmm.
Buy fees vary based on the value of the car, right? So the higher the value, the higher the buy fees. The Dollars go up per transaction, but the percentage value of the car goes down, actually, right? Which is what you would expect. So our buy fees have historically been below market, versus all of our competitors, right? So when you're a young, growing company, you tend to get very aggressive in terms of pricing models, because you're more focused on growing share, and that was a strategy that ACV had. Back in December of 2021, for the first time in the company's history, we started adjusting our buy fees. And we've adjusted them now every year since, so three times, okay? First time we did it was about $50 per unit.
The last two times were about half that. Our buy fees still are below our competitors, okay? So, you know, what we've talked about is that we have some pricing power here, and our competitors are not standing still. Everybody's impacted by inflation. So you know, the good news for us is we believe we're competing against very rational competitors.
Mm-hmm.
Right? This is a industry where margins are pretty, pretty robust, right? Very profitable businesses. So we believe we will continue to have some room to move our fees up over time. We'll probably always be looking to be below our competitors somewhat, but not necessarily as much below as we are today. So we just passed another modest fee increase through September 1st. And again, we continue to be below our competitors. So, you know, that'll just augment our growth revenue growth as our unit volume grows, and we continue to gain share.
That's helpful. Maybe thinking about the other side of the volume, so that was a lot of dealer discussion, but commercial is nascent, and you mentioned in your prepared remarks, that is eventually where you guys kind of want to grow into, I guess.
Mm-hmm.
What are your early learnings so far as you've started to build that muscle? What are the needs of that business that may be different
Yep
from dealer, and how does that fit into the next three to five year kind of outlook for ACV?
Yeah, so first, you have to look at the commercial market and understand the different components of the market, right? There's off-lease transactions. You know, your car reaches the end of the lease
Mm-hmm
y ou decide to return it. That market has dramatically contracted because people couldn't get cars. So when cars came off a lease, they would buy. Consumers have historically been buying those cars the last few years. Plus, the residual value baked into the lease because used car prices have gone up so much, most people decide, "You know what? I'll just keep this car," right? Because the price to basically buy out the lease was below, resulted in below-market value versus what that car was worth at the time. So that market, we think is gonna take a while to come back. You know, that could take several years. So, that's not a market that we're in today.
We're not quite as focused on that right now, though it's eventually a part of the market that we think we can be successful in over time. The other parts of the market, there's the repossession market. So the repo market also declined during COVID because there was a you know, basically, you know, the
Moratorium
t he government stopped, you know, put a moratorium on any repossessions, okay? That moratorium has been lifted, and now the repo market is starting to come back pretty strongly.
Mm-hmm.
Okay? So, the repo market requires land, because when a car is repossessed, state statutes come into play, and on average, most of the states, a car has to be held for about three weeks before it can be auctioned off. Because the consumer has to be given an opportunity to make good on the, you know, on the loan, buy it out, whatever it is, get current on their payments. So you need a place to put it. And I'll get through the other few couple pieces first, and then I'll answer your question. So that's the repo market. Then you have rental and fleet, okay? The fleet market, you know, also typically, not all the time, but typically requires land and reconditioning.
So if you're remarketing a used Amazon van, you gotta get rid of, you know, all the Amazon logos and stuff. If it's a police car, you gotta do the same thing, right?
Mm-hmm.
So there's a part of the fleet market that not only requires land, but basically, essentially reconditioning to to allow it to be remarketed. If it's just, you know, company's got rental cars, you know, as part of their fleet for salespeople, those don't require any reconditioning, right?
Right.
You can just, you know, market those and sell them, right? So that's the fleet market, and then you've got rental. And we have some rental companies that transact on our marketplace today, right? So, you know, a rental car typically also doesn't need reconditioning. If there's room on the lot for it to be marketed, once the rental company decides to sell it, we can absolutely support that today, right? So, if you look at that landscape, and it's an attractive market, and we have a very, very tiny part of this market today. Our conclusion is that ultimately, to compete and capture, especially the repo market, which has a 100% sell-through, so those cars end up having to be sold, okay? Normal markets, dealer to dealer, typical sell-through rates are 50 to mid-50s, right?
100% sell-through has an enormous impact on your business model, okay? You will sell each car. So our strategy is to actually put ourselves in a position where we can capture part of that market, and we need land to do that, okay? So, and some of those repos also might have, depending upon the bank, they might want some mild reconditioning. You know, they might want the car detailed, you know, and try to maximize the price that you can get for the car, that sort of stuff, right? So we have done recently a couple of tuck-ins, where we've bought a couple of small physical auctions that actually will allow us to start to transact, and take part of that market. Because we believe our value proposition applies to that market as well. We're a digital-only marketplace.
We can get the best price for those cars. We can inspect again those cars, and we can provide transparency to buyers, just like we do in our dealer-to-dealer market. So, and land, again, applies in some of these other cases as well. So, that's our strategy. We talked about this at the Analyst Day back in May. Our target is, you know, basically to generate $65 million of revenue by 2026 in the commercial space, which also we kind of bundled in there as consumer to dealer.
Yeah.
Right? We think it's a reasonable target that we can hit. So, but we're just getting started, right? This is incredibly nascent. You know, we'll spend the next 10 years kind of building out this part of our business.
Solid adoption so far when you've piloted that in certain markets?
Pardon me?
Good adoption so far, or how are the conversations going with those commercial sellers? Like, are they willing to try the platform
Um-
from their existing
Yeah
marketing solution?
Yeah, I mean, again, we're still nascent, but we did hire a guy to run our commercial business about three, four months ago, a guy named Joe Mappes, who's been doing this since his entire career, and we're getting a lot of engagement. We're, again, just getting started. We just did a couple of these tuck-ins, so we're still kind of dipping our feet in the water. But you'll hear more about this, you know, in the next few years as we, we build it out.
Great. Nick?
I'm sorry. I'm kind of new to the story, so maybe an educational question, because I'm a little confused by what you're referring to as commercial. The way I understand it is, kind of got two days that a brand dealer gets to bid on the car, and then two days, any dealer gets to bid on the car, and then after that, it goes to, I thought, independent, you know, used car dealers. So I'm not sure what commercial means and how that fits in that.
Yeah. So, commercial would be, again, where you're dealing with a commercial consignor, okay? Could be a rental car company, it could be a bank, okay? And frequently, banks, it would typically be a bank or some kind of lender for a repossession, right? It could be a corporate entity for a fleet. Again, we'll just take the Amazon van as an example. So you basically have a commercial consignor that needs to, you know, basically auction off a vehicle, versus a dealer-to-dealer transaction would be, a consumer trades in a car at a franchise dealership, and that dealer decides that they're going to wholesale that, and they put it into the wholesale market. So there are different segments of the overall market. Think of-
I'm sorry, where does the independent used car dealer enter that equation?
So, okay, so.
Is the buyer.
Well, let me back up. So there are about 17,000 franchise dealerships in the United States, and I believe it's about 37,000-38,000 independent dealers. Okay? The independent dealers are primarily the buyers of used cars. Okay?
Mm-hmm.
Some franchise dealers will buy late-model used cars, and they actually, we have franchise dealers that are both sellers and buyers in our marketplace today, but they would only buy, again, a certain type of car that meets their criteria for them to put on their lot. Typically, again, this frontline notion of a vehicle, right? But by and large, the highest percentage of buyers of wholesale used cars are these independent dealers. So it could be, you know, a used car lot on a corner, or it could be an independent dealer that's, you know, that's kind of more substantial, that you know, is of scale and sells used cars, right? But they're primarily the buyers. The franchise dealers are primarily the sellers. So 70% of our selling is from franchise dealers.
Mm-hmm.
The rest are from some larger independent dealers that would not be franchise dealers. For example, if you have a wealthy family that owns a, you know, a string of dealerships, they're not, quote, "franchise dealer," you know, part of a, one of, you know, bigger public companies that you would know of. But they're large enough that they almost act like a franchise dealer in some respects. We call them certified independents because they kind of are a different class versus other independent dealers, and they're sellers on our marketplace and other marketplaces as well, okay? And buyers. You need to think about the two segments of the dealer marketplace with franchise versus independents. These are mostly sellers. These are mostly buyers.
Does CarMax source their cars through auction or?
CarMax sources their cars from consumers.
Okay.
Okay? And then they will keep, you know, roughly half of those cars, recondition them, and resell them to consumers, and the rest they will sell wholesale. But they have their own marketplace. Because they're so large, they have their own marketplace for selling wholesale used cars.
So back to your earlier point, is the real way to think about this, the NMS, fees, and everything else, is it just revenue per vehicle sold, and then is that auction? Is that the best way to think about your business model?
It's revenue per unit, but it's more than that. It's because the margin profile is very different-
Mm-hmm.
Depending upon the revenue stream. So just auction fees, buy fees and sell fees, okay? Our margins are just under 70% on that part of our business. The transport market, and our transport business is very different. First, based on accounting rules, we're required to record those revenues on a gross basis, whereas our auction business is just net. Okay? And so that's a very different business. That was a business, as you know, which up until about a year ago, was losing money.
Yep.
Now, our margins are approaching high teens, which doesn't sound like a lot, but it's actually substantial in terms of EBITDA because it's high teens on a gross revenue number, right? You know, and we've made tremendous strides in transport capital, our capital business. Basically, what flows through our P&L is just our interest income from loaning money, and that flows through a very high margin. So yes, we look at total ARPU, and we look at a blended margin, which last quarter was 50% for all of these different pieces of the business, but the margin profile on each is somewhat different.
Yeah. One more, and I'll shut up.
Okay.
The transport piece, is that an independent operator, or is that... Are those your own vehicles?
No, it's... No, we don't own any trucks. We have our own marketplace. So, what happens when a buyer wins an auction, there's literally a button they can press if they want to elect ACV Transport. If they hit that button, then that, through software, automatically takes that transaction and floats it into our marketplace. And transport providers, we have thousands of transport providers now as part of our marketplace, literally bid on those jobs. And like 80% of our transactions now are completely automated. We call them auto dispatch. That basically, it's, there's no people involved at all. It just happens through software. And then, you know, they'll provide, you know, the...
If they win that business, they will actually then, you know, do all the logistics, to get that car, pick it up, and send it to the buyer.
One in the back.
Yeah. I'd like you to comment on two things that a competitor said here. One competitor in the auction space says the conversion ratio in the past few months have fallen materially. Have you seen that in the industry?
No, it's interesting. So, conversion rates, which typically, you know, historically are in the 50% to 55% range on average for most auctions.
Mm-hmm.
You know, and there was a lot of volatility in conversion rates, specifically the second half of last year. The entire industry saw conversion rates come under pressure because used car prices, which got extremely elevated during COVID, started rapidly declining. So when prices are coming down really rapidly, buyers get really nervous about bidding for those cars. Because if you're an independent dealer and you're buying a used car, okay, you have to buy that car at a certain price, knowing you're going to spend X dollars on reconditioning. It's going to take Y period of time for you to do that, and then remarket the car, and then sell it to a consumer.
If prices are coming down really rapidly, you have to be really careful that you're not, you know, you're not overpaying for that car, not understanding necessarily what you might be able to sell it for. So that drives conversion rates down. What's happened this year and what we've experienced, and I think most of the industry has experienced it, we've seen conversion rates return to more historical norms. The Q1 was historically off the charts high. We saw incredible conversion rates, I think all of us did in the auction space. Since then, we've seen kind of normal seasonal patterns. So typically, conversion rates in the, especially in Q4, decline as you get into the holidays. Okay? We've seen some of that, but what we've seen is more consistent with just kind of seasonal norms.
We haven't seen anything that, on our marketplace anyway, that's much different from what the normal seasonality is.
You're still in the 50s in October?
I don't want to comment on October because, you know, that's part of obviously Q4, so I can't comment about Q4. But, what we did say on our earnings call is that we see kinda, you know. Our forecast assumes kind of normal seasonality.
Fine. And my other question is, on the floor plan financing side, which you're just entering, what type of losses do you expect to see in that business?
Yeah, so typically, most of the floor plan businesses look at 1.5% to 2% losses. So we've been, you know, pretty focused on managing our loss exposure in light of the, kind of the economic conditions. Our bad debt expense, actually, in Q3, was down 50% quarter-over-quarter for our floor plan business. That doesn't mean we can do that every quarter, by the way. Right? So I don't want to set that expectation. But I will tell you that, and I don't think our competitors are much different than us in the sense that all of us are pretty, you know, focused on making sure we manage our exposures. So we've definitely raised the bar in terms of creditworthiness.
You know, I would, I would argue we probably could have actually grown our capital business even faster than we did last quarter, and it grew 80%, right? So far, we've done a pretty good job.
Mm-hmm.
You know, I personally head up a risk committee that looks at, you know, our exposure and how we're managing it-
Mm.
-in our capital business. You know, and for us, we're loaning out a lot of money, right? So our portfolio grew, you know, to, I think it was about $105 million
Yeah.
Last, last quarter. So, I would say so far, so good, but, you know, it's, it's definitely an area we're keeping an eye on because some dealers are clearly under pressure.
Maybe related to that, just to follow up on the financing side, $105 million-ish portfolio, I guess, how much scale would you want to have before you try to look at the ABS market as a way to, you know, free up capital, get it off the balance sheet-
Mm.
Just if we think about cash flow?
Yeah. So we're financing this off of our balance sheet today. So typically, when you get to about a $200 million portfolio, you have enough scale to basically go to the public debt markets. Which is again, what, you know, AFC, which is part of OPENLANE, and NextGear, which is part of Cox, does. So we're not quite at that scale yet, but, you know, our view is, you know, we potentially could get there, if not the end of next year, sometime in 2025.
Makes sense. And then obviously, you know, covered a lot already, but I want to talk a little bit about profitability. Obviously, it's topical at this point in the-
Mm-hmm.
in the growth cycle. So you guys have been beating kind of the quarterly guidance for a while here, and I think in 4Q, you talked about you were ahead of track on profitability, you may have pulled forward some expenses. Maybe for those who are newer, can you refresh us quickly on kind of where we're at in that profitability journey?
Yep.
When the timeline to flipping towards positive EBITDA is, and then what are some of those investments you pulled forward?
Yeah. So, our commitment was that we would basically exit this year in a position where we were at least breakeven going into Q1 of next year.
Mm-hmm.
What we actually have committed beyond that is to say that we will be profitable every quarter next year.
Got it.
We will certainly do everything under our control to execute on that. Okay? Q1 is typically your seasonally strongest quarter, so you do get a tailwind in terms of driving growth, which is obviously very accretive to our model, right? But that's been the commitment, and we haven't changed, you know, that commitment since the beginning of the year, right? So to your point, we've dramatically beaten our EBITDA targets every quarter. You know, last quarter, our EBITDA losses, our guides, I think, was $8-$10.
Mm.
You know, we came in at just below $4 million, $3.7 million of losses. So you know, we've really, I think, done a pretty good job in terms of financial discipline inside the business. You know, which has been a change. When you're a high growth business, you don't tend to necessarily optimize as much as you would like because you're just trying to drive growth, right?
Mm-hmm.
So we did shift gears a lot when the market changed.
Mm.
And I think the team has done a really good job at executing on that. But what you're referring to is that our guidance, our EBITDA guidance for Q4 was actually a larger loss.
Mm-hmm.
than Q3. So there are a few, there's a few bit of rationale around that. So first, we know that in order to achieve our targets next year, it's not just financial discipline in terms of OpEx, but we've got to drive growth, right? I mean, we're not going to get there without growth, frankly.
Mm-hmm.
Right? And you can't. It's not like we're some large, mature business that you can just, you know, cut a ton of expenses out. At some point, you can't cut your way to profitability-
Mm-hmm.
If you're still a relatively nascent company like ACV. So, you know, what we decided was that we could actually guide to a lower level of EBITDA losses for the full year. So we basically reduced our EBITDA losses for the full year. We took revenue up, and even with doing that, we wanted to give ourselves room in Q4 to be able to place a few more bets and accelerate some spend to drive to put ourselves in a better position to drive growth next year.
Mm-hmm.
Okay? So we're trying to, as quickly as we can, kind of invest in some go-to-market activities. You know, there's some more feet on the ground that we wanna hire in.
Mm.
We're trying to hire those people as quickly as we can. I'm not sure if we'll be able to get it all done by the end of the year, but there's some other investments as well. We're making some other tech investments to drive, you know, some other operating efficiencies. So, you know, will we beat again? I don't wanna commit to that. I never would, right? Our guidance is the guidance, but we felt it was, it was the right move to make because really, we're trying to set ourselves up for a successful year in 2024.
Yep.
Right? And if you can, you know, basically beat and raise, and do that at the same time, that's kind of a win-win in our view.
That makes sense. Maybe thinking about the innovation and tech side, I mean, because the team have been, you know, to your point, leading a lot of that tech push. I guess, what excites you, or what are your customers asking for that ACV doesn't provide today, or that no one in the industry provides today, that you guys are pushing towards to, again, lead with that customer service and kinda win that market share organically?
Yeah, I would say there, there's a bunch of things, but probably what sticks out right now is what we talked about on the last call, which is our ClearCar offering. So, outside of the wholesale market, there's something in the neighborhood of about 10 million peer-to-peer used car transactions. So you're a consumer, instead of trading your car into a dealer, you know, you decide to put an ad, you know, online and try to sell it to another consumer. We believe there's an opportunity to help dealers buy used cars and compete with Carvana, especially, and CarMax.
Mm-hmm.
You know, but Carvana is a competitor to dealers.
Yeah.
Right? So we believe anything that we can do to help dealers acquire cars from consumers is a win-win, right? That dealers can then get more cars that make sense for them to sell, okay? Recondition and sell. And ultimately, some of those cars, they're going to wholesale, of course, right? We believe that, you know, puts us in a position to not just help them, but also drive, you know, business into our marketplace. So, we just announced a new offering, we call it Clear Car, which is basically a widget that goes on a dealer's website, that allows them to y ou know, this whole notion, "We'll buy your car," type of thing. Right? What we believe differentiates us versus our competitors is that since we're a data-driven company, we have now...
This is something we've been working on for a number of years now. We continue to refine our estimate through data science of the value of a used car, to the point that we're starting to feel really good about pricing and valuing a used car, and it's condition adjusted. So the way this works is, you go to a website and, you know, anybody can do this, if you go to Carvana, you know, you answer a bunch of questions, you put in some data about your car, you answer questions about the condition, and then they'll give you a price based on how you answer the questions, right? We can do the same thing and allow a dealer to do that. The difference is that we can then ultimately, if the consumer...
You know, if the prices range is right, because you give them a range
Mm-hmm.
Right? And they're really interested in, you know, potentially then trading that car in to a dealer, and getting another car, right? We can then bring our inspectors to bear, and we can do the same thing that we do for any transaction, right? We can provide, you know, full transparency to buyers. But when the consumer then brings that car into the dealer, for example, or we can inspect it in their driveway, by the way, okay? And dispatch an inspector to do that. Once we put together that condition report, based on our algorithms, we can get a pretty, pretty good feel for what that car is gonna be worth in the wholesale market. And ultimately, we believe that could position us to guarantee a price, for example. I'm talking down the line.
Yep.
Right? So, and it's all data driven, right? That basically takes all the risk out of that equation for a dealer, right? We can allow them to. They can, they can buy that car from the consumer, we can guarantee a price. If they decide not to keep it, they can wholesale it, and they've got a guaranteed return. If they decide to recondition it, you know, they also have a better sense for value. So, so this, this is a, you know, kind of also nascent
Mm-hmm.
but it's leveraging a lot of the data science that the company's been developing for the last number of years, right? So, at the end of the day, it's all about adding value for dealers and trying to help them, you know, better execute their business. And dealers do want to, you know, acquire the right kinds of cars to resell and, and, and generate margin, right? So I would say, out of all the things we're doing, and we're doing a bunch of other things, much of which is also behind the scenes in terms of our technology platform, this is something that we believe, you know, could, could, again, add a lot of value and could, you know, help us be another leg of growth for the company.
That's exciting. Well, I do wanna wrap up on the balance sheet and, and just kind of some, some of the M&A we're gonna talk about. But for those that are newer, can you just remind people kind of what position you're flipping EBITDA positive? Next year, obviously, free cash flow should improve, or cash flow should improve with that. But from a, from a capital structure standpoint, kind of what is the cash flow today, and, and how do you guys feel about that? Just provide that background for those that are newer.
Yeah. So we had $450 million on the balance sheet at the end of last quarter. That includes about $105 million of debt that basically you know kind of provide some of that liquidity to help us, you know, with some of our financing requirements. You know, specifically, for example, our capital business and other, other, other cash needs. But, you know, so we're, we're in a pretty good position in terms of liquidity. You know, we have done a few tuck-ins.
Yep.
Like I mentioned, they've been small, right? You know, at the end of the day, we wanna make sure we have enough liquidity to potentially be opportunistic on the M&A front.
That's what I wanted to follow up on. I guess when you think about what excites you, those small physical tuck-ins will keep happening, but is there capability out there, or what else would excite you to spend? Again, what would be an opportunistic M&A asset? What would be exciting to then spend some of that cash on for you guys?
There are a few things that are exciting but, you know, it's not nothing specific I would wanna talk about. So right now, the notion of gaining a foothold in commercial is pretty front and center for us. And that could be a combination of M&A, you know, tuck-ins and organic. For example, if there's a car dealership that went out of business, right, that has physical infrastructure, you know, we might wanna be opportunistic and, you know, potentially see if it made sense to acquire that location, right? And that'd be more like acquiring land and a physical structure, right? So that's almost more inorganic in the sense that we're not buying an existing business, so to speak, right? So, but there are some of these little tuck-ins that, you know, could give us a nice opportunity to drive commercial business.
So I would say that's the primary focus, but there's always things that we're looking at, just like any business.
Perfect. Well, we'll leave it there, but thanks so much for joining us.