It is what it is. Hello everyone. I'm Andrew Boone. I cover internet here at Citizens. I'm very happy to host ACV Auctions. I'm here with Bill Zerella and then Vikas Mehta. Vikas, you need a mic.
Would like it.
Thank you guys so much for being here.
Sure.
Happy to be here.
Let's see. Before we jump in, Are there any opening thoughts that you have in terms of just recently reporting results? Is there anything that you wanna clarify before we kinda jump into the conversation?
Sure. Happy to. Just going into Q4, we had a few objectives that we wanted to achieve. First and foremost, we were focused on increasing the resources that we had on the ground on the go-to-market side. We started that in earnest in Q4 in terms of adding inspectors and starting to add salespeople. You know, on our last earnings call we had commented that we're adding $11 million of spend on the go-to-market side to beef up certain parts of the country, in order to start to drive more growth in some of those underperforming territories.
That was number one, so we feel really good about kind of kicking that off in Q4. Number two, we had a number of challenges on the arbitration side. Our costs in Q3 and Q4 were above historical norms. We took a number of actions and actually have kind of course-corrected and made some changes and improvements on that side of the house. You know, coming into this year, we can already see our trends are back to normalized levels. That was also something that was important for us to attack since it did have a negative impact on our margins. The good news is. Vikas, come sit down.
The good news is, we accomplished what we wanted there. Lastly, we've talked a lot about our new offering, Project VIPER, which will help dealers through their service bays buy more cars from consumers. Our goal was to make sure that we were positioned to start initial ramp of that into dealers, starting with NADA, which was early February in Las Vegas. We accomplished our goals there as well. We're starting now to actually install those at various dealerships around the United States.
Okay. All right. Thank you for the recap of 4Q. That's helpful. Let's now take it up. Let's go big-picture question. 70% of the industry is still offline. Talk us through what has to happen to convince dealers to accelerate that transition. What are the key trigger points or levers or products that you guys can offer to really move that share and become available to ACV?
Go ahead, Vikas.
I'll take it. Good afternoon. Thank you for having us. The 70% of the industry that's still offline, you're referring to the dealer-to-dealer wholesale. Just to give you guys a little bit of context, 2025, dealer-to-dealer wholesale was about 7.5 million vehicles. You're still talking about five million vehicles that are still transacting at physical auctions. We think the value proposition of moving to digital is pretty clear. Sellers have more efficiency. Auctions run, you know, seven days a week, any time of the day if run digitally versus once a week at a physical auction.
There isn't the lost time and cost of transporting vehicles to a physical auction versus when you run it digitally, you can run it off of your own dealership. Finally, the third-biggest benefit is really about reaching a massive national buyer base. Versus in a physical auction, you're really limited to primarily the people that are in lane. On the flip side, there is inertia. Physical auctions have been around for tens of years, 30, 40, 50 years, depending on the geography. We are actively growing the digital penetration. ACV has been growing nicely over the last 10 years since we've been in existence.
I think what will help accelerate that even further is proliferation of new products. We have a product that we call No Reserve or Guarantee, where based on our digital inspection, we're gonna underpin the value of a car and give a seller a guaranteed offer. There's really no downside. That's been an accelerant to getting sellers to buy and buy onto the digital transformation. The second big thing to try to convince people to leave the anchor from physical and move to digital is really about value bundled offerings.
We're going in, not just saying digital wholesale, but we're actually bundling things like ACV Max, ClearCar, and VIPER, which we'll talk about in a few minutes. That bundled package, I think, will enable us to accelerate that transformation even more.
Okay. Help us understand the macro of the dealer-to-dealer environment, right? It feels like dealers have been holding onto cars a little bit more of late. Is that a structural change? Should we expect that to flip back? Explain macro, and then how should we think about that kind of going forward?
Sure. Sure. Maybe a little bit of context. The wholesale industry was meaningfully disrupted during COVID, and there were a few factors at play. I'll just quickly list through them, and I'll sort of talk about how that goes back. First and foremost, everyone's likely aware massive chip shortage meant a huge supply constraint in terms of new cars. When you think about six to eight million new cars that weren't produced during the early COVID days ended up sort of creating this bubble of missing inventory, that also led to less off-lease cars being out.
Therefore now where we are is a few years out, as new car supply starts to ramp up, you're still missing that lease return side of things. We are still in a place where supply is meaningfully under where it was pre-COVID, and therefore, when a dealer gets a car traded in, there's a higher likelihood that they will hold on to that car versus wholesale the car. Pre-COVID, trade-in percentage kept by dealers were around 40%. We're still seeing an elevated, you know, 55%-60% of cars are being held by dealers.
We think over time, as new car supply starts to stabilize, as off-lease returns start to come back, dealers will start to wholesale more and more of those trade-ins, and that will get the wholesale market back to normal. Do I think there's a structural change? No. I do believe, the industry will normalize. One of the other things we're doing to help it normalize is we're helping dealers, through some of our tools, acquire cars directly from consumers. That'll enable them to basically not be as dependent on OEMs and not be as dependent on off-lease, but have a third channel to try to augment their supply.
Yeah, I should add on that point. There are about 10 million cars that are sold peer-to-peer on the consumer side, so it doesn't really touch the dealer ecosystem. You know, obviously today, Carvana, which is a relatively new entrant, you know, is buying more cars from consumers upstream. Typically, dealers get their used cars through trades. You know, we're being very proactive in terms of helping dealers understand that they can leverage our tools, and the kind of packaging that we put together with other products like ClearCar and ACV Max, as Vikas was alluding to help them buy more cars from consumers. Potentially, that could increase the TAM over time in terms of the dealer ecosystem.
That's, that's a really big opportunity for dealers, not just to get used cars that they want, that they can then retail on their lots, because there's still a lack of later model used cars that they can resell. It also gives them the opportunity to buy even cars that they wouldn't normally wholesale. We'll put a guarantee on that car, which means they can't lose money. If anything, they'll make money by selling those cars wholesale that they wouldn't want to retail otherwise. Then they capture the customer. Right?
There are, last year, there were 270 million what are called repair orders, ROs, which are basically service repairs into franchise dealerships around the United States. 270 million visits by consumers to have their cars serviced. The advantage that franchise dealerships have is they have a touchpoint with consumers, unlike any online digital player would have. We believe we can be the technology player that can enable them to be successful in that regard.
Before we go there, let's talk about one of the investment kind of points that you talked about earlier in terms of kind of 4Q results, in terms of adding more inspectors. Right? Talk about the drivers of that and then step back and talk about kind of the utilization and your coverage with inspectors today.
Sure. You know, for those of you not familiar with ACV, we employ what's called a territory model. The company started in the Northeast, started working its way down the Eastern Seaboard, and then started going West. We have a lot of territories that are very mature in which we're driving still significant growth. In certain cases, we're actually the market share leader in those markets. We're the biggest player, period. We're driving 25%-30% EBITDA margins in a lot of these territories and regions as well.
A key facet of our go-to-market are our inspectors who use the technology tools that Vikas and his team have developed over the years to inspect these cars, produce a condition report, and then be able to sell it online, sight unseen by a buyer. We do have various parts of the country that are less mature that we've realized that we need to kind of reinforce those parts of the country with more resources, especially inspectors and sales force and salespeople as well, in order to drive more vibrancy in those marketplaces and create higher growth levels, which are below our expectations, and that's what's driven our growth rate down a bit. We're still gaining share.
We're still the largest digital player in the United States, our growth rate is a little lower than what we've previously expected and told investors. You know, part of the process to get that growth engine back online, if you will, or back in line, with more like mid-teens growth versus market, is to make sure we're adequately providing the resources in those various markets with our inspectors and salespeople. That's what we started in Q4.
Is there anything else that you want to highlight, though, in terms of getting back to that mid-teens growth level that you guys need, right? Understood the more inspectors. Is there anything else?
I would say the other part of that strategy, which one of the reasons why we guided investors to expect only a modest improvement in our ARPU this year, is to ensure that we have adequate room to be aggressive on the sell side where we need to. We've provided that room within our guidance based on our financial modeling. You know, this is a very competitive market. It always has been. Nothing has really changed. Again, most of this market is still physical, as I think we stated earlier, right?
That 70% of this market or so, depending upon who you talk to, is still conducted on a physical basis. We, along with others are certainly focused on trying to convert as much of that to a digital format as quickly as we can.
Yep. The only other thing I'll add is as we continue to build out the value bundle strategy, as we continue to roll out more ClearCar installations, ACV Max takes a deeper penetration, VIPERs end up being much more ubiquitous in the market. We do feel that that's a key part of accelerating our penetration and our conversion over time.
Can you just explain to everyone VIPER and ClearCar?
Absolutely.
Right, like what are the products? Then explain the broader picture goal of the service lane, right? I know you talked about franchise.
Yep.
Can that also extend into independence that may also offer service? How do you think about the broader opportunity within the service lane?
Absolutely. I'll quickly answer the independent versus franchise. The answer is yes. The model or the product is equally valuable if you have customers coming in and out of your service lane, whether you're a franchise dealer or independent. Okay. Around 2021– 2022 when COVID resulted in a massive supply shortage, one of the things we heard very often from our customers was supply shortage was probably the biggest theme in a dealership's mind. Yes, it was much worse during COVID, but it's always been one of the goals for a dealership to be able to acquire cars from consumers, even outside of the trade-in process.
Dealers have often had trade-in widgets on their websites and often talked to the ability of leveraging their customer base to try to buy back cars. There weren't enough tools, there weren't enough, I'd say, valuation products out there to do it confidently at scale. On the flip side, ACV's biggest and strongest investment has been in the inspection and pricing platform. We know better than anyone else in this industry when we see a car, what are some of the sort of the things wrong with the car, what are some of the things that are great about the car, and in a real-time perspective, what should that car in that location be valued at?
Sort of combining these two gave birth to ClearCar. ClearCar effectively is a light customer and dealer self-inspection that leads to a price. The price is based on our own pricing engine, which is near real time and very much location and vehicle specific, informed by all the algorithms we have, based on what we see transacting on our marketplace. We're very confident that we have the ability to price the car better than anyone else. We go one step further by backstopping that price. We not only tell the dealer that car is worth X, but we actually say, "And we are willing to take it in our wholesale marketplace for this price."
What that has enabled dealers to do is more confidently put prices on cars as cars come in and out of the service lane, and that has led to the ClearCar product, which effectively is a web-based, mobile app-based product that dealers use to appraise cars in the service lane. Now, today, ClearCar penetration is, you know, 1,500+ dealers that are using ClearCar actively. A lot of them are actually using it to acquire cars very successfully. The next logical evolution of that is to automate that process even further. We talked about Project VIPER a few minutes ago.
VIPER, which stands for Vehicle Inspection Processing and Enhancement Reporting platform. What VIPER does is, think about hardware pillars that are in a service lane, and every time a car goes through the service lane, we do a digital inspection on the car. We use capabilities like Virtual Lift, which is our undercarriage scanning tool. We take a ton of photos of the vehicle. We're starting to put technology to listen to the engine.
As a result, in seconds, we believe we can get an accurate condition of the vehicle that will then lead to us confidently suggesting a price to the dealer for that vehicle, which then eases the conversation between the dealer and the consumer and allows dealers to basically have a shot at buying a lot more cars.
Solves one of their biggest problems, which is supply acquisition from consumers. It takes a lot of the doubt away 'cause we're leaning in with a lot of our inspection and technology there. The logical extension of this is for some cars, we're gonna not only suggest a price, but we're gonna backstop it with a guarantee. The benefit to the dealer obviously is at scale in a consistent way, they're appraising millions of cars going in and out of their dealership or $270 million from last year in terms of the number of repair orders there were.
What that also allows us to benefit from is now that the dealers are buying a lot more cars, undoubtedly they're gonna wholesale a lot more cars, that's gonna help us expand our TAM.
What's the value prop for the service lane?
Absolutely. Primary use case that we're addressing in H1 is appraisals, which is understand the condition and put a price on the car. A secondary and a tertiary use case results in— okay, the vehicle is inspected, the individual doesn't wanna sell it, which is the case when I took my car for a service appointment, not interested. The device scanned and let the dealer know that one of the tires or two of the tires needed a replacement. Very easy upsell opportunity for more repair work for the dealer. You'll kind of see in the second half of the year, more and more of these capabilities will be unlocked using software and using technology.
We talked about bundling earlier. I wanna transition this a little bit to Max, right? Talk to me about just incorporating Max as a overall comprehensive view for ACV and to be able to drive more of the core marketplace business as well. What does Max unlock for you in terms of additional just penetration to the dealer from a software perspective?
100%. ACV Max is an inventory management system. It's basically the place where dealers make inventory decisions. Should they retail? Should they wholesale? Should they merchandise? It's basically guiding the dealership around these decisions and providing them tools to do it well. Our philosophy has always been let's automate and make intelligent as much of the workflows at the dealership as possible. We're connecting ACV pricing into Max, that's already been live now for used cars and more recently for new cars. What that'll allow dealers to do— both on the used car side, which is live, and the new car side, which is gonna be coming in Q2 and Q3– is have much more confidence at the price of the cars that they see.
We also have LLM capabilities built in which will guide dealers and today allow dealers to make decisions by sort of consolidating and augmenting a lot of the data signals that they see. There's easy ways to wholesale the vehicles on ACV, sort of through single clicks. There's also the offers on some of the aged inventory that we're providing from our pricing engine. Very strategic product that's used by dealerships to make inventory decisions. Plugging into wholesale, we're basically opening up decisioning and easing up the process of pushing cars to wholesale. What we see today is, Max is very well appreciated by the industry for being an intelligence automation-forward platform.
We see higher ACV wholesale utilization from Max customers. As we roll out the bundles between Max, ClearCar, and VIPER further, we look at that as being a very strategic portion of our growth.
Transitioning this a little bit, let's talk about some of the ancillary products. Let's talk about capital first. Right, you guys talked about tightening the lending standards in the last call. What are you guys seeing right now with capital? Then what's kind of the expectation for capital to normalize, if you will, in terms of 2026?
Sure. For those of you who are not familiar, this is a floor plan business. We're providing liquidity to the buy side, which are typically independent dealers who are typically most of the buyers on our platform and other auction platforms. The two biggest lenders in this space—two of the biggest auctions businesses, You know, Manheim and now OPENLANE, you know, have historically had pretty big floorplan businesses. We started this business a number of years ago, and it's actually our fastest-growing line of business.
The growth of this business for us has typically exceeded what our unit growth is on our marketplace as we've expanded our penetration and attach rate into our market. Last year, we still grew at a really good clip. Q4, we grew at 48%. Q2 and Q3, we grew at 60%. That said, we have tightened up our credit standards and underwriting standards to ensure that we kinda protect our risk on the downside. We're being a bit more risk-averse coming into this year, you know, based on some of our recent experience.
We've also added, kinda more staffing, and we've taken the underwriting function and moved it under the finance and accounting organization under me. I feel like we're really now well-positioned based on the improvements we've made, kinda underwriting standards or process improvements to continue to scale this business going forward. Our growth rate this year, we're assuming, will be a bit less than it was last year, we're just being prudent at this point. There's a very large opportunity for us to finance not only cars that transact on our marketplace, but also cars that transact on other marketplaces, which is pretty common.
You know, that, you know, some of the big players have a significant portion of their floor plan lending is outside of cars that transact on their marketplace, right? I would say this will continue to be a nice lever for growth for us. It flows through at a very high margin through our P&L. Again, it's very important to provide liquidity to the buy side, so they can transact, since most independent dealers don't have the working capital that they need to buy cars, so they typically get a floor plan to lend to them.
This is short-term collateralized lending, so our typical maturity is about 65 days, and we have security interest in the vehicle until it's sold to a consumer.
We haven't talked about commercial at all. Commercial is another large opportunity within just wholesale as a whole. Talk to us about just the Houston side and, like, what's the progression as we think about that product maturing and really kind of scaling and coming more into GA kinda launch?
Yeah, absolutely. What you're referring to in Houston is our first greenfield. We have today acquired 10 physical auctions, and our first greenfield in Houston was an attempt to effectively stand up an online digital auction from scratch. I'm super excited to say that it's gone pretty well. We launched it in Q3 of last year, and the difference between one of the physical auctions and what we have in greenfield, it's digital end-to-end. The value of the land is it's a place for customers to park their cars. There's some light recon work that can happen.
The inspection, the marketplace, and the post-transaction all are coupled with our ACV digital marketplace. The feedback from our customers are they're pretty happy both in terms of conversion and price realization, and then it gives us the ability to have synergies and economies of scale in terms of transportation and in terms of ops processing. That's giving us the confidence to where we will open our second greenfield as well this year, and that'll be a key portion of our strategy going forward in terms of having land in key parts of the country.
In terms of commercial overall, the opportunity is far bigger than greenfield. One of the categories we're really excited about is upstream commercial. The way I would frame it is we're mostly done with core capabilities of integration in and out of consignors using AutoIMS. We have made meaningful progress in terms of our inspection templates. We're kinda finishing up some of the work on the back office stuff. Probably 70-ish percent of the work on the product and tech side is done. We are actively speaking to consignors to basically be their solution for upstream commercial. We think by mid-year, we should be ready to launch some of those.
All right. Awesome. With that, we're at time.
Yep.
Guys, thank you so much for participating.
Sure.
I appreciate it.
Happy to be here. Thank you.
Thank you, guys.