Great. Good afternoon, everyone. Thanks for joining. My name is Rajat Gupta, member of the Automotive Equity Research Team at JP Morgan. Very pleased to have with us the team from OPENLANE, ticker KAR, CEO Peter Kelly, and CFO Brad Lakhia. The format is gonna be a fireside chat. You know, we'll go through a few questions with Peter and Brad, and I will open it up to the audience for questions in between as well. With that, Peter, just had a very broad question initially. Maybe it would be helpful to just recap, you know, how the company has repositioned itself over the last few years.
You know, a lot has happened within the company, you know, with the spin-off of IAA, you know, the ADESA sale to Carvana, you know, the acquisitions of BacklotCars, CARWAVE, you know, then the rebranding and the consolidation. Maybe you would want to touch on your own background as well and, and how you were the first... You know, how OPENLANE, with you coming in with OPENLANE, you know, how you were the first digital solution provider, at scale, and why OPENLANE is, has the entitlement to be a major player long-term in the ecosystem. So sorry, lot, lot in there, but, you know, just more, you know, as a background would be helpful.
Thanks, Rajat. Good afternoon, everybody. So maybe I'll start there, my own background. Yeah, I started a company which became OPENLANE back over 20 years ago. In the sort of first wave of the internet, we were really looking at disrupting the wholesale used vehicle auction business, physical auction business. And that business did quite well. It was acquired by KAR Auction Services, one of the physical auction, you know, players, one of the large players in late 2011. Actually, the business accelerated from that point. We grew even faster in that second decade through to the pre-pandemic era. The pandemic changed a lot of things in our business. Rajat, you touched on some of the things KAR Auction Services did. They spun out the salvage business, IAA, in 2019.
I became CEO in 2021, and I've done a lot to reposition the company as a digital marketplace leader. We sold the physical assets to Carvana. That was just over two years ago. Deal closed in May 2022. We acquired a number of digital properties, BacklotCars and CARWAVE, that are now sort of fully integrated into an OPENLANE-branded marketplace. In some respects, Q1 of this year, Rajat, was our first quarter, you could say, as you know, OPENLANE as it will be going forward, which is a digital marketplace leader for wholesale used vehicles, principally operating in North America, but also some volume, about 10%, a little less than 10% of our volume in Europe. You know, I think a great opportunity ahead for this company. So what differentiates us?
As I mentioned, we're a digital marketplace leader. In terms of volumes, we sold just over 1.3 million cars last year. That's the biggest digital pure play in the industry. We've got a unique mix of commercial and dealer volumes. So about 50/50% of our volume last year was commercial versus dealer. The commercial, a lot of it is off-lease volume. It comes from that business that I started those years ago, OPENLANE. And then a growing dealer-to-dealer business, selling units that are sold by dealers, you know, trade-ins, aged retail units, et cetera. So unique mix of inventory. It gives us scale. I think durable customer relationships with our OEM captives and dealer partners.
You know, strong technologies and proprietary inspection capabilities, a digital marketplace that is very fast. We convert dealers or customers' vehicles into cash very quickly at low expense to them, get them good prices. The business has strong cash flows, is growing. Volumes grew 13% in Q1. And as we look to the future, we see an opportunity for growth driven by a number of factors. One is a continuing secular shift from physical to digital that will take place in this industry, not just this industry, but all industries. But there's a secular shift going on, and then a cyclical recovery, because wholesale volumes in the whole car space have been quite a bit below normal in the post-pandemic era, and there's a whole bunch of factors for that.
I'm sure we'll get into some of them here today. But they remain below normal, but most forecasts are for those volumes to grow back towards normal in the coming years. So we see a cyclical driver, we see secular drivers, we see a very efficient business with a great ability to scale. As volume, as volume grows, profits grow even faster. So, exciting opportunity ahead for OPENLANE.
Great. No, that's a great summary. Maybe touching on, you know, some of the cyclical aspects and, you know, one of the drivers of those cyclical aspects is, you know, gonna start from what happens with new car production, you know, what happens with incentives, and then the related impacts to used car pricing. Could you talk about, you know, what you're seeing in the market today in terms of activity there, what your expectations are for, you know, used car prices declines, and how does that impact, you know, the cyclical shape that your business, you know, might take-
Yeah
... you know, going forward?
Thank you. Yes. Yeah, when we look at the cyclical factors, I'm very encouraged. They seem to be accumulating in a way that I think will be favorable, in the medium and longer term for our company, so that's a positive. So if I start with new car production, new car production, the OEMs have overcome their supply chain challenges. They're able to build new vehicles at the rate they want to. That's a positive. We're seeing inventory of new cars increasing on dealers' lots.... That's a positive, because the more inventory dealers have, the more likely they are to want to wholesale those trade-ins that they're getting. When their lots were empty, they were inclined to hang on to those trade-ins.
Now that the lots are more full, they're gonna start wholesaling those trade-in vehicles and those lease returns that come back in a more normal way. So that's a positive. We're seeing manufacturers starting to put more incentives on vehicles. In fact, that's increasing quite substantially. I saw some, watching TV last night in this hotel, some pretty rich cash on the hood offers on vehicles I hadn't seen, certainly wasn't seeing a year ago. So we're seeing more incentives from OEMs. That's also driving more leasing, lease originations. I saw $299 leases, $279 leases offered last night on TV. Again, haven't seen that for a while. So more leasing will be a positive for us as well.
So I think those things are all good, healthy, getting back to normal, which I think will be very positive for our company. Some of them will take time. You mentioned used car prices. Used car prices today are still about 30% higher than pre-pandemic levels. They were 50% higher, so they've declined about 20% in the last year and a half or so. We see some continued downward pressure on used vehicle prices, but I don't see them getting back to pre-pandemic levels. So if I were to estimate, Rajat, and I'm not an economist, I'd say maybe another 10% of depreciation could be on the cards. And when that depreciation is happening, it can be a little bit of a headwind for a business in the near term because it just puts, puts pressure on conversion rates.
But I think long term, it's a positive 'cause it coincides with unlocking more wholesale supply into our marketplace. So that's ultimately a good thing for our company.
And the 10% number, I mean, what's... Is that what you're hoping for, or is that, you know, something you, you feel like you have decent visibility on, that could happen in the second half? Because, you know, the industry is still going to, you know, cycle past some challenges with respect to lease returns, you know, the supply of zero to five-year-old cars. You know, a lot of consumers who bought their vehicles back in 2021, 2022, you know, the equity situation. Like, even if they not lease the car, like, you know, it may not look that great. So, how do we get to that 10% number? Is it just the incentive activity that you feel like is gonna drive that, or anything else to keep in mind?
Yeah, good, good question. Again, I would say, Rajat, I'm not the expert on this, but I'd say, you know, when we see manufacturers put more incentive money on new cars, that has an immediate and direct impact on used car prices, because ultimately, consumers are shopping for... Or there are some consumers that are shopping on the boundary of new versus used. So if new come down, used goes down in value. So that's a driver. I guess in part, it's like I just don't see it going back to pre-pandemic levels, because there's been inflation, so a dollar today is not worth a dollar, what a dollar was in 2019. So I think that's one element. But also, there was fewer vehicles produced from 2020 to 2023, into 2024, well, 2023.
So there's just a deficit of zero to three -year-old sort of used cars in this market, and I think that also prevents cars. So I'm sort of speculating that this year will look like a more normal year. And from about this point to the end of the year, in most normal years, we'd see a 7%-8% decrease. Maybe we see a little bit more than that this year. That's kind of my thesis.
Got it. Got it. That's helpful. And that's a good segue into, you know, the off-lease business. I mean, that's obviously a significant part of the commercial business that you have both in the U.S. and Canada. You know, talk us through, like, you know, the expectations on the recovery there. On the one hand, we're gonna have, like, fewer vehicles coming off lease, you know, starting, you know, later this year into next year. But on the other hand, we're seeing the buyout rates, you know, start to come down from the consumer side. How do those intersect, and, you know, how do you see the impact to your business in the second half?
Should we start to see that as a net positive for the business year, or do you think we need to wait longer, like, until we actually start to lap those, you know, off-lease return headwinds?
Yeah. Thanks, Rajat. First of all, I'd just like maybe speak to our position in the off-lease market. So we are a leader in the remarketing of off-lease vehicles. We have relationships, most of them are exclusive relationships, to run the online remarketing programs for the majority of OEM brands in the United States and Canada. So most off-lease vehicles that get returned, get returned through our system, through various private labeled programs that we've built for, you know, many or most of the OEM brands that you all know. So we've got great visibility and great exposure to that market. That's, in normal times, a very good thing. It made the last few years a little challenging for us 'cause there were so few off-lease vehicles. So what we're seeing happen today is... Well, let me start.
When we think about off-lease vehicle remarketing, the two inputs that are important are, one, is how many vehicles are actually maturing? So how many vehicles are reaching the end of their three-year lease? And that's generally a function of how many vehicles were leased three years ago. So we're gonna see a headwind on that number, okay? Because in the mid-2021 to late 2022 era, there was just fewer vehicles leased. There wasn't a lot of cars on lots. There was no... Manufacturers didn't have to put any incentives on cars. So there's a headwind at the top of the funnel there, for sure. But offsetting that, for the last few years, the consumer buyout percentage of these leases has been really, really high.
Because when the car got to the end of the lease, the consumer looked at the residual value and the market value, the market value was considerably higher. So if you were returning the lease, you were basically leaving a whole lot of cash on the table. So the consumer didn't return those vehicles. So our actual volume coming back was really light. We're seeing that start to change now as used vehicle values come down, as residual values in the portfolio of the cohort of vehicles that were leased goes up. That's changing, and that was behind the 30% growth in commercial volume that we saw in Q1, was largely driven by that factor, fewer consumer buyouts from the portfolio. So the truth is, the next year and a half will be an intersection of both of those factors.
Rajat, we expect it to be, on the whole, I'd say a neutral or maybe slightly positive is how I'd characterize it. I don't think it puts us in a worse position than the one we've been in the last couple of years. So I'd say neutral to slight positive, with the potential to be even more positive. You know, if we saw, you know, even higher percentage of those returned. That's for the next year and a half. In 2026 and beyond, I think it's pretty much universally positive. We're seeing substantially more leases written today. So our customers' portfolios are going up, so we expect higher off-lease volumes, starting late next year, and continuing as far as we can see at that point.
And we also think those will be returned in high percentages because I think this particular situation we had in the pandemic will be behind us at that point. So again, I feel quite good about the next year and a half. I think on the whole, we'll do fine, and I see an opportunity for a significant acceleration of that in 2026 and beyond.
Got it, got it. The other, like, I think interesting aspect is, you know, I think you mentioned on the 1Q call that, you know, the volumes on the off-lease, on the off-lease side of things are, like, 50% below what's normal.
Mm-hmm.
And, you know, that's obviously a higher fixed-cost business for you from what we know. So once those volumes do get back, you know. First of all, like, if you could help us baseline where the profitability is for that business today, and once those volumes do start to come back, you know, maybe in some form later this year, but more in 2026 and beyond, like, how should the profit inflection look like?
Yeah
... For the business, given, like, given the cost structure?
Yeah. Thanks, Rajat. So I guess, you know, one of the wonderful things about our digital model, like many digital models, is they're very sort of fixed cost in nature, with less variable cost, and we see that in our model. It scales really well. In Q1, I think we saw a 40% growth in marketplace-adjusted EBITDA year-over-year, off of a 13% volume growth. So I think that was, at least to me, an indication of the scalability characteristics of the business. So I think there's great inherent scalability in the model. It's something we're, I think, improving as time goes on, as we integrate these platforms and eliminate, you know, legacy and duplicative technology within the stack, improve our operation structure, our cost structure as well, so we're doing all of that.
So, I think the business has wonderful scalability. You're right. In Q1, even though our off-lease volumes were up 30%, our commercial volumes were up 30%, I did say on the call they were still about 50% below normal. So, Rajat, we don't break out the profitability of the off-lease segment, but I would say it's not linear to volume. So if volumes are 50% of normal, I'd say profits are probably closer to 25% of normal in that business. But again, I'm just giving you a... So there's a significant, I think, opportunity for increased profitability as the volumes improve in that part of our business.
You mean profitability for the off-lease is, will be worse than 50% of normal-
Yeah
like, if the volumes are...
Yeah.
You mean 75%, not 25%, because-
If the business is delivering 50% of normal volume, it's probably delivering 25% of normal profit.
Okay.
That's what I mean.
Okay. Okay, so-
Is that making sense?
So if you see a 50% recovery back, your profits are going to see a 25% recovery or a 75%?
75% .
75% recovery.
Yeah.
Okay, yeah.
Sorry, 75%.
Got it. Yeah. Just to segue, you know, because it feels like, you know, the dynamics around off-lease and the way the lease returns and the lease retentions work for the dealers, that is likely to have a meaningful impact on your D2D business as well. You know, one of the things that, you know, you know, when we talk to the dealers is, they know, like, there are going to be fewer vehicles coming off lease, and, you know, even if the buyout rates do drop from the consumer, I mean, our conversation suggests that they're going to try and retain a lot of those vehicles for their own used car business because of, like, the equity position consumers are going to find in for the vehicles that were purchased.
You know, just a zero to three-year-old shortage. So what gives you the confidence around the D2D business recovery here, you know, in the second half and into 2025? We obviously ran through the off-lease dynamics, but, like, walk us through, like, how you see the recovery in D2D business.
Yeah. I think in the dealer-consigned arena, first of all, that wasn't as negatively impacted by the sort of pandemic-type situations. Yes, it was compressed a bit, more like maybe a 25%, 20%-25% compression versus a 75% compression. And it has been recovering, you know, somewhat in the last year and a half as well. So, that doesn't have as far to go to get back to normal. But I think in the dealer world, we see the opportunity more driven by the secular shift from the physical model, which is still 70-ish percent of the total industry going to physical auctions in that category, moving to a digital model.
The advantages of the digital model, and I think these are resonating with our dealers, is we can sell the car very quickly, you know, directly from their lot without having to move the car. So speed of sale is fast, cost of sale is low, whether you're a seller or buyer, and market price attainment of the vehicle. We believe our channel gets as good a price as any other channel, and the data supports that. So I think on the D2D side, it's more of a secular shift, and we're seeing that play out. You know, we're seeing dealer volumes at physical auction generally kind of under pressure, slightly down. So we think there's a share shift between physical and digital, playing out. Now, that takes longer to play out, Rajat.
But I think that's continuing, and when we talk to our dealer customers, particularly, you know, the most sophisticated, I'd say, franchise dealer groups, they definitely see digital as the future. They see that's an area they need to lean in. We can help them with that. And by the way, the things you talked about of dealers wanting to retain inventory within their dealer network, that's absolutely fine, and we can enable that. We can enable that through our technologies, and frankly, those often show up as revenue events for us, too.
Got it. Got it. How should we think about, you know, just digital penetration, you know, for D2D? Is that a business that you... Is there an upper limit that you think about in terms of where digital penetration can go? And in that context, how should we think about, OPENLANE's share gains? You know, one of your competitors, you know, they've talked about, like, high teens, share gains consistently over time that they would expect. What kind of number would you be satisfied with, you know, for, for OPENLANE's D2D business in the U.S.?
Yeah, well, first of all, we are looking to grow the business. We are looking to gain share, vis-à-vis, you know, as part of the industry overall. I'd say, Rajat, generally, you know, we'd like to be positioned so that our volume growth is beating the industry overall by, I don't know, I'd say something like a 10% would be a good... You know, to the extent industry volumes are flat, can we be growing 10%? Industry volumes are up five; can we be up 15? I think it's that kind of, that kind of opportunity that's available to us right now. Obviously, none of this is static. As the...
I mean, I, I would argue that as commercial volumes grow and more of those vehicles start to show up on our marketplace, that'll be a net positive for us 'cause it'll be a richer inventory selection that we can use to attract more buyers. And that'll help not only lift the off-lease business over here but help the dealer business over there as well, you know, in the long run.
Got it, got it. I think in the first quarter, you know, your share gains were more like mid to high single digits. Are there any areas you would point to within the company? You know, you've obviously done this whole platform consolidation effort, you know, which has been a big undertaking. You know, are there, like, low-hanging fruits, like, within the company that you can fix quickly to get to that 10% number, you know, in the near term and even maybe beyond that?
Yeah, I guess, what I'd say... so first of all, you're right. I think our share gains in Q1 were more in the mid- to high single digits, so I think we've got some room to kind of, you know, further improve that. But as I did say at the beginning, it was our first quarter, as, you know, with an OPENLANE consolidated marketplace in the industry, so I feel really good about that. And frankly, the reception we're getting from our customer base, both on the commercial and dealer side of the business, has been very, very positive in that regard. So it's giving, I think, our company, me and the team, the confidence to lean in even more aggressively.
So we're focused on, well, first of all, our purpose statement: Make wholesale easy so our customers can be more successful. So we're focused on that. How do we make it easy for all these customers, particularly the large-volume suppliers, whether they are dealer groups or commercial sellers? How can we build a process that scales really well, that makes their business more successful, that generates better outcomes for them? And then how can we sort of lean in, you know, from a sales and marketing perspective to reach, you know, that more fragmented audience of franchise and independent dealers across the country? So we're doing more of that as well.
Got it. You know, one of the things that we have noticed, you know, over the last couple of years, there have been a lot of, like... You know, despite the challenging backdrop in the industry, and obviously, used car prices, you know, have held, you know, are still well above pre-pandemic, we have seen the industry, you know, especially on, among the digital players, you know, including you and ACV, you know, see fee increases and, you know, price increases, on a like-for-like basis. You know, we keep hearing a lot about competition. You know, obviously, ACV's out there. You know, we hear about Copart now. You know, ADESA now has ADESA Clear. You know, Manheim has Manheim Express. Like, how do you differentiate in that backdrop?
You know, why is OPENLANE different? You know, what's different in your technology, you know, that allows you to continue to gain share, you know, at the kind of, like, clip you're targeting?
Well, we've got a clear digital focus, so we're focused on a digital marketplace model for all of our customers. And I think that we work hard on the attributes that I think digital creates for our customers: selling the car quickly, minimizing the expenses associated with the process of selling that car, and generating, you know, excellent prices for the sellers for all vehicles sold. So very much focused on all of those. I think our customers appreciate the fact that we've consolidated these brands. I think it clarifies for them, you know, who we are and what the offering is. I think our model is very, very efficient. I think we're, you know...
I kind of look at it, Rajat, as, you know, what does it cost us to sell a vehicle for one of our customers versus what does it cost that customer to take that vehicle to—let's say, a physical channel and go through that process? There's no question in my mind this is a lot less expensive. So if this is less expensive and faster, then on the assumption that this gets the same price, which I believe it does, and the data supports that, this should gain share over time. So that's, that's what we're leaning into, clarifying that for our customers, explaining to them the, the value that our platforms create, again, whether they're a commercial seller or a dealer group, and, and, you know, growing that way, I think is what we're focused on. You mentioned prices.
You know, there have been fee increases in the industry, certainly through the pandemic when volumes were low. I think our service is attractively priced vis-à-vis competition. We're certainly not at the top of the pack when it comes to fees per vehicle sold. That can be viewed as an opportunity for revenue enhancement over time, or a competitive weapon to help us, you know, gain volume and share today, which, but either way, I like, I like our- I like the way we're positioned in that regard. And notwithstanding that, being able to deliver, you know, strong cash flows and, and, and profits today, based on the pricing and volume that we currently have.
How irrelevant or, you know, how important of an aspect is, or a differentiator is the consolidation efforts that you have taken, you know, the one brand OPENLANE, you know, having both commercial and dealer, you know, consignors on that platform. How differentiated would you view that as versus your competition today in terms of, you know, the digital share gains?
You know, I think, I think it's very positive because, you know, OPENLANE. First of all, it's minimized the offerings that our customers had to sort of understand, "This brand does this, and this does something else." It's now sort of consolidated into one. So that's just easier for somebody to get their head around, for us to articulate. It also helps us consolidate our teams internally and reduce our costs that way. So, all of that's been good. But I think it's, it's been very helpful with our customers. A lot of our franchise dealers know OPENLANE because they're been buying off-lease cars through us for, you know, more than a decade. Now they see, okay, we're the partner that enables them to do that. There's a strategic conversation to be had with them.
How do you maximize and optimize that to get the greatest benefit for your dealership or dealerships? And at the same time, not only can we do that for you, we can also help you sell your wholesale units. And by the way, we do that, you know, very fast, very efficiently, and with great outcomes for our customers as well. So I think it's been, you know, very, very positive. From our commercial sellers, we've been able to say we now have a bigger buyer audience than ever for your vehicles because we had our buyer audience fragmented into different venues because we've grown by acquisition. Now, it's all in one place with all of our buyers, you know, able to see all of our cars in one venue, so that's a positive, too.
From an operating perspective, you know, talk about, like, the third-party inspection model that you have. You know, why is that the better approach versus in-house inspection? You know, one would think vertical integration provide more control and standardization of, you know, processes, you know, best practices, and just leverage that cost. So just curious on that approach, and is that something that you would consider, you know, flexing over time?
Yeah. So there's a little bit of a misunderstanding on this one. So every vehicle we inspect in our dealer-to-dealer marketplace is inspected using our proprietary technology that we built in-house. So it's a guided inspection. The car is inspected in exactly the same way, based on what our technology says this 10-year-old Ford truck should be inspected in this manner, for example. Now, some of those are inspected by our employees, but a bigger number of them are inspected by third-party independent contractors. So it's not. I would argue it is an OPENLANE proprietary inspection. It's just the person who's doing the inspection may be an employee or a 1099 contractor. If they're a 1099 contractor, they're typically somebody who's got automotive experience.
Former mechanics are people we target, people who really understand cars but don't wanna be doing the hard physical work of, you know, lifting engines and turning wrenches, but they wanna leverage that skill, inspect cars. So we do a lot of that. I actually think it's really effective. I think our dealers like our inspection, and it has a big advantage in terms of cost. Think of it as, you know, the independent contractor model that many digital companies leverage, you know, across lots of different industries. This is kind of no different, except we're leveraging an individual who's got a particular automotive skill. So these are inspections using our proprietary technology. We integrate AI into the inspection. I think we're the first company in the industry to do that. Dealers love that. And we do it in a really efficient way.
This 1099 model is really efficient, so our cost per vehicle inspection, per vehicle inspected, I think, also leads the industry. And why does that matter? It matters because we've got this thing called conversion rate. If you've got a conversion rate of 50%, and that's not unusual in these marketplaces to be around that level, that means you're inspecting two cars for every one you sell. So having your inspection costs be really efficient is really important in terms of your cost, cost of sales for the cars you're actually selling. So I feel really good about that model. Now, we have employees doing it, too. We can dial that up anytime we want. We feel we've got a good mix of employees versus 1099s across the country.
Got it. Got it,
Yeah, and, and Rajat, I would just add, you know, that while the delivery cost of our inspection model we think is, is really advantageous and also flexible, as Peter mentioned, the outcomes are, are equally important, and we see that in, in our arbitrations, right? So if you think about, you know, customers who actually have to come back and arbitrate a vehicle, the quality of our inspections prove time and time again that we're, we're very competitive there.
Got it. Got it. That's, that's, that's clear. You know, I wanted to talk about, like, this, you know, product technology, AI as well. You know, you recently rolled out, you know, the Visual Boost AI, you know, damage detection functionality. You know, any early reads into how that helps, how that's helped, just inspector productivity as well as conversion rates? You know, any early, you know, metrics you can share, on that tool?
Yeah. Well, first of all, I feel really good about the tool we rolled out. So how it works is while the inspector is doing the inspection, and again, it's a guided inspection, we're guiding them around the car, as every photograph is being taken, it's being synced, loaded, you know, up to the cloud. An AI tool is looking at it and saying we see this damage here, and by the time the inspector gets to the end of the inspection, they can sort of scroll through those photos and see, okay, on this photo, the AI has indicated three different damages, and you, the inspector, have noted one. So these other two, do you want to take another look and just make sure, are they there or not?
So it's kind of a inspector-AI sort of collaboration, and the inspector kind of reviews it all at the very end and clicks, and at that point, the vehicle's in the marketplace. So it's a—I think it's a very neat implementation. It hasn't shortened the inspection time for the reason I just said. It actually probably has added a minute or two to the end, but that's fine 'cause it's a quality improvement overall. We noticed that buyers use it, particularly when they're in the later stages of discovery; they can switch on this layer and see what the AI... So that's a really strong signal. Once a buyer does that, they're highly likely to place a bid, so that's been evident in the data. I don't know that it's had any material impact on conversion.
I think our conversion rate's more or less the same with or without this, but Brad mentioned us reducing our arbitration expense, and that's-
Right
... That's another really important thing. So our arbitration expense has been coming down on a per-vehicle basis. I'd say some of that is probably due to, you know, this, but we obviously have got a multitude of initiatives to continue to manage that.
Got it. Got it. Sorry, I just wanted to quickly open it up to the audience for any questions. Sure, right there.
Are there any obvious kind of, I guess, adjacent categories that you could expand into, whether it be RVs or power sports or things like that, that you could leverage your technology and platform across?
I'd say potentially, yes, but today we're very much focused on used vehicles, principally North America, you know, some in Europe. And I think part of the rationale for that is the market has been uniquely challenged over the last few years, so we're really just focused on navigating that, you know, doing all the stuff we talked about, integrating our platforms, having an industry-leading offering for used vehicles. But you're right, the technology could be leveraged across different asset classes. When we've done that analysis in the past, those asset classes tend to be a lot smaller than automotive. Automotive is such a huge, you know, TAM, that I think it really, really worth our while for now focus very much on the wholesale used auto space.
Any other questions in the audience? One right here. One here.
You talked about, like, the current bias towards still physical transactions, particularly on the D2D side. I guess, what can you do, or what are you doing to kind of evangelize the digital-first approach, aside from just, you know, building your own platform, but how are you kind of going out and evangelizing that?
Yeah, I think, good question. Very much focused on explaining to the customers the benefits that digital brings to them, and I, I think many customers, you know, get this today. I'd say if we look at franchise dealers, the majority of franchise dealers are either exclusively digital or digital hybrid at this point in terms of the used vehicle acquisition. Independent dealers, a little further back the adoption curve, but definitely heading in that direction.
So if to the seller, explaining to them the benefit of, what this channel can offer in terms of time, cost savings, price attainment, really getting an opportunity to demonstrate, "Give us a small number of cars that will show you, the benefit this can have." And on the buy side, I think, you know, there are some dealers that still, you know, "I want to kick the tires. I want to be standing beside..." So trying to explain to them that these condition reports are really good, these are, vehicles are inspected by auto mechanics, we have AI on here, and in the event that you get a car that's not what you thought, we've got a very robust arbitration buyback protection as well.
Trying to make that offering as strong as we can, and then, you know, getting the message out through our sales and marketing efforts.
We have one more. We can do this final one.
Thank you. You mentioned earlier exclusivity with off-lease. Can you quantify how much you think that is in that market? And then, second part, are unit economics the same commercial and dealer-to-dealer?
Yeah. So on the exclusivity, we operate for, I'd say, the majority of OEM brands in North America in the United States and in Canada, private label programs for their off-lease vehicles, and those programs, by their very nature, are exclusive. So OEM Brand X doesn't want to have two different branded programs for its franchise dealers. They want to have one, and we're generally operating that. So the way that process works is, all of the vehicles for that brand are returned, processed through our technology, offered for sale to that franchise dealer network in that brand through our technology. Those are all revenue events for us as those cars sell. And then, at the end of that process, those vehicles are offered into an open digital marketplace, which is openlane.com, and that, again, is, at least at the beginning, exclusive to us.
The car is offered with us first before it's offered anywhere else. Now, if we have the car for a few days and we haven't sold it, then the car probably gets delivered to a physical auction or pushed to some different platform. But we have it at the sort of start of the process, through its private label, closed auction iteration, and into its first open auction offering. That's the exclusivity. Sorry, did I miss...?
Oh, yeah.
Oh, on the economics, yeah. Sorry.
The unit economics on commercial off-lease are similar when they get to the open market. So when they're in a closed market that Peter described, those ARPUs are lower, but again, as Rajat mentioned, it's a higher fixed cost model. So from a margin perspective, even when they're in the closed network, they're still fairly margin accretive.
Great. I think we've run out of time here. So thanks, Peter and Brad, for the time, and thanks, everyone, for joining.