ACV Auctions Inc. Q3 FY2025 earnings call

Growth: - Leveraging AI across solutions to attract buyers/sellers, increase penetration. Marketplace saw over 10,000 sellers and 14,000 buyers transacting in Q3, franchise rooftop penetration reached 35%, major account team rooftop penetration increased 300 basis points year-over-year. Data services like ClearCar and ACV MAX gaining traction. ACV Transportation had strong execution with record revenue and transports delivered, revenue margin expanded 200 basis points. ACV Capital had 70% growth in Q3 but is lowering exposure to higher-risk customer segments and reducing Q4 revenue forecast. ### Innovation: - Leveraging ACV AI for real-time pricing, ACV Guarantee as fastest-growing channel in marketplace. Project Viper and Virtual Lift 2.0 in pilot phase with positive feedback. First greenfield remarketing center in Houston successfully soft launched. ### Financial: - Q3 revenue $200M, grew 16% y-o-y. Adjusted EBITDA $19M at midpoint of guidance, margins improved 280 basis points. Adjusted EBITDA benefited from a lawsuit settlement but offset by ACV Capital reserves and bankruptcy-related expenses. Non-GAAP net income $11M at midpoint of guidance.

Q3 revenue was $200 million, growing 16% year-over-year. Sold 218,000 vehicles, a 10% year-over-year increase. Auction and assurance revenue was 56% of total revenue, growing 10% year-over-year. Marketplace Services revenue was 40% of total revenue, growing 28% year-over-year. SaaS & Data Services products comprised 4% of total revenue, growing 2% year-over-year. ACV Transport and Capital delivered record revenue performance. ACV Capital team had 70% growth in Q3, the fourth quarter of accelerated growth.

• Q4 revenue expected to be in the range of $180 million to $184 million, growth of 13% to 15%. - Q4 adjusted EBITDA expected to be in the range of $5 million to $7 million. - 2025 revenue now expected to be $756 million to $760 million, growth of 19% year-over-year. - 2025 adjusted EBITDA now expected to be $56 million to $58 million, growth of approximately 100% year-over-year. - 2026 planning assumes dealer wholesale market is flat, enhancing field engagement model in emerging regions and rolling out new innovations.

• ACV Capital conducted a review of loan portfolio due to former customer Tricolor's bankruptcy, lowering exposure to higher-risk customer segments and reducing Q4 revenue forecast. - Challenging macro environment with dealer wholesale market weakening, price depreciation above normal seasonal patterns pressuring industry conversion rates.

Q: Is it fair to ask, do you guys think it's possible the wholesale market -- the dealer wholesale market has changed structurally and dealers are just going to hold on to trade-ins at a much higher rate? Or I just want to think about because it's been a choppy couple of years. Just how you guys think about this going forward? And then I just had one on competitive landscape as well.

A: Chris, I don't think we should assume that there's a long-term structural change. I think the dealer wholesale market is still -- should recover. I think when you look at all the factors, off-lease really hasn't come back in a significant way, where we haven't seen interest rates come down, you haven't seen all the macro factors play in. So I think at the end of the day, it'd be way too early to say with all the macro events that the dealer market has structurally changed.

Q: Could you unpack a little bit on the third quarter auction ARPU moderation from second quarter? I appreciate your market share comments. I'm curious that if there were any price actions that were being taken to maintain that? Is that a change in strategy?

A: We, I think, mentioned in the call that we have targeted regional pricing campaigns where we are being a bit more aggressive. Think about that more on the supply side. So where we're still new and we're still emerging, we are attacking the market and it is helping us win share. I think. Bill, also mentioned in the call that we expect Q4 for ARPU. How did you...

Q: I wanted to ask about ACV Capital and just the return to normalization of lending. Can you guys just help us understand the guardrails outside of macro of what you guys need to do to be able to return that business? And then again, going just back to top of funnel demand. Can you guys talk about cohorts, and is there anything you're seeing within the cohorts as we think about just the change in dynamic of macro and what you guys are seeing? Or is this just widespread?

A: This is Bill. So I'll start with ACV Capital, and then I'll turn it over to George. So maybe first, a little bit of context in terms of ACV Capital. So as part of our planning, we have historically planned an historical loss rate that's slightly higher than some of the bigger players out there. Typically, we model a 3% loss rate based on the fact that we're in a high-growth phase for the business, and we're certainly not as mature as some of the bigger players out there. So that's what's been baked into our financial models for ACV Capital historically. So despite what occurred in Q3, and I'll get into that in a minute, our view of that loss ratio hasn't changed in terms of our modeling going forward into next year. That said, as I mentioned on the call, as a result of this large bankruptcy that occurred in which we've reserved basically over $18 million for that bankruptcy, not sure what the ultimate outcome will be in terms of recovery, we did do a very thorough portfolio review. And as a result, we've looked at our internal controls, our processes, and we're in the process of making a number of improvements going forward so that we can scale with comfort next year in terms of the confidence that we're going to stay within our planned target in terms of those loss ratios. But as a result of that, there were certain higher risk credits that we had outstanding that we concluded it was prudent to book some reserves in Q3, which is what flowed through the quarter, and that was approximately $7 million. In terms of the go-forward plan, there's still a lot of upside opportunity for us. This is very synergistic, obviously, with our auction business. So it's very strategic. And you can expect this business to continue to grow next year at a good clip, albeit maybe at somewhat of a slower rate than we experienced this year. And we are taking our ACV Capital revenue down a couple of million for Q4, as I mentioned, just to ensure that before we start to scale next year, we've got the right processes and controls in place. So hopefully, that gives you a little bit of color in terms of ACV Capital. George Chamoun: And maybe just 2 more things on that. Even with that bit of caution, we're still going to be executing on attach rates in the high teens. So look at this as it's still very strong execution, even with having this mitigated risk and being a bit more careful. The midterm model assumed 25% attach rates. So when you just -- the way I look at this is, listen, you learn on moments this, you sometimes just add some more controls. You take moments this. Obviously, there's other major banks in the world that had the same common customer. This will make us even a better company in the midterm. And you really become, I think, a more durable company in moments that when you have a situation this like this Tricolor. But I would say, I have the same confidence in getting back to the 25% attach rate goals in the midterm model. This is a small period of time. We have a lot of demand for ACV Capital. We've got a great product. You saw us execute really well up until that moment. And I would say one step backwards, I think we'll then take 3 steps forward. So that was all on your first question. Your second question, I believe, was about other cohorts and other things going on the business. Can you repeat that one, just to make sure because it was so long ago, it took us a while -- such a long time to answer your question that I remember your first one, but I want to make sure -- your second one, but I want to make sure I got it right. Andrew Boone: It was a great first answer. So let me try the second one again. If I think about macro just overlaying in terms of results, is there anything you want to call out in terms of specific cohorts or geographies that may help us better understand what's going on across the industry?

A: Yes, I'll try to give a little color on this. We mentioned on the call that 2 of the regions that we were probably known to be weaker in had 20%-plus growth year-over-year, and we were really excited about that. If you look at our largest regions from a cohort perspective, most of our large regions are still growing. And there's only one, and the one that -- it still grew. It grew, but it didn't grow as much. It was one where we've got nearly 40% market share. And so when you look at overall the cohorts, I still -- the reason why I remain confident in the midterm model is because in the regions where we don't yet have the brand and support of being the dominant player in that region, we're emerging. And in the areas -- in most of the areas where we have very significant market share, and that's significant against physical and digital, all in, we're still growing in the majority of those regions even with big numbers. So long-winded way of saying, I think not a lot has changed. But we did mention on the call, there's a few reasons where we need to step it up and grow even more, and we're on it.