ACV Auctions Inc.

Ladies and gentlemen, thank you for standing by and welcome to the ACVA third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. I would like to turn the call over to your host, Tim Fox. You may begin.

Thank you, Operator.

Good afternoon, and thank you for joining ACV's conference call to discuss our third quarter 2022 financial results. With me on the call today are George Chamone, Chief Executive Officer, and Bill Zarella, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of the risks and uncertainties related to our business can be found in our SEC filings in today's press release, both of which can be found on our investor relations website. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's earnings materials, which can also be found on our investor relations website. And with that, let me turn the call over to George. Thanks, Tim.

Good afternoon, everyone, and thank you for joining us. We are very pleased with our third quarter performance with revenue in line with guidance and EBITDA exceeding guidance. The ACV team once again delivered impressive results while navigating through a very challenging macro environment. With that, let me turn to third quarter highlights on slide four. Our market momentum continued in the third quarter with revenue of $105 million. a year-over-year growth of 15% versus strong results in Q3 21. Despite a modest year-over-year decline in units, GMV grew to $2.1 billion due to an increase in ARPU, which was driven by strong vehicle mix and also wholesale price inflation. Overall, we are very pleased with our execution in Q3. and our progress in key strategic initiatives. We delivered strong results despite an automotive market facing continued supply constraints, weakening retail demand, and vehicle price depreciation. Because market conditions are expected to remain challenging in Q4, we have assumed that wholesale volumes and conversion rates will be compressed through the balance of the year. Our guidance reflects this more cautious view of current market conditions, while also reflecting a balance between investing in growth and maintaining a clear path to profitability. Turning to slide five. To frame the rest of our discussion today, we will focus on the three pillars of our strategy to drive long-term shareholder value, growth, innovation, and scale.

I'll begin with growth.

Moving to slide seven. I'll begin with a brief overview of the dealer wholesale market and the important role retail automotive plays as a wholesale supply source. The US retail vehicle market is composed of 16,500 franchise dealers and 38,000 independent dealers. And together, they historically sold over 45 million new and used vehicles annually. These retail consumer transactions are typically accompanied by a trade-in, and in turn are sold into the wholesale market. Dealers also rely on the wholesale market to dispose of aged vehicle inventory that is not sold retail after a few months. Together, trades and aged units produce an estimated 11 million dealer wholesale units a year. With this market structure as context, let's turn to slide eight to further illustrate the supply side trends in our market. The US retail market continues to remain under pressure due to OEM supply challenges, and more recently, consumer affordability issues stemming from increased borrowing costs. There are some early signs that automotive supply chains are improving, which bodes well for wholesale supply volumes longer term, but for now,

cautious consumer behavior is clearly pressuring new and used retail sellers. Now turning to slide nine, let's look at the demand picture in the wholesale market.

The chart on the left illustrates a renormalization of vehicle prices that is also reflecting softening consumer demand. After reaching historically high levels in 2021, wholesale prices declined during the first quarter of this year. recovered modestly in early Q2, but have been decelerating consistently since that time. Wholesale price depreciation, especially when it occurs quickly, typically leads to conversion rate compression across the auction industry, as dealers become more price sensitive in the wholesale market. You can see this illustrated in the chart on the right, which shows industry conversion rates declining for the past five months. Next, on slide 10, we provided additional insight into our business that underpins our confidence in ACV's long-term growth opportunity. The chart on the left shows quarterly listings on our marketplace, which is a measure of dealer penetration and marketplace adoption. After moderating in the second half of 2021, as OEM supply issues mounted, listing volume turned positive at the beginning of 2022. and grew 19% year-over-year Q3. Through Q3, listings have increased 24% year-over-year, reflecting our strong execution on dealer penetration and wallet share expansion. In fact, franchise dealer penetration reached approximately 33% across the U.S., an increase of 500 basis points since Q4 21. Of course, in many cases, our wallet share is limited today, as we are in the early days of working with many new dealers. However, this expanding network builds a robust foundation for growth once wholesale volumes recover and we continue to gain more wallet share. The figure on the right is an updated view of the quarterly variance in ACV's conversion rates. As we highlighted over the past few quarters, Pre-pandemic conversion rates in our marketplace were in a tight range, then increased significantly as supply, demand, and wholesale pricing factors drove very strong conversion rates. Beginning early this year, as vehicle prices and consumer demand moderated, cautious buying behavior in the wholesale market resulted in conversion rates returning to normal historical levels. This trend continued in Q2, with conversion rates ticking down quarter-by-quarter. then declined further in Q3, correlating with the Black Book data shown on the prior slide. We are confident that conversion rates will recover as the macro environment normalizes, which will serve to be a growth tailwind given our strong listing performance. Furthermore, we're currently in flight with new pricing tools and marketplace formats aimed at increasing conversion rates. However, based on the latest market trend, We believe it's prudent to assume conversion rates will remain below the lower end of historical ranges for Q4. Turning the slide a little, you can see that conversion had a material impact on unit volume in Q3. More specifically, the year-over-year change in conversion rate was a greater than 30,000 unit headwind, and negatively impacted unit growth by around 20% . Despite the modest year-over-year unit decline,

GMV grew 6% to $2.1 billion, with growth driven by strong RPOs. Turning now to slide 12.

Based on our internal analysis, we estimate that the U.S. dealer wholesale market continues to remain well below normalized lines and contracted 21% year-over-year in Q3. Despite the macro backdrop, we are executing on key growth initiatives within our control, including gaining market share and attracting new dealers for our marketplace. Given our 5% year-over-year unit decline in Q3 and an estimated market contraction of 21%, this implies that ACV grew market share by approximately 16% year-over-year. Next, we'd like to wrap up the growth section with highlights on our value-added services. Our investments in the technology and resources to scale ACV transportation and ACV capital are driving strong top-line growth, while also improving customer experience and creating efficiencies both for our partners and ACV. On slide 13, you can see that ACV transportation continues to deliver strong results and is truly scaling into a great business. Our growing carrier partner and fast cycle time resulted in attach rates once again exceeding 50% in Q3, with newer technologies such as our carrier app gaining wider adoption. In Q3, over 60% of our transports were automatically dispatched, an increase of 20 percentage points from Q1. The investments we are making in transport technologies are attracting new carriers to our marketplace, and driving operating efficiencies. In fact, our transfer business hit another key milestone in Q3, with revenue margins in the low double digits, an increase from the mid single digits in Q2. As a reminder, our 2026 financial targets assume transport revenue margin of 15%. So our rapid progress this year is clearly putting us on a path to achieving this target. Turning now to slide 14, our ACV capital team continues to deliver strong results in the market. Capital attached rates doubled year-over-year in Q3, resulting in over 75% loan volume growth. Our tech investments within our capital business are also paying dividends. ACV's capital portal launched in Q1, and adoption has been strong with 75% of active ACV capital dealers now leveraging this post-auction financing solution. Lastly, we have continued to ramp up our investments in HV capital sales capacity to drive adoption and dealer engagement to ensure the value added service is an important growth and profit driver going forward.

Turning to the second element of our strategy to drive long-term shareholder value, innovation. Turning now to slide 16.

I would like to highlight a few examples of product innovation that will drive growth by enhancing the dealer buying experience on our marketplace and enable ATV to engage with a broader range of large dealer groups. Let me begin with our advanced buyer solution, SAM. This solution enhances the buyer experience through intelligent notifications and optional auto bidding capabilities. SAM creates persistent demand in our marketplace, leading to better price realization for our sellers and ultimately higher conversion. We are still early, but with over 1,400 dealers leveraging SAM on our marketplace today, we believe it can be a big road driver as we expand use cases and capabilities. Next, we're also enhancing our marketplace experience by testing a host of new formats, including varying auction durations, start pricing, and vehicle-specific merchandising. Our testing is showing promising conversion results and could increase buyer and seller success on our marketplace. Lastly, our private marketplace solution continues to gain market traction with some of the largest dealer groups in the country. This solution enables dealership groups to easily auction inventory within their network to maximize group profit. It's fully customizable to match each group's specific needs and seamlessly integrates with our open marketplace when a vehicle is not purchased in the private marketplace. On slide 17, I'll wrap up the innovation section with examples of how we are scaling our operations while innovating to drive customer success and reduce costs with a focus on our market-leading data and inspection capabilities. First, our APEX launch has been going great with adoption going across our nationwide inspection team. Recall that APEX is our next-gen data collection device, with upgraded audio capture capabilities and a sensor detection for vibration, displacement, and ultrasonics. The more comprehensive data set delivered by APEX drives significantly higher transparency into vehicle operating conditions, while also increasing the inspection productivity of our teammates. Next. We're excited to leverage our virtual lift data powered by AI. Starting in the last, we have developed a Cadillac converter detection model. As you may be aware, there has been a huge spike in Cadillac converter theft due to the higher content of valuable precious metals. There are also very expensive devices to replace, so it's a critical element of our inspection process to ensure dealers can accurately derive vehicle value. Our model can actually detect the presence or lack of a catalytic converter with 97% accuracy. And on the right, perhaps a bit less flashy, but still an important element of a vehicle condition, is rust. Manual inspections can easily mistake surface rust for a deeper structural or penetrating rust, which materially changes the equation on the vehicle value. Our app uses AI technology to automatically detect rust classification and quantify the amount on the undercarriage, which again raises the bar in ACV's inspection transparency while reducing arbitration risk. Next, I'd like to introduce our newest innovation that we have in beta, a pre-inspection data capability we have dubbed internally Copilot. Copilot is a proprietary technology that leverages machine learning predictive analytics, field team insights, and customer feedback to inform our BCIs on common vehicle-specific issues before conducting an inspection. We are equipping our inspection team with valuable knowledge gained through millions of vehicle data points and inspections, and it's being delivered in an easy-to-consume format specific to the vehicle they are standing in front of. all before they start the inspection. So to wrap up on innovation, I think it's clear that our team is delivering highly differentiated technology solutions to the market and to our own operations that expand our competitive mode and help drive profitable long-term growth. With that, let me hand it over to Bill and take you through our financial results and how we're driving growth at SCAM.

Thanks, George. And thank you, everyone, for joining us today. We are pleased with our Q3 financial performance. We delivered revenue in line with our guidance with upside to adjusted EBITDA, despite the challenging macro factors George outlined earlier on the call. We also demonstrated the strength of our business model with revenue margin and adjusted EBITDA margin expansion versus Q3 21. Turning to slide 19, I'll begin with a review of our third quarter results. Revenue of 105 million was at the midpoint of guidance. representing year-over-year growth of 15% versus strong results in Q321. Adjusted EBITDA loss of 12 million, or 11% of revenue, beat our guidance range. And EBITDA margin improved approximately 200 basis points versus Q321. Turning to slide 20, I will cover some additional detail on revenue. Total revenue of 105 million represented a 25% CAGR since Q320. Auction and insurance revenue, which was 53% of total revenue, grew 7% year-over-year, where it's a solid result in Q321. Year-over-year growth in auction and assurance ARPU of 13% was driven by higher GMV due to the strong mix of vehicles sold on our platform and the buy-see increase we instituted last December. Marketplace services revenue, which was 38% of total revenue, grew 26% year over year, reflecting strong adoption of our ACV transportation and capital offerings. Our SAS and data services products comprised 8% of total revenue and grew 20% year over year, driven primarily from growth in our max digital business and adoption of data enabled inspection services. Now turning to slide 21, I will review cost in the quarter. Q3 cost of revenue is a percentage of revenue decreased approximately 400 basis points versus Q3 21. The improvement was driven primarily by our transport business, which delivered a low double digit revenue margin in the quarter. To reinforce George's earlier point about the scale we're delivering in transport, our 2026 targets assume a 15% revenue margin for this business. By having achieved low double digit margins This soon is a strong indicator of the long-term profitability of this business. Also, a reminder, our transport revenue is required on a gross basis, so margin improvement has an outsized impact on our overall blended margins. Turning now to operating costs. The key takeaway here is that after significantly ramping OPX in 2021 to support market expansion and technology initiatives, we have continued to invest this year, but at a much lower rate of growth. This is a testament to the ACV team who has done a great job identifying ways to optimize how we operate while still delivering superior customer service to our dealer partners. Moving to slide 22, let me put a finer point on our investment strategy and path to profitability. Given ACV's leading market position and large addressable market opportunity, we continue to support both our growth and technology investments. At the same time, we have remained focused on investing prudently to ensure a clear path to profitability. As you can see, our focus this year on spending discipline and operational efficiency is expected to yield a material full-year decrease in OpEx growth. We're doing this while also preserving our key go-to-market and technology investments to ensure ACV is in an even stronger position when market conditions improve. As it relates to our EBITDA breakeven objective, We believe that despite the ongoing market and macro headwinds facing ACV, there are additional levers in our business to help us achieve this objective. Next, I will highlight our strong capital structure on slide 23. We ended Q3 with $502 million in cash and equivalents and marketable securities and $71 million of long-term debt to finance our rapidly growing ACV capital business. Note that our Q3 cash balance includes $138 million afloat in our auction business. As we discussed previously, the amount of float on our balance sheet can fluctuate meaningfully based on business trends in the final two weeks of each quarter, and it has a corresponding impact on operating cash flow. In Q3, cash flow used in operations improved materially to just $3 million, with a sequential increase in float contributing $13 million in positive cash flow. Based on our current outlook for the balance of 2022, we continue to expect cash use in operations to decline in the second half of 22 relative to the first half of the year. Now I'll turn to guidance on slide 24. For the fourth quarter of 2022, we are expecting revenue in the range of 97 to 100 million. Adjusted EBIT is expected to be a loss in the range of 15 to 17 million. For the full year of 2022, revenue is not expected to be a range of 421 to 424 million. This range represents growth of 17 to 18% year over year, and is modestly below our previous guidance to reflect our more cautious view of the macroeconomic factors impacting wholesale volumes and conversion rates in our market. Despite this lower revenue outlook, our adjusted EBITDA loss is expected to increase just 2 million at the midpoint of revised guidance. Adjusted EBITDA is not expected to be a loss in the range of 59 to 61 million, or approximately 14% of revenue. As it relates to our 2022 guidance, in addition to the macro factors impacting wholesale volume, we're assuming that conversion rates remain at or below the lower end of our historical range, with current market conditions persisting through the balance of the year. Finally, we expect non-GAAP operating expenses to grow approximately 24% year over year. Let me wrap up on slide 25 by reviewing our 2026 financial targets. We are very pleased with our execution and what has proven to be a very challenging macro environment, and we remain confident in our ability to achieve 1.3 billion of revenue and 325 million of EBITDA in 2026. Our confidence is reinforced by a number of factors, including strong dealer penetration and wallet share gains across our territories, resulting in sustained market share gains. Our broad technology platform enabling durable long-term growth and operating efficiency. consistent improvement in revenue margins, and a commitment to balancing growth and investments as our business scales. And with that, let me turn it back to George. Thanks, Bill.

Before we take your question, let me summarize. We are very pleased with our strong execution during these challenging times in our industry. We are especially proud of our ACV team that has delivered these results. We continue to gain market share by attracting new dealers to our marketplace. and by gaining wallet share within our existing customer base, which positions ACV for strong growth when market conditions improve. We're executing on our territory penetration plan, and our suite of marketplace offerings are gaining traction. We are innovating and delivering an exciting product roadmap to further differentiate ACV and expand our addressable market. We are in track to generate over $1 billion in revenue with attractive margins through a proven business model that we believe will drive significant shareholder value. We will remain committed to continue to build a world-class team to deliver on our goals. With that, I'll turn the call over to the operator to begin the Q&A.

Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster.

Our first question comes from Vincent Cardo. So, Jefferies, your line is open. Hey, Vincent.

Hey, guys. This is Vincent on for John calling Tony at Jefferies. Do you think you can talk about what you're seeing in terms of any developments in Q4 so far to headwinds to wholesale conversion rates and then Maybe help us get a sense of sort of where headwinds are hitting the hardest. How are headwinds impacting customer engagement and retention versus kind of the impact that you're seeing to the sales teams as they try to enroll new dealers? Thanks.

Hey, Vincent. It's George. I'll start and then if Bill wants to chime in. Vincent, if you look at the Black Book data that recently came out, what it really informs is that what we really have seen is conversion rates have continued to decline, and then they've sort of started to level out a little bit. I think in the last 24 hours, it showed it went down minimally. And we're not going to speak much to Q4. Beyond by saying like it our our conversion data and black books is mirrored pretty consistently so high-level bosses You know, we could be as we could have solved this Ross sort of how we're thinking about it and we were sort of leveled out on conversion and then the second part of your question there is Even though we've continued to grain gain dealers, you know, we look at our market expansion and I'll answer your question a couple of ways. So one, we now have a third of franchise dealers across the country starting to use ACV, some more so than others. Some we have limited wallet share, some we have a lot of wallet share. So what does that say? That says dealers are looking for ways to wholesale their vehicles differently. At the same time, we are starting to see listings per lister. If you look at it from 100% of their wallet share, listers per lister across the industry, listings per lister has started to decline. And that's mainly related to the macro environment where dealers are selling less cars, the combination of used plus new. So even though we've gained And even though we've gained listings this year by over 24%, we are starting to see the number of wholesale cars available per lister decline. So those are some of the macro things going on. But you're seeing compared to the others in the industry, we've bode well. And we've done a great job of taking share and gaining more relationships and also starting to take more wallet share. Phil, anything else you want to add?

Yeah, so what I would just add, then, just based on what George took you through in terms of the context for our guidance, we are assuming essentially that conversion rates are basically flat with Q3 and, again, remain at this, call it depressed level versus our historical conversion rates. But we have assumed that listings per lister, as we call it, does decline based on this macro environment that we're all of dealing with today so that's that's kind of the underpinning for our our guidance for q4 essentially thank you for your question thanks so much guys yeah thank you one member for our next question our next question comes from chris pierce with needham your line is open hey chris

Hey, good afternoon, guys. Just had a question on as vehicle prices depreciate, you know, higher arbitration. I'm just kind of curious what you guys are seeing, what safeguards you have in place. And is that something more of a we should think of as a growing pain and you guys are somewhat past it with the caveat that, you know, you always have to be vigilant around it?

Yeah. Hey, Chris, I'll start on this. But, you know, thanks for the question. And great, great question. You've probably seen throughout the industry that you have risk for higher arbitration as price declining. With us, quarter over quarter, we actually improved. In a market where the prices were going down, when you look at the investments we've made in technology and our inspection platform, when you look at the discipline in our operations, when you look at the way we're operating the business, we actually improved. And in a tough market, that's not easy. So, Chris, when you really think about, we've really invested very significantly in this inspection technology. We've invested in a national inspection team that are all employees of ours who are working hard out there, who are doing all the right things. We're not relying on any third parties. When you look at the internal processes we have to make sure we have good actors, not bad actors on the platform. We've got tremendous discipline here at ACB. We still have more rooms to go. We got still improvements that we can sort of improve throughout the next year. And we have not achieved all of our goals and objectives. But maybe Bill can sort of chime in a little bit more on this.

Yeah, Chris, what you'll see in the supplemental data is that we actually took what's on our P&Ls, basically our assurance cost of revenue, which is effectively arbitration costs, down quarter on quarter from $14.6 million to $12.2 million. And if you look at it on a per unit base, we were down almost 10% on a per unit basis. So actually, we've made some great strides in terms of driving those costs down despite what's a pretty challenging environment today. you'll see some of that in the map in terms of the data.

Okay, perfect. And then just one more, if I could. Bill, you mentioned the buy fee increase last December. If I look at, let's say, KAR's 2019 brick-and-mortar auction fees, you guys are still 10% to 12% below there. Is that something that – I know you're not going to commit to annual price increases, but I'm just curious how you think about the evolution of pricing on the platform as you kind of grow the platform.

Yeah, it's a good question, and you're right. We do have some headroom there, and, in fact, we did pass a smaller increase in our buy fees this quarter, which, again, tends to mitigate any downside we have on ARPU to declining prices for vehicles. So we've got some headroom there, and we'll see what we decide going forward in terms of whether we continue to march that upward over time. I mean, we're also all subjects, not just us, but all our competitors are subject to inflationary costs, right? So, you know, we've been able to pass some of this through pretty successfully, and it helps us, again, you know, mitigate any downside on ARPU for us going forward. Yeah, and Chris, I'll just add a little more to that.

Sort of our philosophy is don't be a pick. We do have opportunity to increase and increase. With both small price increases we made over the last 14 months, we had very limited commentary from the dealer community. Comments like, surprise, they didn't increase it more. Comments like, that's still extremely fair. So to your point, we still are charging fees lower than market. And we'll be smart about this for the next few years. We should earn the market value for what we're doing in time, but we'll be smart about it, and we'll do it carefully, and we'll do it in a manner where dealers actually are also feeling like we're being fair to the whole thing. So, Chris, so far, so good, as we've increased ARPU within a market where GMV was actually challenged.

Okay. Got it. Thank you. I won't be a pig, and I will pass the mic.

One moment for our next question. Our next question comes from . Your line is open.

Hi, thanks a lot. So two questions from me, maybe just to kind of piggyback on your response there about the price increase that you did. Just to clarify that, that happened in Q4 or did you also benefit from it in Q3, just trying to figure out the timing. And then second, really, just on the innovations that you kind of highlighted, when can we expect to see the benefit in terms of maybe higher efficiency in the field, in the inspection process as you start to use these?

Okay, this is Bill. So I'll take the first question, and then I'll pass it to George. Yeah, so that buy fee increase actually was earlier this quarter. So it was literally just a few weeks ago. So we'll get the benefit for most of the quarter, but not all of it.

Meaning the fourth quarter?

The fourth quarter, that is, yeah. Your first question was no to the Q3. Yeah, sorry, it didn't impact Q3.

And your second question, I believe you're asking about sort of the efficiencies and gaining scale with our inspection team. Is that really what your question is around?

Yeah. And even maybe leveraging some of the, you know, innovations here, you know, you highlighted whether it's ethics or, you know, other things that you can do to kind of make the process more efficient, faster, maybe. Okay.

Got it.

Yeah.

Yeah. Thanks for clarifying. So I'll, We're still investing. So I'll give you a couple of different categories. Apex, and then there'll be an adjacent thing we'll be working on where there's some other data in the vehicle where we get a little bit more manual today. Think about each part of the inspection. Any part right now could take us, let's say, four to seven minutes per sort of application or device you're utilizing. So in the aggregate, we might be spending between 20 and 40 minutes per inspection. with an objective of eventually getting it down to where each and every vehicle is taking you under 20 minutes. And these investments we're making are still early, so we won't see massive benefit in Q4 or even Q1. But when I think about between now and the end of next year, the investments in APEX, investments in us curating the type of an inspection that we should do on a low-priced vehicle versus a fairly high-priced vehicle. The inspection we should do based on that vehicle type, so this new investment, this new product that we internally call Copilot for right now, allows us to say, based on this Nissan, which has the following issues, go look at the following things. Still early. Some of this we just built. We're really excited about it. But we've got objectives internally that we're going to hit next year. And you can see the discipline we have here at ACB. We say we're going to do something, we're going to go do it. And we've built this tech to help us get more and more efficient on the time it takes to inspect the vehicles. But at the same time, you probably see by doing some studies on the industry, you don't want to then get killed on arbitration. So you need to be efficient. but you also need to get the data you need or else the car is going to come back and it's going to hurt you. And you don't want any surprises. So we're that combination of efficiency, but getting the data we need, we think we're years ahead of anybody else in the marketplace, years.

Got it. Thank you, guys.

Thank you.

One moment for our next question.

Our next question comes from Roger Gupta with JP Morgan. Your line is open.

Thanks. Hey, thanks for taking the question. Maybe, you know, this is like a twin question maybe, but trying to understand like how you're managing, you know, your cost structure, you know, your OPEX in context of, you know, what you're seeing in terms of conversion rates and this thing, you've obviously given the fourth quarter guidance, but I'm curious, like, how are you planning, you know, for 2023? You know, are you planning? Are you viewing fourth quarter as a trough for the business? You know, even expecting 2023 to be a recovery year? And in that context, like, how do you plan to manage your expense structure? I mean, are you? Is your optics at a level enough that you can just go into that into whatever the volume outlook is for 2023? Or Do you think you might need to make more cuts? So just trying both, like, you know, just budgeting maybe, you know, for 2023, if you could just help clarify that. And then I have a follow-up. Thanks.

Hey, Rajat. So it's Bill. Yeah, so look, obviously, you know, on our last call, we talked about the fact that we're exiting this year at a $40 million lower OPEX run rate than what we got it to when we entered into the year. That said, To answer your question more specifically, there are other opportunities for us to continue to optimize the business going into next year. That's really across the company, but I'll just give you a few examples just to give you a flavor for this. If you look at arbitration costs and our inspection costs together, this year that's about $130 million roughly evenly split between the two. Arbitration costs, we answered that question earlier in terms of driving those costs down from Q2 to Q3. So there's already great strides that we're making in terms of reducing the frequency and the size of arbitration claims. But really going forward, there's the ability to continue to leverage a lot of the technology that George highlighted in his prepared remarks. So there's a lot more room for improvement. And I would argue in the context, again, of the environment that we're dealing in, It's particularly impressive when you consider this backdrop in terms of us being able to drive those costs down, where you're seeing those costs going up in a lot of other cases. So that's number one. Number two on the inspection front, obviously we've got a big team out there on the inspection side, and we've been pretty focused on making sure we manage that as well as possible going forward, and we've made some adjustments to our cost structure. in the last quarter. But even if you look at our current team out there, we're still averaging across the country six inspections per day versus our best territories that roughly double that. So what that tells you is that we've got less mature territories that are still far below our average. And really, that gives us a lot more capacity to grow our units with really a relatively small increase in costs. That's just an opportunity as it exists today without us pretty much changing anything. And you can bet that we're going to continue to look at ways that we can continue to optimize that side of our cost structure. Another area, just as one more example, is offshoring. And we've already started establishing a beachhead offshore in terms of lower cost engineering. But we're in the process of really leaning in even more going into next year and expanding that. and basically bringing on lower cost capacity to augment our existing team. So those are just a few examples. And there's a myriad array of other areas that we can optimize. So I would tell you that we're continuing to focus on everything we can in terms of optimizing going forward. And that'll put us in a better position to deal with any other market turbulence as we look to hit our target of exiting next year at even a break even. So, I don't know, George, if you want to add any more color to that.

Hey, Rajal, I could go further into how we're thinking about 2023, or you could have a follow-up question to that.

It's up to you. Yeah, maybe like, you know, any comments on like, you know, the fourth quarter trough and, you know, the 2023 would be helpful.

So, the way we think about 2023, is we really put it into two buckets. One is, you know, what are the external factors we can't control? And that's sort of OEM, you know, OEM production of units, consumer borrowing, used car values, you know, what's happening in the market? Those are the things that we can't control. And we think, okay, what can we control? And what you're going to see us really lean in on between now and we come back and deliver our annual plan is one, let's talk about market share. Even when you look at today, we're gaining, you know, we're gaining the right to go out and work with more dealers. You know, a third of the dealers out there are starting to work with ACB. But today we're only 7%. We only have 7% share. So when you look at first and foremost, We've done a fantastic job, you know, bringing on more dealers, fantastic jobs to earn more wallet share. We're going to hold ourselves accountable to taking even more next year. And that's sort of first and foremost, both for when I think about mature territories, that means more wallet share. When I think about new territories, it means really accelerating the dealer penetration while also increasing wallet share for those that are dabbling with us. When you think about, you know, in addition to taking share, we also think it's about adding more value, which you've seen us consistently do. I mean, we've been delivering more products, adding more value. Products like Private Marketplace and others, dealers are starting to work with ACV because of these value adds. In a market that's contracting and challenging, our value add approach is helping us win. You're seeing us focus on scale quarter after quarter. When you think about how we've focused on scale, whether it be our inspection technology that we talked about, as Bill mentioned, growing into the size of our inspection team and other elements of scale. Last but not least, I would say is you haven't heard us talk much about consumer or commercial over the last year, but we've been building away. We've been building products. We've acquired a few. We're starting to work with some rental car companies. We've got some other elements of commercial that we'll talk about. um in in the coming sort of quarters as we we start to get a little more traction but we think 23 will both go to market with an asset-like consumer offering that helps dealers acquire cars not not us taking risk on these vehicles and second we'll we'll be expanding our commercial offering because we're already starting to get some traction with some rental car companies and this is rental car companies selling cars by the way not buying um This is where we're starting to see what repo companies need, and we're actually going after their needs and making sure we have a full service. So Rajat, we're feeling good about next year. You're really saying that we feel good. We're going into this. We're being disciplined in our approach, but we're still feeling good. Billy, anywhere you want to add to that?

Yeah, just a couple more items, Rajat. So I talked about the cost side of the equation. So in terms of the revenue and margin side, things that things that we're thinking about and feeling good about going into next year. So the buy fee increase that we just passed on will further kind of mitigate any downside that we have on ARPU. So we're not necessarily entirely insulated from a reduction in used car prices, but we're certainly going to mitigate part of that as it would affect our ARPU. And secondly, So we're going into next year with a much better margin profile in our transport business. We came into this year with it being essentially break-even. We're going to go into next year with low double-digit margins. And again, since it's on a gross revenue basis, that can be relatively material to our margin profile. So I just wanted to throw that in as well, just to give you a little more context for all sides of P&L.

Are you viewing fourth quarter as a trough for the industry? I don't know, like, George, was that kind of implied in your answer or no?

You know, listen, we, none of us know what next year is going to bring us. What I'm telling you, Rajat, is how we're going to hold ourselves accountable. Meaning the market might get worse. None of us know right now, right? Trying to, you know, there was predictions on politics for the last couple of days that didn't happen, right? It's really, think about more, we're, we're going to hold ourselves accountable to grow. And that's really more like a mind share is, you know what the market might get worse. Who knows? We are seeing new car production, by the way, start to come back. That's one little positive. And we're starting to see, by the way, some programs come back. So it's not like what some of the dealer groups out there, like when I think about what some of the great franchise dealer groups out there are thinking about next year, they're not predicting it going down. That's positive. Okay. Some of them are predicting a couple points higher in volume. So some of my largest customers are predicting higher volume of units next year. That's positive. I think new car dealers do have a slight advantage over use next year as it relates to selling cars, only because they'll come with programs like 0% interest, 1.9% financing. We even saw in the last 24 hours a couple of the manufacturers come out with a rebate. I mean, we haven't seen that in almost two years. So all of that implies I think next year could be a better year. But whether it is or not, we're going to hold ourselves accountable for taking more share.

Got it. Great. Thanks for all the answers and good luck.

Sure. Thank you. Thanks. One moment for our next question. Our next question comes from Eric Sheridan with Goldman Sachs. Your line is open.

Hey, guys. Great to speak to you. I hope everybody's well on the team. I do want to follow up on that last answer because there was a lot in there. If you think about what's in your control, which was one part of the bucket you said, what do you see as the critical pieces of execution there? that you're holding yourself to that you think would be most determinative in terms of a year from now we're sitting here and you've gained dealer share as a result of those efforts 12 months on versus where you sit today and you've already gotten a fair bit of dealer share. But just put a little bit more sort of elements of what pieces of execution you're the most focused on that you think would yield that share 12, 18 months from now. And then in terms of the externalities, I totally get the the volatility of the environment and the unknown variables. When you look at those variables, though, which now of those variables do you think is the most important to unlock elements of the supply-demand dynamic that would be most advantageous to you? Is it the OEM supply? Is it the consumer demand piece tied to interest rates? Which externality do you think would result in the biggest unlock over the next 12 months? Thanks.

Yeah, certainly, Eric. Thanks for the question. So when I think about our execution and as we start to prepare for next year, one is dealers are going to be looking for more and more guidance. What is the value of this asset? And what we're delivering is a series of enhancements. One is price expectations. Two is when should they be launching the car? Three, the duration of that car. Should it be launched for 20 minutes? Should it be launched for two hours? Fourth, should they sell it within their group first, meaning within a large dealer group? Should they even do an auction yet? Should they first try to keep it? So think, Eric, us delivering on us becoming, at the end of the day, the intelligence platform for the dealer. And we're way ahead of the competition. And we... Whereas up until I would say recently, it's been ACVs, I would just say this sort of random 20-minute auction. And now we're adding. We spent the money to have several hundred engineers. We've been building away. Hopefully all you can appreciate the amount of products you see us deploy quarter after quarter. And we're going to expect some results from all this. And I'm already sensing it from the testing and the opportunities. I'll give you one example. Two dealer groups in the U.S. now, two franchise dealer groups, are some of the largest buyers on ACV. That happened right after we launched ACV Private Marketplace. So not only were they starting to sell cars, but they became some of our largest buyers. So think one product. So bucket number one, Eric, is execution of our product delivery, getting it in the hands of our dealers, because that offers more value. By offering more value, you get more share. That's bucket number one. Number two is being extremely disciplined on our approach on whether it's revenue per unit, whether it's arbitration and goodwill, good actors, bad actors. You never chase units. You build a good business. You've seen us do that. You know, I'm not just coming on these calls going, hey, we have units. I mean, the units are important, but we're going to grow revenue. We're going to grow margin. We're going to hit our path to profitability. And we're not here just to mention X units or Y units. So while we're going out there and gaining, you know, a product advantage in building a large relationship, we'll be doing, we'll be executing while delivering this with more discipline, more and more discipline, which we've already acted on and done a great job. Look at our quarter over quarter improvements. And then three, when I think about the broader capability here of not only offering more value by products, like I mentioned before, but transportation, you're seeing adoption for transportation, you're seeing products like ACV Capital, you're seeing us enhance our overall offering, products like Sam, allowing them to buy more. Eric, we're setting ourselves up in extremely differentiated way. So when I think about 2023, and I see everything from the products that have gone live or the stuff that we're testing right now, it's just further increasing my confidence that we're investing our resources well, and we're seeing some of the results of that. The second part of your question was what of the uncontrollable pieces, OEMs, consumer sort of used car values, what do I think is the most important? really at the end of the day, number of cars being traded into a dealer is, you know, whether it's being sold as a new car or a used car, it's the number of trades coming in, meaning the number of transactions coming in. That is the biggest component of the dealer wholesale market. So sort of thing that the first element of our TAM is the dealer wholesale market. And, and as, The benefit of new cars being produced and the benefit of starting to see some promotions by the OEMs, like we've been starting to see over the last few weeks here, is we will start to see franchise dealers with advantages of selling cars that will lead to trades. And so I think that bodes well for us. We've got great relationships. We're already walking into the third. You know, the mom and pop independent dealers are almost always going to figure out a way to win. You know, they're always going to always figure out a way. They're going to readjust based on what they're paying for these used cars. If prices come down, they're going to be more and more disciplined. These are like some of the best entrepreneurs in this country are independent used car dealers. So think about that top of the funnel. The supply comes from the trades. I think the OEM production will start to come back. I think our franchise dealers should do well next year. I think that could really bode well for us.

Thanks for all the color, George. Really appreciate it.

Yes, certainly, Eric. One moment for our next question.

Our next question comes from Daniel Imbrow with Stevens. Your line is open.

Yes. Hey, good evening, guys. Thanks for taking our questions. We've had a lot of discussion of kind of the high level. So just a couple kind of clarifiers or financials. You talked about this internal kind of dealer offering a few times, George. Obviously, that's growing with the franchise groups. How is the profitability of that channel? As that grows next year, is that going to be a drag to revenue per unit? Does a big group get better pricing? And then any kind of help on scaling? Like what percentage of volume is it this year? Where do you expect that to go next year as you grow that business?

So Daniel, to think about it, it's It's not a drag. It's more like a wash. But more importantly, I'll give you the goals, objectives of a dealer that I was talking to this morning. Their objective would be of the trades coming in and of the aged inventory, they can keep 15% of those cars that they would have wholesaled inside their group. That would be very successful. So that specific group wholesaled 100,000 cars between trades and in. and aged vehicles they can keep 15 so think daniel most of the cars end up in open auction anyways their goals and objectives are are reasonable like these these dealer groups are smart they don't want to actually keep and retail a car that's got material issues it doesn't fit within their it's going to hurt their brand you know just about all of them are very reasonable so today think about it as you know lots of cars inspect um we get a nominal fee then we actually it works well into the way that we already kind of charge them the small fee and then we go out and we then get our other fees for let's say wholesaling the vehicle so when you actually look at it from the front just inspecting to then they actually go into the open marketplace it actually does not um hinder our unit economics so but i think look at it simply as their goals and objectives are reasonable And since their goals and objectives are reasonable, that's when a partnership works out. Got it.

Got it. And then just you mentioned, Bill, during your comments, the transportation margin took a big step higher, kind of low double digits this quarter from mid-singles last quarter. Where can that go long-term? Kind of what drove the improvement? Was it the decline in fuel prices? Was it just the scale of the business? And then, you know, could that keep taking legs higher on transport, or is this kind of where it should be?

Yeah. Yeah, thanks for that question. So first, What drove the improvement? So number one, and this is something we kind of pivoted a few quarters ago, we started moving from just focusing on increasing the attach rate because we hit our targets at that point in time several quarters ago to really focus on maximizing spread. So it was kind of just a conscious change in our orientation for the team in terms of what they needed to focus on. But if we look at what some of the other drivers are, through technology and data intelligence, we've basically deployed these capabilities to do auto dispatch, which was 70% of our transactions now last quarter. So that's a huge percentage of our transactions just happen automatically. We're matching loads also, which is requiring less human intervention, including improvements in how we price through different lanes. So that's number two. And then number three, we're also optimizing deliveries through better carrier management. So these kind of collectively are allowing us to drive those margins up a lot faster than we actually expected. The target transport margins are 15% by 2026. So we're kind of well ahead of schedule. Right now, we're pretty happy to be in the low double digits. We think that's certainly very sustainable as we go into next year. Whether we can continue to improve that next year, we'll see. But we're already within striking distance of our long-term targets. So we're pretty happy. And again, that's been a nice tailwind to our overall margins for the business.

Great. I'll leave it there. Thanks for all the color.

Okay.

Thank you.

Ladies and gentlemen, so let's conclude the Q&A portion of today's conference. I'd like to turn the call back over to Tim for any closing remarks.

Thanks. And I'd like to thank everybody for joining us on the call today. Please note that we'll be on the road at several investor conferences this quarter. You can find all the details on our investor relations website. So we do look forward to seeing you on the road, hopefully. And thank you again for your interest in ACV and have a great evening.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.