ACV Auctions Inc.

Good day and thank you for standing by. Welcome to the ACVA second quarter 2023 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'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tim Fox, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you for joining ACB's conference call to discuss our second quarter 2023 financial results. With me on the call today are George Shimon, 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 and 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 ACV's continued momentum in the second quarter. Another record-breaking quarter in revenue that once again exceeded the high end of guidance, reflecting strong execution by the ACV team as we continued to gain market share. Demand for ACV transport and ACV capital was very strong, which contributed to both revenue growth and revenue margin expansion versus Q2 2022. And our continued focus on driving profitable growth resulted in adjusted EBITDA also exceeding guidance, highlighting the leverage in our model. With that, let's turn to a brief recap of the quarter on slide four. Second quarter revenue of $124 million was $4 million above the high end of guidance, resulting in 8% growth year over year. GMV of $2.5 billion declined 10% year over year, reflecting continued moderation of wholesale market prices. Despite this price moderation, ARPU increased year over year, reflecting our price increase from last fall. We sold 153,000 vehicles on our marketplace, a sequential increase from strong results in Q1, and growth of 3% year over year. Year-over-year unit growth benefited from an increase in conversion rate, which benefited from a range of data-enabled marketplace innovations focused on enhancing dealer engagement. On slide five, I will again frame the rest of today's discussion around the three pillars of our strategy to maximize long-term shareholder value.

Growth, innovation, and scale. I'll begin with growth.

On slide seven, I'll begin by sharing observations about the broader automotive market as context for the trends we are seeing in the dealer wholesale market. In Q2, light vehicle retail volumes increased 2% quarter over quarter and increased 17% year over year from depressed levels. SAR is still running about 10% below pre-pandemic levels. But inventories are slowly building, which is key to supporting the recovery in retail sales. Used vehicle retail sales were flat quarter over quarter and year over year, as affordability issues continue to impact consumer demand. In fact, used retail volumes were about 15% below 2019 in the first half of this year. Combined new and used retail units increased about 6% year over year, which is a positive sign for supply into the wholesale market. As we expected, wholesale prices and conversion rates declined quarter over quarter from seasonally high levels in Q1. However, we believe prices will follow a more normalized depreciation curve this year, and conversion rates will also follow normal seasonal patterns. On balance, we continue to believe that end market conditions continue to show early signs of improvement, giving us confidence to, again, raise guidance for the year, which Bill will take you through later.

Turning now to slide eight, we estimate that the U.S.

dealer wholesale market remained well below normalized volumes in Q2, but we're in line with a seasonally strong first quarter. We remain confident that as the market continues to recover, our growth will benefit from both market expansion and market share gains. In Q2, given our 3% year-over-year unit growth and an estimated market contraction of 14%, this implies the ACV grew market share by approximately 17%. Next, I would like to wrap up the growth section with highlights on our value-added services. First, on slide nine, the ACV transportation team delivered another strong quarter, and it's scaling ahead of schedule. Our strong carrier network and record cycle times resulted in attached rates reaching the mid-50% range. Our technology investments in dispatching and pricing, optimized by AI, are driving both growth and operating efficiency. These efficiencies resulted in revenue margins in the mid-teens, an increase of over 900 basis points year over year. As we discussed at our recent analyst day, our 2026 financial targets assume transport revenue margins in the high teens. So we are squarely on track to achieve that objective.

Turning to slide 10, our ACB capital team also delivered strong results in Q2.

After achieving 10% attach rates for the first time in Q1, ACV Capital maintained this level in Q2, resulting in 50% loan volume growth year over year. And combined with very strong ARPU expansion, delivered over 110% revenue growth. Along with our core floor plan offerings, we are investing in new ACV Capital products for our sellers, enabling the emerging consumer to dealer market. we remain confident that ACV Capital will be an important long-term growth and profit driver. Turning to the second element of our strategy, innovation. On slide 12, I'd like to highlight how we're leveraging innovation to drive growth, and in this case, how we're improving conversion rates. We have further expanded the rollout of our two-hour auction, complementing our traditional 20-minute live auction format. In just a few short quarters, we are running over half of our auctions for two hours. We're also testing new merchandising links, where vehicle listings are segmented by a specific set of criteria to provide buyers with even more flexibility when searching for the right inventory. Our mantra for continuous improvement extends to our HANCE vehicle display page that makes vehicle condition data easier to digest, enabling faster buying decisions for our dealer partners. We are leveraging AI to enhance our inventory matching capabilities that feed alerts to dealers based on their historical buying patterns. Lastly, we continue to innovate on our pricing engine, which is powered by machine learning and leverages our industry-leading vehicle condition data along with a growing curated automotive data set. The goal here is to provide dealers with holistic pricing guidance to drive even higher success rates on our marketplace. The ACV pricing engine now powers several ACV products, including ACV Auctions Market Report, our ClearCar brand of consumer sourcing tools, and upgrades we're making to Max Digital. As I mentioned earlier, our conversion rate expanded over 150 basis points year-over-year, and we believe innovation is a key element in driving these results. On slide 13, we highlighted examples of tech investments that extend into our operations, delivering customer success while reducing costs. In this case, arbitration costs. As you know, minimizing arbitration has been a key focus for both customer satisfaction and optimizing margins. The key here is inspection accuracy. Several innovations that are improving inspection accuracy and efficiency are Copilot, ArbGuard, APEX, and our AI-powered imaging apps. Copilot and ArbGuard leverage machine learning, predictive analytics, and sensor data to inform our VCIs on vehicle-specific issues before and after conducting an inspection. Our next-gen collection device, APEX, delivers significantly higher transparency into vehicle operating conditions, while also increasing the inspection productivity for our VCIT maintenance.

Our imaging AI continues to improve.

VirtualList increases accuracy by identifying specific conditions like catalog converters and rust. In Q2, these innovations helped drive an 8% reduction in arbitration costs year over year. which is great performance in the current market. To wrap up on innovation, I think you'll agree that our team is delivering industry-leading technology to our dealer partners and to our own operations. We have an exciting roadmap of innovation to drive both growth and scale, and we look forward to sharing more next quarter. With that, let me hand it over to Bill to take you through our financial results and how we're driving growth at scale.

Thanks, George, and thank you everyone for joining us today. We are very pleased with our Q2 financial performance, again delivering record revenue above our guidance range with upside to adjusted EBITDA. We also demonstrated the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q2 22. Turning to slide 15, I'll begin with a recap of our second quarter results. Revenue of 124 million was above the high end of our guidance range and grew 8% year-over-year. Adjusted EBITDA loss of 4 million also beat our guidance range, and adjusted EBITDA margin improved approximately 900 basis points versus Q2 22, demonstrating the attractive operating leverage in our model. Next, on slide 16, I will cover additional revenue details. Auction and assurance revenue, which was 56% of total revenue, increased 6% year-over-year versus solid results in Q2 22. This revenue performance reflects 3% year-over-year unit growth and auction and assurance ARPU of $453, which also grew 3% year-over-year. As George mentioned earlier, despite a decline in GMV per unit of 13% year-over-year, we were able to grow ARPU by 3%, reflecting our price increases last fall. And we believe we still have pricing headroom going forward. Marketplace services revenue, which was 37% of total revenue, grew 12% year over year. Results were driven by record revenue for both ACV transport and ACV capital. Our SaaS and data service products, comprised 7% of total revenue and grew 1% year-over-year. As we discussed over the last few quarters, we are making significant improvements to the MAX digital platform while taking a more measured approach to customer acquisition in the near term. We're confident these improvements position MAX for a re-acceleration of growth entering 2024. Turning now to slide 17, I will cover costs in the quarter. Q2 cost of revenue as a percentage of revenue decreased approximately 480 basis points year over year. The improvement was driven by both strong auction and assurance results and by ACV transport. As George mentioned, we delivered mid-teens transport revenue margins in Q2, which is within striking distance of our 2026 target. We continue to focus on expense discipline as we optimize and scale our business. Non-GAAP operating expense, excluding cost of revenue, increased 2% year-over-year versus 36% year-over-year growth the prior year. This reflects the significant investments we made in prior years to support market expansion and technology initiatives. Moving to slide 18, let me frame our investment strategy and path to profitability. Our focus on spending discipline and operating efficiency is expected to result in a material decrease in OpEx growth this year, resulting in our adjusted EBITDA loss declining by over 50% year-over-year. And as you've seen reflected in our Q2 results, we have accomplished this while preserving our go-to-market and technology investments to ensure ACV is in a strong position as market conditions improve. Next, I will highlight our strong capital structure on slide 19. We ended Q2 with $500 million in cash and equivalents and marketable securities and $105 million of long-term debt to finance the growth of ACB Capital. Note that our Q2 cash balance includes $168 million of float in our auction business. As we've discussed previously, the amount of float on our balance sheet can fluctuate meaningfully based on the business trends in the final two weeks of each quarter. It has a corresponding impact on operating cash flow. For the first half of 2023, cash flow from operations was $23 million, a significant improvement from the $73 million loss in the first half of 2022. Now I'll turn to guidance on slide 20. For the third quarter of 2023, we're expecting revenue in the range of $115 to $119 million. Adjusted EBITDA is expected to be a loss in the range of $8 to $10 million. For the full year 2023, we are raising our expected revenue to a range of 474 to 482 million, representing growth of 12 to 14% year-over-year. We are also reducing our expected adjusted EBITDA loss to a range of 23 to 27 million, and we remain committed to achieving adjusted EBITDA break-even exiting this year. As it relates to our guidance, we are assuming that new and used vehicle supplies remain lower than historical levels in the near term, then improve as production and inventory continue to recover. We're also assuming that conversion rates follow normal seasonal patterns in the second half of the year and wholesale price depreciation continues. Let me wrap up on slide 21 by reviewing our 2026 financial targets. We are very pleased with our execution in a challenging macro environment and remain confident our ability to achieve 1.3 billion of revenue and $325 million of adjusted EBITDA in 2026, with 25% adjusted EBITDA margin. As we detailed at our analyst day in June, our confidence is reinforced by a number of factors, including strong dealer penetration and increased wallet share, resulting in sustained market share gains, opportunities to expand our TAM into adjacent markets, including commercial wholesale, our broad technology platform enabling long-term growth and operating efficiency, consistent improvement in revenue margins, and a commitment to balancing growth and investment 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 in the second quarter, and we are especially proud of our ACB teammates that delivered these results. We continue to gain market share by attracting new dealer and commercial partners to our marketplace and by gaining wallet share, which positions ACV for attractive growth as market conditions improve. They're executing our territory penetration plan and gaining traction in an expanding suite of offerings. We are delivering on an exciting product roadmap to further differentiate ACV and expand our addressable market. We are on track to achieve our near-term adjusted EBITDA target and, over the medium term, generate over a billion dollars in revenue with attractive margins that we believe will drive significant shareholder value. We are committed to achieving these results while building 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.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our first question comes from the line of Michael Graham with Canaccord.

Hi. Can you hear me okay?

We can. Yeah. Don't worry, Michael. Okay, good. Thanks. Thanks for the question and congrats on the execution. I just wanted to ask a macro question on the environment for dealer wholesale. You mentioned new car sales are sort of picking up, inventory levels are getting more healthy, which helps prime the pump for the used market, but also that we're still facing this period of high prices for used retail. I just want to kind of ask where you think we are on that curve of you know, marching towards normalcy in the used market? And how long do you think it takes to get there if the new vehicle market can, you know, continue its, you know, sort of positive trend?

Yeah. Hey, Michael. Again, thanks for the question. And, you know, we talked quite a bit about this on our investor and analyst day. And one of the, we talked about really the steps that all take place and sort of that return to normalcy. market conditions, one being new car production and new car sales starting to come back towards normal. We're seeing great progress there. So very, very excited to see that even with this sort of all the thoughts or the concerns around the economy, consumers are buying new cars. They're excited about these new cars. There's all these great products coming out. OEMs are starting to put incentives around these new cars. So step number one has been seeing new car production come back. And that is starting to happen. That's really an important part. We're also starting to see used car values start to come down. That's important because if you don't want to buy a new car, the used car has to be of lower value than that said new car. And with that also, it will help once interest rates also come down to those used cars. So think new car sales, right direction. We'd like to see used car volume and sales come back a little bit more significantly. And we'll also start to see used cars start to add up on dealers lots over the next couple, you know, when you think about net path of normalcy. So I really said the same thing I probably said on on on on. on the investor analyst day, but we are, these are all positive signs. We also said this year we thought would be the trough where, and that was all part of our forecasting for the year, part of our, you know, our expectations. Really, we'll start to see next year be the year where we'll start to get back towards normal. And then between now and 2026, we're thinking by 2026, things are normal. But this year being the trough, and it starts to come back from that.

Okay. Thank you, George. Yes, thanks, Michael. Thanks, Mike.

Our next question comes from the line of Nick Jones with JMP Securities.

Hey, thanks for taking the questions. I guess one on some of your expectations around depreciation for the rest of the year. I guess what gives you confidence in kind of the trajectory of unit depreciation? And then I guess in a scenario where there's more volatility, you know, do you feel dealers are better prepared to bid on cars that are more volatile and maybe, you know, result in less arbitration if things do get more volatile? Thanks.

Yeah, Nick, thanks for the question. Yeah, we do have as part of our planning for the year, we do have used car values going down, and we feel very comfortable. Bill can chime in some more if I don't answer completely, but we feel very good about how we've modeled used car values, you know, declining and what that means from average GMB. So, one, I would say we feel good about it, but then I think the flip side to your question, which I think is a great question, is what does this all mean for dealers? Because at the end of the day, They've got together a number on a trade and consumers walking in, they've got this trade of a vehicle, let's say it's got 80,000 miles or whatever, how many miles are on it. And they've got to put a new number on this. And that number will be going down throughout the year. We're helping by providing great data to the dealers, real-time data, not just the old way the books were done that were just based on averages over many months. This is really real-time data. We've got AI powering our data. And in helping those dealers with their pricing, more and more dealers out there are starting to use the ACV market report. We're starting to get our data into more places to help dealers and consumers understand the new value for that trade. And if they price it right, Nick, then they won't have a hard time selling it in the wholesale market. because they'll have priced it right to the consumer. So the combination of our real-time market data, how we then take the market data plus the condition assessment of that vehicle is a unique value that we think helps dealers in that declining market. As long as they price it right to the consumer, they'll be fine. And we're here to help them.

I think, yeah, Nick, I'll just add a couple of points here. So our guidance assumes that Prices come down in double digits for the second half, so we've baked that into our assumptions. I would also add that you'll notice that we actually saw in our marketplace an increase in our GMV per unit in Q2 versus Q1, and that that was attributable to an improvement in mix on our marketplace. So we're not assuming that, though, going forward. We are assuming there is a steady decline in the second half.

Really helpful. Thanks, George. Thanks, Bill.

Thank you.

Our next question comes from the line of Eric Sheridan with Goldman Sachs.

Thank you so much for taking the question. I want to come back to two themes from the analyst day that you touched upon. You prepared remarks today. Can you talk a little bit about conversion longer term? You've opened up sort of a gap vis-a-vis the industry and and want to understand what you see is key to either maintaining that gap or even widening as we've talked about over the medium to long term when you think about conversion and then also pricing you know you took price last year any updated thoughts on elasticity over the long term in terms of platform pricing and and maybe those two concepts are sort of broadly fed into each other but just wanted to get any updated longer term thoughts thanks

Yeah, thanks, Eric. We spend a lot of our resources focused on conversion and focused on helping both sellers and buyers. And just to remind ourselves, it's both the benefit to the seller and the buyer to get conversion rates up. Sellers, because obviously they're selling more of their inventory quicker, faster. And buyers, because they're not wasting their time bidding on cars that don't have selling. So beyond the model itself, it's really important for the end customers. On the seller side, it's several things. So you've been hearing us talk about auction formats. You can hear us talking about these conceptually different lanes that where different vehicles are selling in different ways. We're investing quite a bit on this mantra of one size doesn't fit all and each vehicle should be sort of merchandised the right way. You'll hear us talk about that more and more. over the next sort of six to nine months. We've been putting a little out there at a time as we're building, but we've got a pretty significant effort on our merchandising strategy. And we hinted, and then I really talked about it more once it's all fully allowed. So more to come on merchandising, but that's one key thing. So I think merchandising is making sure buyers see the vehicle, right? And not that it just came up for 20 minutes, it wasn't seen, and we've got a pretty significant effort A lot on AI and matching this merchandising to the said buyer. So we've got all this rich data. We've got all these buyers signed up around the country and really matching sellers and buyers. So we've got a tremendous effort on matching. So some significant technology and other resources there that we're spending. And then broadly, when you think about taking the friction out, you want to make sure buyers are bidding on the right cars for them. So if it's a higher risk ASCA or a lower risk, meaning more issues or less issues on that given vehicle, the condition report and other data that you get from that vehicle helps you create that matching. So long-winded answer to quite a bit on us working on improving condition rates. This is never done. We can be on this call 10 years from now. We'll talk about how we're investing. on globally matching up sellers and buyers, right? Because you're really working on this connection of any given asset, making sure it's going from a seller to the right buyer. On price, and really, I don't think we could talk too much about that today, but I'll say that we've said that we've got more room. And a way to think about that room is how you straddle pricing with value. meaning in our base offering today, we give buyers quite a bit of assurance. So you can't compare it tit for tat to our competitors' pricing, meaning the buyers get a certain level of assurance. And then in addition, we'll start to offer some other buyer assurance initiatives. We have one product out there today. We'll be launching more. So you'll hear us talk probably more about that towards the end of the year. But for today, I'll say that we do have some more room Eric and probably more to come on that topic.

Really appreciate all the color, George.

Thank you. Thank you, Eric. Thanks. Okay, operator, we're ready for the next question.

Our next question comes from the line of John Colentuoni with Jefferies.

Thanks for taking my questions. I hope I didn't just break the system right there.

Blame you, John.

Starting with, I want to start with guidance. Your outlook calls for a sequential acceleration in revenue growth in the next couple of quarters. Can you just break down your expectations for marketplace and assurance in services and data? And specific to marketplace and assurance, what's embedded in your outlook in terms of conversion rates and listings? And what are sort of the key factors that could drive a delta relative to your expectations? And then next question, just quickly on gross margins for transportation capital and other services. They moderated a little bit sequentially. And I think that's the first time they've moderated sequentially in two years. And so maybe just talk a little bit about what drove that sequential moderation. And then related to that, talk about the opportunities to continue to drive the attachment rate for ACB capital higher over time? I know there was a lot in there.

Sorry about that. Hey, John, it's Bill. So let me let me answer the second question first. So what we saw in Q2 was yet another improvement in our transport margins quarter on quarter, which we just continue to execute at a really high level in terms of our transport business. So you know, we're pretty happy with that. So that was certainly part of it. Also on the capital side, keep in mind in an increasing interest rate environment, you know, we're passing through those rate increases to our customers. So as I would expect all of our competitors are doing as well. And that's a tailwind also in terms of margin. So those are the two dynamics with respect to marketplace services, okay? In terms of our guidance, So what I would tell you is we're assuming that we continue to gain share. This past quarter, based on our math, we gained share at the rate of 17% for Q2, which seems to be kind of the zone that we've been in for the last several quarters. So we're certainly extrapolating continued share gains. Obviously, in the second half, there's a seasonality factor as well. But there are a number of other initiatives that we just continue to drive internally that we think will allow us to execute at the level that we've baked into our guidance. That's probably all I would say at this point. I don't know if there's anything you want to add, George.

No, I mean, obviously a favorable compare. So, you know, just saying the obvious. But, you know, we're happy with the execution and the end of the year just assumes we just keep executing the way we've been.

Thanks for the details. Appreciate it. Sure.

Thanks, John. Our next question comes from the line of Naved Khan with B Reilly.

Yeah, hi. Thanks a lot. George, maybe I heard you correct, but just wanted to clarify this. Did you say that half of the auctions are running for up to two hours? Is that right? And what are you hearing from dealers on that format? Looks like it's helping conversion with any color that would be helpful. And then anything you can share with respect to dealer count on the platform? Is it stable or is it growing? What are you seeing on that front?

Yeah, so yes, you heard correct in the two hours. So we primarily offer the two-hour auction to our sellers with higher conversion rate so that if we are in a way, think of it as almost like offering them real estate, more time on the platform. We primarily give it today to our top producing sellers and also some to our new sellers who are also showing some good signs. You know, dealers, sellers typically love it. Some buyers love it. Some buyers don't. There's, like anything, a little bit of, you know, everyone's got their own sort of favorite way to approach things. We keep making tweaks. A matter of fact, I think we have some rollout happening, not to get into the weeds, but even this week and next week, on buyers to be able to pick and choose when they get their notification. And like, they can get the notification down to, if they only want the notification within 20 minutes, there'll be no change for them, things like that. So high level, taking it back a step, look at it. Maybe it's your... you're you're matching buyers and sellers it is helping with conversion it's helping us outpace what's happening in the industry and then you're never done so whatever feature set we have out there right now it just that happens to do it's live at this point and the team is working away to give more controls to sellers and to buyers so that each one loves what we're doing and we'll just keep iterating

Got it.

And then on the dealer count, any color or commentary?

Yeah, dealer count, we only really talk about that once a year. It's not something we do quarterly, but generally we're doing, you know, we're a pretty consistent company. You're seeing us quarter over quarter and whatnot, our gains being pretty consistent. So I would say consistent.

Great. Thank you. Thank you.

Thank you. Our next question comes from the line of Christopher Pierce with Needham.

Hey, good afternoon. You guys touched on it. New car sales, if you break down new car sales, we're seeing a lot of rental car fees kind of taking in allocations from OEMs. I'm just curious, you guys touched on rental car penetration at the analyst day. How does that kind of And I'm surely not an expert here, but when they're taking in cars, there needs to be some defleating, I would assume. How did you guys view that opportunity? Is that kind of an opportunity that's become more near-term than you might have thought because of the changes you've made and the allocations they're getting from OEMs?

Yeah, definitely, Chris. You know, it's a new opportunity. And the nice thing is, historically, it's been very low. Like, think, a few hundred units a month, right? So this is all, in a way, not new for us to grow into this sector. The nice thing when you look at the broad commercial TAN that I've mentioned to you all, some commercial needs land, some commercial doesn't. As we scale, rental would be an example where we can gain units across the country, even where we don't have land. So that's one of the nice elements of the rental. Now, that deflating is still very low. So it's nice to see it starting to go up. think really high level of me giving you exact numbers. We'll go from, you know, a few hundred units a month to a few thousand, and then it'll become more and more substantial over time. But yes, the answer to your simple question is that part of the ecosystem is starting to come back. And when I think about the industry coming back to normal between now and 2026, that's one example of a part of the industry that's starting to turn the right direction. So low, very low. very, very low compared to historical deflating and wholesale volumes, but it's showing some positive signs.

Okay. And then just lastly, you guys talked about revamping Max Digital and putting it back out there early next year. I'm just kind of curious, you know, what did the product, you know, what did dealers used to use it for and what are you kind of intending or what are you hoping they'll use it for going forward? Is it just pricing data or is there more to it than kind of dumbing it down that much?

I'll try to say this in a way where it does not make a press release or news article because that's supposed to not happen until January or February. But I'll still try to provide you a little color, okay? If you connect the dots here, so the MAC sigil that we acquired and inherited helped dealers price inventory, both trades and sort of how they're going to price a trade and how they're going to price their retail inventory at a really high level. It also does some merchandising, like it does merchandising around imaging and helps dealers put the right photos on the internet, areas like that. We are in the process of taking the ACV assets. So think things like self-inspection and some of the things you've heard us talk about, which help understand condition of a vehicle and how that relates to pricing. And yeah, our objective is You know, think about like NADA is kind of like our Super Bowl event every year. And we're hoping to get what we're done. The reason I keep saying end of this year, early next year is because we want to show up at NADA with sort of this refresh process. And it's sort of our own forced timeline to have a little fun here and come out with this fresh view of this product and how it's going to help dealers leverage this broader ACV data set. that allows them to do their own self-inspection in a way, understand the value of these assets, do a little bit more. So, yeah, I think that's all I'll tease for today. I think I gave a little bit more than I did on analyst day, and more to come between now and sort of early next year.

Okay. Thank you. Appreciate it. Thanks, Chris.

Our next question comes from the line of Ronald Josie with Citi.

Great. Thanks for taking the question. Can you hear me okay?

Yeah, certainly, Ryan.

Oh, great. Thanks. I wasn't sure if I was live. So maybe, George, just a quick thought to that. Understood you don't want to say too much about what might be coming. But I thought I heard you say on the call that more dealers are using or utilizing ATV's market data to set prices and improving the auction experience. So just can you tell us about what's available in the here and now as we think about what might be coming down the pike? And as we think about wallet share gains, which was a big part of the analyst day, and we just heard earlier on just how friction is being reduced, talk to us about how all these different tools can just help the sales process and improve wallet shares overall. And I have one quick thought.

Okay, great. So, Ron, on your first question, the ACV pricing engine lives in several places. So Max is just one of those places. So within the auction itself, AC Auctions, there's a market report where while you're bidding on a car, you can go really deep and look at that market report. That's free. That's dealers being able to go in as a value add to being an AC Auctions customer. It helps that matching a little bit more or the way it was built, maybe a little bit more oriented to the buyer versus the seller. Because it gives all this transactional data and pricing data. A newer area that we just updated was taking the pricing engine to, I hate to get in the weeds here, but to the launch screen. The launch screen is on the seller side, so helping the seller decide what to price that asset. That was a recent thing our team has been iterating on. So we've inspected this vehicle for you. You thought it was a $25,000 car. Now that we've inspected it, it looks like it's a $23,000 car. You want to change your reserve price. That was for an example. Again, that same pricing engine went from being helping buyers to now helping sellers a little bit more. That part is also free, not in a subscription level like Maxx. Whereas if you go into Max Digital, Max Digital is broader. Think about this as a broader inventory management tool where it's not just helping you price. It's going into workflows. It's going into whether you're going to take a net card to trade and retail it or wholesale it. So it's a broader use case than just what's the wholesale value. So it's taking all those lessons learned and applying it into a broader platform. So that was your first question. Your second question was around, wait, I'm sorry. Repeat your second question.

Well, it was, I think, I think you sort of answered it was around wallet share gains. And I think the, it was around wallet share gains overall. All right. Perfect. All right. You had another one and go ahead. And that one was on clear call. Just, you know, we didn't hear it. We haven't heard about it. So.

Yeah. So it's your point. That's the fourth area where the pricing engine goes. So thank you for helping me finish my own sentence. So the same platform, right, this pricing engine we've been building, it's all, you know, leveraging AI and, you know, machine learning to help us price vehicles. We are really psyched about where we're at. We've quietly launched the ClearCar brand. If this was the restaurant analogy I've given to some of you is, you know, we've launched this, you know, you've launched the restaurant, but we haven't yet actually done our grand opening yet. Okay, so you're sort of like getting it out to market. Our objective is still to do, okay, ClearCar is here, sort of press release and go to market. We do have several hundred dealers using ClearCar. We've got, you know, over the last couple months, we've got a healthy amount of new dealers signing up. We're feeling really good about it. ClearCar helps. dealers price the vehicle accurately with consumers who start their journey in their own driveway. So you're at home, you want to decide what is the value of your vehicle. We put ClearCar on the dealer's website or it could be its own website that says like a we buy car type of thing. So whether it's a dedicated webpage or within their dealer webpage, the consumer answers a few questions and then the new version also by leveraging the product monk we acquired, consumer can go around, take some pictures, and we leverage AI to understand condition. And from all that, we're putting a number on a vehicle. And so we love what we're up to here. Dealers love it. We're getting really positive signs. Again, using the restaurant analogy, think like the grand opening's coming soon. But we like to get these products out there in market, kind of really see, okay, where are we in scaling it before we do like all the press and And what, you know, and we're really excited about what we're at. But you'll see probably from Alice today to now, we now have a website up there. We've got some content up there. We're making our ways. And similar to what I said before, between now and the end of the year, we'll get more aggressive.

Awesome. Thank you, George.

Yeah, thanks, Juan.

Our next question comes from the line of Bob Libick with CJS Securities.

Yeah, hi, good afternoon. Can you hear me? It's Pete Lucas for Bob.

Yeah, hey, Pete.

Hey, one of the biggest areas of focus has always been inspections. We've talked about that a bit in terms of the technology that you're looking to roll out. But can you tell us a little or kind of expand on in terms of your 2026 numbers remind us of inspections for VCI and efficiency built into those 26 numbers?

Yeah. Hey, Phil. So we're currently running around six inspections or so on average per inspector. And as we've talked about in the past, our best performing inspectors are roughly double that. So we've got some inspectors obviously who are below the average in less mature territories. So what we've assumed is certainly greater efficiency by 2026, but not on average at the maximum productivity of our best inspectors today. So assume high single digits, up to 10 inspections a day on average by 2026. So that directionally is what we baked into our modeling.

Extremely helpful. And then just one more. We know you're always innovating, and you talked a lot about that on the call, which was very helpful. But in terms of NextUp and the 26 goals, is there anything you need to... Is it a build versus buy strategy? Is there a missing piece or something we should be thinking about there to get to those goals?

No, I think on analyst day, we felt like we really laid out the plan, both on our expansion of our sort of product vision, making the inspection better and better, and without giving everyone exactly what we're up to, right, because you want to keep a little bit for our own patent protection and legally keeping ourselves protected on all things we're building. I think we really leaned in and said, this is the future where we're really leveraging AI to help us with vehicle condition and inspection. And I think it's an area where we're way ahead of the industry. So I think just more, you know, just us continuing our path. I think the only thing you have to believe there to answer your question is you believe we're going to keep executing like we've been. Territory expansion, just keep growing the way we've been growing. On the commercial side, that would start to be a part of our PM expansion. So that part we started to also lay out.

Yeah, it's a continuation of share gains. And we quantify that. It's leveraging some of our pricing power over time. It's the market recovering by 2026. Those are the biggest drivers. If you go back and look at the chart that we put together, breaking out the different revenue components.

Extremely helpful. Thanks. I'll jump back in the queue.

Yes.

Thanks, Pete. Our next question comes from the line of Daniel Imbrow with Stevens.

Good afternoon, everybody. Daniel from Stevens. Maybe one longer-term question and then one follow-up. When we think about market share, you've talked about some of the services and inspections you offer, but liquidity is still a really important long-term share, I guess. Are you still adding buyers to the platform? I think the comment earlier was sellers are relatively consistent, but how would you judge your liquidity at auction or seller returns versus maybe your large omnichannel competitors out there?

Yeah, how are you? We're executing, I would say, as planned. We've got... On the buyer side, we've got a pretty significant effort on bringing in new buyers. Not to get into the weeds, but yeah, we had, I think, a month ago, two months ago, a little internal record, I think. We hadn't seen in many, many, many months, which was like the most amount of new buyers signed up in one month. We were all clapping here, and we were pretty psyched about it. So new buyers are coming on board. Even though there was a little record broken internally, I would say consistent, right? Consistent new buyer acquisition. Retention has been, I would say, consistent. So really no change. I mean, we're bringing on sellers and buyers. There are some parts of the country where we don't have enough supply to really get the demand, which is no different than what I've been telling many of you all for the last, you know, Those that have known me for six, seven years or those last couple of years, right? You can bring more demand up in certain regions as you get more supply. There's a little bit of matchmaking in that regard. So I guess I would use the word consistent. We've been consistently adding on sellers and buyers.

Great. That's helpful. And then, Bill, maybe quick clarifiers to John's question earlier. Industry conversion rates have picked up the last three, four weeks. Is that what's making sense of the guidance? And I didn't see any comment on kind of your previous expectation to exit this year at a positive EBITDA run rate. Could you just, you know, discuss those two pieces of the outlook? Thanks.

Sure. Yeah, so we are assuming conversion rates do moderate in the second half, and that's just based on seasonality, Daniel. So I would say, you know, nothing out of the ordinary there. You know, we did have another good quarter in Q2 in terms of conversion rates. It was down from Q1, but Q1 was, you know, well above historical norms. So I would say our conversion rates, you know, are doing pretty well. And, you know, what we talked about previously is that we expect the year to have conversion rates that are consistent with kind of historical norms pre-COVID, you know, which is the mid-50s, right? So that's all baked in. You know, there are a number of things that we're doing. We talked about the two-hour auctions and, you know, things of that sort to try to continue to drive conversion rates up from where they are. And we're pretty happy so far with the results, per se.

And then, Daniel, any comments?

Yeah, I believe in my prepared remarks, I reiterated that we continue to, you know, reiterate our commitment to exit this year to be able to break even.

Great. And sorry to cut you off, George. Was there something else you wanted to add?

Yeah, and just when you look at some of these external things that say about, you know, conversion rates going up versus us saying we think it will be your typical seasonal pattern, you know, a lot of that data you're seeing was from, let's say, the last X weeks. We have to, I would say, have a tough job of saying what could happen between now and the end of the year. So just to separate those two things, that's why it's always prudent for us to say follow seasonal patterns. It's the prudent way to go.

Makes sense. I appreciate the color, guys. Best of luck.

Yep. Thank you.

Our next question comes from the line of Rajat Gupta with JP Morgan.

Hey, am I on? Yes, you're on. All right, Rajat. Okay, great. Yes, thanks for taking the question. Just a couple of quick ones. On consumer assurance, you know, the growth margins, you know, move lower sequentially. was there anything to flag over there? What was it like when you pick up an obligation card? And then you talked about the year-over-year improvements, you know, just in terms of inspection quality. We're just curious, like, was there anything to flag in the second quarter specifically? If the margins there came a little lower than what we had expected. And then a follow-up on OPEX, you know, it was really nice to see OPEX actually move down sequentially in the seasonally better quarter. But the guidance continues to call for a pickup in the second half versus the first half in a seasonally light second half. So if you're curious about what's going on there or just preparing for next year, any other call you could add. Thanks.

Hey, Rajat. Okay, I'm trying to keep track of all the different parts of your question. So let me see. So the first one was on margins for customer assurance. So if you're remembering Q1, We talked about, you know, the great performance we had on the arbitration front, which drove, you know, overall our blended gross margins hit 50% in Q1, obviously, right? And we did say that we expected that Q2, our cost would go up sequentially quarter on quarter. That's what drove the reduction in margin. And again, I think we've taken you through how the accounting works for that, right? In terms of, you know, you kind of look at the trailing, the trailing 12 months, average, and then depending upon what your actual is in that quarter, it moves the actual margins reported either up or down. So frankly, that was not a surprise to us at all. In fact, at the end of the day, our overall revenue margin was 49%, which was actually a little better than we modeled internally. And obviously, with the OPX efficiencies that you mentioned, we had a really strong bottom line performance with EBITDA loss of $4 million. So I know the third question was on OpEx. So let me just answer that one. Then I've got to remind me what your second question was. But in terms of OpEx for the second half, so part of this, Rajat, is actually the timing of spend. So we can't be exact every quarter in terms of what the linearity is of our OpEx. So what you're seeing is based into our guidance you know, a slightly higher OPEX spend in the second half versus the first half. Obviously, we'll try to beat those numbers, but, you know, overall, obviously, we're lowering our projected EBITDA losses for the full year based on our new guide, right? Now, remind me what your second question was?

Yeah, it was more on OPEX, like how was it down sequentially, despite, you know, in a seasonally better quarter sequentially. So I was just curious, like, what drove the sequential production there?

Yeah, yeah, good question. So actually, our single largest expense on the marketing side is the NADA trade show, which happens in Q1. And that's a seven-figure cost for us. So that obviously only occurs and hits our Q financials. So that is the primary driver in terms of the quarter-on-quarter decline.

Got it, got it. So just to clarify on the arbitration, there's nothing like industry specific or anything to be concerned about from an arbitration perspective when given this period of price declines that are coming in the industry?

That's right. We beat our internal expectation. We try to telegraph this like we always do as much as possible. Q1 was like exceptional. I think I said specifically, don't expect exactly this late every quarter, but directionally, you know, we hit closer to our 2026 goals in Q1 of this year. So don't expect all of it to be like quarter to quarter is linear that way. But yeah, we did beat our goals and us hitting our exceeding guidance on EBITDA. We did beat our internal margin goals as well. So not only our OPEX, but we beat our internal. So we did execute better than we had internally planned.

Understood.

And nothing weird, your second part of that question, followed up, weird with customers or arbitration, nothing weird like that. It was just the quarter over quarter compare.

By the way, Rajat, I would also add in Q2, we added over 100 employees. So while the sequential decline was, as I mentioned, because of the the trade show expense in Q1, you know, we continue to exercise a lot of discipline and prudence around our discretionary spending levels. And, you know, we're trying to always invest in the future and invest in technology and go to market. We're also very, very focused on operating efficiencies and continue to drive those, you know, every quarter. And we expect to continue to do that as best we can.

Great. Great. Thanks for all the comments.

Yeah. Thanks.

Our next question comes from the line of Gary Prestapino with Barrington research.

Hey guys, how are you doing?

Very good.

Good. Good. A couple of questions here. I don't know if you can answer this George. Um, I know you don't give out your exact conversion rate, but could you maybe directionally talk about how your conversion rates were in excess of what the industry conversion rates were in the quarter?

Gary, I'd rather not go there. Again, it's not how everyone is using this conversion rate as though they're all the same thing. But I would look at it this way. We're probably actually conversion rate slightly ahead of schedule. It's helping on units. It's helping on customer satisfaction. And yes, compared to many of our competitors, we're probably doing a better job. But it's really hard for me to give you a number or a compare. But I would say, generally speaking, thematically, many of our sellers are ecstatic. Buyers are feeling like they're not wasting time bidding because they're actually getting more and more of these cars. And every week and every month, if you take industry out of it meaning all the macro stuff with used card uh declining are all the stuff we keep talking about is helping whether it's pricing guidance the merchandising um helping buyers we get the bid on the right vehicles uh we're doing a lot here gary it's not one thing i think that's the competitive advantage we have is we have the resources both on product and technology, as well as the people out in the field and on the phone to sort of complement and help our sellers and buyers sort of come together on a vehicle. So we're feeling really good about it. So sorry not to answer your question specifically, like give a numeric number, but we feel good about what we're doing.

That's okay. And then the second question is, you guys that are out in the field, I mean, especially dealing with the franchise dealers, are you and maybe specifically more the OEM franchise dealers, because vehicle supply on the new car side is starting to get a lot better, are you seeing, are people seeing in the field that the dealers are less apt to retail a trade and they're selling it through your system rather than keeping it on the lot?

So first, Gary, I'll I know we don't get all this granularity out because it gets confusing, but yeah, listings are starting to come up. That's a sign of willingness to trade. So that's a positive sign for us. So yes, we are starting to see more willingness. And as the dealer's lots start to fill up, keep in mind, most of these dealer's lots are still 20 to 30%, Tim, is that right? Lower than they were in 19. You're still seeing, Gary, you know, 20 to 30% of a dealer's lots have a lot of empty spots for vehicles. So new car supply was like step one. Used cars supply is almost like step two. That'll take a little bit. But even while step one is starting to happen, we're starting to see a little bit of that willingness. early signs, but early in that recovery. But yeah, some early signs that are positive show dealers' willingness to wholesale so that year over year, hopefully by next year, I can say year over year, dealers will have wholesale more vehicles year over year. Obviously, I've been saying the opposite up until this point.

Okay. Thank you.

Thank you.

Thanks, Gary.

That concludes today's question and answer session. I'd like to turn the call back to Tim Fox for closing remarks.

Great. Thanks, Liz. I'd like to thank everybody for joining us on the call today. Please note that we're going to be participating at the Ken Accords Annual Golf Conference this Wednesday in Boston. So we look forward to hopefully seeing you there or at another conference over the quarter. Once again, thank you for your interest in ACV and have a great evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.