ACV Auctions Inc.

Greetings and welcome to the ACV Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Fox, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon, and thank you for joining ACV's conference call to discuss our third quarter 2025 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 today. We are pleased with our team delivering record revenue, despite challenging market conditions during the quarter. Our performance was driven by solid execution in our dealer wholesale business as we continue to gain market share, expand our dealer partner network, and leverage our value-added dealer solutions. And again, this quarter, ACV Transport and Capital delivered record revenue performance. We also executed on our product roadmap to further differentiate ACV's marketplace experience, support our commercial wholesale strategy, and expand our TAM. As Bill will detail later, we have updated our 2025 guidance to reflect continuing cross-currents in the broader macro environment. while still expecting to deliver strong top line growth of 19% year over year. Furthermore, we expect to deliver strong adjusted EBITDA growth of over 100% while continuing to invest in our long-term growth objectives. We're confident that executing on this profitable growth strategy will create significant long-term shareholder value. With that, let's turn to a recap of our results on slide four. Q3 revenue was $200 million and grew 16% year-over-year, against a tough comparison in Q3 2024 with 44% growth. We sold 218,000 vehicles, which was 10% year-over-year growth, despite the sustained market deceleration during the quarter. Next on slide five, we will again focus our discussion around the three pillars of our strategy to maximize long-term shareholder value, growth, innovation, and scale. I will begin with growth. On slide seven, we highlight how ACV is leveraging AI across our suite of solutions to attract new buyers and sellers, increase penetration at WalletShare, and gain traction with large dealer groups. Let's begin with our marketplace. For sellers, we provide highly accurate condition-adjusted pricing guidance, enabling them to set better-informed reserve prices, increasing buyer engagement. Flexible auction durations and scheduling allow dealers to customize their marketplace experience. Given the challenging market conditions, with vehicle price depreciation above normal seasonal patterns, dealers are increasingly leaning into ACV's technology. The buying experience on ACV is tailored across buyer personas, and we optimize the bidding experience by providing AI-enabled recommendations informed by dealer preferences and current market factors. Our differentiated marketplace experience is showing up in the numbers. In Q3, we achieved new quarterly milestones with over 10,000 sellers and 14,000 buyers transacting in our marketplace. Our franchise rooftop penetration also achieved a new milestone reaching 35% in the quarter. And our major account team delivered impressive results with rooftop penetration within the segment increasing 300 basis points year over year. Lastly, from a geographic perspective, we delivered solid growth in our more established regions, where ACV has built significant market share. We also delivered accelerating growth in several emerging regions, like in Southern California and the Midwest, where unit growth exceeded 20% in Q3. While we are very pleased with this performance, there are certain emerging regions where we are enhancing our field engagement model to accelerate growth. These efforts will continue in 2026, and we are confident in the medium-term growth outlook for these emerging regions. Next, on slide 8, I'll provide some highlights on our data services. Market traction for ClearCar remains strong. Dealers are leveraging ClearCar's service to generate consumer appraisals and offers in their service lanes. creating a valuable sourcing channel in the current supply-constrained environment. While this is great for our dealer partners, Clearcar is also becoming an effective lever to increase wholesale wallet share and attract new dealers to our marketplace. Dealers that recently launched Clearcar increased their wholesale volume by over 30% after going live. And 50% of recent Clearcar customers also became new sellers on our marketplace. ACB Max is gaining further traction in the industry, with dealers now using AI to accurately price retail and wholesale inventory. And we're seeing the same cross-sell dynamic when bundling ACB Max with wholesale. A recent cohort of new ACB Max dealers increased their wholesale vehicle sales on our marketplace by an average of 40% within one quarter of launching max. We're excited to see that our strategy to offer a broader set of solutions is creating another long-term growth lever for ACB. Turning to slide nine, let's review our marketplace service offerings, beginning with ACB transportation. The transportation team had strong execution in Q3. again setting records for both quarterly revenue and transports delivered. AI-optimized pricing continues to drive strong growth and operating efficiency. Revenue margin expanded 200 basis points year-over-year in Q3 and was in line with our medium-term targets in the low 20s. And our off-platform transportation service continues to gain traction from our dealer partners, creating additional long-term growth opportunities. Lastly, I'll wrap up the growth section on slide 10 with ACV Capital highlights. The ACV Capital team delivered strong revenue performance with 70% growth in Q3, which was the fourth quarter in a row of accelerated growth. In terms of managing risk and in light of the bankruptcy of a former customer, Tricolor, we conducted a review of our loan portfolio. Based on our review, and current macro factors, we're lowering our exposure to higher risk customer segments and reducing our Q4 ACV capital revenue forecast. Overall, we are confident that ACV capital will remain an important value-added service for our dealers and long-term growth opportunity. Next on slide 11, I will address the second element of our strategy to drive long-term shareholder value, innovation. Turning to slide 12. Let's go deeper into how we're leveraging ACV AI to drive growth and deliver value to our dealer and commercial partners. Using machine learning, we've used inspection and dynamic market data to provide real-time pricing for every vehicle within ACV's pricing platform. Last quarter, we highlighted how we're leveraging our pricing platform to offer ACV guarantee to sellers and deliver a no-reserve auction format to buyers. This offering is the fastest-growing channel in our marketplace. We are pleased to see ACV guarantee increase from 11% units sold in Q2 to 18% in Q3. As a reminder, our guarantee sale is a win-win-win for buyers, sellers, and ACV. This offering accelerates bidder engagement increases buyer satisfaction, and delivers 100% conversion rate while removing seller market risk. We're confident this highly differentiated offering will be another key driver of continued market share gains. On slide 13, we highlight how we're expanding our competitive edge with AI-driven next-generation products like Project Viper and Virtual Lift 2.0. Since launching our first few pilots in Q2, we added new dealers and our own remarketing centers to the pilot program. To date, over 60,000 vehicles have been inspected by Viper and Virtual Lift, and our team is leveraging this data to fine-tune the product. We are receiving tremendous feedback from dealer and commercial partners, as our imaging and AI models are maturing and identifying key inspection data. We are looking forward to the commercial launch of Project Viper and Virtual Lift 2.0 in 2026. Wrapping up on innovation, let's turn to our commercial wholesale strategy on slide 14. Our first greenfield or marketing center in Houston successfully completed its soft launch and volumes are beginning to ramp. Our team has deployed a range of capabilities developed over the past year, including vehicle assignments from auto IMS, commercial inspection applications, work order and repair estimates, and integration with ACV's wholesale marketplace. We believe this new digital model and end-to-end experience will transform commercial vehicle remarketing. We also look forward to launching additional greenfield locations to expand our footprint. With that, I'll hand it over to Bill to take you through our financial results and how we're driving growth at Scala.

Thanks, George, and thank you for joining us today. We are pleased with our Q3 financial performance. Along with record revenue, we continue to deliver strong adjusted EBITDA margin expansion and growth, demonstrating the strength of our business model. On slide 16, let's begin with a recap of our third quarter results. Revenue of 200 million grew 16% year over year, and was at the midpoint of our guidance range. despite market headwinds in the last two months of the quarter. Adjusted EBITDA of 19 million was at the midpoint of guidance, with margin improving 280 basis points year over year. Note that adjusted EBITDA benefited from a $7.6 million class action lawsuit settlement against a data services vendor. However, this benefit was almost entirely offset by approximately 7 million in ACV capital reserves. As George discussed earlier, during our quarterly review of capital loss reserves, we factored in current macro conditions and exposure to higher risk customer segments, which yielded a higher level of reserves booked in Q3. Adjusted EBITDA also excludes 18.7 million of operating expenses related to the tricolor bankruptcy. Finally, non-GAAP net income 11 million was also at the midpoint of guidance. Non-GAAP net income includes the net impact from the legal settlement and ACV capital reserves and excludes the 18.7 million bankruptcy-related reserves. Next on slide 17, let's review additional revenue details. Auction and assurance revenue was 56% of total revenue and grew 10% year-over-year against a very tough comparison of 52% growth in Q3 24. This performance reflects 10% unit growth and auction and assurance ARPU of $508, which grew modestly year over year, but declined 3% quarter over quarter. The sequential decline resulted from targeted volume pricing and ACV guarantee promotions we implemented to support our seller acquisition strategies. We were pleased to see the promotional activity deliver early returns with unit growth accelerating in September to 13%, reflecting 16% market share gains. Note that we're expecting auction and assurance ARPU to increase sequentially in Q4. Marketplace services revenue was 40% of total revenue and grew 28% year over year, reflecting record revenue for ACV transport and ACV capital. Lastly, our SAS and data services products comprised 4% of total revenue and grew 2% year-over-year. Next, I'll review Q3 costs on slide 18. Non-GAAP cost of revenue as a percentage of revenue decreased approximately 100 basis points year-over-year. Note that cost of revenue benefited from a $7.6 million credit related to the class action lawsuit settlement. Excluding the credit, cost of revenue as a percentage of revenue would have increased approximately 300 basis points. The increased cost of revenue is primarily driven by increased arbitration costs within a specific cohort of customers. Given the pressure dealers are facing in the current market environment, we expect arbitration costs to remain elevated in Q4, but are taking steps to mitigate the impact and expect trends to normalize in 2026. Non-GAAP operating expense, excluding cost of revenue as a percentage of revenue, decreased approximately 100 basis points year over year. Note that Q3 non-GAAP operating expenses included the increase in ACV capital reserves resulting from our loan portfolio review. Moving to slide 19, I'll frame our investment strategy as we drive profitable growth. In 2025, we expect OPEX growth of approximately 12% to support our remarketing center strategy and commercial platform investments. Even with these growth investments, adjusted EBITDA margin is expected to increase by approximately 400 basis points year over year. Next, I will highlight our strong capital structure on slide 20. We entered Q3 with $316 million in cash and cash equivalents and marketable securities and $220 million of debt. Note that our cash balance includes 200 million of marketplace float. In the figure on the right, we highlight our strong year-to-date operating cash flow, which reflects adjusted EBITDA growth and margin expansion. Now turning to guidance on slide 21. Following two months of year-over-year declines in the dealer wholesale market in August and September, market conditions continued to weaken in October. Dealer wholesale price depreciation has been tracking above normal seasonal patterns, which has pressured industry conversion rates. As such, we're expecting the dealer wholesale market to decline in the mid-single digits in Q4, which is more than previously anticipated. Our updated guidance factors in this more challenging market environment and a $2 million reduction in projected ACV capital revenue, reflecting a more cautious approach in Q4 as we prepare to further scale in 2026. We are now expecting fourth quarter revenue in the range of 180 to 184 million, growth of 13 to 15%. Fourth quarter adjusted EBITDA is now expected to be in the range of 5 to 7 million, reflecting the impact of the market conditions on dealer wholesale volumes, plus higher expected arbitration costs discussed earlier. Based on the revised Q4 outlook, 2025 revenue is now expected to be 756 to 760 million, growth of 19% year-over-year. Adjusted EBITDA is now expected to be 56 to 58 million, growth of approximately 100% year-over-year. We are expecting non-GAAP OpEx excluding cost of revenue to grow approximately 12% year-over-year, resulting in a 24% incremental adjusted EBITDA margin at the midpoint of guidance. Before handing it back to George, I would like to share some initial planning assumptions for 2026. First, based on an uncertain backdrop for automotive retail and elevated trade retention rates, we believe it's prudent to assume that the dealer wholesale market is flat in 2026. Second, as George discussed earlier, we are enhancing our field engagement model in certain emerging regions and rolling out a host of new innovations next year which will be key factors in re-accelerating market share gains over time. And third, we expect to balance margin expansion while investing for growth. And with that, let me turn it back to George.

Thanks, Bill. Before we take your questions, I will summarize. We are pleased with our record revenue performance in Q3 and accelerated market share gains, all while navigating through challenging market conditions. We are quickly overcoming these market challenges by continuing to enhance our technology and operating models, ultimately making us even more resilient. We continue to attract new dealer and commercial partners to our marketplace and expand our addressable market, which positions ACV for attractive growth as market conditions improve. We are delivering on an exciting product roadmap powered by ACV AI to further differentiate ACV and drive operating efficiencies. We are focused on achieving strong adjusted EBITDA growth and delivering on our mid-term targets 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.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the start keys. One moment please while we poll for questions. Our first question comes from the line of Chris Pierce with Needham & Company. Please proceed with your question.

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

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

Okay. So we've got this choppiness right now. And against this backdrop and maybe a true or number two competitor emerging, have competitive dynamics changed on the ground when you go to market to talk to dealers? Are dealers thinking they need to have a second source more? I'm just curious if we hear anything different from dealers that you were hearing maybe 18 months ago.

Chris, we'll be very specific. Quarter over quarter, we grew by 8,000 units. When you look at 8,000 units quarter over quarter, I believe that was significantly more than any other competitor that had U.S. growth. So that would be, I think, fact number one. So that shows pretty significant quarter over quarter growth. In addition, When you look at it, we went from our share gains, you know, became double digits again in Q3 for the whole quarter. And then last but not least, in September, according to AuctionNet, you know, with the market being down 3%, we would therefore have had 16%, therefore mid-teens growth. So the way I look at it is, yes, the market's softer. And with the market ending 3% down, dealer wholesale market being down, obviously made the quarter challenging and the start of this quarter more challenging. But when you look at the fact that we've always had competitors from day one, and we grew 8,000 units quarter over quarter, and had, you know, end of the month, end of the quarter, you know, right around those mid-teens objectives for that month. Chris, I would say we've always had competitors, we still have competitors, and we believe we have the best solution.

Okay. I appreciate the detail, and good luck. Thank you.

Thank you, Chris. Thank you. Our next question comes from the line of Rajat Gupta with J.P. Morgan. Please proceed with your question.

Great. Thanks for taking the question. I just have a couple. Could you unpack a little bit on the third quarter auction ARPU? you know, moderation from second quarter. Yeah. I appreciate like your market share comments. I'm curious that if there were any price actions that were being taken to maintain that, is that like a change in strategy? I know you talked about like putting more boots on the ground. So curious, like, you know, if you could talk about that a little bit and I have, and I have a quick follow-up.

Yeah, I'll start. And then Bill can chime in Rashad. We, we, I think mentioned the call that we have targeted regional pricing campaigns where we are being a bit more aggressive. Think about that more on the supply side. So where we're still new and we're still emerging, we are attacking the market and it is helping us win share. I think Bill also mentioned in the call that we expect Q4 for ARPU.

How did you? Yeah. So what I mentioned on the call was that we expect Q4 ARPU to actually go back up. Yeah. So, you know, it went down, you know, 3% in Q3, but, you know, that's kind of more just a result of some of the activities in that quarter.

So, you know, at the end of the day, we're going to go out and win share. We are using pricing, especially where ACV has low volume in certain regions. We are being a bit more aggressive. So I think that that's definitely one – one part of your question. And the other part is I'm still very confident in our midterm model. We've given you eyes for pricing. So look at those as, you know, we, you know, when you look at our midterm model and where we've been hovering, and I think I'm still very confident in ARPU for Q4, but we will use pricing in certain regions to gain more share.

Got it. Got it. And, you know, you briefly touched upon the 2026 wholesale market outlook. I'm curious if there's any more color you want to like, I mean, maybe provide some sort of a soft guidance. You know, should we, you know, should investors still expect the same kind of share trajectory or should we expect some acceleration given they're putting more boots on the ground? Maybe, you know, if you could give us some sense of market share expectations going forward and also like what kind of incremental margins is reasonable to assume at this point as you attack more share. Thanks.

Yeah, so again, I'll start and Bill will chime in. As you mentioned, I think assuming flat helps us all so that basically just be very open. We don't have analysts assuming right now dealer wholesale goes up next year. I just think we'd rather just put it out there. Let's not assume that. There's too many macro factors going on. I think better for all of us just assume flat. None of us really know. But if we just assume that, I think that would be prudent for all of us as we start to think about next year. Two, I would look at share gains and how we've operated. In most of our months and quarters, we've been hovering right around the double digits. You've seen us range Granted, last quarter, we were high single digits. This past quarter, we were double digits. We ended the quarter in that mid-teens. So when you look at that range of our execution, just to be fair, I would say our range has been an execution has been in that lower double-digit range has probably been our true execution. Our objective is to get back to mid-teens. but I would say we need to go out there and prove that. And that would be a way to sort of maybe restate what Bill said. Maybe just, you know, I think I basically said the same thing he said a few minutes ago, but it's a way to think about, you know, we need to more consistently hit that mid-teens, which we haven't yet proved we can do each and every month. But having said all that, I'm really proud that if you look at the quarter over quarter, you know, we grew more than anyone else last quarter. So I would separate those two things of like, you know, how we grew last quarter was better than anyone else in the market.

And in terms of just the incremental, sorry, go ahead.

No, I was going to say just one other thing I would just add, you know, again, Q3 of this year was our biggest quarter of the year. And if you remember, like historically, you know, at least prior to last year, typically, you know, our growth and unit volume would follow seasonal patterns. You know, the first half would be relatively strong And then Q3 would be a bit weaker, and then Q4 would be the weakest quarter. So last year, for the first time since we went public, our Q3 volume and revenue was actually the highest it was the entire year. And the same thing occurred this year. So the growth rate might have been a bit different since we came off of a very, very strong quarter last year. But again, we had record revenue in Q3 and record volume for the full year. bigger than Q1 or Q2. So I guess that's the other context to just give you in terms of our Q3 performance.

Yeah, I just wanted to like follow up on leverage, you know, given, you know, some pricing action, you know, or double your share, you know, should we assume, you know, like lower than 30% for now as reasonable before you get back to the 40s on incremental margins? I'm just curious if that is, because that has been a bit of a change in the operations as well. Thanks.

Yeah, I don't think we're ready to comment on that at this point, Rajat. You know, we're in the middle of obviously putting our planning together for next year. You know, you can assume some marginal improvement, but beyond that, there's nothing else for me to comment on at this point until we have our plans finalized.

Understood. I appreciate the color and good luck.

Thank you. Thank you. Our next question comes from the line of Bob Libick with CJS Securities. Please proceed with your question.

Good afternoon. Thanks for taking our questions. Hey, Bob. Thank you. Sure. I wanted to ask a question about kind of ARPU is where I'm going to get to. Hopefully I can make this make sense. Kind of recent J.D. Powers analysis showed the spread between retail prices and wholesale prices. has widened from like $9,000 to $15,000 over the last five years. And this seems to confirm earlier points you guys are saying that dealers are keeping more cars and better cars and retailing those versus wholesaling them. That's kind of part of the problem now because there's no off-lease to have, et cetera, et cetera. So the question is, what does this mean for your ARPU going forward if dealers are going to keep the highest value cars and wholesale lower ones? How should we think about this trend and when does it kind of start to reverse itself?

Yeah, Bob, I think it's a great question. Difficult one to answer because you're predicting, obviously, macro with everything else. I think the simple thing to do is just to look at a revenue range, an ARPU range, that you're hearing us, you know, be comfortable with a certain ARPU range. And You saw our execution in Q2, Q3, a bit later. We're trying to give you guys a little bit of an indication on Q4. But I think for right now, just to keep everyone's expectations in line, I would just not have ARPU going up maturely next year or at all. Because to your point, with all these factors going on, I just would rather just put it out there that keep ARPU in this sort of moderate area for now. There will be a quarter or two that it might bump up. You know, you may see a little bit of that. But I think we'll go into next year, and I think better to keep, you know, keep the expectations of ARPU in a reasonable area for analysts and everyone to think about the year. And then to your point, in a more medium-term outlook, there probably is some ARPU that may be in the next, one to three years, whenever that happens, Bob, to your point, we could start to see ARPU bump up even more. And I just don't want to be wrong at this point, right? And put too much out there. So I just think let's take this correction and say, I think you're right. There will be a correction and it would mean we'd have a higher ARPU. I just don't want to think, I don't want to guess it's going to happen next year. If it happens, it takes a little bit longer.

Right. No, absolutely fair. I mean, I think you just need, you know, deals to start wholesaling the better as well, you know, and therefore off lease to come back so that they have other things to sell, et cetera. Okay. Great. And then you talked about, you know, lower conversion rate for the industry in Q4 based on the accelerated depreciation of values. But at the same time, you guys are, you know, increasing your guaranteed pricing. I think you said it was 18% during the quarter and that's higher conversion, obviously. So kind of looking into next year, how should we think about, you know, conversion at auction with, you know, those little factors?

I think conversion rates, um, and then my biggest goal for next year is it's just not as crazy, right? We've seen some ups and downs this year, even within a quarter. that's pretty significant. And when you think about this year with everything from tariffs and everything else going on, we've really had a challenging year for dealers to absorb the value of a car. And then what is that value? What is that depreciation? Like all these factors. It's been a very difficult year for dealers. I hear sentiment from dealers saying, you know, some of this will normalize. I mean, that's what I'm hearing. I believe that's what many of you others are hearing, which the normal, having the value of these vehicles normalized would mean that we would, we'd see the bid and the ask between sellers and buyers also start to normalize. And we won't have this up and down on conversion rates that we've seen. So I think next year, conversion rates, You know, we'd see a bit more consistency in conversion rates across the industry. Obviously, it all depends on all the macro factors. But I think, you know, some of this stuff starts to work itself out. I don't know, Bill, if you have any more on that topic. But it's a hard one, Bob, as you know, for us to predict next year as it relates to conversion rates. But I think you and others have also heard dealers saying things should start to normalize as some of these other factors start to take place.

Got it. Okay. Thank you very much.

Thank you. Our next question comes from the line of Andrew Boone with Citizens. Please proceed with your question.

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

Yeah, this is Bill. So I'll start with ACV Capital and then I'll turn it over to George. So maybe first a little bit of context in terms of ACV Capital. So as part of our planning, we have historically planned an historical loss rate that's slightly higher than some of the bigger players out there. Typically, we model a 3% loss rate based on the fact that we're in a high growth phase for the business. And we're certainly not as mature as some of the bigger players out there. So that's what's been baked into our, you know, financial models for ACV Capital historically. So, you know, despite, you know, what occurred in Q3, and I'll get into that in a minute, you know, our view of that loss ratio hasn't changed in terms of our modeling going forward into next year. You know, that said, you know, as I mentioned on the call, as a result of you know, this large bankruptcy that occurred in which, you know, we've reserved, you know, basically over $18 million for that bankruptcy, you know, not sure what the ultimate outcome will be in terms of recovery. We did do a very thorough portfolio review. And as a result, we've looked at our internal controls, our processes, and, you know, we're in the process of making a number of improvements going forward so that we can scale with comfort next year in terms of the confidence that we're going to stay within our planned target in terms of those loss ratios. But as a result of that, there were certain higher risk credits that we had outstanding that we concluded it was prudent to book some reserves in Q3, which is what flowed through the quarter. And that was approximately $7 million. In terms of the go-forward plan, There's still a lot of upside opportunity for us. This is very synergistic, obviously, with our auction business. So it's very strategic. And you can expect, you know, this business to continue to grow, you know, next year at a good clip, albeit, you know, maybe at somewhat of a slower rate than we experienced this year. And we are, you know, taking our ACV capital revenue down a couple of million for Q4, as I mentioned, you know, just to ensure that before we start to scale next year, we're we've got the right processes and controls in place. So hopefully that gives you a little bit of color in terms of ACV capital.

And maybe just two more things on that. Even with that bit of caution, we're still gonna be executing on attached rates in the high teens. So look at this as it's still very strong execution, even with having this mitigated risk and being a bit more careful the mid-term model assumed 25% attach rates. The way I look at this is, listen, you learn on moments like this. You sometimes just add some more controls. You take moments like this. Obviously, there's other major banks in the world that had the same common customer. This will make us even a better company in the you know, in the midterm and where, you know, you really become, I think, a more durable company in moments like that when you have a situation like this tricolor. But I would say I have the same confidence in getting back to the 25% attach rate goals in the midterm model. This is a small period of time. You know, we have a lot of demand for ACV Capital. We've got a great product. You saw us execute really well up until that moment, right? And I would say, you know, one step backwards, I think we'll then take three steps forward. So that was all on your first question. Your second question, I believe, was about other cohorts and other things going on in the business. Can you repeat that one just to make sure? Because it was so long ago. It took us such a long time to answer your question. that I remember your second one, but I want to make sure I got it right.

It was a great first answer, so let me try the second one again. Okay. If I think about macro just overlaying in terms of results, is there anything you want to call out in terms of specific cohorts or geographies that may help us better understand kind of what's going on across the industry?

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

Thank you.

Yes, certainly. Thank you. Our next question comes from the line of Naved Khan with B Reilly Securities. Please proceed with your question.

Great, thank you, thank you very much. Maybe just touching on commercial, how should we be thinking about the volume through the auto IMS relationship ramping kind of exiting this year and into next year, what kind of trajectory should be assumed there as we kind of not only just map out Q4, but also look at 2026. And then, George, you spoke about being opportunistically with respect to discounting in certain markets where penetration is low. What do you see from your competitors in terms of Did you see any price increases occur in the recent quarters? Or are we in an environment where pricing is not necessarily going to be a level for any of the players, including yourself?

I'll go to the second one first. I think pricing, you know, between the hundreds of physical auctions and the few digital, there's a lot of different pricing things going on. To your point, some people continue to increase fees, and some are using fees primarily on the supply side to get the attention. But generally speaking, buy fees typically go up every year with most of the competitors, which is the majority of the ARPU. And your first question on commercial, we're going to be hovering – somewhere in the, um, you know, mid to higher single digits. So think somewhere six, 7% of our volume and commercial for 2025, like somewhere in that range for commercial. So, uh, I'm very proud of what we're doing, but as I've said in, in many other calls that, you know, we are, we're really laying out the foundation right now for, for many years to come. I'll just remind you of the three things we're doing there. One is the upstream digital, like you said, with AutoIMS, the upstream digital. That's one. Two is the greenfields, like Houston being our first. And then we'll have a second greenfield that we launch sometime early next year. And then third is once our software is hardened and we're ready to go, we'll take it back to the 10 legacy locations that we acquired. So that... that will take us some time. So look at it as if you're, right now our total commercial is sort of in that six to seven-ish percent range of our total volume. And even if that defaced pretty materially for next year, it won't be a big number, right? I just want to be fair to that. Like it will help, it all helps. And it will grow. But dealer wholesale will remain next year being a far significant piece of our overall volume. But then commercial, when you think about going into out years, you know, into 27 and beyond, it starts to really add up. So hopefully that gives you a lot of color because we're really not yet talking about next year. Obviously, a lot of these questions are about next year, but trying to give you enough color. But we're going through that planning cycle right now to nail down our objectives. But maybe that gives you a little bit of color based on the base.

Understood. Thank you very much. Certainly.

Thank you. Our next question comes from the line of Glenn Schell with Raymond James. Please proceed with your question.

Thanks. Just following up with what Nived said on commercial wholesale. Will we see that broken out so we can parse out dealer wholesale versus commercial wholesale? And I just got a quick follow up after that.

You know, at this time, we don't know yet. We really didn't come into today's call with that answer, I would say, ready to go. But, you know, appreciate the question, but I would say we're not sure yet.

Okay. Sounds good. And then on Project Viper, is that still on track for a first half of 26 launch, or is that more just generally 26? And then what have you been seeing from initial demand contribute to performance next year?

Yeah, Project Viper is getting incredible feedback from dealers. Our goal, and we still go out and hit this goal, I just speak to be open, but our goal is to start taking orders by NADA. That's when we start actually taking orders by dealers, which would be in February, and start shipping units in sort of that middle of the year. Those are the internal goals. So I don't have any reason why we're not going to hit those goals of starting to take orders by an ADA. I think next year will be primarily launching to enough dealer groups, get the feedback, and then you kind of then start scaling it the following year. But I would say so far so good, getting great feedback, plan to go live. And we'll go from there.

All right. Thank you.

Thank you. Our next question comes from the line of Jeff Lick with Stevens Inc. Please proceed with your question.

Good evening. Thanks for taking the question. George, I was wondering if you could talk about, like, you guys obviously have a pretty robust and novel set of services and features, you know, ClearCar, ACB Max, data services. Obviously, Viper is up and coming. If you just look at the places that you're winning, you know, that are disproportionately doing better than the average, could you talk about just, you know, where you're really, you know, getting traction and the dealer just looks at you and says, hey, look, this is a great partnership and, you know, where you clearly have an advantage in your winning?

Yeah, certainly. I'll try to give you a little bit of color without mentioning the dealer's names just to get a little closer to this, but Yeah, we mentioned on the call that dealers that have recently launched Clarecar and Max, where we've won a higher proportion of the wholesale volume than our average across the board. And if you kind of get the why, you're now a strategic partner to that dealership group. And if they're using us for Clarecar and or Max, AC Max, and soon hopefully Viper, then they're using us to price their inventory. We're predicting the retail price. We're predicting the wholesale price. We're helping them make better decisions. And so we were the one to predict the trade value before they even bought the car. So you're not going to sit here and make the wrong decision on having wholesale values that are too high because you actually bought the car right way up front during the trade. So when you think about what AI can do for this entire industry is take all these manual decisions that a lot of these dealers are working hard. These are people across the country who just don't have the right tools today, who have got prices going down. And here we are. We're predicting the retail price of what the car is going to sell for in the next 30 days within a few hundred bucks. We're predicting the wholesale price on average within 100 bucks. That's really significant. Because now as you're sourcing and you're deciding what reconditioning to do, it's a big deal. So some of the data we mentioned during the call, you know, about dealers now selling more wholesale with ACV, they happen to have ClearCar and happen to have Max. It's partially because they're actually making better decisions. And, by the way, they're retailing more cars and typically having better margin versus our competitor sort of SaaS equivalent companies that we compete against. hopefully that gives you what you're looking for.

It does. And then a quick follow-up for, you know, either you or Bill, as it relates to, you know, what you guys referred to as kind of targeted volume pricing on the, you know, on the supply side or for the seller, I was just curious to me, because usually that's a pretty low price to begin with, you know, how does that work in terms of, you know, you're probably talking that you're saving, you know, 50, 75 bucks. Is it, is it kind of short lived in terms of, Hey, okay, I'll give you this. And you would, it would seem like you're going to eventually have to provide a little more for them than just pricing. I mean, does the dealer's really motivated by, you know, 50, 75 bucks?

You know, first of all, I agree with your question. 50 or 75 bucks or a hundred bucks shouldn't matter. We're a better solution. You know, and we're helping them sell the car for more money. But when you do give one of these sell side promotions, You're getting their attention. You're getting them to try it. You're getting them into the family. And, you know, some of these guys have been using these legacy options for a very long time. So look at it as you're just trying to get their attention. And then what you do is you start to say, hey, this is good for so long, X period of time, or Y amount of volume. So you just start to set some parameters about it. And none of those parameters make me worry about our midterm model.

Okay, great. Thanks very much, and best of luck in the next quarter. Thank you.

Thank you. Our next question comes from the line of Gary Prestapino with Barrington Research. Please proceed with your question.

Hi. Good evening, everyone. Hey, last quarter there was a big delta between listings and cars sold. Did you still see pretty good listings, but the conversion rate was just so much lower than expectations?

Yes, Gary. We continue to drive listings, which is listings obviously represents the opportunity to get in front of that car and sell it. But yeah, so we've continued to see listings grow.

Okay. And then just a question that Bill had mentioned, there was an increase in arbitration expense. With all the technology that you've put on your inspections, what is actually causing that to happen? Is it just that you're getting a car that might be a little bit lower quality?

No. Gary, most of the customers that we inspect their car and then we go out and we look at the arbitration results, the far majority of the customers, we hit our target arbitration and goodwill. There are subsets of customers where it's become elevated. And what we've been doing is over the last couple of months is we're enhancing some of our dealer management tools to identify faster customers. on what is going wrong with this one seller and or buyer. You know, what should we be doing differently? Where it could be training or other best practices. And we're starting to build like privileges and other aspects to our dealer management model. So it's really into the details of look at it as the far majority of the time, you really, you know, you don't have an issue, but you got to get into those times where you know, things become elevated and we're diving in, it's, again, when I look at this from a, you know, going into early next year, I think even by Q1, we're probably fine. I think just you kind of go in there and you mitigate and you really learn through some of these things that sort of crept in. And then we'll, our dealer management and internal sort of training when these things go wrong, we'll be even better on top of it.

Okay. Thank you.

Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Tim Fox for closing remarks.

Great. Thank you, Operator. And I'd like to thank everybody for joining us on the call today. We look forward to seeing you on the conference circuit this quarter. We'll be at a couple conferences in November and in December. And finally, thank you for your interest in ACB and have a great evening.

Thank you, and this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.