ACV Auctions Inc. (NASDAQ:ACVA) Q4 2023 Earnings Call Transcript
ACV Auctions Inc. (NASDAQ:ACVA) Q4 2023 Earnings Call Transcript February 24, 2024
ACV Auctions Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the ACV Fourth Quarter and Full-Year Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker for today, Tim Fox. Please go ahead.
Tim Fox: Good afternoon and thank you for joining ACV's conference call to discuss our fourth quarter and full year 2023 financial results. With me on the call today are George Chamoun, Chief Executive Officer; and Bill Zerella, 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.
George Chamoun: Thanks, Tim. Good afternoon, everyone, and thank you for joining us. We are pleased with our fourth quarter performance, which capped off another strong year of execution by the ACV team. We delivered 21% revenue growth in Q4 and adjusted EBITDA have once again exceeded our guidance. For the full year, revenue grew 14%. We gained market share and exited the year with over 28,000 dealer partners buying and selling on our marketplace. We launched new innovations that expanded our competitive moat and drove operating efficiencies, resulting in approximately 70% year-over-year improvement in adjusted EBITDA. Along with our continued momentum in dealer wholesale, we expanded our TAM with the launch of ACV's consumer sourcing solution, ClearCar, and by building the foundation for our commercial wholesale strategy.
We are pleased to announce that our expansion into commercial wholesale will benefit from securing access to the AutoIMS software platform and also by growing our remarketing center footprint. More on our commercial efforts later in the call. As we turn to 2024, ACV is focused on accelerating top line growth, continued margin expansion, and achieving an important milestone with adjusted EBITDA profitability in 2024. We're confident that executing on this profitable growth strategy will result in creating long-term shareholder value. With that, let's turn to a brief recap of fourth quarter and full year 2023 results on slide four. Fourth quarter revenue of $118 million was in line with guidance and grew 21% year-over-year. GMV increased 6% year-over-year despite a 9% decrease in GMV per unit as wholesale prices continued to normalize.
We sold 144,000 vehicles on our marketplace, growth of 15% year-over-year, reflecting solid listings growth and improved conversion rates. For the full year, revenue of $481 million increased 14% as unit growth rebounded year-over-year, along with strong attach rates for ACV Transport and ACV Capital. GMV for the year declined modestly to $8.8 billion due to a 10% decrease in GMV per unit, largely offset by a 10% increase in unit growth to just under 600,000 units. 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. Turning to slide seven, I'll share our observations about automotive market trends as context for dealer wholesale volumes in 2023.
New retail sales increased 8% year-over-year, recovering from a 10-year low in 2022. While volumes continue to lag 2019 levels, inventories improved and OEM incentives increased. These are key factors in supporting a recovery in retail sales, trades, and therefore dealer wholesale supply. The used retail environment was a different story. Units declined 1% year-over-year in 2023, down from what was also a 10-year low in 2022 as affordability issues continued to pressure consumer demand. In terms of vehicle sourcing, dealers continued to retain a higher-than-normal percentage of trades for retail inventory, creating a headwind for dealer wholesale supply. The trade-to-wholesale mix is expected to normalize over time as new and used inventory recovers from depressed levels, which are currently about 30% below normal.
While the supply picture remains muted, on a positive note, price depreciation and conversion rates across the industry recovered in 2023 following very challenging operating conditions in 2022. On balance, we believe that end markets are showing early signs of improvement and while the shape of the dealer wholesale recovery is difficult to predict at this stage in the cycle, we do believe the market will post modest growth in 2024. Moving to slide eight. After declining 20% in 2022, we estimate that the dealer wholesale market declined 7% in 2023. As new retail sales recovered from depressed levels year-over-year, given our 10% unit growth, this implies 17% market share growth for ACV, which is in line with our midterm target model. As I mentioned earlier, while there are cross currents still impacting the broader automotive market, we continue to believe that 2023 will be the trough for the dealer wholesale market.
Next, I would like to provide highlights on our value-added services. First on slide nine, the ACV Transportation team delivered very strong results in 2023. Attached rates for the year were in the mid-50% range, in line with our midterm target model and our carrier network delivered over 325,000 vehicles. Our tech investments yielded a greater than 20% improvement in cycle times, which is a key element of ACV's value proposition for our dealer partners. AI-optimized pricing, which we introduced in early 2023, expanded significantly during the year and we achieved 90% lane coverage in Q4. By leveraging AI, our Transport team drove growth and operating efficiency, resulting in a 900 basis point year-over-year increase in revenue margin, reaching the high-teens.
As a reminder, our midterm target model assumes Transport revenue margins in the high-teens. While margins may fluctuate modestly over time, the fact that we already achieved our target speaks to the value we're delivering to our dealer partners and our strong execution. Turning to slide 10. Our ACV Capital team also delivered very strong results in 2023. Attach rates in the low double digits resulted in 50% loan volume growth year-over-year, and combined with strong ARPU expansion, resulted in over 80% revenue growth year-over-year. We are continuing to invest in new ACV Capital capabilities, including bundled offerings with ClearCar, and we remain confident that ACV Capital will be an important long-term growth and profit driver. Next, I would like to wrap up the growth section by updating our progress on penetrating adjacent markets to provide ACV with additional growth levers.
On slide 11, I'll begin with ClearCar, ACV's consumer sourcing solution that leverages AI and real-time market data to deliver highly accurate condition based pricing. As a reminder, the consumer peer-to-peer market is large with about 10 million vehicles transacting each year outside the dealership ecosystem. Given ongoing inventory challenges facing our dealer partners, the peer-to-peer market is an attractive vehicle sourcing opportunity. ACV is addressing this challenge with ClearCar. Adoption has been impressive with about 600 dealer rooftops live today, and we have a robust pipeline of new prospects. Based on dealer feedback, lead generation and conversion rates are significantly higher than competitive sourcing tools. This speaks to the power of ClearCar in driving qualified leads and ultimately increasing overall dealer supply.
We are excited about the momentum for this value-added solution, which adds another growth lever to our business. Next on slide 12, I am pleased to highlight some exciting news related to our commercial wholesale strategy. At our Analyst Day last June, we shared our rational for expanding into commercial wholesale, while we believe ACV is well-positioned to capture commercial market share and the investments required to service commercial consignors, and it turns out our timing could not have been better. Commercial volumes in the rental, repo, and fleet categories are recovering at a strong pace. While off-lease will take a few years to normalize, the overall commercial opportunity is very attractive. We believe that ACV is uniquely positioned to address this market with our deep data moat and vibrant marketplaces, along with a growing nationwide buyer base looking to secure commercial inventory.
And we've expanded our remarketing center footprint with a recent acquisition of a Texas-based auction group that provides additional locations for vehicle storage and light reconditioning to service commercial vehicles. Lastly, we are thrilled to announce that ACV has secured licensing to AutoIMS. This technology platform connects wholesale auctions to nearly all 1,300 commercial consignors in the U.S. Our agreement enables ACV to deploy AutoIMS in a way that supports our remarketing centers and our digital-focused business model, which will be an industry's first capability. To wrap up on growth, we continue to execute on our playbook to capture dealer wholesale market share. Our Transport and Capital offerings are gaining significant traction and we are well-positioned to expand our TAM by executing on our consumer sourcing and commercial market expansion.
Turning to the second element of our strategy to drive long-term shareholder value, innovation. On slide 14, I will first recap some of our growth-oriented product innovation. Let me begin with the dealer buying experience. We leaned in with tech to increase conversion rates by launching new auction formats, an improved user interface, better inventory notifications, and enhanced pricing data. Our private marketplace solutions experienced strong traction with some of the largest dealer groups in the country, enabling dealers to both easily auction inventory within their network and leverage ACV's open marketplace. We launched new capabilities in our advanced buyer solution, S.A.M., which enhances the buying experience through intelligent notifications and auto-bidding capabilities.
And as I discussed earlier, our ClearCar solution is gaining significant market traction and our Transport team is leveraging AI to drive growth and operating efficiency. On slide 15, we highlight examples of tech investments that extend into our operations, delivering customer success, while reducing costs. One of the key drivers is inspection accuracy. Just as a reminder, each vehicle is unique with its own imperfections. We believe AI and our structured data is a massive competitive advantage. Our field team is equipped with technology such as CoPilot, ArbGuard, Apex, and our AI-powered imaging apps to deliver high-quality inspections. 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.
This is an industry-first. Apex delivers significant transparency into vehicle operating conditions, while also increasing the inspection productivity of our VCI team. Dealers often observe that you can't smell a car over the internet. This is no longer true thanks to Apex, with smell being one of the many sensors it enables, and we continue to expand our AI imaging capabilities to identify specific important conditions like the presence of damage and rust. Together, these innovations contributed to a 10% reduction in customer assurance costs in 2023, incredible performance in the current market. Next, I'd like to share some of the key focus areas of our tech roadmap for 2024 on slide 16. First, we plan to continue driving increased conversion rates by further tailoring the dealer experience on our marketplace.
What was MAX Digital is now ACV MAX. This is more than a name change. We integrated ACV's proprietary data moat from our million annual inspections to enable dealers to make smarter sourcing decisions. We introduced cutting-edge recon alerts by leveraging ArbGuard and built a seamless integration with ClearCar to help dealers source more vehicles from consumers. Dealers now have a way to elevate their brand by becoming more consistent at all their stores, ultimately enabling them to source more inventory and drive gross profits. Given the strong adoption of ACV Transport in our marketplace, we are extending these services to vehicles transacted off-platform, enabling our dealer partners to further leverage our best-in-class Transport services.
We recently implemented a loan management system to support our growing ACV Capital business, which enables us to offer a broader set of finance offerings and drive scale across the platform. For example, expanding our finance to dealers looking to source consumer vehicles. To accelerate our commercial strategy, we'll be focused on integrating our remarketing centers with ACV's digital marketplace to create a range of cross-sell and upsell opportunities. We are well underway selling vehicles from our remarketing centers on ACV's marketplace. Lastly, we are planning to leverage our industry-leading inspection technology to create dealer self-inspection solutions for two use cases, private marketplaces and live appraisal. These are examples of dealers directly using ACV's inspection and auction capabilities.
To wrap up on innovation, ACV remains committed to delivering industry-leading technology to our dealer partners and to our own operations, driving both growth and scale. And we look forward to sharing more details with you 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.
Bill Zerella: Thanks, George. And thank you everyone for joining us today. We are very pleased with our Q4 and 2023 financial performance. Along with delivering accelerating revenue growth in the back half of the year, we had meaningful revenue margin and adjusted EBITDA margin expansion, which demonstrated the strength of our business model. Turning to slide 18, I'll begin with a recap of our fourth quarter results. Revenue of $118 million was at the midpoint of our guidance range and grew 21% year-over-year. Adjusted EBITDA loss of $5 million beat our guidance range and adjusted EBITDA margin improved approximately 800 basis points versus Q4 '22. This demonstrates both the operating leverage in our model and continued strong OpEx management.
Next on slide 19, I will cover additional revenue details. Auction and assurance revenue, which was 56% of total revenue, increased 19% year-over-year. This performance reflects 15% year-over-year unit growth and auction and assurance ARPU of $456, which grew 3% year-over-year. Note that ARPU increased year-over-year despite a 9% decline in GMV per unit, reflecting our Q3 price increase, and we believe we will still have pricing headroom going forward. Marketplace services revenue, which was 38% of total revenue, grew 29% year-over-year. Results were driven by strong ACV Transport performance and another record revenue quarter for ACV Capital. Our SaaS and data services products comprised 7% of total revenue and revenue was flat year-over-year.
While ACV MAX revenue grew modestly year-over-year, recall that we have been taking a measured approach to customer acquisition, while making significant improvements to the ACV MAX platform. As George discussed earlier, we recently launched the upgraded ACV MAX suite and we're confident these improvements will drive long-term growth. Turning now to slide 20, I will cover costs in the quarter. Q4 cost of revenue as a percentage of revenue decreased approximately 300 basis points year-over-year. The improvement was driven by strong auction and assurance results and by ACV Transport. As George mentioned, we delivered high-teens Transport revenue margins, which is in line with our midterm target model. We continue to focus on expense discipline as we optimize and scale our business.
Non-GAAP operating expense, excluding cost of revenue as a percentage of revenue decreased 4% year-over-year in Q4. This reflects a more metered approach to growing OpEx relative to our revenue as we march towards profitability. Moving to slide 21, let me frame our investment strategy and path to profitability. Our focus on spending discipline and operating efficiency resulted in a material decrease in OpEx growth in 2023, resulting in adjusted EBITDA losses declining by approximately 70% year-over-year. And as you've seen reflected in our Q4 results, we delivered margin expansion while preserving our go-to-market and technology investments to ensure ACV is in a strong position as market conditions improve. On slide 22, I would like to provide an update to regional profitability that we shared at our Analyst Day last June, demonstrating why we're confident in our midterm target of achieving 25% adjusted EBITDA margins.
In 2023, 35% of our regions comprising about 50 territories achieved adjusted breakeven or better. Of those regions, three were in the 15% to 25% adjusted EBITDA range. Additionally, we had three territories exceeding 25% adjusted EBITDA margins. We believe that this performance demonstrates the inherent leverage and scale of our business model as we continue to drive top line growth. Next, I will highlight our strong capital structure on slide 23, We ended Q4 with $411 million in cash and equivalents and marketable securities and $115 million of debt on our revolver. Note that our cash balance includes $134 million of float in our auction business. The amount of float on our balance sheet will continue to fluctuate meaningfully based on business trends in the final two weeks of each quarter, which has a corresponding impact on operating cash flow.
Cash flow from operations in 2023 improved significantly year-over-year, a 75% reduction in burn, reflecting the strong margin improvements and OpEx management we delivered and the leverage in our business model. Now, I'll turn to guidance on slide 24. For the first quarter of 2024, we're expecting revenue in the range of $141 million to $146 million. Adjusted EBITDA is expected to be in the range of $2 million to $4 million, consistent with our commitment to achieve a full quarter of profitability in Q1. For the full-year 2024, we are expecting revenue in the range of $610 million to $625 million, representing growth of 27% to 30% year-over-year. Adjusted EBITDA is expected to be in the range of $20 million to $25 million, reflecting operating improvements in our core business and integration investments in our remarketing centers.
As it relates to our guidance, we are assuming that the dealer wholesale market grows modestly in 2024 and conversion rates and wholesale price depreciation follow normal seasonal pattern. We're expecting the Texas-based auction group acquisition to contribute approximately 5% of annual revenue in 2024 and be accretive to full year adjusted EBITDA. Revenue growth is expected to outpace non-GAAP OpEx growth, excluding cost of revenue, and depreciation and amortization by approximately 10 percentage points. And finally, moving to slide 25, we remain committed to achieving our midterm target model, which is underpinned by sustaining market share gains, penetrating adjacent markets, and expanding margins through revenue mix and scale, all of which we've clearly demonstrated in our performance.
Our midterm targets are primarily predicated on the dealer wholesale market recovering to historical volumes over time. But in addition, we are expanding our TAM and consistently taking share, which will drive long-term growth. And with that, let me turn it back to George.
George Chamoun: Thanks, Bill. Before we take your questions, I will summarize. We are very pleased with our strong execution in 2023. We are especially proud of our ACV teammates that delivered these results. We continue to gain market share by attracting new dealer and commercial partners to our marketplace. We are expanding our addressable market, which positions ACV for attractive growth as market conditions improve. We are delivering on an exciting product roadmap to further differentiate ACV and drive operating efficiencies. We are on track to achieve our near-term adjusted EBITDA targets and deliver on our midterm 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.
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