Hey, everybody. My name is Chris Pierce, Transportation Technology Analyst at Needham. Welcome to the third annual Needham Consumer Tech e-conference and e-commerce virtual conference. It's my pleasure to have the team from ACVA. We have George Chamoun, CEO, and Bill Zerella, CFO. Thanks for joining this morning. How's everybody doing? Good. Doing great, Chris. Yeah, thanks for having us. Great. I thought for the session, we'd kind of just keep it we'll kind of run through the model, but as we run through the model, we can tie in changes and trends in the auto industry over time, any macro you guys are seeing, hitting on how ACVA has been able to win and gain share, the path to future share gains, and leveraging the model. Kind of if I do it right, I think we'll be able to hit on most everything kind of investors are asking about these days. So I appreciate having you. Let's start with top line, revenue. So just excluding software and data services for a minute, there's no revenue without a cleared auction, and there's no cleared auction without a vehicle listed for sale. So how do you guys go about filling out the supply side of the auction? Who are vehicle sellers? Where do those vehicles come from? What macro has been affecting this? And just lastly, you know, if you'd hit on your value proposition to these sellers versus legacy brick-and-mortar auction houses. Yes, certainly, Chris. So the business has been a regional rollout of the business. So in the Northeast, where we've been operating the longest, we've been out building relationships, both with franchise dealers and independent dealers now for several years. And we are now nationwide, just in some of the territories we've been in for well over five years, and some just a few. We go out. On the franchise dealer side is where the majority of our supply comes from. These franchise dealers, your typical Honda, Ford, GMC dealer, sells new and used cars. They take in trades, and for the cars they don't want to keep, our vehicle condition inspectors show up one, two, or three days a week, depending upon the volume. We inspect the cars on behalf of that seller. We launch an auction, whether it be a 20-minute auction, a two-hour auction, whatever format makes sense. We auction the vehicle, and on the buying side, it's the inverse. About 70%+ of the buying is independent dealers, and about 30% is franchise dealers. So, supply and demand from the types of sources are an inverse of one another. We've grown the number of franchise dealers listing cars and buying across the platform. We've grown the number of independent dealers, both listing and buying across the country, and that's how we've been able to grow to where we are today. And really shifting to the second part of your question, the majority of these cars historically were going to physical auctions. They were being shipped, typically on a once-a-week sale. So look at the inverse of what I mentioned. Instead of us showing up two, three times a week, these cars would've been shipped at a, to a physical auction, sold, let's say, the week later. Whereas we're showing up, it's quicker, quicker to be able to sell the vehicles. Also, instead of just selling cars to a local, regional base, it's now getting the more regional and national base of the ACV buyers. And then, we've been able to grow our footprint and also grow wallet share all at the same time. Great. And just as a quick follow-up there, do investors ask or do you get the question? Because independent dealers take in trades as well, and independent dealers sell at auctions, sell vehicles that they... If they can't retail a vehicle, it goes to a wholesale auction. Is that an opportunity in the future, or is there something specific to independent seller, potential sellers on the vehicle side that you wouldn't kind of participate there or wouldn't participate at as much scale? Yeah. Today, independents and other sources are somewhere around 30% of our listings, give or take. Don't take me specifically there, but but it's, it is a portion of our share. But we, we typically only focus on the independents that have a reasonable amount of volume and listings for us to show up to, only to keep our efficiency well. It's tougher for us to show up and inspect one vehicle at a time. So with our current model, we typically go after the independents with a little bit more volume. But as we grow into a territory, if you're going down any Main Street America, and you're gonna hit the franchise dealer who's got, let's say, 10 or 12 cars when you show up, it becomes a little easier to show up and do that one or two cars if you're going to that street anyways. So yes, as we grow, as we scale, making additional stops, even although that one spot is less efficient, we are able to go after a larger portion of the independent target market. Then you kind of talked about where supply comes from, but that kind of bumps into, if I can have you guys put on your macro hats, just kind of... You don't have to go too far down the rabbit hole, but just you know, at a high level, we've got new car stock, then we've got kind of used car stock. How do these feed into auction supply, and then how deep do investors go? You know, I talked to some investors that say, "Hey, new car stock is up this year. That creates a higher level bar for next year." But then investors say, "But wait a minute, it was a real estate... A lot of the buying this year has been on the fleet side of the world, rental cars, so there's still pent-up consumer demand on the new car side of the world. And then, you know, I just kind of would love to... How deep do you guys go on the new car side of the world, and how deep do investors- how should investors think about it? Then we can touch on used velocity as well. Yeah, I think at the end of the day, consumers eventually need to buy a car, whether it be new or used. The cars out on the road are aging. It's getting more and more expensive to fix vehicles, and for most of Americans out there, they're better off just getting rid of their current problem, getting a new payment, getting a car that is either more, you know, that includes within their budget and their range. And with new car incentives now coming back really strong, there's a lot of great deals out there for consumers. So, on the flip side, used car interest rates are high, so it makes it where buying the used car versus new makes it a little bit tougher of a decision. It means the retailer of the used car has to put it at a price point that competes in not only their market, but against the new cars coming into the market with incentives. So I think all of that means is consumers will have a competition, will have manufacturers putting out incentives for over the next year. And you know, we believe even though there's broader challenges in the economy, it seems like you know, consumers will have affordability options and will have options for both new and used. So as long as we can get both of these kind of coming back in the right direction, which they both are, we feel good about it. Okay. So twin tailwinds, but timing of tailwinds, strength of tailwinds, difficult to kind of gauge at this point in time? Exactly. Okay, perfect. And then let's kind of talk about the transition of the legacy auctions, brick-and-mortar, like you talked about, versus purely digital. And then just... Can we kind of take a step back? I really want to go, like, high level, 'cause when investors ask about what percentage of auctions is going digital, how do you guys think about it? Because the buy side of the transaction with simulcast at some of the larger players, that sort of went digital during COVID, but then they're still selling cars physically. So how do you guys think about what makes a digital auction and what digital share is, and what does the runway look like for digital share gain at this point in time? Yeah, I think it's a great question, 'cause what investors are really saying is, "Aren't more and more buyers ready to buy digitally?" And they are correct for asking these questions. A big portion of cars sold at physical auctions are starting to run Simulcast or being sold through a digital platform. So it means, like, yes, the internet is real. It's here to stay, and cars will be sold more and more. The biggest difference really is that, when we went out there and went after the digital dealer-dealer, we were talking about going to the dealership or going where the car is instead of it being shipped, and doing a pure, a pure-play digital. So we're excited that more and more buyers want to buy vehicles this way. And it's really as our competitors launch Simulcast, it really helped educate and really helped get buyers more comfortable buying digitally. So, I love the topic. It's actually an intriguing topic, 'cause it's really, in a way, buyers are getting trained every day more and more. Now, having said that, are still probably, you know, in some of these physical auctions, between 60%-70%, some of them are still bought locally, physically. Yeah, that's probably true, too, right? And some of the more mature ones might be between 30%-50% digitally, meaning via Simulcast, but the industry is maturing. Buyers are getting more and more comfortable buying online, and what it really says is buyers, buyers just want to buy the cars. They, they'd prefer it digitally, but at the end of the day, if the car is locally and if they have to go show up, they'll do that, too. Is there something holding back sellers from... 'Cause if you think about buying and buyers being habituated to buying digitally, you can get a lot more buyers lined up to look at a car versus the physical auction. So what might be holding up the sell side of the transaction? And not- holding up is the wrong term, but, like, is there a certain subset of sellers that still thinks that they can get better prices physically, or is there something more to it than that? Yeah, I think there's more than one factor. One is just sellers that just, "It's not broken right now. I don't want to fix it." So look at it, your typical thing there. They're just not. They don't feel like there's a compelling reason yet. And if you look at the way we... If you look at if you study ACV cohorts, the longer we're in the market, the longer we're able to convince a seller that there's compelling reason why to change. We usually get a little bit of their wallet share, then we sell, and we get a little bit more, and we get a little bit more, and we start to convince them we're the right solution. So one is just trying to get folks to try it before they actually get convinced to switch, right? So that'd be one. In general, I would say, you know, the majority of franchise dealers and independents, really there isn't a compelling reason why to send it to a physical auction beyond just history, except for maybe a few dense markets, like the middle of Manhattan, which very little cars are sold out of Manhattan. It's more Long Island, New Jersey. You know, for example, New Jersey is one of our biggest markets. So but, you know, people work in Manhattan and live in New Jersey, right? But there are a few markets where land for franchise dealers is helpful just to get it off the dealer's lot, but that's minor. You know, that's not a huge part of the market. And then the third element, to answer your question just completely, would be commercial cars. So a bunch of commercial cars need land. So repos, cars need to sit based on the state laws between two to three weeks, so that would be a category that will need land. Whether it needs a physical auction or not, look at it as just it needs land, right, for the car to sit. Fleet cars, 'cause it's a former employee or company or government-owned car, those fleet cars need to be sent somewhere. So there is a certain segment where land is important, and where we need land, we're also gonna have the land available to help us pursue our commercial strategy. ... Okay, we'll get back to land and potential VCI efficiency gains when we get back to the, the OpEx side of the model. But we're still talking about revenue. Sure. So revenue, we're talking about cars coming in, cars being auctioned, growing the number of cars on the platform. But you guys have had, you know, you've exercised pricing power, you've shown that you have pricing power as well. Can we talk about revenue per car now, sort of how to think about versus legacy peers, versus your digital peers, and where pricing could go, and what you guys think about as the right way to raise prices, and what the feedback you get from customers? Yeah, so I'm happy to take that one, Chris. So, our auction fees, which is, are comprised of our buy fees and sell fees, are roughly around $450 today. Last quarter was a little less, first half was closer to $450. Our, you know, competitors do on average have higher buy fees than we do. And, you know, we've exercised some of that pricing power over the last few years by making some small adjustments to our buy fee schedule. So if we think about our 2026 model, we've actually modeled $500 in between buy fees and sell fees, and we think that's very attainable. You know, when you do the math, by the way, and you look at the size of this market in terms of just dealer to dealer, pre-COVID anyway, not right now, but pre-COVID was about 11 million units. So that's about a $5.5 billion, you know, market in terms of the TAM for just buy and sell fees. And then, of course, on top of that, you know, you have ancillary fees, which are related to transport, and those attach into the marketplace, and we're typically north of 50% attach for transport services. And then floor plan, our ACV Capital business. So, you know, when you add the ancillary services in, you know, that easily increases the TAM another 50%-70% on top of that, and that's just dealer to dealer. Commercial, of course, is another big opportunity, and we're just starting to dip our feet into the water there. And that's at least pre-COVID was about 8 million units, so it's a little less than that today as well. But, so it's a really big TAM. And I would say over time, you know, as we continue to gain share, and we continue to, you know, tweak our buy fees to be closer to what our competitors' buy fees are, there's some, you know, pretty big opportunities to continue to grow the top line. Do commercial, you know, buy fees, do they come with... Is it similar to kind of your current structure, or are there differences in how those cars are priced in the marketplace right now versus considering who's auctioning them? Yeah, so generally speaking, the sell fees may differ. Sell fees are more fixed. In the case of commercial, you're dealing with a consignor, so those are separately negotiated, and potentially could be actually a bit lower than our current sell fee structure. Buy fees would typically be more consistent, you know, in the sense that you have existing buyers who would buy those cars as well, and they would be subject to existing buy fee schedules. That doesn't make us any different than anybody else, but that's typically the way it would work. How would conversion look on those units, just, while we... Since we're talking about it, just out of curiosity? So I can talk about repos, and I don't know, George, I guess you can talk about the other facets. But repos are actually very attractive because, you know, typically, your conversion rates are close to 100%. So once a car needs to be auctioned because consumer, you know, has failed to make their payments to a bank or any kind of financial consignor, then once you've reached those statutory holding periods that George mentioned, the car does have to get sold. So proceeds can pay the loan, and, and then the consumer gets the balance. So that's very attractive financially in terms of our business model. I don't know, George, you want to touch on the other pieces? I think you summed it up pretty well. Yeah. Higher. Okay, perfect. So you hear the ancillary opportunities. ACV Transport, is that a fully formed product across all geographies, or are you still subsidizing some regions to kind of grow out the buy side of the transaction, or is it kind of fully formed geographically? And then on ACV Capital, can you just kind of walk through how you guys—I don't want to use the word slow playing, but I know you haven't really hit the accelerator as far as growth on ACV Capital, or ACV Capital. Is it macro concerns at the dealer level? Is it volatility in used car prices and not wanting to make loans against these assets? Like, I just want to get a sense of, just kind of touch on ACV, ACV Transport and Capital, just kind of broadly, and if you could drill down, that'd be great as well. Why don't I talk about capital, and George, you can touch on transport. So capital, that's our fastest-growing line of business today. It grew 80% last quarter. It's been growing at, you know, 100% or more. So, and it's a very profitable business, flows through our, our P&L at very, very high margins. So it's our fastest-growing and highest-margin business today. We have been, you know, a little more focused on risk profile of dealers in light of the current macro economic conditions. So I would say we, we could grow even faster, except, we've kind of raised the bar in terms of the, all the risk criteria that we look at, in doing business, since we're loaning money to a dealer. It's short-term lending, and it's secured with the, with the asset, but nevertheless, we've been really careful in terms of managing the risk profile. So far, we've been pretty successful. In fact, last quarter, we actually drove our bad debt expense down 50% quarter-over-quarter. Now, you can't extrapolate that trend, 'cause there's gonna be volatility every quarter, but look, it's a very attractive business. You know, we've set a target of 25% attach rates by 2026, and we're just over 10% today, so there's still a lot of room to grow. But I would say, at least for the foreseeable future, we're going to try to balance our growth objectives, which means making sure that we're managing risk at the same time. Just so, I've never quite understood, or I, I wanna make sure I understand: Does a dealer have two or three floor plan partners already, and you're just becoming a- another partner? It's kind of an easy, "Hey, once you buy the car, you select transport, then you select Capital," or do they have one partner, and you have to, you know, really win them over to become the second partner? Like, how does it kind of work on the dealer side of the world? More, more of the latter. Typically, they have one primary- Okay ... floor plan company, and we, in most cases, we're becoming the second. And they can't necessarily get rid of the first, 'cause we only fund vehicles today purchased through ACV. Right. Yeah. And then on your first set of questions on transport, you asked two themes there on transport. One, are we fully launched across the country? And then also, are we also subsidizing any of the territories or regions? And the answer is yes and yes, and I'll go into each one. So yes, we're fully launched and becoming more and more competitive, but, but yes. And yes, we're already hitting our margin objectives for 2026, and we're doing that while still subsidizing some of the regions. So, which is a really good thing, 'cause it means in the model, you've got levers that help you hit your goals and objectives, whether it be sell-through goals and objectives, margin goals and objectives. So we're really just, you know, ecstatic on the fact that we're both... You know, we've now launched transport across the country. We're hitting our overall, both attach rate and margin goals. But in addition, yes, to answer specifically, there's a few territories we're still subsidizing. Okay. Okay, Okay, perfect. And then just last one on revenue. It's gonna be a long question, I apologize, but SaaS and data services or data revenue, kind of think of this as kind of like a Trojan horse, where right now you've got auctions. It's the discretion of the seller for the most part. I mean, I understand you have proactive VCIs. You can kind of do things to drive vehicles to auction. But as you launch, move down this road, you'll kind of see better into a dealer's inventory across a growing percentage of your clients. You'll have real-time leads on these aged vehicles versus kind of depending on the dealer to kind of reach out to you, and then you'll know which dealers might actually be buyers of those vehicles because, again, you see inventory across a broad range of dealers. You'll know the wholesale and retail values of those, you know, those vehicles, so you can kind of help people where to price, where they should buy, where they should price it, when it gets to the retail lot. So I kind of look at it as like a Trojan horse to help you win more auction supply. Is that? Am I on the right track, or how are you kind of framing this opportunity? And if that's totally wrong, that's fine, but I'd love to hear you guys', kind of how you're thinking about it. Yeah, Chris, it's both. There's elements of our SaaS service that is intended to be that Trojan value add, okay? That, and then in addition, there's elements of our SaaS products where we still require a fee. So we, as part of this overall strategy, we have both. Like, for example, ClearCar is our fastest-growing sort of SaaS-related product, but we're willing, and it's a... You know, the retail price for ClearCar Capture and ClearCar Price, without getting into all the weeds here, is about a $900 subscription per month. We're willing to give it to the dealer if they give us their wholesale. So that's an example of using our SaaS product to win wholesale. Where there's other parts of our SaaS offering, where we don't subsidize it, we just charge the monthly fee. But I would say generally what you mentioned, directionally, is right. So a bundling opportunity that potentially didn't exist or didn't exist prior is a fair way to think about it? That's right. Okay, okay. All right, we've made it through revenue. Let's, let's talk about cost of revenue. Post-auction. Arbitration is pretty much the number one line item here within cost of revenue. Is there, without kind of going too deep on the technology side of the things, I guess just frame how you can kind of keep hammering away to drive arbitration lower, where you think you're at versus your peers as far as your technology. And I know trust is a big thing in terms of how you guys think about your relationship with dealers. How does that all sort of play in here in terms of cost of revenue to drive higher... I don't want to say gross margins. I know you don't report gross margins, but higher, dollars flowing before OpEx? Yeah, so maybe we should start by just describing how, arbitration costs, come about, how it impacts our- Yeah ... our P&L. So, you know, we stand behind our condition reports, which disclose, you know, the condition of each vehicle that's marketed on our website. And, you know, basically, through a fee structure to our sellers, which we call our Go Green Assurance product, we will stand behind the condition report, and if there's anything that we miss in terms of the condition of the vehicle, we will arbitrate with the buyer, and basically compensate them for whatever the cost is associated with things that we missed. So, that's how arbitration costs basically are incurred and hit our cost of revenue. So, the key here for us has been continually improving-... The data set that we're able to put together in terms of the condition of a vehicle, as a result of inspecting it. And we've continually invested in the technology that our inspectors use across the country to inspect vehicles, and we've talked a lot about this the last few years in terms of those investments and the increased visibility it gives us as to the condition of a vehicle. To the extent we identify the issue and we disclose it in our condition report, then there isn't an arbitration claim, obviously, right? So to the extent we get better and better at disclosing, you know, various issues through our inspection, we can better manage our arbitration costs. You know, that said, there's an ebb and flow to arbitration costs. In fact, there's seasonality to it. You know, Q1, which is the best quarter seasonally, in which, you know, there's a lot of demand for used cars because of the upcoming, you know, tax return season, where people, you know, get refunds, and that drives up demand in the spring for used cars. You know, dealers tend to be less focused on necessarily arbitration issues than, for example, in Q4, where we are today, where, you know, used car prices are, you know, typically come down in Q4, and buyers will get more focused on any potential issue that might impact, you know, the resale of the car. So there's an ebb and flow and a seasonality to it, but generally speaking, as we continue to improve our technology, and improve our disclosures, that, that puts us in a better position to avoid arbitration costs. Yeah, and Chris, we've been really happy with our year-over-year improvements. You know, it's a good way to kinda look at what we've done. You know, and you're looking at, you know, how we did, you know, Q3 compared to Q3 last year. We did it, you know, we had a great improvement. Q2 versus Q2, we had a great improvement. So if you look at the business through that lens, we've done a great job. Our technology is helping. Our trained inspectors are helping. But overall, our year-over-year improvements have been great. And Bill, you touched on seasonality within a year, but is it right that arbitration should have a tailwind if industry units return to normal versus kind of the trough or depressed level where they're at? Because that... You know, we talk about end demand lowers arbitration. If we see higher end demand overall, yes, Q4 will always be higher than Q1, but is there a natural tailwind, potentially, to arbitration if we see the industry return to normal level of units? Yeah, I think you're right. You know, that's a harder one for us to model. Yeah. But Chris, your intuition is right. Okay, okay. And then operations and tech. So on the operations side, I think of it mostly as VCIs, you know, so the cost of running the auctions and the tech in their hands. How do you get further leverage here? Is it about the VCIs just going from four vehicles a day to eight vehicles a day, and can the VCIs make that happen, or is it about the territory managers winning more on the franchise side? Like, how does it kinda, how do you get leverage on that line item? Yeah, so, at any point in time, our average productivity is a mix between those inspectors and territories that are very mature, have a lot of density, and they have a lot of productivity because they're able to inspect a lot of cars at any given point in time. In fact, they can go to one dealer. If we have very high market share, they might be able to do three or four inspections, you know, really quickly without having to drive, you know, to another dealership. So those inspectors are already very, very efficient. You know, thinking in terms of, like, 10-12 inspections a day. On the other hand, our less mature territories, you have the opposite dynamic, where inspectors may be spending a fair amount of time driving from one dealer to another. You don't have the same level of density, and the productivity there is a lot less. So in order to drive the average productivity higher, it's very much a function of starting to or continuing to mature those less dense territories, add more sellers, you know, generate more unit volume in any given geography, and therefore better utilize the inspector. And when we do that, or as we do that, that improves productivity, not just in that territory, but then on average across all of our regions around the country. Okay, and on the tech side of the world, so is it... I think 2021 was an investment year, or before it was 2022. Like, I just wanna make sure I get the years right, and then the spend going forward is more incremental. I know you're making some investments in the fourth quarter of this year, but how do you kind of frame the technology spend to kind of maintain- Yeah ... the competitive advantage on the inspection side of the world? So, so 2021 was a very big investment year. 2022 we invested as well, not at quite the same rate as we did in 2021. This year we've been more metered in terms of our investments in product and tech. We just opened a new offshore engineering center in India, and we're just starting to ramp that up so that we expect that we'll be able to, you know, lower our, or change our cost structure over time, as well as we add more capacity there to augment our teams in Buffalo and Toronto. So, you know, there we kind of see an opportunity to continue to increase our capacity, but not necessarily increase our cost at the same rate, more on a kind of marginal basis. So that's, that's the way we kinda think about it going forward as we march towards our goals for 2026. ... SG&A, is it fair to say that's the line item you'll see the most leverage on as more units go through the model? It is. The way to think about that, and we talked about this on our Analyst Day, on average, we look at SG&A as roughly 75% fixed and 25% variable. So there's certainly a variable piece, especially on the go-to-market side, and somewhat on the G&A side as well as we scale the business. But we, you know, this is an area that, as you would expect, as we get bigger, we should get, you know, a fair amount of leverage in our model going forward. Okay. And then we made it down to Adjusted EBITDA. Bill, if you wanna hit on goals exiting this year, kind of goals for next year, kind of what you've communicated so far to investors. Mm. Then you can loop in moving towards 2026 margins as well. Yeah, so we haven't set our goals yet for next year, so I can talk in terms of the trend. How do we get from where we are this year to 2026? So this year, you know, think in terms of roughly -5%, EBITDA, getting to 25% EBITDA in 2026, and there's really two, two big drivers of that. Taking our, our margins from roughly 50%-60%, over time, and that will give us about 10 points of, EBITDA improvement, and then taking our OpEx, down about 20, 20 points, from 55%-35% of revenue, and that's how we get from 5%- 25% by 2026, so a 30%, revenue swing, over time as, as we get to those targets. Okay. Okay, perfect. We made it through the model. I have a couple little non-model ones since we have about two minutes left. Just, I'd love to know, how do CarMax and Carvana fit in the picture as... 'Cause they're kind of large buyers from consumers, but then they're large sellers of vehicles they can't retail. Like, how does that affect your business, if at all? And if dealers try to follow that playbook of acquiring vehicles from consumers, would that affect your business, or there's always... Or auction has consistently been 25% or so of dealer supply, and it's, I'm just curious how to think about that going forward. Yeah, I think at the end of the day, our job is to help the 16,500 franchise dealers and 30,000+ independent dealers, you know, compete against Carvana and CarMax. So look at our tools, like ClearCar, which helps them- Mm ... helps our dealers buy cars from consumers. We're helping the everyday dealer in your neighborhood be able to buy the cars, trade the cars, sort of compete, and we've got the technology, they've got the land and the local brand. There's no reason why the local franchise dealer shouldn't be buying the same vehicles. Okay. Okay, and then I think we'll leave it there. I, I appreciate everyone's time. We're at two minutes. I appreciate the time. Hope you have some good meetings today, and happy holidays to you guys and everyone listening. Thanks, Chris. Appreciate it. Thanks a lot. Thanks, everyone. Thanks. Bye-bye. Okay. Bye now.