Hey, everybody. Good morning. My name is Chris Pierce, with the Needham research team covering transportation technology stocks. Welcome to the virtual day at the nineteenth annual Needham Tech and Media Conference. It's my pleasure to welcome the team from ACVA. We have George Chamoun, CEO, and Bill Zerella, CFO. We're going to do a fireside chat format. If anyone has any questions, you can pop them into the portal in front of you, or you can email them to me at cpierce@needhamco.com. George and Bill, welcome. Would you guys do some quick introductions and introduce ACVA at a high level, then we'll hop right into it. Yeah. Thanks, Chris. We appreciate you having us. As Chris mentioned, George Chamoun. I lead ACV, and Bill is my partner here, who's our CFO. We're pleased to introduce... Those who don't know ACV, we are a digital marketplace that's in the automotive category. We primarily focus, our business model is primarily on the wholesale side of automotive. Many of you have done a lot of research on the retail side. Wholesale is both the vehicles that dealers wish to not retail, as well as also on commercial consignors. These are repos, fleet cars, other cars in the commercial category. So large addressable TAM. We've been at it for over seven years now. We've built fantastic technology to help buyers really understand the vehicle they're purchasing. A lot of the technology we've built helps understand the condition of an asset. And the whole thesis of the business is the more confident buyers are buying digitally because they understand the condition of a vehicle, then we'll see more and more of this sort of category move to a digital model. So as fast as I can do it, Chris, hopefully that helps the lean in there on who ACV is at a really high level. That was great. And, Bill, how long have you been with the company and kind of, you know, your responsibilities day to day and bigger picture would be great to hear as well. Yeah, so Bill Zerella. Joined the company a little, a little less than four- years ago. September will be four- years. My background has been almost entirely in tech. Spent the last 25 years in Silicon Valley. Typical CFO responsibilities, as you would expect, you know, finance, accounting, IR, audit, and the like. So, that's my, my background and, role in a, in a nutshell. Great, appreciate it. And, so can you kind of start at a high level, used vehicle auctions, what is their place within the industry? You know, what problems are you helping your customers try to solve? And then kind of loop in what auctions used to look like in a physical world and as they shift towards a digital world, kind of what that looks like for your customers. Yeah, certainly, Chris. So, first I'll focus on the dealer segments. That's where the far majority of our revenue is today, and commercial is new to us, but emerging. On the dealer side, our primary go-to-market has been hiring inspectors throughout the country. We call them VCIs, Vehicle Condition Inspectors, who go to the dealership where the car has been traded in, and instead of the dealer having to send that car to a physical location, we give the dealer the option of having us inspect it and auction it right from their dealership. No cost to that seller, unless the vehicle sells. And they also choose the reserve price. So, not a ton of friction of getting the seller to try this model, because at the end of the day, if we don't sell the asset, the car then gets shipped later in the week to the local physical auction. So we really built this methodology of getting ahead of the industry, being like we're the first place these assets go. Then buyers, we've signed up thousands of buyers across the country who become familiar with our condition report, and they get comfortable with the ACV process. And so not only do we inspect the vehicle, we launch the vehicle, we also have an array of value-added services, from moving the title from the seller to the buyer, which includes them being FedExed to us, then FedExed to the buyer, which includes ensuring the title is compliant. We have services like ACV Transportation, where the buyer can choose our transportation to move the vehicle. We have a product like ACV Capital, where if it's an independent dealer, they could use us to actually pay for the vehicle and pay us a fair interest rate for that category. So we've really built up the entire infrastructure to go from winning over the supply side of the equation to supporting the demand side of the ecosystem. Can you talk about the size of the dealer market, kind of what's been happening with the dealer market as we've seen kind of new vehicle, you know, inventories fall rapidly, now rise? Sort of what's been happening with the, with that dealer-to-dealer wholesale market. Yeah, so what we've shown our investors a framework that says the market on dealer wholesale was somewhere in the 11+ million units range pre-COVID, and post-COVID, it dipped down to really as potentially even under 8 million. And there will be a recovery back on that size as more supply comes back into the ecosystem. But whether it's, you know, 8 million or whether it's 11 million, this is still a very large TAM, really large TAM. There should also be this tailwind over the next few years but either way, it's a huge, huge market. The commercial size of the market also somewhere in that same, let's say 8 million-9 million units. When you look at repos, rental cars, fleet cars, and then off-lease cars, and in that order, the market's been coming back, meaning off lease will take a little longer, but the first three segments I mentioned are all coming back to where they were pre-COVID or higher. So, dealer wholesale, very large TAM, commercial, very large TAM, and what you've seen us is grow into this market, initially regionally, by taking very significant market share across the East Coast. And then we've been starting to take market share, pretty consistently now in both the Central and West parts of the country. Okay, and can you touch on what's been driving that market share? I know you kind of highlighted the VCIs as your key go-to-market earlier, but kind of what are you know, what are they doing? What does a typical day look like for them? And then what is your best performing VCIs or your VCIs in, like lower, I don't want to say lower performing, but newer regions? What do things look like there, and how do you get leverage on that? Yeah, certainly. We, in our go-to-market, like a lot of marketplace businesses, the more supply, the more demand, you know, and really, the network effects start to kick in as you start to get stronger and stronger share, and then it goes from, like, local dynamics to regional to national dynamics, like a lot of other marketplace companies. So we have that sort of benefit, right? Even when we're new. We're not new on the demand side. We may need more local buyers, but the more supply, the more demand, and we also could leverage our regional demand, so. But to your point, Chris, on the east side of the country, we've been at it for, let's say, over five years in some of these markets. We do have inspectors doing well over 10 cars a day, which creates great leverage for our model. They're inspecting a lot of cars. Bill said, on average, the inspectors are doing around six. Knowing on the east, we've got inspectors doing over 10. So we obviously, that means in our newer markets, we're doing a lot, you know, we're doing much less than six. So our model gets stronger. There's a reason why we've shown our investors both regional and territory based economics that show you the leverage we have as we get more supply in our model. Bill can add in there if you'd like, Chris, to add a little more color. But this is really sort of a rinse and repeat. We know what it looks like. We go make the investment, and over the course of a handful of years, we, as we get more supply, the model just gets stronger and stronger because that initial investment is almost, like, fixed in a way, until we get enough supply to carry that team- Yeah. Bill, Bill, where do they fit in the, in the, you know, the financial statements in the model, and then kind of can talk about is it, is it something investors should view as a fixed cost, and that's why you're a high incremental Adjusted EBITDA company, or is, is that simplifying it too much? Yeah, it's simplifying a bit too much, but, so first inspector costs are in Marketplace Operations on our P&L, separate line item. Okay? And certainly our inspector costs is a very large share of that. So I would argue it's more semi-fixed in nature, in the sense that as we improve the operating efficiency of our inspectors around the country, those costs will not grow on a linear basis with revenue, right? So that's one of several points of leverage in the model as we scale, because we can see, again, as George mentioned, in our most mature territories where we have a high density, those inspectors, you know, have very strong utilization, and it drives the unit economics in a pretty big way. Okay, and then before we go a little deeper on the dealer-to-dealer market, George, can you just talk about, you know, you guys, like you said, you've been able to win share in that market. How should investors think about, you know, in the end, you're, you have a vehicle seller looking to sell a car to the highest bid that they can find, the highest priced buyer. How portable should the technology and the, your process be from the dealer-to-dealer market to the other markets that you're sort of looking to penetrate? Yes, if you look at the commercial consignors that you're alluding to, many of them are, to your point, very just math-oriented, right? They want to maximize their results. So it's really getting the case study going and getting them to try us somewhere across the country. And once you show them the results, then you're just asking for more locations. Commercial consignors, you know, I would say 90% of the time are just looking for the best marketplace in each region. So we're most already are working with different auctions in different parts of the country. It's really, Chris, about proving to them that we are the right marketplace, and we can get them the right results, and we feel really good about that. We, we've got buyers who are looking for this inventory, so, a way to look at it is we already have half the riddle solved, meaning we have the demand side. Of course, we want more and more demand. We want more and more buyers. We're, we're going to keep growing that area, but we, we already have a lot of buyers across the country, and, it's just really about getting a case study going with any one of the... whether it be a bank for repos. I mean, all banks have a fiduciary responsibility to get the most of these cars, so they all should be trying us. Rental car companies, you know, many of them are already testing us in many different geographies, and we're already starting to win some business in some geographies. And it'll just keep going, right? We just need to keep proving in each location across the country, and then in time also, our network effect should kick in stronger and stronger. The more, you know, supply, the more demand, and our strength should just increase. So should it look sort of like the maps you show at your analyst day, where because you have high seller penetration in the Northeast, you tend to have high buyer penetration, and in the Northeast, if a bank or a rental car company is, you know, looking to try something new, they might start there, or you would kind of tell them that might be a good place to start because you have a deeper buyer pool, and then sort of you move west, just like you've done with the dealer-to-dealer business? It'll be a little bit of that, but it'll also be where do they want us to be. It'll be based on the tuck-ins we buy. Chris, it won't be that scientific. What it'll really be is we're gonna go put up 40 locations, one way or another, across the country. I love the category- Okay ... and, I've said 40+ locations gets us to 80% of the TAM. So, we're gonna get those locations, and wherever we need to augment demand, we'll get demand in time. So, you know, it's gonna be a little more straightforward than that. Okay. Okay, perfect. So if we drill down on the dealer-to-dealer market, can you just talk about what is... Like, how does a vehicle- when a vehicle ends up in the auction marketplace, the VCI shows up, he does the inspection. What industry guideposts, or how does the dealer know, the selling dealer, know where to set the price, and how can you sort of help them with that? Are they leaning on industry data? Can they supplement that with your data? How do you see the data you've collected on the wholesale and now on the retail side fitting in and solving this problem for them? Yeah, it's an area where it hasn't been very scientific for dealers up until this point. The our competitors' data were really, I would call more of an average value. Whenever you have any things that are more on average, you're almost always pricing your assets that have a lower condition too high, and then the assets that are in better condition too low in a way, right? 'Cause that's the essence of what an average is, right? And I think one of the reasons why this whole industry was only, you know, had a, you know, conversion rate of 50-ish% this whole time, in any given month, is 'cause sellers and buyers and what are these things worth, right? A lot of it was regarding the condition-adjusted value of that asset wasn't really well understood, and we really can help in this category. So we're helping in several ways. One, I'll start with the consumer. What should the dealer pay for that trade? With ClearCar, we have a condition-adjusted value in real time, so it's not just humans trying to make their best adjustments and their feelings of that vehicle using gut and third-party data and market data and all the things they do today. ClearCar is gonna give you, leveraging machine learning and AI, the value of that asset and what they should pay for the consumer, and it gives them $a few hundred in margin they're looking for in wholesale value. All built in, and if they want to put in more, they can put in more. Then it gets to, okay, now they bought the asset, and ACV has an ACV wholesale estimate pre-inspection. We have an estimate post-inspection, and we also give them a recommended reserve price. So we're building in tools, and soon we'll add more things like expected retail for the buying dealer, expected recon. We don't have all that in there yet. But think about this whole value proposition of, for any one car you have, what should you pay for the consumer? You know, if you were to recondition it, how much it would cost, and this is an industry, Chris, where no one solved this whole riddle, and we are that partner for dealers. We're here to help them. We're here to have them buy more cars from consumers, and that's that additional value add. Beyond just selling these assets, we become a real critical partner 'cause, you know, there's big box companies buying a lot of cars from consumers. We can help them. We can help them buy more on their local geography. How does ACV MAX fit into this? You know, the acquisition you did a couple of years ago. Is that because you can't determine the wholesale value without knowing the retail value, or do I have those backwards, or they, they just feed into each other because that gets you to your gross profit, so you need both sides of the equation? Yes, so I'll explain that for those that are kind of new to this. I'll slow a little down on that, but ClearCar is consumer pricing for the dealer. ACV MAX takes it further. It is beyond just the trade, it's how much reconditioning should I be putting in? What car should I even be keeping? How many days on lot should I expect? How do I merchandise that asset? So look at it as a dealer could just go with ClearCar and not change how they're managing their inventory, and we'll just help them price their trades and help them buy more cars. Or they can get ClearCar and ACV MAX, and we can take it from just the appraisal price all the way through to should they even be retailing it, at what price, at what margin? Okay. Okay, and right now there's no source of truth on both sides of the market in the marketplace, and this is sort of a greenfield opportunity for you guys or, or- We have competitors- They're cobbling together data sources from multiple places right now. Yeah, we have competitors in both categories, and you know, they're in both categories, you know, we have a small piece of the market share today, and we have lots of room over the next few years to win more market share. ... Okay, okay. And then, you know, once we have the auction cleared, we have ACV Transportation and ACV Capital. How do those fit into the picture, and how should investors think about the growth opportunities there? Yeah, so ACV Transportation is really important in that I just bought a car from a dealer or commercial consignor that I may not even know, but I need that car. In the traditional world, you're only buying based on who the seller was, based on proximity, right? So ACV Transportation has been a really important investment for us, 'cause it, in a way, now it just becomes about that asset. And whatever my cost is of transportation, I knew that while I was bidding on the car. And we've done a fantastic job of investing in ACV Transport, adding in this whole advanced pricing mechanism. Look at ACV Transport as, like, thousands of lanes across the countries from various geographies that all need to be priced appropriately on the fly while the dealer's bidding, without even, we may or may not even know who the carrier is gonna be while they're bidding. That we, we've built some great tech there. There's still a lot more room for us to make that tech better and better over the next few years, but even today, it's, it's really incredible, and it's satisfying sellers and buyers. You know, as some of you do homework on us, you're gonna see sellers say things like, "These cars are getting off my lot very fast, much faster than I ever imagined," and buyers saying, "I'm getting these cars much faster than I ever thought and at a fair value." So we're seeing just great accolades, both from sellers and buyers, so really important. ACV Capital is a product for small to medium-sized independent dealers. That category of buyers can't go to the local bank for a line of credit like a major franchise dealer could. And so it's a category that historically was perceived to be too risky for banks, so more of an independent-oriented banks emerged over the years, mainly owned by the marketplace companies. The reason being is we know these assets, we know the customers, we audit the end dealers. We actually go to their lots. We make sure the cars are there. So our VCIs play a dual role in that regard. They also help us do our audits. But independent dealers are so important to our country, so important to the consumer. We need them to be healthy, and ACV Capital is a part of that mix. It provides them with capital. We're willing to provide that risk-based capital because we know the cars, we know the condition, we know the dealer, we go and verify these assets, and then it provides more demand to our marketplace because dealers can now participate and have the funding to buy these assets. Mm-hmm. And, and Bill, can you talk about the cost of revenue profile on the auction side of the business, the transportation side of the business, and the ACV Capital side of the business? So, let's start with just our auction fees. You know, we break out what's called customer assurance revenue on our P&L. We're required to do that for GAAP, but we really manage the business looking at it on a combined basis in terms of total auction fees and assurance. You know, those margins, for example, last quarter were 73%. A big part of the cost of revenue are arbitration costs. This is where we stand behind the condition report that we publish, that buyers use to buy the car, and if we miss an issue with the car, we'll arbitrate that with the buyer and protect the seller against those costs. And the seller pays a fee associated with kind of that assurance product. So about two-thirds of the cost of revenue are arbitration costs. The rest of the costs relate to, kind of labor and, you know, things like FedEx costs for, you know, moving titles from seller to buyer, those sorts of things. So that's the auction fee side. The transport side of the business, we're required to record those revenues on a gross basis. Those margins are now in the high teens, which is a significant improvement over what they were even a couple of years ago. We were actually, we had negative margin even a couple of years ago. And we've already achieved what we call our midterm target, margins for transport. So that's been a nice tailwind to our margin profile on a blended basis. And then capital is very high margin. It flows through our P&L at 90%+ margins. You know, that's a relatively small part of our revenue today. I think low single digits as a percentage of total revenue, but growing fairly rapidly. The only caveat there is we've been very sensitive to dealer financial health and have been a little more risk-averse in terms of who we're lending to based on the current environment. But even with that, it's our fastest-growing line of business. Just so I, just so I have it right, that you're saying that when you book transportation revenue, you've already paid the carrier. It's just that revenue that comes through onto the revenue line, that's very high margin revenue because there's no cost in your model associated with it, that we see? Correct. So this is. Yeah, we don't own, for investors who are not familiar with us, we don't own any, you know, trucks or any kind of transport. We have thousands of independent transport providers that are part of a separate ACV marketplace. And they will bid on jobs, and if they win, then, you know, basically we'll pay them for the transport and, you know, have a margin on top of that, right? But we have to record the gross amount. It doesn't sound like a lot of margin, but when you consider its gross revenue, which is about, you know, 36%-37% of our total revenue, you know, it's actually pretty material to EBITDA. So what's the right way to think about arbitration moving forward in terms of improvements? You guys have shown improvements over time. What's the right way to think about where that line item could go to drive cost of revenue on the auction side of the business lower? ... Why don't I start, Bill, then you can just chime in? Yeah, sure. Go ahead. So Chris, look at it in two ways. We showed, I think it was last June, that we're already getting to our EBITDA margin profile in, in our territories with the highest volume today, right? So, look at it as there's two ways we're, we're gonna get to that you know, that, that mid, mid target sort of expectations we've provided. One, even with our margins today on, on, assurance, and, and we, we could get there by just adding more scale, okay? And then in addition, we are intending to get better and better at this assurance to arbitration risk, meaning what are you charging versus what are you, what are you, what are you making or losing? We haven't given that directly out to the market. I'll see if Bill wants what he wants to ask, answer. But I wanted to say, like, there are two paths. One is the model already works just the way it is today, just by adding more scale. Just rinse, repeat, just keep going, rinse, repeat. And then there's enhancements to the model. But I know we had... We never really put out to the world Chris's direct question, that's why I stepped in here. But anyways, go ahead. Yeah, I mean, I would just say directionally, it's all about bringing more and more technology to bear to, you know, identify, you know, the condition of the used car. If we disclose an issue with a car to a buyer, then, that, that's not a subject for arbitration. It's when we don't identify an issue with a car. So as our tech improves, you know, that, there, there's an opportunity for us to drive those costs down, and that's, but that's only one element of driving to our target model. You know, we've been able to increase our fee structure over time, you know, which is highly accretive to margins as well in terms of auction fees. So, George, you sort of hit on it, and you shared it at the Analyst Day in 2023, those market or geographic level economics. You know, how would you bucket how you're getting to positive EBITDA in those markets? Is it that it's just scale, and you're better able to leverage the- Yeah ... semi-fixed VCI costs, or is it higher buyer trust in those geographies because of history and there's less arbitration in those geographies? Just scale. Okay. Yeah. The arbitration costs per unit are within reason, more like our other markets. I mean, that's really not the primary thing, Bill, unless you want to chime in. It's the key differential is, you know, once we've taken our share, we can already hit our midterm targets just the way we are today. Not, you know. And we'll get better, of course. Now, our midterm markets don't assume the whole country is where we are in our most advanced markets, right? So that's where you kind of get a little flavor, you know, of the fact that, you know, we'll keep winning share, and we'll keep improving, you know, you see us sort of incrementally improving our margin profile. But I always like to point out both, that the model already works- Okay ... you know, right, the way it is today. Would you say we're in sort of, because we've tried, I've tried to avoid macro on this call, but because it's sort of an unknown. It's safe to say, or fair to say, that used cars are sort of trundling along sort of the bottom versus historical numbers. Well, one never knows. The main question is, are we in a higher arbitration environment right now because of depressed units across the industry, and there could be a natural uplift to arbitration based on units moving higher towards their more normal level, or are those not related? There are seasonal trends to arbitration, okay? Generally speaking, Q1 is our costs are lower because dealers do dispute. They just want the cars. They don't dispute as much. They kind of, like, nudge us more in Q4 when the market gets softer, okay? So there is a little bit of that built into our model that when we think about, even within our own margin profile, we know going into the year, Q1 is gonna always be a tiny bit better, Q4 is gonna be a tiny bit worse. Like, you kind of just need to participate well in the ecosystem. You know, you need to know your market, know your business. But look at it as when dealers are under more stress, they nitpick a little more. When they're selling more cars, they don't nitpick as much. But, so maybe I didn't really answer your macro, but I'm using, I'm using seasonality as a way to get to the core of your question... Yeah ... of, right, when it's harder, they do nitpick more, and when it's good for them, they do nitpick less. Same page. Okay, perfect. I have two from the audience, two good ones, actually. So one on, you highlighted the 40 spaces across the country that you've put out there before. Can you speak to the Texas acquisition you did in the first quarter, and how many physical locations have you disclosed that you're at today on that path to 40 locations? Sure. Bill, I believe we said... What did we say on the last call? What did he ask? Yeah, we're at nine locations today. We did talk about that on the last call, George. Okay, great. Mm-hmm. The Texas locations were fantastic. Obviously, a little bigger than just buying a small, little company, right? Well, we disclosed it, not because it was material from a legal perspective, but more just to give investors up to speed. This was a little bit bigger size because it was 5 locations with one acquisition. Obviously, Texas is a great state. It's an important state. There's population growth, right? There's a few states that are really, really important to go now, as it relates to commercial. Texas is one of those. Mm. And, great, also augments our team. We brought on some leadership to now run that area. So, and we've combined our teams down there. We're just in a really good spot to grow Texas. We've got our great digital marketplace. We've got great physical locations. We're not yet in Houston, I don't think. Right? So I'm just trying to think of what part of Texas we're in or we're not in. So, there might be a couple more we need in time throughout Texas, but we're in Dallas, we're in Austin now, right? We're in a few locations, and it was a fantastic buy. Fantastic team, just great synergies here all around, so we feel really good about it. It's safe to say you picked up relationships with commercial sellers each time you buy one of these transactions, one- Yes ... exit one of these transactions. Okay. And then it's up to you- Yeah, we just got one of the- It's up to you to show you have the buyers. You can drive at least industry prices, if not the higher prices, and then sort of feeds on itself. Okay. That's right. I mentioned on the call, I think I said on the call, that we took one of our OKC, Oklahoma sellers, so a commercial consignor, and they just started giving us, a few hundred units down to Texas, and, we were so psyched about that, right? We showed them the trust, we showed them it works, and then we just got, you know... And by the way, we celebrate those few hundred cars a month, just like we would've early on in any of the dealer wins, right? Those are the early case studies. It says, "Okay, the model can work. Mm. Yeah, we're still early. I don't want to. I don't want—we're not trying to be like. I don't want any. You know, we've given you all, you know, a range for this year. I don't want anybody getting ahead of us at the end of the day, but we're still early, but yet very excited in our early stages of growing the commercial part of our business. Okay. Well, why don't we leave it there? George and Bill, thank you for your time this morning, and good luck on the rest of your meetings today. Thanks so much. All right. Thanks, everyone. Yeah, bye-bye.