ACVA - NASDAQ

Good day and thank you for standing by. Welcome to the ACV Auctions Third Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tim Fox, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining ACV's conference call to discuss our third quarter 2023 financial results. With me on the call today are George Chamoun, Chief Executive Officer; and Bill

Thanks, Tim. Good afternoon, everyone, and thank you for joining us. ACV's momentum continued in the third quarter with revenue at the high end of guidance and adjusted EBITDA once again exceeding our guidance. Our performance reflects another quarter of strong execution by the ACV team as we gain market share and launch new innovations that expand our TAM and drive operating efficiencies. Strong demand for ACV Transport and ACV Capital contributed to revenue growth and revenue margin expansion and a continued focus on driving profitable growth resulted in our adjusted EBITDA margin expanding 800 basis points year-over-year. With that, let's turn to a brief recap of Q3 on slide four. Third quarter revenue of $119 million increased 13% year-over-year, with growth accelerated sequentially. We sold 150,000 vehicles in the quarter, resulting in 13% year-over-year growth, reflecting further adoption of our marketplace solutions targeting dealer engagement. GMV of $2.1 billion was flat year-over-year, reflecting continued moderation of wholesale market prices. Despite this price moderation, ARPU once again increased year-over-year, reflecting the strength of ACV's core value proposition. On slide five, I will again frame the rest of today's discussion around the three pillars of our strategy to maximize long-term shareholder value growth, innovation, and scale. I'll begin with growth. On slide seven, I'll share our observations about the broader automotive market as context for factors impacting the dealer wholesale market. In Q3, new vehicle retail units declined sequentially but increased approximately 10% year-over-year from depressed levels. While volumes continue to lag pre-pandemic levels, inventories improved which is key to supporting a sustained recovery in retail sales, trade and dealer wholesale supply. Used vehicle retail units modestly increased sequentially and year-over-year, but also remain well below historical levels as affordability issues continued to pressure consumer demand. In terms of vehicle sourcing, our data indicates that dealers retain a higher-than-normal percentage of trade for retail inventory, creating a near-term headwind for wholesale supply. We believe the retail wholesale mix will begin to normalize as inventory levels for both new and used vehicles recover. While supply remains muted, price depreciation and conversion rates across the industry have generally been following normal seasonal patterns and have marginally improved in recent months. This is in stark contrast to industry trends in the back half of 2022, which resulted in challenging operating conditions in the wholesale market. On balance. We believe that end markets are showing early signs of improvement, giving us confidence to again raise guidance for the year. Turning now to slide eight. We estimate that the US dealer wholesale market remained well below normalized volumes of Q3, but grew modestly quarter-over-quarter. Relative to Q3 '22, the market only declined about 2%, which was a significant improvement from the 14% year-over-year decline in Q2. As the market begins to recover, our growth will benefit both from market expansion and for market share gains. In Q3, our 13% year-over-year unit growth and an estimated market contraction of 2% implies 15% market share growth for ACV. Next, I would like to wrap up the growth section with highlights on our value-added services. First, on slide nine. The ACV Transportation team delivered another strong quarter and continues to scale ahead of schedule. Our strong carrier network and improving cycle times resulted in a attach rate in the mid-50% range again this quarter. Our technology investments and expanded carrier coverage of AI optimized pricing are driving both growth and operating efficiencies. This combination yielded record revenue margins in the high teens, an increase of approximately 500 basis points year-over-year. As a reminder, our 2026 financial targets assume transport revenue margin in the high teens. While margins may fluctuate modestly over time, the fact that we achieved our target last quarter speaks to the value we're delivering to our dealer partners and to the strong execution of our transport team. Turning to slide 10. Our ACV Capital team once again delivered strong results in Q3. Attach rates in the low double-digits resulted in 40% loan volume growth year-over-year and combined, the strong ARPU expansion delivered about 80% revenue growth year-over-year. In addition to our floor plan offerings, we are investing in new ACV Capital capabilities that will help our sellers source consumer vehicles, leveraging ClearCar. We remain confident that ACV Capital will be an important long-term growth and profit drive. Turning to the second element of our strategy, innovation. On slide 12, I'd like to touch on the formal launch of ClearCar, ACV's consumer sourcing solution that leverages AI and real-time market data to deliver highly accurate condition-based pricing. As a reminder, consumers looking to sell their vehicle is a very large market opportunity, including 10 million transactions that historically are sold peer-to-peer and, therefore, do not end up in a dealership. As I discussed earlier, the below normal supply of new and used inventory in the market, especially late model used vehicles, is a challenge for our dealer partners. ACV is addressing this challenge with ClearCar, which has experienced strong early adoption with hundreds of dealer rooftops. And based on dealer feedback, consumer conversion rates are significantly higher than competitive sourcing tools. This speaks to both the power of the offering and its effectiveness in driving qualify leads. At its core, ClearCar helps decode how vehicle condition influences vehicle value, allowing ACV dealers and commercial clients to have more transparent conversations with consumers. And consumer benefits can have greater visibility into how their vehicle value is determined. The solution consists of ClearCar price and ClearCar capture. ClearCar price is an estimation tool that resides in the dealer's website, providing consumers with precise value estimates for their vehicle. ClearCar Capture allows consumers to submit photos of their vehicles for further documentation of conditions through our AI imaging and self-inspection tool, which we acquired for Monk. ClearCar Capture digitally detects exterior damage during the photo capture process, enabling dealers to update their condition enhanced pricing without an on-site infection. We are very pleased with the early market momentum for this value-added solution and the opportunity to both expand our TAM and add another growth lever to our business. To wrap up on growth. We are also pleased with the early stages of our commercial market strategy. We are operating in a few markets where we have the services required by these customers. And even though it's early, we're very encouraged with our progress and believe we can scale and capture the market share outlined in our 2026 financial targets. On slide 13. We highlight examples of tech investments that expand into our operations, delivering customer success while reducing costs. As we discussed last quarter, reducing arbitration remains a key focus for both customer satisfaction and optimizing margins. One of the key drivers is inspection accuracy. Our field team is equipped with 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 VCI on vehicle-specific issues before and after conducting an inspection. Apex delivers significant transparency into vehicle operating conditions while also increasing the inspection productivity of our VCI teammates. We continue to expand our imaging AI capability to identify specific important conditions with the presence of damage and rust. Together, these innovations have contributed to a low double-digit reduction in arbitration unit costs this year, which is a great performance in the current market. Our technology investments are also driving efficiency in our model with OpEx leverage increasing by over 200 basis points in Q3. 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. 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.

Thanks, George, and thank you, everyone, for joining us today. We are very pleased with our Q3 financial performance with strong revenue growth and upside to adjusted EBITDA. We also continue to demonstrate the strength of our business model with meaningful revenue margin and adjusted EBITDA margin expansion versus Q3'22. Turning to slide 15. I'll begin with a recap of our third quarter results. Revenue of $119 million was at the high end of our guidance range and grew 13% year-over-year. Adjusted EBITDA loss of $4 million beat our guidance range and adjusted EBITDA margin improved approximately 800 basis points versus Q3'22. This demonstrates both the inherent operating leverage in our model and continued strong OpEx management. Next on slide 16, I will cover additional revenue details. Auction and assurance revenue, which was 55% of total revenue, increased 17% year-over-year. This revenue performance reflects 13% year-over-year unit growth and auction and assurance ARPU of $439, which grew 4% year-over-year. Note that ARPU grew year-over-year despite a 10% decline in GMV per unit, reflecting our price increases from last fall and this September, and we believe we still have pricing headroom going forward. Marketplace Services revenue, which was 38% of total revenue, grew 11% 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 declined 6% year-over-year. The decline was primarily related to our stand-alone inspection offerings which continue to be impacted by the weak off-lease market. While MAX Digital revenue grew modestly year-over-year, recall that we continue to take a measured approach to customer acquisition while making significant improvements to the MAX Digital platform. We're confident these improvements position MAX for long-term growth. Turning now to slide 17, I will cover costs in the quarter. Q3 cost of revenue as a percentage of revenue decreased approximately 500 basis points year-over-year. The improvement was driven by both strong auction insurance results and by ACV Transport. As George mentioned, we delivered high teens transport revenue margins in Q3 and which is in line with our 2026 target. We continue to focus on expense discipline as we optimize and scale our business. Non-GAAP operating expense, excluding cost of revenue, increased 9% year-over-year in Q3 versus 18% year-over-year growth the prior year. This reflects a more metered approach to growing OpEx relative to our revenue and margin growth to deliver higher operating margins as we march towards profitability. Moving to slide 18, let me frame our investment strategy and path to profitability. Our focus on spending discipline and operating efficiency is expected to result in a material decrease in OpEx growth this year, resulting in our adjusted EBITDA loss declined by over 60% year-over-year. And as you've seen reflected in our Q3 results, we have delivered margin expansion while preserving our go-to-market and technology investments to ensure ACV is in a strong position as market conditions improve. Next, I will highlight our strong capital structure on slide 19. We ended Q3 with $450 million in cash and equivalents and marketable securities and $105 million of debt on our revolver. Note that our cash balance includes $162 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. Year-to-date cash flow from operations was $9 million, a significant improvement from the $75 million outflow in the same period of 2022. Now I'll turn to guidance on slide 20. For the fourth quarter of 2023, we are expecting revenue in the range of $116 million to $120 million. Adjusted EBITDA is expected to be a loss in the range of $7 million to $9 million. The sequential increase in adjusted EBITDA loss in Q4 reflects targeted investments to drive continued revenue growth in 2024. For the full year 2023, we are raising our expected revenue to a range of $479 million to $483 million, representing growth of 14% to 15% year-over-year. We are also reducing our expected adjusted EBITDA loss to a range of $20 million to $22 million and remain committed to achieving adjusted EBITDA breakeven exiting this year, setting us up to deliver a full quarter of profitability in Q1'24. As it relates to our guidance, we are assuming that new and used vehicle supplies remain lower than historical levels in the near term that improve as production and inventory continue to recover. We are also assuming that conversion rates and wholesale price depreciation follow normal seasonal patterns for the balance of the year. Let me wrap up on slide 21 by reviewing our 2026 financial targets. We are very pleased with our continued execution in a challenging macro environment and remain committed to achieving $1.3 billion of revenue and $325 million of adjusted EBITDA in 2026 with 25% adjusted EBITDA margins. Our targets are underpinned by a number of factors, including sustained market share gains, dealer wholesale market recovery to historical volumes, TAM expansion into adjacent markets, technology innovation to drive growth and operating efficiency and a commitment to balancing growth and investment as our business scales. And with that, let me turn it back to George.

Thanks, Bill. Before we take your questions, I will summarize. We are very pleased with our strong execution in the third quarter. We are especially proud of our ACV Teammates to deliver these results. We continue to gain market share by attracting new dealer and commercial partners to our marketplace and by gaining wallet share, which positions ACV for attractive growth as market conditions improve. We are executing on our territory penetration plans and gaining traction with our expanding suite of offerings. We're delivering on an exciting product road map to further differentiate ACV and expand our addressable market. We are on track to achieve our near-term adjusted EBITDA target and over the medium term, generate over $1 billion in revenue with attractive margins, and 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. [Operator Instructions] And our first question comes from Chris Pierce of Needham & Company.

Hey, good afternoon, everybody.

Hey, Chris.

Hey, Chris.

Can you just talk about your unit growth versus the used units we see year-over-year at the publicly traded dealer groups? I know you don't probably have that handy, but they averaged about down 5% year-over-year in their Q3, but you guys are up 13%. I think it's because of your leverage to independent dealers, but I'd love to kind of hear why you're able to grow versus them kind of shrinking? Or just kind of -- just in general, how you're able to kind of differentiate yourself?

Yes, Chris, thanks. So there's a couple of factors of why our units grew even though, to your point, the used car retail market shrunk. So one is that we did see new car sales, which is where our supplies comes from. So one is we are starting to see some of the health of the market come back, which is positive. Two, we are continually not only growing sellers, but getting more wallet share. So we're expanding our capabilities and growth within our footprint. So look at the two main reasons why being both customer wins, customer wallet share and also the fact that new car sales is starting to come back, and new car sales coming back is helping us have trades coming in to dealerships, which then creates the wholesale opportunity. Now granted, we didn't see dealer wholesale grow year-over-year, but we are seeing the market at least incrementally get healthy, especially compared to last quarter.

Okay. Perfect. And then just talking about normal seasonal depreciation at the year-end. Can you just speak to what gives you the confidence to say that given what we saw last year where -- is it just that dealer inventories have loaded last year and they're tighter this year? Or is there something else to it?

Yes. Chris, the normalcy we're referring to on the call was both regarding, thus far, I would say, listings and sell-through rate or conversion rate, I should say. We're seeing a sense of normalcy as it relates to both. So, so far, we're feeling good. We're both seeing the -- and actually, last but not least, I think to your point, though, is the value of used cars. We do have, in our plan, used car values going down. So it is part of the plan. We do expect moderate -- moderation in GMV happening sort of month-over-month throughout the quarter. So when you look at all the trends, listings, conversion rate and also our expectations on GMV going down, it gets us comfortable for the plan we've outlined.

Okay. Thank you.

Thank you. One moment for our next question. And our next question comes from Eric Sheridan of Goldman Sachs.

Thanks so much for taking the question. Hope everyone on the call is very. Maybe two, if I could. First, longer-term question about pricing. When you think about your long-term plan and where you are relative to competitors today, how should we be thinking as pricing as a lever to either gain more market share versus gather more unit economics and compound more revenue growth? So that would be number one, just a refresh on pricing versus competition. And then second, just in terms of the adjusted EBITDA guide for Q4. Just want to make sure that is maybe year-end one-timer type technology investments as opposed to maybe a new run rate or thought we should be taking in on incremental margins going into next year. I know it's a little early to talk about 2024, but just want to understand the context around those investments that have some of the margin reversal in Q4. Thanks.

Yes, certainly, Eric. Thanks. This is George. I'll go first and then I'll let Bill chime in on your second question. So on your first question, we -- our long-term target at least -- I would say, at least in 2026 model is about $500 in combined buy/sell fees. We've been averaging around 450 this year. So when you look at the fact that we -- that's only about $50 more. Now assuming GMV does decline a bit from time to time, we feel very comfortable that we've got the room. So instead of just giving you the gap, there is -- the gap is larger than that $50 between us and some of our competitors. I think the way we look at it, at least for now, we feel very good about where we've got our -- we've gotten the model between now and 2026, knowing that the buy and sell fees that the majority of traditional auctions is pretty significantly higher than that. I think definitely well over $100 in room today, and that's not where the competitors may go in the future. So that goes your first question. Bill, do you want to take the second?

Yes. Eric, so in terms of your second question, the short answer is there's really no change in terms of our operating model going forward. But to give you a little bit of context, so even with the Q4 guidance, we're reducing our OpEx guidance for the year by about $2 million. So if anything, we're actually in a better position in terms of heading into next year to achieve our EBITDA breakeven, if not EBITDA profitability in Q1. But there is an opportunity for us to make some targeted investments to drive growth next year, and we're taking an opportunity to bake that into our Q4 OpEx. So again, these are pretty targeted. We still have a lot of growth opportunities ahead of us, not just in dealer wholesale but commercial peer to peer. And our focus is basically setting ourselves up as best we can for next year's targets while still, again, lowering our total OpEx for the year by about $2 million. So hopefully, that gives you a little bit of context, but there certainly isn't anything beyond that or anything you should adjust your models to reflect.

Helpful on both fronts. Thanks.

Thank you, Eric.

Thank you. One moment for our next quarter. And our next question comes from Nick Jones of JMP Securities.

Great. Thanks for taking the questions. I guess just maybe back on the normalization or time line to normalization. I think back at the Analyst Day, you said 2025, give or take, you expect kind of the industry to normalize. How are you guys monitoring what can kind of dislocate or change that time line as we see various data points come out, whether it be industry-specific or maybe more particularly kind of a for your consumer challenges may be causing an overcorrection and supply starts to build as consumers struggle to afford auto? So any color on kind of, I guess, to boil it down, are there any changes in your time line to normalization from here? And then the kind of the second question is how are you thinking about consumer challenges, auto affordability playing into that? Thanks.

Yes. Thanks, Nick. So the way to think about this is we have in our planning that the market returns by 2026, okay? And that's really how we've been thinking about it. And so we -- yes, it's '23, late in the year here, but we do have some time, right, for us to kind of -- for the world to keep evolving. If you look at like dealer wholesale units even over the last few years, just in '21 alone, it was over 10%, '22 is likely over 8%. This year, it might end up being under 8%. So we've seen these changes. We're pretty comfortable in the fact that we will see improvements over the next couple of years. The rate of improvement we should all see. But let me walk you through why I feel good saying we should see improvements. So one is new car sales are getting incentives. And these new car sales incentives are important. They help drive affordability. We're starting to see incentives even for across almost all OEMs right now. That's a great bang for us, okay? So we're starting to see interest rate in things, lease incentives. So as we're -- as you think about our primary source of supply today, being franchise dealers is where the primary source of supply comes from. As they drive more new sales, we get more trains. So that's one. Two, the other part of what you mentioned is dealers really want to be careful with on their lots. And up until recently, you've heard us say dealer wholesale contracted for two reasons. Sales went down. New car sales went down. And also, dealers kept a higher percentage of cars. You've heard us talk about that. I mentioned it earlier on the call. The later part of that becomes really important. As used car inventory started to add up, we believe dealers will start to wholesale a slightly higher percentage throughout the next few years and return back to normal levels. Dealers are still keeping an elevated number of these trades even today. So when you look at those two factors, we feel pretty good that over the next few years, we should see improvements. How much of an improvement? I've got until February to give you an opinion on next year, at least. I'll use those couple of months to wait on our exact thoughts. But I'm feeling pretty good on some of the signs we're seeing. We even saw a slight quarter-over-quarter improvements in the market of dealer wholesale, although really, really small. Any type of improvement is a good thing. It feels like we're in that trough. And even if interest rates stay high, consumer affordability for used cars stay challenged for next year, I think new cars, we're going to see incentives coming out. OEMs are going to want to move that inventory. That's going to be more trade. And I think franchise dealers should be careful in the cars they keep. Long-winded answer, I thought it was an important question, so I leaned in a little bit more.

Great. Thanks, George

Certainly.

Thank you. One moment for our next question. And our next question comes from Ron Josey of Citi.

Great. Thanks for taking the question. George, I want to ask about conversion rates. I think you said we're seeing a sense of normalcy here. And I'm wondering if conversion rates are getting back to, call it, the '21 levels or before. And if that's the case, maybe talk to us on what are the drivers here in the past. We talked about new auction format to two-hour auctions, et cetera. And I have a quick follow-up.

Yes, certainly. There's -- we think we did a little bit better than the market on conversion rates. I would say a couple of parties out there who provide data on conversion rates. When I say -- I would say we were marginally better than the market. Being better is always a good thing. Probably two reasons. One is we are benefiting, to your point, from some of these innovations that we've been doing, whether it be product enhancements, time to auctions, enhancements we're making to our condition report, all those things are also helping us sort of incrementally, I would say, managed seasonality well. We always plan to go in the fourth quarter, conversion rates are going to go down a little bit. That's always the plan, and that's the case every year. But I would say we're doing a good job in Q3 represented also a good job. The second is we went out -- we went to market this year being a little bit more careful on pressing our sales team and our inspectors for listings and customers, and we pressed for a little -- a better conversion as part of the overall success story. And so think about that as being a little bit more selective. And typical, I would say, growing up, right, as you're getting bigger, as we're dealing with more and more sellers, more and more listings, you just really want to make sure being prudent if we've got certain sellers that have very low conversion, we're more careful on that. So those will be the two reasons that we are doing well from a conversion rate perspective. Both was product intact and also from an operating policy perspective, we're definitely more careful on sellers who remain low at their conversion rate.

Got it. That's very helpful and conversion rates, I just wanted to clarify maybe something you said on the call now that we're seeing the units reaccelerate growth, and I understand your point on incentives and supply. Just can you repeat or talk just a little bit more on pricing? We've seen high singles, low doubles down this year. And do you expect that to continue as supply improves? Thank you

Yes. When you speak to this pricing, you're really saying the GMV, meaning what's selling on our platform, right? So yes, we're -- we have in our plan low single-digit, things like 2019, like 1-ish to 2-ish percent based on the month, depreciation rate as part of the plan. So we go into the quarter, planning for that to be the case, which is -- which we're finding prudent, right, because you -- one is expected. So, so far, I feel really good about the team's ability here to predict what we think is going to happen. And the plan we've outlined seems -- we're confident with it.

Yes. I think -- Ron, it's Bill. So just maybe a little more context here. So last quarter, our GMV per unit was down year-on-year, 10% down quarter-on-quarter 11%, except we managed to drive year-on-year, actually a 4% increase in our ARPU. Quarter-on-quarter was down a few points, down about 3%. So one of the strategies, and we've talked about this in the past, is with the pricing power that we have, as prices due to climb because that's what we're assuming, and that's what we've baked into our forward-looking models. We believe over time, we can offset any of that downside in terms of our buy fees. We've been able to do that thus far. And then maybe one more level of clarity. So if you look at, in our example, our GMV per unit, about half of that is due to a modest shift in mix to less expensive vehicles in response to consumer affordability issues. And the rest of that is just the overall market decline in prices. So you've got a few kind of dynamics driving it. But at the end of the day, we're able to, I mean, so far, we've been able to protect our financial model from any of that volatility.

Very helpful. Thank you, guys.

Certainly.

One moment for our next question. And our next question comes from John Colantuoni of Jefferies.

Hey, thanks for taking question. Two for me. Starting with the September price increase, can you help size how it contributed to 3Q and 4Q revenue or how it will contribute to 4Q revenue? And second, turning to your 2026 revenue target. I think your outlook assumes 17% outperformance relative to the market. And that's a bit above the 15% you saw this past quarter, which was down somewhat from recent quarters despite the conversion tailwind from longer auction formats. So just talk about what drives -- helps drive the improvement in market share trends over time. Thanks .

Hey, John, it's George. I'll go with your second question first, and Bill can go to your first question. So we've been -- if you look at our last six quarters, we've been between 16% and 17% average. So 15% is pretty consistent with that range. And keep in mind how you even do this math is -- math, where it's not perfect, right? Talk about this. So number two, if you do a little homework on the competitive environment, I think you're going to see that 15% was really good. So one, I think, compared to our competitors, we really did a great job. And two, I would say -- I would call that rather consistent with the 16% to 17% for the last 16 -- or last six quarters. I'd go to -- so I feel great on the fact that when you look at what we've been putting up there in any given quarter, let's is generally say between 15% and 17%, I feel really good about that. So no change. Bill, do you want to go to the first question?

Yes. So John, in terms of Q3 and the price increase, it was roughly about $25 in terms of sizing. So also relatively small, similar to the price adjustments we passed through last year. And that was only for one month in the quarter. So roughly 1/3, about $8 worth of impact on our auction ARPU. And then obviously, we will get the full quarter benefit of that in Q4. That's all other things being equal. Obviously, what ultimately impacts ARPU are other factors, including average car prices, right? So that's the biggest variable. But if you just want to isolate the price increase by itself, those would be the numbers, that would be the math.

Very helpful. Thanks so much.

Yeah. Thank you.

Thank you. One most four our next question. And our next question comes from Bob Labick of CJS Securities.

I wanted to start with the exciting discussion earlier on ClearCar and self-inspection and maybe tell us -- expand a little bit on the uses. Is it right now just for dealers -- for consumer sourcing? Or is there an opportunity to use this self-inspection for perhaps some more remote dealerships that a VCI can't get out to efficiently and therefore, just have a dealer inspecting their own cars and loading them on the network as well? Or how is it being used now? And what are the opportunities for this self-inspection that you're pioneering?

Yes, certainly, Bob. We -- I would say so far, what you heard us talking about is the first category you open up, which is dealer sourcing more consumer cars. We've been pressing that as a problem we want to solve, number one, because it's the biggest complaint we hear from dealers is they need more inventory, especially late model inventory, the cars that they would normally keep. And they need help, right? So they're keeping cars that they typically would wholesale primarily because they still need the right inventory. So we think by them sourcing more consumer cars, we'll actually wholesale more, right? So you're seeing us focus there. And the second part of your question. Even today, dealers do self-inspect some cars. It's low today, low single-digit percentage of our cars today. Dealers are inspecting and selling, first, ACV is inspecting. These new tools we're doing will make it easier. Probably not ready to talk about that until somewhere around Q2 or Q3 of next year. Somewhere in that timing, we'll probably sort of talk about that a little bit more. But already something we support. So if a dealer does want to inspect a car, launch it, that's already something that we support. But the category would be dealers asking if we could make that a little bit more efficient and easier for them to do. So that would be the category that you're -- you got here for the call, which is a good one but something we would be probably -- I would be more comfortable to talk about sometime in maybe the first half of next year.

Okay. Very fair. Please remind me to ask you how much that will increase your TAM at some point in the first half of next year. And so just for my other question then. If you could give us an update on your penetration into the large dealer groups. Obviously, that's another driver of your units and your opportunity and your growth. And just kind of where you stand now and where you want to be.

Yes. No, it's a great question. I don't think we've been giving any data about our growth rate there. But what I will say this is our growth rate with the major dealer groups has been materially higher when you compare that compared to the growth rate we share with you all. The growth rate with the major groups is a higher percentage. So it's going well. We continue to focus on adding more value, whether it be ACV private marketplace, whether it be products like ClearCar. One of the large dealer groups out there want to top three or four, I would say, at least the only top five is using us. Private marketplace. They're using us for MAX Digital. Now they're using us or ClearCar. So this is a top five dealer group using us literally all of our value-added services, and we're starting to have a material piece of their overall wholesale share. So feeling really good. The strategy we're doing is working, where our value-added service strategy is working and we're able to build a relationship with several of these dealer groups.

Super. Thanks so much.

Thank you, Bob.

Thank you. Once moment for our next question. And our next question comes from Michael Graham of Canaccord.

Hey, thank you. I just wanted to ask two. The first one was on the transport attach rate in margin, which is going great. Do you have any updated thoughts on like terminally where that transport margin can get to? And I just wanted to ask, as we inch a little closer to the new year here, when you think about achieving your 2026 targets, any updated thoughts on whether over the course of like 2024, 2025 and 2026, any updated thoughts on whether you think that expansion on the margin side is expected to be linear or back-end loaded? Or just any high-level thoughts you could share would be great.

Yes, certainly, Michael. We -- obviously, we're ecstatic about how well ACV Transport has been going, both from take rate and margin. It's going really, really well. We'd really rather keep everyone's expectations about what we've been doing for a couple of reasons. One is look at the addressable market as 70%, right? So when you look at the addressable market at 70%, hitting the take rates we've been hitting is really incredible, right? Because there's always going to be a portion of your dealers who are local and who can just go and pick up the car. So one is when I look at the overall take rate for transport, we'd rather not create higher expectations we've created. And even if we do, in any one quarter be a little higher than that, I'd rather you all keep the expectations where we've had it, okay? So that's one is I think it's good to keep our expectations reasonable there. On margin. Again, we're doing a really great job. I'd rather -- until we're significantly higher end units. We still, at the end of the day, we still deliver a margin profile and transport that's blended with both mature markets and less mature. So instead of getting into a tangent here, I'd rather just say that for at least the next few years, I'd like to keep our expectations where they are. And I think that gives us the opportunity to invest in the lanes that we want to invest in and still take the revenue and margin we want in another lane. So that's giving you a little bit behind the scenes of why. I didn't think that post 2026 in that dialogue, at least from now to 2026, I'd rather keep the expectations where they are and then kind of go from there.

Yes, I think I would add just one of your questions was, will the growth in EBITDA margins to be linear. The answer to that question is no, I would not expect them to be linear. Obviously, we haven't provided 2024 guidance yet. We'll do that on our next call. But I think in terms of the leverage of our model, which is very significant. And as we start to accelerate our growth due to continued share gains, market recovery over time over the next several years, penetrating commercial, continuing to expand our ARPU, there will be a lot of leverage that will flow through to the bottom line in the out years, right? So I think kind of acceleration through '25 and potentially significant acceleration through '26 as we get the benefit of that leverage. So again, we didn't, at our Analyst Day, break down what it would look like each year, obviously. But that's the overall concept and the reason why we're confident that we can execute on that path assuming we can drive the top line revenue growth that we articulated a few months ago at the Analyst Day.

Okay, thanks. Those are helpful answers. Thank you both.

Thank you. One moment for our next question. And our next question comes from Rajat Gupta of JPMorgan Chase.

Great. Thanks for taking the question and congrats on the execution in the quarter. I just had one on -- just first one on you talked about the supply challenges getting a little better. You talked about dealers moving, reducing more trades than what they're doing right now into next year. I mean, we're going to see some challenges like from the off-lease supply challenges hitting starting middle of next year from the low penetration in '21 and then after that? How do you overcome that in context of your market expectations? Or maybe another way to ask is, what is your expectation of just used car retail industry volumes improving next year that gives you comfort around the recovery in your market next year? And I have a follow-up. Thanks.

Yes. Certainly, Rajat. I mentioned some of this earlier, and not be repetitive too much. But when you think about our primary supply today coming from franchise dealers. Granted, we have new channels that we're also building that we talked about at Investor Day. But just to focus first your first question on our primary channel. I would at least today out predict new car sales should at least marginally improve, if not improve better than marginally year-over-year. That would be like sitting here predicting next year, right? Just like the rest of us trying to predict all these macro things going on. We've got better -- the actual OEMs aren't having the challenges building vehicles. So most of that is behind us. We have incentives starting to come out. I would say better expectations from OEMs. I mean, we're not hearing you all ask questions like maybe OEMs will never do incentives again. I mean, all those questions are all gone, right? We all know we're going to go back to incentives. So you kind of go into next year, say, okay, consumers are going to be incented to buy a new car. Meanwhile, cars are aging. We have cars. Consumers are driving, at least from an age perspective, the oldest cars we've seen on record, and it's getting worse. And for the everyday consumer out there, that's not a good thing. It's getting more and more expensive to fix these cars. If any of you have friends or family have gone through this, you're probably all hearing the stories every day right now. It's challenging. When you go in there and you're getting a repair that's $1,500, $2,500 for repair. It's tough. I'd much rather get in there, do a $400 or $500 payment or a lease or something like that. You've seen most recently in the TV commercials. I noticed even yesterday, watching television, Chevy was promoting their cars that are brand-new vehicles between $25,000 and $30,000. There was a reason why they were showcasing, right, that specific commercial right now. They're trying to tell consumers. There are cars. There are new cars they can buy. It might not be the one they wanted, but there are cars. So when I think about next year, I think we'll see new cars come back in favor. I think we're going to have consumers that can afford and have the credit and means to buy those new cars. And I think what that's going to mean for the used cars that are being traded in, dealers are only going to keep the ones they know they're going to make money on. I think it's going to -- dealers are going to go into the year, not saying we need to keep everything like they have been in the last couple of years because they know interest rates might stay high. They're not going to think they could -- not every single one of these used cars is going to be the champion they bought the last couple of years. It's going to be a much more realistic mindset, which I think will press these trades to end up at a dealer, an independent dealer or someone else who's got a much lower cost of labor, they can fix these things cheaper than some of the franchise dealers. And I think some of the old trends will come back again. So again, long-winded answer. I think, important question. But I feel good that at least sitting here right now, now how much -- whether or not next year is just marginally better than this year or materially better, I'm not ready to say. But it feels like we should at least improve year-over-year. That's at least my current professional guess.

Got it. That's helpful. And then maybe just a quick one on the price increases. The September price increase a little faster than we had expected. Last year it was December. Should we expect you to continue to do this at a higher frequency or was it just more of a timing shift this year and we need go back to like once a year next year? Just maybe any thoughts on that would be helpful. And that's all I had. Thanks.

Yes. I mean our main goal is to hit the objectives we've shown you all in ourselves that get up to about $500 and buy and sell these between now and '26. The rate will always be determining how fast we do that. But our look at it as same goal we've been outlining $500 in '26, again, will be lower than our typical traditional competitors are today. So there's room here for us to increase fees incrementally, and we'll decide when the right time is between now and then. But as Bill told you, this last one was about $25-ish box. We'll just keep incrementally getting there until we have our pricing be competitive because today, it's really a little bit lower than it should be.

Got it. Thank you so much

Yeah, certainly. Thank you.

Thank you. One moment for our next question. And our next question comes from Daniel Imbro of Stephens Incorporated.

Hey, good evening, everybody. Thanks for taking our question.

Certainly, Daniel.

Maybe one on the volume backdrop haircut. I'm just curious with floor plan rates this high for your dealer customers, are you seeing dealers be more disciplined about moving aged inventory off the lot? And I think some of your peers maybe have tools to help with this, but do you have specific tools to maybe help dealers not only source cars, but determine, okay, like this is how long to hold this car for and this car should be wholesaled now. How is that adoption going just as floor plan rates are 7%, 8% now, not the 1% to 3% we saw a few years ago?

Yes, Daniel, great question. Dealers are getting more and more disciplined. So we're seeing it definitely with the larger groups, we're seeing dealers -- you're all hearing that you're seeing disciplined return in the ecosystem. The last couple of years, dealers really, in a way, paused all their aging policies. And for those of you that are new to this concept that Daniel is bringing up. Historically, if a car was on a dealer's lot for over 90 days, the owners of the dealership or the operators would push the dealer to them, wholesale the vehicle, and they would deem it aged. That's the category Daniel's bringing up. So those policies are starting to come back in play. Some of them have been additive, likely said, hey, we'll give you 120 for now, but we're going to push to 90 by the end of this year. And some dealer groups have gone right back at it and going right back to discipline. And your -- second part of your question. Yes, we have tools. We have a product within our MAX Digital offering to help dealers both know their sweet spot and also help dealers manage what dealers they're -- what car is doing well, what cars they should really just be wholeselling right now. So that intelligence is currently in our MAX offering, and we're always brainstorming how we can get some of this out to all of our dealers sort of iteratively. But yes, part of what you're asking, we provide those services for somewhere around 1,000 rooftops out there today. So -- but yes, I think both great questions. We are starting to see the discipline come up.

Great. And then maybe just one follow-up on Rajat's question on pricing. Curious how did your competitors respond? I think over the last 18 months, I think your large peers have raised fees, but you -- each time fees have come up, how have you seen the market respond so far to your fee increases?

Yes. As far as I can tell, we've been very fair to our end customers on our fee increases. I don't know if we're keeping up with everybody or not, honestly. If you went around and definitely looked at like the traditional physical auctions, these fees have gotten really high across the country. So we've been fair where -- our buyers think we're fair. We got really very little negative reaction and just as much positive reaction to the buy fee increase than we had negative. So our objective right now is not be a pig. Yes, our fees are low. We're trying to increase these incrementally over a long period of time. And just do this well is fair to our buyers. I mean, these guys are all trying to -- and gals are trying to build a business. They're all trying -- they got their own struggles going on and yes, our fees are low. But we're trying to do it incrementally to also be fair to our buyers. And so far, the team's recommendation to me and others, the team's recommendations have been thought on. The planning has been spot on. I'm just really, really proud of how we just keep doing the market intelligence, where are we compared to the market. And you just know when you do these things if you're doing it well because your end customers even tell you, you're really handling it as well. So I'm really proud of how the team has done this so far.

Great. Appreciate all the color. Best of luck.

Thank you.

Thanks.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Tim Fox for closing remarks.

Thanks, TD. I'd like to thank everyone for joining us on the call today. Please note that we will be participating in several investor conferences in November here. You can find all the details on our IR website. We look forward to seeing you on the conference circuit, hopefully, this quarter. And again, thank you for your interest in ACV, and have a great evening.