ACV Auctions Inc. Q3 2025 earnings call

Good afternoon and thank you for joining.

ACV's conference call to discuss our third quarter 2025 financial results. With me on the call today are George Chamoun, Chief Executive Officer, and Bill Zerella, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. A discussion of the risks and uncertainties related to our business can be found in our SEC filings and in today's press release, both of which can be found on our investor relations website. During this call we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's earnings materials which can also be found on our Investor relations website.

With that, let me turn the call over to George.

Thanks, Tim. Good afternoon everyone and thank you for joining us today. We are pleased with our team delivering record revenue despite challenging market conditions during the quarter. Our performance was driven by solid execution in our dealer wholesale business as we continue to gain market share, expand our dealer partner network, and leverage our value-added dealer solutions. Again this quarter, ACV Transport and Capital delivered record revenue performance. We also executed on our product roadmap to further differentiate ACV's marketplace experience, support our commercial wholesale strategy, and expand our TAM. As Bill will detail later, we have updated our 2025 guidance to reflect continuing crosscurrents in the broader macro environment while still expecting to deliver strong top line growth of 19% year-over-year.

Furthermore, we expect to deliver strong adjusted EBITDA growth of over 100% while continuing to invest in our long term growth objectives. We're confident that executing on this profitable growth strategy will create significant long term shareholder value. With that, let's turn to a recap of our results on slide four. Q3 revenue was $200 million and grew 16% year-over-year against a tough comparison in Q3 2024 with 44% growth. We sold 218,000 vehicles, which was 10% year-over-year growth despite the sustained market deceleration during the quarter. Next, on slide five, we will again focus our discussion around the three pillars of our strategy to maximize long term shareholder value: growth, innovation, and scale. I will begin with growth.

On slide seven we highlight how ACV is leveraging AI across our suite of solutions to attract new buyers and sellers, increase penetration and wallet share, and gain traction with large dealer groups. Let's begin with our marketplace for sellers. We provide highly accurate condition-adjusted pricing guidance, enabling them to set better informed reserve prices. Increasing buyer engagement, flexible auction durations and scheduling allow dealers to customize their marketplace experience given the challenging market conditions. With vehicle price depreciation above normal seasonal patterns, dealers are increasingly leaning into ACV's technology. The buying experience on ACV is tailored across buyer personas, and we optimize the bidding experience by providing AI-enabled recommendations informed by dealer preferences and current market factors. Our differentiated marketplace experience is showing up in the numbers. In Q3 we achieved new quarterly milestones with over 10,000 sellers and 14,000 buyers transacting in our marketplace.

Our franchise rooftop penetration also achieved a new milestone, reaching 35% in the quarter, and our major account team delivered impressive results with rooftop penetration within this segment increasing 300 basis points year-over-year. Lastly, from a geographic perspective, we delivered solid growth in our more established regions where ACV has built significant market share. We also delivered accelerating growth in several emerging regions like in Southern California and the Midwest where unit growth exceeded 20% in Q3. While we are very pleased with this performance, there are certain emerging regions where we are enhancing our field engagement model to accelerate growth. These efforts will continue in 2026, and we are confident in the medium term growth outlook for these emerging regions. Next, on slide eight, I'll provide some highlights on our data services. Market traction for ClearCar remains strong.

Dealers are leveraging ClearCar service to generate consumer appraisals and offers in their service lanes, creating a valuable sourcing channel in the current supply constrained environment. While this is great for our dealer partners, ClearCar is also becoming an effective lever to increase wholesale wallet share and attract new dealers to our marketplace. Dealers that recently launched ClearCar increased their wholesale volumes by over 30% after going live and 50% of recent ClearCar customers also became new sellers on our marketplace. ACV MAX is gaining further traction in the industry with dealers now using AI to accurately price retail and wholesale inventory and we're seeing the same cross sell dynamic when bundling ACV MAX with wholesale. A recent cohort of new ACV MAX dealers increased their wholesale vehicle sales on our marketplace by an average of 40% within one quarter of launching MAX.

We're excited to see that our strategy to offer a broader set of solutions is creating another long term growth lever for ACV. Turning to slide nine, let's review our marketplace service offerings beginning with ACV Transportation. The Transportation Team had strong execution in Q3, again setting records for both quarterly revenue and transports delivered. AI optimized pricing continues to drive strong growth and operating efficiency. Revenue margin expanded 200 basis points year over year in Q3 and was in line with our medium term targets in the low 20s. Our off platform transportation service continues to gain traction from our dealer partners, creating additional long term growth opportunities. Lastly, I'll wrap up the growth section on slide 10 with ACV Capital highlights.

The ACV Capital team delivered strong revenue performance with 70% growth in Q3, which was the fourth quarter in a row of accelerated growth. In terms of managing risk and in light of the bankruptcy of a former customer, Tricolor, we conducted a review of our loan portfolio. Based on our review and current macro factors, we're lowering our exposure to higher risk customer segments and reducing our Q4 ACV Capital revenue forecast. Overall, we are confident that ACV Capital will remain an important value added service for our dealers and long term growth opportunity. Next, on slide 11, I will address the second element of our strategy to drive long term shareholder value, innovation. Turning to slide 12, let's go deeper into how we're leveraging ACV AI to drive growth and deliver value to our dealer and commercial partners.

Using machine learning, we fuse inspection and dynamic market data to provide real time pricing for every vehicle within ACV's pricing platform. Last quarter we highlighted how we're leveraging our pricing platform to offer ACV Guarantee to sellers and deliver a no reserve auction format to buyers. This offering is the fastest growing channel in our marketplace. We were pleased to see ACV Guarantee increase from 11% units sold in Q2 to 18% in Q3. As a reminder, our guaranteed sale is a win win win for buyers, sellers and ACV. This offering accelerates bidder engagement, increases buyer satisfaction and delivers 100% conversion rate while removing seller market risk. We're confident this highly differentiated offering will be another key driver of continued market share gains. On slide 13, we highlight how we're expanding our competitive edge with AI driven next generation products like Project Viper and Virtual Lift 2.0.

Since launching our first few pilots in Q2, we added new dealers and our own remarketing centers to the pilot program. To date, over 60,000 vehicles have been inspected by Viper and Virtual Lift and our team is leveraging this data to fine tune the product. We are receiving tremendous feedback from dealer and commercial partners as our imaging and AI models are maturing and identifying key inspection data. We are looking forward to the commercial launch of Project Viper and Virtual Lift 2.0 in 2026. Wrapping up on innovation, let's turn to our commercial wholesale strategy. On slide 14, our first greenfield remarketing center in Houston successfully completed its soft launch and volumes are beginning to ramp.

Our team has deployed a range of capabilities developed over the past year, including vehicle assignments from AutoIMS, commercial inspection applications, work order and repair estimates, and integration with ACV's wholesale marketplace. We believe this new digital model and end to end experience will transform commercial vehicle remarketing. We also look forward to launching additional greenfield locations to expand our footprint. With that, I'll hand it over to Bill to take you through our financial results and how we're driving growth at scalability.

Thanks George and thank you for joining us today. We are pleased with our Q3 financial performance. Along with record revenue, we continue to deliver strong adjusted EBITDA margin expansion and growth, demonstrating the strength of our business model. On slide 16, let's begin with a recap of our third quarter results. Revenue of $200 million grew 16% year-over-year and was at the midpoint of our guidance range. Despite market headwinds in the last two months of the quarter, adjusted EBITDA of $19 million was at the midpoint of guidance with margin improving 280 basis points year-over-year. Note that adjusted EBITDA benefited from a $7.6 million class action lawsuit settlement against a data services vendor. However, this benefit was almost entirely offset by approximately $7 million in ACV Capital reserves.

As George discussed earlier, during our quarterly review of capital loss reserves, we factored in current macro conditions and exposure to higher risk customer segments, which yielded a higher level of reserves booked in Q3. Adjusted EBITDA also excludes $18.7 million of operating expenses related to the Tricolor bankruptcy. Finally, non-GAAP net income of $11 million was also at the midpoint of guidance. Non-GAAP net income includes the net impact from the legal settlement and ACV Capital reserves and excludes the $18.7 million bankruptcy-related reserves. Next, on slide 17, let's review additional revenue details. Auction & Assurance revenue was 56% of total revenue and grew 10% year-over-year against a very tough comparison of 52% growth in Q3 2024. This performance reflects 10% unit growth and Auction & Assurance ARPU of $508, which grew modestly year-over-year but declined 3% quarter-over-quarter.

The sequential decline resulted from targeted volume pricing and ACV Guarantee promotions we implemented to support our seller acquisition strategies. We were pleased to see the promotional activity deliver early returns, with unit growth accelerating in September to 13% reflecting 16% market share gains. Note that we're expecting Auction & Assurance ARPU to increase sequentially in Q4. Marketplace Services revenue was 40% of total revenue and grew 28% year over year, reflecting record revenue for ACV Transport and ACV Capital. Lastly, our SaaS and Data Services products comprised 4% of total revenue and grew 2% year-over-year. Next, I'll review Q3 costs on slide 18. Non-GAAP cost of revenue as a percentage of revenue decreased approximately 100 basis points year-over-year. Note that cost of revenue benefited from a $7.6 million credit related to the class action lawsuit settlement.

Excluding the credit, cost of revenue as a percentage of revenue would have increased approximately 300 basis points. The increased cost of revenue was primarily driven by increased arbitration costs within a specific cohort of customers. Given the pressure dealers are facing in the current market environment, we expect arbitration costs to remain elevated in Q4 but are taking steps to mitigate the impact and expect trends to normalize in 2026. Non-GAAP operating expense excluding cost of revenue as a percentage of revenue decreased approximately 100 basis points year-over-year. Note that Q3 non-GAAP operating expenses included the increase in ACV Capital reserves resulting from our loan portfolio review. Moving to slide 19, I'll frame our investment strategy as we drive profitable growth in 2025. We expect OpEx growth of approximately 12% to support our remarketing center strategy and commercial platform investments.

Even with these growth investments, adjusted EBITDA margin is expected to increase by approximately 400 basis points year-over-year. Next, I will highlight our strong capital structure on slide 20. We ended Q3 with $316 million in cash and cash equivalents and marketable securities and $220 million of debt. Note that our cash balance includes $200 million of marketplace float. In the figure on the right, we highlight our strong year to date operating cash flow which reflects adjusted EBITDA growth and margin expansion. Now turning to guidance on slide 21, following two months of year-over-year declines in the dealer wholesale market in August and September, market conditions continued to weaken. October dealer wholesale price depreciation has been tracking above normal seasonal patterns, which has pressured industry conversion rates.

As such, we're expecting the dealer wholesale market to decline in the mid-single digits in Q4, which is more than previously anticipated. Our updated guidance factors in this more challenging market environment and a $2 million reduction in projected ACV Capital revenue reflecting a more cautious approach in Q4 as we prepare to further scale in 2026. We are now expecting fourth quarter revenue in the range of $180 million-$184 million, growth of 13%-15%. Fourth quarter adjusted EBITDA is now expected to be in the range of $5 million-$7 million, reflecting the impact of the market conditions on dealer wholesale volumes plus higher expected arbitration costs discussed earlier. Based on the revised Q4 outlook, 2025 revenue is now expected to be $756 million-$760 million, growth of 19% year-over-year.

Adjusted EBITDA is now expected to be $56 million-$58 million, growth of approximately 100% year-over-year. We are expecting non-GAAP OpEx excluding cost of revenue to grow approximately 12% year-over-year, resulting in a 24% incremental adjusted EBITDA margin at the midpoint of guidance. Before handing it back to George, I would like to share some initial planning assumptions for 2026. First, based on an uncertain backdrop for automotive retail and elevated trade retention rates, we believe it's prudent to assume that the dealer wholesale market is flat in 2026. Second, as George discussed earlier, we are enhancing our field engagement model in certain emerging regions and rolling out a host of new innovations next year, which will be key factors in re-accelerating market share gains over time. Third, we expect to balance margin expansion while investing for growth.

Let me turn it back to George.

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

With that, I'll turn the call over to the operator to begin the Q&A.