ACV Auctions Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
ACV Auctions operates a digital business-to-business wholesale used-vehicle marketplace, supported by transportation, financing, vehicle assurance, inspection, data, and inventory-management services. The filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company operates primarily in the United States, with certain data services supported internationally.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $105.4 million | $91.8 million | $323.6 million | $258.3 million |
| Marketplace and service revenue | $90.9 million | $79.3 million | $277.0 million | $221.6 million |
| Customer assurance revenue | $14.6 million | $12.5 million | $46.6 million | $36.6 million |
| Loss from operations | $(25.1) million | $(24.7) million | $(78.9) million | $(51.1) million |
| Net loss | $(23.7) million | $(24.8) million | $(77.7) million | $(51.9) million |
| Adjusted EBITDA | $(11.8) million | $(12.4) million | $(43.9) million | $(28.4) million |
| Operating margin | (24)% | (27)% | (24)% | (20)% |
| Net margin | (22)% | (27)% | (24)% | (20)% |
| Marketplace units | 133,165 | 140,734 | 421,337 | 422,394 |
| Marketplace GMV | $2.1 billion | $2.0 billion | $7.2 billion | $5.4 billion |
- Q3 revenue increased 15%; nine-month revenue increased 25%.
- Q3 marketplace units declined 5%, while nine-month units were approximately flat. GMV increased 6% in Q3 and 33% for the nine-month period.
- Marketplace and service revenue benefited from higher GMV per unit, higher buyer fees implemented in December 2021, transportation activity, and data services.
- Operations and technology expense increased 30% in Q3 and 45% for the nine-month period, primarily due to headcount, stock-based compensation, technology, and infrastructure investments.
- Stock-based compensation was $9.6 million in Q3 and $25.9 million for the nine-month period.
- Interest income increased to $1.9 million in Q3 and $2.6 million for the nine-month period, reflecting higher interest rates and increased investment in marketable securities.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $294.8 million at September 30, 2022, compared with $566.0 million at December 31, 2021.
- Marketable securities were $207.6 million at September 30, 2022, compared with $13.8 million at year-end 2021. Cash and marketable securities totaled approximately $502.3 million.
- Operating cash flow was $(75.3) million for the first nine months of 2022, compared with $88.4 million provided in the prior-year period. The change primarily reflected the net loss and a $98.4 million decrease in accounts payable, partly offset by collections of receivables.
- Investing cash flow was $(264.3) million, including $217.7 million of marketable-security purchases, $32.1 million of increases in finance receivables, $18.9 million for the Monk SAS acquisition, $14.1 million of capitalized software, and $2.7 million of property and equipment purchases.
- Financing cash flow was $68.5 million, primarily reflecting net borrowings under revolving credit facilities.
- Outstanding debt was $70.5 million: $0.5 million under the 2019 Revolver and $70.0 million under the 2021 Revolver. A $1.1 million letter of credit reduced availability under the 2021 Revolver.
- The company stated that it was in compliance with applicable debt covenants and believed existing cash, marketable securities, operating cash flow, and borrowing capacity would support requirements for at least the next 12 months and the long term.
Material changes versus the prior comparable period
- Revenue growth remained strong despite lower Q3 marketplace unit volume, with higher value per unit and increased fees supporting marketplace revenue.
- Profitability remained negative. Q3 net loss improved modestly by $1.1 million, but the nine-month net loss increased by $25.8 million, reflecting substantially higher operating expenses.
- Adjusted EBITDA loss improved modestly in Q3 but worsened for the nine-month period, declining from $(28.4) million to $(43.9) million.
- Operations and technology expense grew faster than revenue for both comparison periods, increasing pressure on operating leverage.
- Liquidity shifted from cash toward marketable securities, while total cash and securities declined by approximately $77.0 million from December 31, 2021.
- The company completed the $19.1 million cash acquisition of Monk SAS in February 2022 to enhance visual-processing, inspection, and data capabilities.
- Class B shares continued converting into Class A shares; 9.2 million shares converted during the first nine months of 2022.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a clear numerical revenue, margin, or earnings outlook for future periods.
- Management expects continued investment in sales, marketing, employees, technology, and product development. These investments may delay profitability, although management expects Adjusted EBITDA to improve over the long term as the company achieves scale and operating efficiencies.
- Management expects marketplace seasonality, with generally lower vehicle auction volume in the fourth quarter and into the winter months. Used-vehicle prices may also depreciate faster in the second half of the year.
- Key operating risks include used-vehicle supply and pricing volatility, macroeconomic pressure, inflation and higher interest rates, customer demand, competition from physical and digital auctions, credit losses, inspection and assurance claims, transportation execution, cybersecurity, data privacy, regulatory compliance, and dependence on key personnel and third-party systems.
- Vehicle condition guarantees covered vehicles with aggregate sale prices of $216.5 million at September 30, 2022. The recorded guarantee liability was $1.6 million, and an additional probable loss contingency of $1.2 million was recorded.
- A putative antitrust class action remains pending. The court was considering defendants’ motion to dismiss the third amended complaint as of the end of September 2022. The company cannot estimate potential loss but believes the matter will not materially adversely affect its consolidated financial position.
- The company expects to lose emerging growth company status and become a large accelerated filer as of December 31, 2022, resulting in increased reporting and internal-control requirements.
Important facts for investors to verify
- Whether marketplace unit growth resumes and whether higher GMV per unit and fee increases can offset potential used-vehicle price normalization.
- The pace at which operating expenses, particularly operations and technology costs, moderate relative to revenue.
- Quarterly operating cash burn, marketplace-float changes, receivable collections, and the sustainability of liquidity after continued investments.
- Credit performance of finance receivables, bad-debt provisions, and potential losses from settlement, assurance, or vehicle-condition guarantees.
- Debt covenant compliance, variable-rate exposure, available revolver capacity, and the effect of LIBOR replacement on borrowing costs.
- The status and potential financial impact of the antitrust litigation and any other regulatory or legal matters.
- The effect of transitioning from emerging growth company status on audit costs, internal controls, accounting adoption, and reporting comparability.